Did Web 2.0 bankrupt Iceland?

Not by itself, no.  But Web 2.0, in particular the data-mashups on the comparison websites, the blogosphere and the consumer discussion boards, made the banking crisis broader and deeper than it would otherwise have been.  Or so I have just concluded, though I’ve not heard anyone else saying this.

‘How so?’ you ask.

Every now and again you come across a piece of research so startling that you have to get up at 6 in the morning and blog about it.  OK, I appreciate it is slightly odd to be reading a Deutsche Bank Research paper in bed at 05:45 am but I find I study best in the mornings, ok?

So here it is.

In 3 years the percentage of people who shopped around for financial products went up from 15% to 55%.

Consumer Empowerment 2002-2005

Consumer Empowerment 2002-2005

This is good, yes?  We get better value for money and it’s an end to the miss-selling scandals of the 1980s and 1990s.  The consumer wins and Martin Lewis rules, right?

Right?

Ri-ight.  And I certainly do use comparison web-sites to shop around for financial services and utilities. But…

But presumably if you flip this around it means that during the middle three years of this decade the banks found they could no longer rely on inertia to sell 85% of their products for them.  And that, my chickadees, is an astonishing upheaval.  And I believe that the graph above  goes a long way towards telling us why the credit crunch (the consequences of which will outlast the lifespan of my pension) was so deep and so disturbingly global.

You see, this swing in consumer habits is astonishing. It is a tectonic shift in the financial services industry in its own right.  It’s huge.  And it tells us a lot about the pressures that the retail banks were under during the period leading up to the crisis last  year to create comparison-site winners.  No bloody wonder that when Northern Rock created that pernicous 125% mortgage the Coventry and HBOS followed suit.  They had to, or lose business.  And no wonder that a niche and specialist product – the self certified mortgage – ended up comprising almost half the mortgage market. The market over-heated when information became friction-free, the regulators didn’t stop the bankers and the bankers couldn’t stop themselves.

I won’t say that Martin Lewis made them do it, but I will say that bad business drives out good.  Putting it simply, the banks cut margins to the point where they couldn’t afford the products they sold us.   The chart above just puts numbers on the pressures they were under: in 2002 a bank or insurance company could, it seems, rely on 85% of its customers not to shop around for the best deal.  So it was relatively easy for it to sell us sustainable products that were not artificially competitive. And, yes, it could also miss-sell us inappropriate products; the force has a light side and a dark side after all.  But in three short years, by 2005, it seems that only 45% of it’s customers would buy the first product they’re offered.  As I said, I would love to know what that figure is now.

For a while, this unsustainable business put artificial pressure on the sustainable businesses. Look at the period from 2003 to 2006 in the chart below.  HBOS’s lending products were super-competitive, it was increasingly successful, and it left Lloyds TSB standing. But as we can see, early in 2007 the chickens tumbled home to roost.

LLoyds vs HBOS share movements 2002-2009

LLoyds vs HBOS share movements 2002-2009

(Unfortunately the Telegraph’s excellent free charting service does not let me plot a specific stock against its sector but HBOS tracked the sector and Lloyds didn’t).

And Iceland? Could Iceland’s banks have grown their foreign business in the way that’s charted below without individuals and organisations overseas shopping around on-line?

Growth of Icelandic Financial Services 2001-2008

Growth of Icelandic Financial Services 2001-2008

I don’t know the answer to that question. It could be co-incidence; I have to admit that the paper I got the chart from argues against interventionism, but I needed to reference Iceland again to justify a cheap headline.  However, the chart above indicates that Iceland’s foreign assets and liabilities appear to have gone up six- or eight-fold between 2002 and 2005, and it seems implausible to me that Iceland could have got so much consumer business in that time without consumers responding to online reviews and advertising.

So – is this yet another case of my only love springing from my only hate?

Web 2.0 is immensely liberating.  It is amazing that we have so much access to so much competitive information.  It is great for us as individuals that we can protect ourselves from being ripped off by banks and utilities.  But there’s no two ways about it – Web 2.0 changed consumers’ financial services buying patterns in a way that amplified the competitive pressures on the retail banks, and that is the untold story of the credit crunch.

As my grandmother used to warn me: too much ice-cream is bad for you.


References:

Philip Bagus and David Howden (2009)
Iceland’s Banking Crisis: The Meltdown of an Interventionist Financial System

Stefan Heng, Thomas Meyer, Antje Stobbe (2007)
Implications of Web 2.0 for Financial Institutions: Be a Driver, Not a Passenger


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11 responses to “Did Web 2.0 bankrupt Iceland?

  1. Pingback: Did Web 2.0 bankrupt Iceland? « Thinking about it… | iceland today

  2. The scandal here is two-fold:

    1. A previously not-very-competitive market rapidly became competitive (good spot!), and apparently NONE of the participants were able to tell the difference between products that were “competitive” and products that were “suicidal”.

