Category — Financial Services

“Advertisers are drawing new redlines,” affecting who gets what in the marketplace, writes Lori Andrews in the New York Times (2/5/12). Redlines, which date back to the 1970s, refers to the practice of drawing a red line on maps to designate geographies (e.g., inner cities) where banks, insurance companies and others would not do business. The term came to be associated “with a wide array of racially discriminatory practices, such as not offering home loans to African-Americans, even those who were wealthy or middle class.”

Today, a new term, “weblining,” refers to an emerging “practice of denying people opportunities based on their digital selves. You might be refused health insurance based on a Google search you did about a medical condition. You might be shown a credit card with a lower credit limit, not because of your credit history, but because of your race, gender, zipcode or the types of websites you visit.” This, says Lori, is because of “data aggregation,” or the practice of determining individual credit risk based on aggregated information.

So, if you’re a guitar player who visits Musician’s Friend, you might be denied credit because guitar players, in aggregate, are deadbeats (probably true, if you ask me). Clicking that “like” button on Facebook might also make it harder to get credit, if you tend to “like” the same things as bad-credit types — regardless of your actual financial situation. While it is possible to challenge a bad credit report, currently “there are no laws that require data aggregators to reveal what they know about you” or “regulate what types of data” they can collect.

New York’s smallest bank is "investing in its community instead of growth," reports Alan Feuer in the New York Times (12/25/11). The Bank of Cattaraugus, which is somewhere south of Buffalo, New York, was established in 1882, and under the direction of its current president, Patrick J. Cullen, sees itself as an indelible part of its past, present and future. With just $12 million in assets, the Bank of Cattaraugus "is a microbank, well below the $10 billion ceiling that defines small banks." Its mission — "to safeguard townsfolk’s money and to finance local commerce" — hasn’t changed during its 130-year-history.

"My examiners always ask me, ‘When are you going to grow?" says Patrick. "But where is it written that I have to grow? We take care of our customers. The truth is we probably couldn’t grow much in a town like this." When he says he takes care of his customers, Patrick isn’t kidding. He once had his son, who lives in Chicago, buy a house a customer had to sell to pay back taxes, and then rented it back to the customer so she could continue to live there. The transaction wasn’t profitable for the bank, which in its history has never booked a profit higher than $50,000 and last year came out just $5,000 ahead. But this type of good citizenry has made Patrick a beloved banker.

Patrick, who runs the bank with his wife and daughter, envisions the enterprise as not just a business but also as an instrument "that can shape and preserve the history of his village." In addition to the bank, he heads the Historic Cattaraugus Corporation, and through it has purchased and refurbished various old buildings around town. The Corporation recently acquired a 4.5-acre parcel, the site of the town’s founding, where he hopes to rebuild what was there originally, and open it as a Colonial Williamsburg-style theme park. Patrick says the entire town will have a stake in the venture. "Creating that experience is what it means to be an American, in a sense," he says. "It’s what it means to be from a place."

For growing numbers of shoppers, Walmart has "become their de facto bank, even if technically it is not one," report Andrew Martin and Stephanie Clifford in the New York Times (11/8/11). "I always come here," says Courtney Houlihan, adding, "I don’t like banks anymore." Courtney "dropped her bank because of the constant fees … She now comes to Walmart to cash her checks." Geoffrey Cardone feels the same way. "It’s cheaper," he says, because at Walmart he pays a $3 flat fee to cash his paycheck, versus a percentage he would have paid elsewhere.

It can be convenient, too, because at Walmart Money Center, of which there are more than 1,000 nationwide, shoppers can also "pay bills, wire money overseas or load money onto a prepaid debit card." They can’t make deposits or get loans, but Walmart’s array of "a la carte financial services" is "becoming a force among the unbanked and the ‘unhappily banked,’ as one Walmart executive put it." Jennifer Tescher of the Center for Financial Services Innovation thinks Walmart’s Money Center is "one of the best things that has happened in the last 10 years for underserved customers."

Some competitors aren’t so enthusiastic, though, and question how Walmart is making money at this. Walmart says that it is "simply offering financial products for less than its competitors, much the same way it does for underwear, detergent and milk. Walmart does not produce the financial products, but sells them on behalf of financial firms," enabling it "to avoid financial regulations, and, because of its size, offer steep discounts." Putting money into shoppers’ pockets certainly is smart retail. "I cashed my check," says Barbara Reif, a shopper at Walmart’s Dickson City, PA store. "And now I’m going shopping."

