“Mind The Gap!” – The life and times of a man on the move Episode 67

In this weekly series, I look back on what stood out, what was bemusing, amusing and interesting during my weekly travels, interesting findings within the FX industry and interaction with an ever-shrinking big wide world. This is purely observational and for your enjoyment.

Monday: Retail banks wielding their power over small retail customers

A quick but very interesting chat with a relatively senior employee at global credit referencing agency Equifax on Monday gave me quite an insight into a practice by retail banks that is becoming quite prevalent, especially in the UK and North America, the financial markets economies that are Equifax’s biggest market along with rival company Experian.

Not so long ago, credit referencing agencies would use a generic set of criteria to establish an overview of the financial position and affordability summary of members of the public, often along the lines of how long an adult over the age of 18 has been registered to vote, how long he or she has lived at a specific address, and whether there have been any more than 3 missed payments on any credit agreements held.

Having a mortgage was always a very good indicator of creditworthiness, as it is long term lending, and other peripheral aspects such as contracts with cellular telecommunications providers.

My conversation this week alerted me to something quite unusual, and what appears to be a relatively recent practice.

Let’s say that you have a bank account with any of the major well known high street banks, and you do not keep any money in it at all and you never use it.

Banks do not like this type of business, and with the shrinking of the retail branch banking sector by many banks – Barclays being a notable example having closed a substantial number of branches and offloaded entire retail units in full over the past two years – they are starting to use the credit reference agencies to make people think twice about keeping a dormant account.

This is what happens: Dormant retail bank accounts that are not closed down entirely are often subject to bank charges, which range from £1 per month to around £5 per month depending on the bank or account type, which if a bank account is left dormant with a zero balance, can result in a very small unauthorized borrowing situation.

My pal at Equifax told me that even a £2 drop into the red for just one month can cause a complete decimation of the credit rating of the account holder, with agencies marking them to a “very poor” credit rating, citing reasons such as “Arrears” on accounts when actually no borrowing took place, and no credit agreement was set up.

Bank accounts are listed as ‘credit agreements’ by many major credit referencing agencies, even if no overdraft or borrowing facility has been extended, and therefore a £2 drop over the zero balance would have the same impact as if a retail customer did not pay back a hire purchase agreement or personal loan !

I approached a few banks about this just out of curiosity following my conversation and they indeed confirmed that this practice does take place.

One has to ask oneself why? Why actively destroy the ability of many people who are usually careful and responsible – surely the type of customers banks want – to gain credit? In today’s world of low interest rates, credit is popular and most people in developed countries are very responsible with borrowing small amounts, especially post-2008.

Indeed the banks are the real customers of Equifax and Experian, therefore these agencies are working in favor of credit institutions, not retail customers so it is very hard to have such data amended unless a bank sanctions it, however I can think of one thing that this will perhaps lead to, that being another reason for retail customers to disappear from the high street and go online.

The challenger banks are once again stepping up their marketing. Just this week alone during my daily trips on the London Underground I saw at least 15 different types of Starling Bank advertisements in different guises from revolving billboards to notices on the escalators in stations.

These online tech-orientated firms that aim to take clients away from the mainstream established banks are doing everything they can to highlight the ‘all in one’ service they offer via an application rather than the obsolete method of going to a branch, and are majoring on not charging customers for certain services, hence credit ratings can be kept cleaner.

Yes, that is all very well, but there is just one thing to bear in mind. The majority of challenger banks have got NO MONEY. They are all still on their venture capital and will be debt-heavy due to shareholder loans from the investors who started them off.

We know that most of these are the darling of venture capital investors right now, having seen many of them gain tens of millions every time they go for a round of funding.

This will need to be paid back, and they have no capital of their own.

What would you rather do? Be subservient to the high street establishment who use bully-boy tactics such as destroying your credit rating if you don’t give them £1 for doing absolutely nothing, yet be secure that these banks are traditional, wood-paneled institutions with 400 years of heritage and a balance sheet that would give the Saudi Royal Family something to think about, or go to a challenger bank which will not interfere with your online records but could well be here today, gone tomorrow – along with your cash….

Tuesday evening until Wednesday evening: Nil by mouth, omni by brain

It’s that time of year again when the Yom Kippur fast of 25 hours keeps me and approximately 7 million out of the 14.6 million people worldwide that I share my DNA with abstinent from the consumption of food or drink.

Along with a few other laws such as not wearing leather shoes, it is a day of atonement and thought about how to make better of one’s place in society for the year ahead. Spending this week’s Yom Kippur in Sheffield, South Yorkshire with very good friends, my pre-fast meal and post-fast meals were indeed 25 hours apart and plenty of discussion and looking back at the past year took place in between.

