Wednesday, January 13, 2010

Online Banks-Fate of Brokers

As a finance student, who has worked in the banking industry, I have seen a trend that not many people seem to follow or agree with and that is the future of retail banking is unclear. To explain more about what I mean I will use the example of stock brokers.

During the 1990's if one would want to purchase stocks of a company or invest money in the stock market, they would have to discuss the matter with their stock broker. Stock Brokers were known to be fat money eating traders who constantly gave their clients bad advice. Individuals or corporations would have to either call their broker or go into their office to purchase shares of (ex) Microsoft. There would be a lot of paperwork involved and stock brokers would take a heavy commission for performing the trade. The job of a stock broker is pretty simple: they are a middleman. The customer comes to them to purchase stocks, they fill out the paperwork and contact the company to purchase the stock. In doing so they would charge terribly high prices.

Over the past decade since 2000, we have seen a shift from having to go to a stock broker to facilitate a stock trade to being able to directly going online and trade shares yourself. Online stock brokers charge commissions ranging anywhere from $3 to $20 for the most involved trades. In todays day an age, someone maybe laughed at for using a personal broker charging exuberant commissions. More so, major online brokers provide research and analysis that allows individuals to easily research their own stocks and not have to rely on the advice of anyone else.

Lets take a look at retail banks and where the trends have been going. Before we look at where banking is going in the future it is important to take a minute to understand how banking works and the simplicity. Banking is a very very simple idea that has grown exponentially. The basics idea of banking is that similar to stock brokers. If an individual has $10,000 that they do not plan on using immediately, they can go to a bank and deposit that money into an account. Bankers are essentially the middlemen; They take in deposits and reinvest and loan out money charging a higher interest rate. So the bank may take your $10,000 and loan it to someone looking to buy a car. The person may promise to pay the bank 6% interest or 10,600 after one year. Traditionally a bank should take a small portion of the interest for facilitating the trade (maybe 1%) and give the depositor the rest of the interest (5%), as an incentive to deposit more money. Now this concept is pretty basic and easy to understand, the part I do not understand is: How come the bank his charging 10%+ to loan out money and depositors are getting >1% interest. This to me is a major flaw and will backfire on the banks.

Just like stock brokers, I have begun to see a transition in which most banking will be done online. Because more people have been using traditional retail banks for longer time period than stock brokers, this online banking transition will be gradual and slower. I will give an example of how online banking can be implemented. I recently opened an online account with a bank named Etrade (FDIC insured). You may have heard of them as the stock brokers. I have never set foot in an Etrade bank nor have I seen one. I filled out my application online and received a call confirming my identity and that I am the one who actually opened the account. The process took less than 30 minutes and I was able to open the account from the comfort of my own home.  Within 2 days, I received my account opening information and my Visa Check Card.   I have been using Etrade for over a year and have yet to encounter a problem with them. Once again, I would like to emphasize I have never gone to an Etrade bank since I opened the account.

Many people may question this concept as it seems a bit far stretched. First question that comes to mind is "how do you know your money is safe?" Well as i mentioned before, Etrade is actually a bank and is FDIC insured. I did my research. If you don't believe me, here it is.  Another question someone may have is "how do you deposit money?"  There are many different ways.  The three most popular are:
1) Transfer money from another bank account
2) Mail them a check
3) Direct deposit from your employer.
Now depositing may be a little more involved, but withdrawing is as can be.  Etrade refunds any ATM withdrawal fees at any atm.  Because they do not have to incur the high cost of stand alone branches, they can  afford to refund your fees.  As you may or may not already know, you can use your visa check card anywhere like a regular credit card.  Getting your money from the bank is not an issue.

Etrade also offers a higher interest rate than most of the other banks right now.  This is probably because, like I said before, they do not have to pay for big branches with lots of tellers.  Their major costs may be ATM fees, customer service centers in one or two locations, and any additional government fees or costs.  As a result, Etrade is able to loan out money an give me more interest due to lower costs.

Credit Unions have also become popular but I do not feel they will kick off anytime soon.  I like the concept of Credit Unions but unfortunately they have fallen behind banks. Credit Unions are groups in which institutions can enlist their members in.  They have less costs and as the members run the Union, all profits are returned to them therefor offering higher interest rates.  They still require lots of tellers, buildings and other additional costs.