Aflac, the insurance company, says it is improving customer satisfaction simply by improving the voice on its automated customer-service lines, reports Joe Light in the Wall Street Journal (11/1/10). In the past, Alfac says it had no standard voice for its automated system, and the quality varied. Virgil Miller, the company’s vice president of client services thinks this was a problem. "Our brand is warm and conversational, but the voice was cold and inconsistent," he says.

Virgil believes that this "led some callers to opt to go straight to a customer service rep," which is more expensive for Aflac — it’s estimated that automated calls cost "five to seven cents" versus "$3 to $9" for human attention. So, Aflac found a new voice that intended to evoke "a homey, family image. Aflac settled on a middle-aged, female voice actress that they thought could lower the stress level of callers needing to make a claim."

Says Virgil: "It’s a stereotype, but if you think of a woman with a Midwestern voice, you think family." Apparently, the new voice is working. Even though Aflac expects "to take 11.5 million calls this year, up from 11 million last year," it will employ "three-percent fewer customer-service reps." He also reports that Aflac’s customer satisfaction has improved "about seven percent with the new voice." Implementing the new voice cost Aflac only about $8,000, via a company called GM Voices.

Ultra-affluent American consumers are increasing their fast-food intake far more rapidly than other income groups, reports Julie Jargon in the Wall Street Journal (9/30/10). According to a report by American Express, fast-food spending among the very wealthy increased 24 percent in the second quarter of 2010 versus a year ago, compared to only an eight percent increase among other consumers. Expenditures on fine dining also increased among the very rich, but only by 12 percent.

American Express defines these monied consumers as having a certain income level and spending (and paying off) an average of about $7,000 a month on their cards. Keith Gutsell, who basically meets that criteria, says he frequents fast-food places because it makes him feel thrifty, sort of. "Subconsciously, I think I’m saving money by spending less on food, but my spending somewhere else must be going up because the amount on my credit card is not going down," he says. Ed Jay of American Express says this is typical.

"We’re seeing a bifurcated behavior pattern, with a lot of affluent consumers still trying to be frugal where they can by spending at quick-service restaurants and discount retailers, but we’re also seeing a return to higher-end spending on air travel and luxury items." While they we’re eating more burgers and fries, they were also "spending on cruises, car rentals and luxury hotels." They spent 114 percent more on business-class airplane tickets, too. Overall, fast-food traffic fell "two percent for the year ended July 31 … compared with drops of three percent for mid-price restaurants and eight percent for fine restaurants," according to NPD Group.

"I’m going to be in jail for committing tomato Ponzi," says Zachary Lippman in a New York Times piece by Robin Finn (8/22/10). Zach probably won’t be going to jail, but he may be laughing all the way to the bank once his research into tomato genetics bears, um, fruit. Zach and his team at the Cold Spring Harbor Laboratory have figured out how to "make a tomato plant increase its yield by half and simultaneously sweeten its produce."

But they’re doing it not with "genetically modified tricks" but rather as Mother Nature intended. The process involves "manipulating a single copy of a mutant gene … known as S.F.T. (single flower truss)." Called the "flower power gene" it "tells plants when and how many flowers to generate." The hope is that one day any gardener with a packet of Zach’s superseeds could produce a bumper crop, not to mention the commercial potential of sweeter, more plentiful tomatoes.

There’s also the possibility of manipulating melons and soybeans in similar fashion. "If this technology can be transferred to other species it could be quite valuable, and that’s what Zach is working on now," says Bruce Stillman, president of Cold Spring Harbor Laboratory. Zach’s fellow scientists may not be so impressed though; a group of them recently greeted him with shouts of, "Hey Zach, nice tomatoes!" But Zach is undaunted: "If I had a million dollars, I’d start a seed company tomorrow," he says. A patent on his mutant seeds is pending.

"Bank of America, J.P. Morgan and Wells Fargo are making life harder for local bankers," report Dan Fitzpatrick and Robin Sidel in the Wall Street Journal (7/20/10). Taken together, the three banks "now have 33 percent of all US deposits, up from 21 percent in mid-2007." They also "now hold more than a third of all deposits in 25 metropolitan areas that are home to 70 million people, or nearly one-fourth of the US population." This is really putting the squeeze on smaller, local banks, who are finding it harder to compete.

The big banks say that consolidation benefits their customers, what with "more branches, ATMs and features like free online bill payment." They also "often offer lower mortgage rates and other types of loans." However, to help make this possible, they’ve slashed interest rates on "certificates of deposit and other savings products." The average yield on a one-year Bank of America CD "fell to 0.4 percent from 3 percent" versus a year ago, for instance. "The US average is 0.79 percent." Loans, meanwhile, are generally harder to come by.

