by Peter H Frank | Oct 30, 2015 | Business |
Earlier this month, I gave a lecture on critical thinking to an association of Hungarian economists in Targu Mures. At the end of the conversation, I was asked two questions: what was my first impression of business in Romania when I arrived here six years ago? And, what advice do I have for a young person looking to start a business?
As occurs all too frequently, it was not until after I gave my answers and sat down that I realized I wished I had answered them differently. After only a few minutes of reflection did I see how the two answers were perfectly related and how important they both are now as much as ever. Here is how I wish I had answered:
My first impression upon coming to Romania was of a reality that unfortunately remains as true today as when I arrived. Actually, I noticed it even before I arrived. After changing planes in Italy, I was on a Tarom flight to Bucharest looking through the in-flight magazine when I saw an advertisement for a Bancpost-American Express-Tarom credit card.
Having spent 12 years at the world’s largest credit card issuer and the pioneer of affinity/cobranded cards (and then several years after that teaching and writing on the topic), I immediately shook my head and saw what a financial failure that product was likely to be. I knew firsthand that this type of three-branded arrangement existed in other places, but replicating what you see from outside – without understanding the very challenging particulars that lay beneath – was a recipe for disaster. And from what I was reading, this was not going to work.
It was not until after I landed and began to live here that I found more and more examples of exactly this syndrome, whether in banking, in media, at retailers, in restaurants, or even inside American-inspired bars and cafes. Yes, the veneer looked the same – the products and logos and menus and concepts – sometimes, in fact, they were even more American than they were in America.
But it didn’t take long to discover that the product and messaging and service and flavors were but superficial in appearance and misunderstood. Indeed, there was generally a lack of any deeper understanding of the structure and of the strategy within the businesses and products that are required for success.
Six years later, unfortunately, I see little improvement. There still remain too many examples of this fundamentally wrong approach. And too many companies, from banks to newspapers to retailers to restaurants, still fail to understand. Most of them, especially Bucharest newspapers, seem to have no concept as to why they’re in business.
As I know the credit card and loyalty businesses rather well, let me give you a few examples I observe from that sector. In the several years after my introduction to that Tarom credit card (which, by the way, has moved to another bank), I came across the BCR Zambet card, a confused and expensive product that I’ve criticized before for not knowing what it was or why it existed. And after obtaining the bank’s internal presentation some time later, I could see the confusion. There were lots of superficial benefits, but little recognition of the challenges.
Then I noticed Raiffeisen’s cobranded SMURD MasterCard, which I confess led to a sad laugh. The demographics might be good, but clearly the basics of card affinity are not well understood. And then there’s a Steaua card – again, a good idea in other places, but a seriously dubious product here.
Or look at the other big banks and the hundreds of things that were copied and brought here: a credit card for doctors, for small businesses, for entrepreneurs, for students, for shoppers. Discount cards. No-interest borrowing. Points and rewards. Elaborate cash-backs. In each case, I guess, someone saw them in other countries, or read about them somewhere.
But also in each case I can tell you it doesn’t take long to see that too much is wrong – from ineffective benefits to badly constructed messaging to misconceived positioning to card designs without purpose to descriptions intended more for bankers than consumers – overall creating dozens of different products either virtually indistinguishable from each other or giving potential customers no good reason to want them.
And while I don’t know their profitability, these card programs must be attractive to issuers. Some banks are now willing to effectively pay you 100 lei to sign up or some other amount if you bring them your friends. But that’s not likely to work either as short-term acquisition does not necessarily translate to long-term utilization – not with the customer marketing that you find here at the banks.
In fact, of all the bonus and loyalty cards being offered here (whether from banks or any of the retailers), not one that I’ve seen is truly conceived and structured as anything but a product – not a program – and loyalty, to succeed, is not a product to be sold. No. Paying cash for new customers is not a way to build loyalty.
The fact is these could be tremendously successful if done correctly in this market. But there is not a bank or retailer here that seems to fully understand how to correctly position these loyalty, advantage, bonus points, or affinity programs – whatever you want to call them. Instead, it appears they have merely designed card products to look the way they think they should and they are probably wondering why none of them succeed as well as they do in other places.
In other words, what I found when I got here – and still find all too often – is that Romania has businesses that do everything done elsewhere. But all too often, they throw products on the shelves and compete mostly with price and waste a lot of money on new customer acquisition. And when all is said and done, it appears they lack the essential understanding of why these products exist or where they’re headed in the future.