Bank of America has recently added unique advance features to their ATM's.  I use Bank of America ATM's on a regular basis.  The ATM has the ability to scan checks and detect the amount on the check.  More so, I can put up to 40 currency bills at once and it will accurately count the money and deposit.  If an ATM has the ability to do all of these tasks, the stand alone job of a teller has essentially been eliminated.  I love not having to wait in long lines, or deal with annoying customer services representatives.  (No offense to tellers, as I was one myself).  Disclaimer: I do not mean to sound like a salesman for Bank of America and Etrade-rather they are meant to be examples.  No one pays me to write these blog posts.  

There have also been a rise for online "peer to peer lending."  This may also be a new trending in banking.  Peer to Peer lending is a system in which depositors can pick people or groups that they would like to lend their money too. These sites gives people the ability to post pages to request loans and allow investors to read their request and invest as the like.  People can earn very high interest rates by doing this.  Such sites have already started to creep up such as Prosper and Lending Club.

With the recent economic crisis people have started really hating banks.  Banks essentially took in depositors money, charged bogus service fees on their accounts and started playing poker with their money.  People are beginning to loose trust in banks and wonder why they are getting a quarter for every $100 saved-why save in the first place?  Retail banks need to drastically change to stay in the game.  They can not afford to have huge bank buildings and employee dozens of tellers.  Maybe this may take decades to fully change, but we saw how fast people began using online stock brokers.

Friday, January 8, 2010

Postal Service Sundays

One of the biggest issues that has puzzled me for months if not years is: Why dont we get mail on Sundays? In today's digital age with the rise of e-commerce why is there a one day break every week in our mail. Not many people seem to complain about it, yet everyone I discuss this with agree with me. I already paid my taxes-how much more will it cost me to get mail on Sunday?

Let me start out with an example. One of my favorite websites is Crammer yesterday on Mad Money called it "the Walmart of the Internet" which to a certain extent is true. Amazon has mastered and perfected a system of housing large inventories around the country and shipping it to the customer with almost no delay. When people want to buy something, they do not want to have to wait and longer than they have to. I can't remember a single item I have purchased on Amazon within the last year that took longer than 2-3 days to arrive to me-in many cases, it was the next day. Amazon has done everything it could to get the product to the customer as fast as possible, the Postal Services not delivering on Sunday is out of Amazon's hands.

Many stores have started an "in store pickup" feature where customers can buy products and pick them up in the stores. This is great considering it is faster for people who want the product and cheaper that you don't have to pay for gas. However it is still an inconvenience to go to the store to pick up the item, it defeats the purpose of buying it online-why waste the time online?

If the postal service were to deliver on Sunday, would it really hurt them? I understand USPS is a government service so they are closed for government holidays, but buses and trains still run on Sunday; Police still operate on Sunday; Almost every retailer having an online store is open on Sundays-Whats wrong with Postal People. From my knowledge, UPS, FedEX or DHL do not have deliveries on Sundays, and if they do it probably costs more than the item being purchased. This issue is not just limited to USPS. I read a report that USPS has had a decrease in profits and have had to shut down Post Offices and relieve workers. Is it really that hard to figure out why they are loosing business? It doesn't take a genius to tell their rates are high and their services is slow. Staying open on Sundays may even help postal services increase business.

In my view with more and more people buying products online, this is a serious problem! As a business student, this situation appears to be a complete economic inefficiency as slow shipping can discourage people to buy products online and hurt online retailers. Now the issue that bothers me the most is that online retailers try so hard to increase online sales and sell as much as they can, but the biggest issue people (including myself) find with buying things online is slow shipping and terribly high costs. Of course, transport of so many items is no easy task however if the Postal services made deliveries faster and on Sunday, there would not be a one day break in 24 hours online retailing and more people would buy more products online. E-commerce is a huge portion of the United States economy, this simple change could drive increase productivity and profitability off the charts.

Maybe I'm just mad my speakers are in the mail and taking forever.

Monday, January 4, 2010

Google Has Got it Right-For The Most Part

People who know me well know that I am a big fan of Google.  I felt it would be nice to dedicate one post to Google as I have a feeling many posts will be referencing them.  The way I see it Google is Good.  People see some hidden agenda behind closed doors, but that may just  be fear of the past.  Many times in the past corporations have tricked people and as a result they had not read the "fine print."  Here is Google's catch-The more you use Google, the more money the make.  Not from you but from advertisers.