I actually think we have a great opportunity ahead for our industry. The economy within the leading financial markets countries is doing very well indeed, and the younger generation which is not yet of working age appears sensible, astute and willing to look at life analytically, and has a massive advantage in the availability of so much information via handheld devices.

Gone is the age of delinquent hipsters, and here is the age of 15 year olds who want to make a difference to technology, or to forge their own path to success. Even the big four management consultancies are looking at this dynamic, with Ernst & Young having stated recently that the new generation which was born in the early 2000s is likely to be far more financially astute than the Millennials, and that many are technology focused and have very good work ethic.

These are not just the future customers of the electronic financial services industry, but they are our potential partners. Perhaps firms should look at how to work with this new generation and engage them – even perhaps in an open source environment to make them part of the experience which would stop them going elsewhere if their product range was their own rather than generic.

Indeed Yom Kippur is specific to only a handful of people worldwide, but in the wider industry we can all think – how did we do last year, what can we fix and how can we do everything even better next year. Food (or not) for thought!

Thursday: ASIC forcing the b book issue down the wrong road! 

Talking to a risk manager in the Asia Pacific region this Wednesday was of great interest indeed. The subject of how trade reporting will be made transparent in Australia as the island continent’s regulator, ASIC, continues to bear down on the FX and CFD industry came up in conversation.

“It would seem ASIC maybe also looking at retail brokers who have 1 liquidity provider, as the regulator perhaps does not want retail traders to deal with brokers who have just 1 pricer in case of too many pricing anomalies” he said.

“It would therefore be interesting to see if ASIC goes down the route of requiring brokers to present their trading with their liquidity provider as they are required to do in Europe. In relation to the ASIC product intervention, an argument the industry is making is that any lower leverage will constrain liquidity in the FX market” he said.

“When I looked at this report recently, one of the points it makes is that speculators are adding vital liquidity to the market globally. Is this right?”

It is an unusual viewpoint, however my conversation moved to how to analyze this thought.

“Do market maker B Book brokers create liquidity or add liquidity? asked my risk expert colleague.

“Assuming the broker takes all client trades onto their balance sheet – which effectively means taking the other side of the trade and not pass it through to their liquidity provider, that means that they provide prices to retail customers to trade, so in that respect the report makes sense, however they don’t provide liquidity to the market, like a broker does by passing all trades through to the liquidity provider” he said.

“Usually, the liquidity provider runs a natural hedge book and NOP exposure, so brokers have zero impact on this which means no liquidity, so it is therefore sensible to state that by just taking a price feed from a liquidity provider but continuing to run a B book hence LP pricing to brokers and broker turnover does not add to liquidity” he said.

“Am I right? I ask because if the broker passes retail trades through it would impact liquidity providers’ natural hedge of NOP exposures allowing them to manage exposures, but of course with no flow from the broker, no liquidity is supplied and this doesn’t of course impact prices, it just impacts liquidity” he said.

In the context of the Australian example, 22 trillion in turnover is not liquidity. This turnover sits within the brokers ‘platforms’ hence it is effectively a side show. Until the brokers pass on exposures in creating new exposures to the FX market in total, that would equal liquidity. Perhaps ASIC is missing the point if this is their criteria for measurement.

My colleague continued “Maybe my definition of liquidity is to general, or am I wrong somewhere with the logic?”

“If a broker provides a price which is provided by the liquidity provider and the client trades, the broker takes the trade exposure but where is the liquidity? The client is trading with the broker – who simply receives price feeds, but it is an enclosed system” he said.

“So if I look at the bigger picture, liquidity is about exposure in that a market maker makes two-way prices all day long and gets hit both sides so therefore the market makers are the liquidity providers to the brokers. Liquidity providers send prices out to brokers, but the brokers only deal with their clients and I am sure ASIC wont answer the questions anyone might have for them about this” he said.

“I am as a result of this also interested to read the public responses to the product intervention. I think the industry will survive as is, just with a few less brokers. As to multiplatforms, yes they will evolve into something beyond simple stockbroking or wealth management – just out of interest my benchmark is tradesocio.com” he said.

“The b book won’t die, using leverage or not, and I agree with quite a few firms that have said that ASIC’s draconian stance will not stop inexperienced traders losing money, so we live in interesting times, but I think that with a particular focus in product, the evolution in platform can evolve into something that can be very dominant [and not Saxo, IG, Plus 500 dominant ] something really fundamentally like Renaissance Technology dominant but under the radar or Bridgewater for the masses” he concluded.