One of the more common excuses I hear is that this or that product was already tried and it didn’t work. Or times have changed and the product won’t sell. Or it’s only been 20 years – you have to give it more time. What this typically means is the person has failed to understand. My guess is they did try that product as they saw it someplace else with the attitude that “I’m a smart person, I can see how it’s done.” But the truth is, they cannot. They never tried the product the way it actually exists someplace else. So they never tried the product the way it needs to succeed.
And that, very simply, takes me to the answer to the second question I was asked.
What advice do I have for young people and entrepreneurs looking to launch a new business? It sounds so obvious, yet it’s so often overlooked. Understand your business – better than anyone. Because once you truly understand what goes into a successful product and then design it accordingly, what you’ll be offering is precisely what your customer wants – not only what you’ve seen without understanding from a distance.
Your business does nothing without customers. And the best type of customers are the ones who like you. Customers who value you. Customers who like doing business with you no matter your industry or the flavor of your product.
And how do you create that? Through the design of your products, the delivery of your services, the internal procedures of your business, and the treatment of your employees. Everything aligned to satisfy your customers.
Whether you are a bank or a newspaper or a shop or a neighborhood restaurant, it’s not enough to offer your product and then pay for new customers. You must inspire your employees, create a business that others enjoy and be a good neighbor (whether you’re local or on the web). Your customers will feel it and the profits will come.
And never forget that it all starts with you.
Yes, the opportunities are out there. Others’ lack of understanding is like a gift made for you.
That’s how I wish I had answered those questions.
by Peter H Frank | Apr 11, 2013 | Business |
This almost reads as a parody of what we saw in 2007. A parody because, certainly, we wouldn’t let it happen again. This has to be a joke. Right? And it might even be funny – if it wasn’t true.
Here are a few excerpts from The New York Times website this morning [full text, here]:
“Banks have been shedding risky assets to show regulators that they are not as vulnerable as they were during the financial crisis. In some cases, however, the assets don’t actually move — the bank just shifts the risk to another institution….
“Citigroup, Credit Suisse and UBS have recently completed such trades. Rather than selling the assets, potentially at a loss, the banks transfer a slice of the risk associated with the assets, usually loans. The buyers are typically hedge funds, whose investors are often pensions that manage the life savings of schoolteachers and city workers.”
Sound familiar? Here’s the first truly scary part:
Known as capital relief trades or regulatory capital trades, “most of these trades are structured as credit default swaps, a derivative that resembles insurance. These kinds of swaps pushed the insurance giant American International Group to the brink of collapse in September 2008.”
And then here’s the kicker (I recommend you sit down for this). To paraphrase, in part:
One of the consultants advising a pension fund in New Mexico that invested in one of these trades said that his deal “has a little flavor of that” (meaning AIG-type swaps) but that this time, the investors did their homework (unlike AIG) and this time they have a better understanding of the risks. So, you see, it’s ok.
I say: RUN! Run for the hills! Anyone who will tell you that “this time, we really understand the risks” is either suffering from pathological hubris or simply didn’t read a newspaper in the past six years.
The fact is modeling the risks for many of these derivative products is about as accurate as most economists’ long-term predictions or today’s weather map for Christmas. There are too many variables. Too many possibilities in the future that are completely impossible until they become possible when they actually happen.
That fact is no secret. It was a completely impossible event – a nationwide blip in US housing defaults – that exploded exponentially through these derivative products, which rendered them impossible to value, that led to the recent crisis. (Remember that one?) AIG insurance did not help. It did not have enough money. Suddenly the banks were holding momentarily valueless paper. And that was enough…the financial industry went into cardiac arrest…and the crisis began.
And now the regulators, powerless they say, are watching and lamenting as it happens again. Why is it so impossibly hard to understand that if children cannot be controlled on a giant playground, you don’t just throw up your hands, you take away some toys and restrict what they’re doing? I wouldn’t care if it’s just some investors losing money. But these guys are tied up, inextricably, to our retail banks.
None of this is new. The danger has been evident for decades. People whose job it is to safeguard our money should not be the ones to tell us what it’s worth.
I first learned this lesson – and trust me, so did the regulators – more than 20 years ago. I was covering the insurance industry in Maryland (insurance is state-regulated in the US), and at that time, a huge insurance company named SunAmerica (ironically bought by AIG some 10 years later), moved its place of incorporation from Maryland to Nevada.