Smaller banks are also complaining that the giants are telling customers that if they move their savings accounts elsewhere, they won’t give them loans. A Wells Fargo spokesperson denies this, but allows that "deeper customer relationships better equip us to offer the best solutions." Adding to the pressure, the big banks are investing heavily in "billboards, print and television ads and junk mail." A local bank in Florida closed its loan office after its newspaper ads failed to dent a big-bank billboard campaign. "You cannot compete on that level," the bank’s finance chief said.

Josh Reich is creating a banking experience that’s "more akin to Twitter than to Chase," reports Ira Boudway in Bloomberg Businessweek (7/12/10). Josh is a 32-year-old "former equity researcher at a New York investment fund" who thinks traditional banks "suck." His solution is called BankSimple and has no bank branches — in fact, it isn’t even chartered as a bank (money is "held at FDIC-insured partners, mainly nonretail institutions that manage money held on gift cards and flexible spending accounts").

Members receive a debit card that "is also linked to a small credit line. When they have a positive balance … they earn interest at ‘above average’ rates. If it’s negative, they pay interest but will face no overdraft fees. Customers can get cash from 50,000 ATMs in small banks, stores, and fast-food outlets across the US." Membership is limited to "smartphone users, though they will also be able to access their account online."

Each time members use the debit card, they receive a message on their phone "showing the amount charged and the balance — which serves as both a record-keeping tool and an instant fraud alert." Members can also submit their financial goals and instantly set up the recommended instruments. Some observers think BankSimple, being unchartered, faces considerable consumer skepticism, while others note that traditional banks aren’t exactly all that trusted these days, either. BankSimple will launch this fall, and already has signed up 10,000 customers.

"We are looking at different ways that customers can provide us value for the value we provide," says Bank of America spokesperson Robert Stickler in a Wall Street Journal piece by Dan Fitzpatrick (7/16/10). "That can be the way they interact with us," he continues, "how much business they bring us, and if all else fails it can be a monthly fee." That’s the strategy at Bank of America, which has "some sort of banking relationship with half of all US households," once "the expected new era of regulatory restrictions" takes effect.

It’s a strategy involving the "retraining employees in its 6,000 branches" and it is captured in a single word, "Guest." It’s actually an acronym: "G is for ‘genuine welcome,’ U means ‘undivided attention,’ E is for ‘empowered,’ S stands for ‘solutions’ and T is for ‘thank you.’" But its effect, apparently, is to invite customers to stop talking to tellers and use the ATM machines outside instead because it’s cheaper, for the bank. Soon, it will be cheaper for its 55 million customers, too.

Bank of America is introducing a new type of account where if you agree to bank only online and by ATM, your account is free. But if you still want to talk to a teller and receive paper statements, it’s $8.95 a month. The bank is doing this, in part, because the new banking regulations outlaw overdraft fees, which will eliminate $2.2 billion of its revenues. In fact, as of last year, "fees and service charges generated $6.8 billion, or nearly half the revenue in the bank’s deposit business." Next window please.

Woody Tasch thinks "small local farms are the ultimate hedge fund," reports Stephanie Simon in the Wall Street Journal (9/16/09). Woody is a former venture capitalist who believes investors should "put some of their assets into businesses they can see, smell and even taste — to measure growth not by the flashing numbers on a stock ticker, but by the slow ripening of a tomato." He doesn’t pretend that "investing in sustainable local agriculture will yield an enviable return," maybe 3-6 percent over the very long term. He says the real dividend is "diversity."

As Woody sees it, investing in small farms is a way to introduce something different into a marketplace dominated by industrial farms, "where millions of acres are planted with the same variety of corn and millions of pigs are bred to be genetically similar." Small farms meanwhile "preserve heirloom seeds and quirky breeds; strengthen the soil with organic nutrients; create local markets that connect producer directly to consumer." A few investors are buying into the slow-money idea, although cautiously.

"I won’t lie — it’s a scary thing," says Martin Lindstrom, a Rockefeller heir, who says that giving his money to a goat farmer feels like "jumping off a cliff." Even some of the farmers aren’t so sure about they idea: "Specifically, they fear deep-pocketed local investors will demand a say in management decisions." They’re also afraid that "small-sum investors" will swamp them "with requests for tours and samples." Some feel they’re better off with a traditional bank loan. But Woody Tasch, who has written a book about his idea, "Inquiries into the Nature of Slow Money," seeks a million people to join him. "We must bring money down to earth," he says.