Google is a search engine, but they make money from online advertisements.  In short, Google is an advertising company.  If you preform a Google search, your page is filled with relevant advertisements to the search query you made.  These advertisements are by corporations and individuals who want you to come to their website.  For example, if you search "headphones" the first link that should appear is "SkullCandy" headphones in a shaded text box.  In the top right corner there are these little words written "Sponsored Links."  How many times did you notice that before you clicked on the ad.  If you dont believe me, here it is:

To me, that ad is just as relative as the next link in the list and I loose nothing by clicking on it.  Every time you, me, or anybody clicks on that link, Skullcandy pays Google a "Pay Per Click"  This could be $.01 or $20.  The more obscure the search the higher the value.  if a Pay Per Click is $.05 per click, The Advertiser will pay Google $.05 per click on the ad.  Google then keeps a cut-maybe $.01 and gives the website owner the rest- $.04.  Everyone is happy:

Marketters get a lot of people to see their product for cheap
Google takes a cut
Website owners get a cut
Viewers see something relevant and have nothing to loose (except time)

Hopefully soon I intend on having Ads by Google on this page for relevant advertisements to appear and to generate revenue.  If I have thousands of people coming and reading my blog and them clicking on the links, I make money-Therefore Please Click the links/Ads on the side of this page.

Just Kidding

If you are still with me, you will come to see that the more people use Google, the more money it makes.       Essentially all the free products Google releases is to get you to use their search more.  That this the catch.  They are not forcing you to use the products, search anything, or do anything different.  If Google makes you happy, you will keep using the search engine and they will keep making money every time you click on a search Ad.  Now in my opinion - this is brilliant.

People have been complaining that Google has too much information stored online about them.  They are not the only ones.  Almost everyone uses email in todays world-Yahoo, Hotmail, Gmail, Company Mail, or any other Domain Mail.  All of the information is saved on a server located elsewhere that is accessible anywhere there is internet.  Email is just one aspect of Google's product line.  Google also has Voice, Calendar, Talk, Docs, Reader, and a lot more.  Now Google is providing us with all of these free services so that we use Google more.  We sometimes (ab)use these new innovative products to the max that help us in our day to day lives, now inevitably Google is going to have a huge amount of data about use stored on their servers.  I know almost everything I do (including this blog post) is on Google.  This is the key question-How is this Google's fault?

I'll give you an example.  When I go to get a haircut (cost cutters),  I go into the salon and they ask for my name.  I give it to them and they pull out a little card which tells them exactly how to cut my hair.  I like this especially because I can never remember what clipper number I usually get.  Now my barber has no other use for the card other than providing me fast good service when I come in.  It makes it easier and faster for them, and it makes me happier and satisfied.  Now one day I come in and don't like the fact that they write down how they cut my hair last time.  Its an invasion of my privacy right?  What are they going to do-sell the card to my neighbor?

Google provides use with great services so as a result, they have to store all the information that we provide them with.  Whose fault is that?  What is the solution?  I wouldn't know to do if I were the CEO of Google-how does one explain this situation to an ordinary person aside of reading this blog post.  They tried to make it as transparent as possible by creating The Data Liberation Front, but that just made people even more mad after seeing how much information THEY gave google.  This comes to a key point in this blog:  I don't know if I am missing something here- please let me know if I am.  Like I mentioned in my first post, I ask myself this question many times a day.

Please leave me comments if you agree or disagree with me.

My First Blog-Who Am I?

I will dedicate my first blogpost to describing myself. I have nothing to hide-My name is Sapan and I attend Lehigh University as a Business student. Currently I am in my third year and was born and brought up in Allentown, PA. I wanted to go somewhere fun, exciting and different so I decided to attend Lehigh University all the way in Bethlehem, PA. (sarcasm noted) My parents are from Indian-thereby classify my nationality as Indian and I have 1 sister.

That sums up who I am now I will explain the intent of this blog. Ever since I was a young boy, I have had this talent of identifying inefficiencies in many of the things we do. Somethings in my opinion do not make much sense and are not very practical. Many times a day I find myself asking questions like am I really that stupid or have people not thought this through? I know there are millions of bloggers out there who may or may not have similar discussions about the matters I want to address, but I really want to see if I am the only one who sees the world in a different light. Many times when I explain something to my friends, they tend to agree with what I have to say which means:
1) I am always right
2) They just don't feel like arguing with me
3) They don't know what I am talking about

Speaking of not knowing what I am talking about, you as the reader, probably have no idea what my intent of writing in this blog. I wish to provide daily accounts of something that I have found that is not practical, inefficient, or plain just doesn't make much sense. I wish to see the views of other people to see if they agree or disagree with me-and why.

I tend to be particularly interested in the Tech and Finance sectors but the topics I write about will go past these 2 topics and should describe general issues.