Regulators in Maryland were relieved. It seems SunAmerica had started investing some of its customers’ money in something new back then called derivatives, some of which were related to the founder’s other company, a giant homebuilder in the west. How these investments worked, what the underlying investments were, and how much they were worth was all unclear to this small state agency in charge of ensuring the company was financially stable. So when the company left, despite the state taxes it paid, everyone breathed a bit easier.
(And just so you see how old some of these games are, the reason the company picked Nevada was generally believed to be because the top insurance regulator there was elected. And regulatory oversight was loose. In Maryland, the top regulator was appointed. How much better to be somewhere you can actually – and legally – give money to the person at election time whose job it is to watch you.)
To the regulators’ credit, what they did understand about these investments was that virtually no one understood them.
For those of you unschooled in (or just bored by) the fine art of derivatives, let me explain briefly. There is nothing inherently new in the idea. There is nothing inherently wrong or dangerous about them. It’s just thanks to computers, and some highly paid “quants,” that disaster is now possible.
The fact is even an IOU is a simple derivative. It’s a piece of paper whose value is derived from something else. Now let’s see how, if you’re clever and paid to create games with no substance, this might work:
I sell my bicycle to my friend A for $100. He doesn’t have the money so he will pay me $10 a month for 11 months (to pay interest). But I want all my money now, so I sell that IOU to friend B for $101. I made a quick one dollar profit and my friend B is now due to receive a total of $109 over the next 11 months (deducting the one dollar he gave me). If A does not pay the money, then B loses out. But B will take the chance because he knows I trust A and that if I fooled him, he will never buy from me again.
I now have my $100 back. And so I do this again. I buy a new bike – I sell it to C – I then sell the IOU to D – and I make another one dollar.
I like this game. And now here’s where it gets good. I call one thousand friends and sell each of them a bike. I take all the IOUs and I put them in a box. Instead of selling them each for one dollar, I sell the whole box to a rich friend for $1,000. I use $200 to buy insurance to protect my rich friend against possible losses if people don’t repay. He now will collect lots of monthly payments and by the end of it all, he’s made a profit of $9,000 (remember, he paid me $1,000). And I do this again, and again, and again.
My friend likes this game. He finds 1,000 people like me and he looks to buy 1,000 boxes. But for that he needs to borrow some money. It’s a lot of money so he needs lots of investors. Ok, he admits, some of these bike owners might not pay. So to some group of investors, he says, he’ll pay them back first. They won’t profit as much because there’s less risk. To another group, he says, he’ll pay them back second, or maybe third, and they’ll make a nicer profit but they have more risk. And just in case he’s wrong about being paid back, he’ll buy other insurance or trade some of his paper with somebody else’s paper in a way that will help insure all the payments. And he does this again, and again, and again.
And the investors like this. So they take their pieces of paper and they sell them, or pieces of them, to still other investors to raise still more money so they can invest in these more.
Now you tell me, what is that one last piece of paper really worth? And just what will happen when a million bicycle friends stop paying?
But who cares? Right? That box full of IOUs has suddenly transformed.
“The loans then look less worrisome — at least to the bank and its regulator,” The New York Times story explains. “As a result, the bank does not need to hold as much capital, potentially improving profitability.”
And how does it end? Like any terrifying movie, there’s always the promise of a sequel.
“These trades allow the banks to go to regulators and say the risk is gone,” said Anat R. Admati, a professor of finance at Stanford University, according to The Times. “But it’s not gone at all; it’s just been pushed into a murky corner of the market.”
[Update: A new NYTimes story, here.]
by Peter H Frank | Mar 28, 2013 | Business, Culture, How I Know I'm Not in New York, Life in Romania |
“Remus Bank & Trust”
I met with my Romanian friend Remus the other day. As you might know, he has been searching for a career that fits his, well, let’s say, his special skills and personality. It looks like he finally found it.
“Hello, Remus. How are you, my friend?”
“I’m well. Very well. Yes, indeed. Very well indeed. You know I’m just too excited. Finally. Finally. I’ve finally found what I was meant to do with my life.”
“That’s great! I know it hasn’t been easy, has it?”
“No. Honestly, it’s been much more difficult than I thought it would be. When I was studying the history of the Moldovan Empire in university, I never expected it would be this hard.” (more…)