    2. When it all came tumbling down, those with the very largest collection of “suicidal” products on their books were not allowed to die.

    It does rather point to the necessity for some elements of management in the economy, in the sense that if there had been, for want of a better term, a National Bank (i.e. one run by the state, not for profit), that bank would simply not have ever got involved in sub-prime lending. And that fact might, perhaps, have served as a warning to other banks.

    The cautious investor would make sure the majority of their cash was in the National Bank, and therefore untouchably safe, and the other banks would have to compete for the rest of the market. And if they ever went belly-up, they could safely be allowed to die, because anyone who had EVERYTHING there, out of greed or idiocy or whatever, would deserve to lose everything.

    The reason the current crisis is as bad as it is is because there was no bank that escaped, no bank acting as the safe pair of hands. They were all out for maximum profit, so they all got burned, and we poor investors have to choose the devil or the deep blue sea.

  3. Pure Marxism, of course. Competition -> lower and lower prices -> M0re marginal profits -> The Crisis of Capitalism.

    Ultimately, everything becomes so cheap that it might as well be given away for free. (and because the low waged workers can’t afford them anyway). Have you been in Poundland lately? Or Lidl?

    And in these web 2.0 days, how much do we pay for software, music, porn? AND it’s better quality than the paid-for stuff!!!!!!!!!!

    A clever man, Marx.

    (wish I could find a better Ebony site, mind. YP is too white.)

  4. My Dad has a regular rant about endowment mortgages. His point being that when They were handing them out back in the day, he, having done a minimum amount of homework, wouldn’t touch them with a barge pole. He thinks that anyone who had an endowment mortgage after a certain point deserved everything they got and shouldn’t have been rescused. He says it’s subsidising greed.

    TANSTAAFL and all that. It does go for customers as well as the banks, although really, what were they thinking?

    Very interesting analysis of the cause though. It sounds thoroughly convincing to me.

  5. >> apparently NONE of the participants were able to tell the difference between products that were “competitive” and products that were “suicidal”.

    Interestingly, Sir James Crosby who trained as an Actuary and worked as a trader stepped down as CEO of HBOS in 2006 to become – wait for it – deputy chairman of the FSA. Awesome timing. And of course Paul Moore raised concerns at Board level that sales were prioritised over risk and (according to his testimony to the Select Committee) he was sacked for it.

    >> those with the very largest collection of “suicidal” products on their books were not allowed to die.

    But they were too big to fail because they would have taken all their customers’ savings and credit balances with them. Yours and mine. Which is an argument for not putting the national eggs into a single banking basket, of course.

    >> The reason the current crisis is as bad as it is is because there was no bank that escaped, no bank acting as the safe pair of hands

    HSBC?

    Interesting comments SoRB. And by and large you are right.

    +++++++++++++++++++++++++

    Hey there Edward, good to see you here. I wish I understood the point you are making though. Two things enable manufactured goods to be cheap, the exploitation of the work-force and improvements in technology. I get giddy with excitement in PoundLand, and then feel twinges of guilt for the short life of the shoddy product before slinging it into landfill and feeling guilty all over again.

    +++++++++++++++++++++++++

    Your father is bang on the button about endowments, Sol. The truly pernicious products were the ones which tied mortgages in with pensions. Oh, and self-certified mortgages for salaried people. And interest only. Don’t forget the time bomb that is interest only. And I have ended up thousands short on every single fixed rate deal I ever had because – guess what – the banks are better at second guessing interest rates than I am.

    In fact, it is there any such thing as a “good” mortgage?

    I like the world where I borrow the money – you check I can afford it – I pay you back. Oh dear, I’m turning into a Daily Mail reader.

    TANSTAAFL – you are so right, there IS no such thing as free lunch.

    Incidentally, this Web 2.0 is not the cause, the whole cause and nothing but the cause. We’ve had economic cycles since the first hominid picked up a cowrie shell and turned it over thoughtfully in their hand. All Web 2.0 did was amplify the pressures on the retail financial services companies.

    Cheers all.

    Ben

  6. >they were too big to fail because they would have taken all their customers’ savings and credit balances with them. Yours and mine.

    But who has all their savings in one institution? And what is this mythical “credit balance” of which you speak?

    If they’d been allowed to die, yes, it would have cost the money of the customers, and all the employees would be out of a job. Whereas instead what we find is that it’s costing EVERYONE, whether they’re customers or not, and the employees are back to business as usual and massive bonuses.

    >Which is an argument for not putting the national eggs into a single banking basket, of course.

    It’s an argument for not putting them in a competitive basket, for sure. It’s an argument for making sure there’s a bank with whom you can save, and from whom you can borrow, who make only enough to cover their costs and nothing more. A bank that offers uncompetitively low interest on savings and slightly uncompetitively high interest on loans, but which is guaranteed by the taxpayer, and is the ONLY such institution and all the others are barred from any subsidy, EVER.

    I do not doubt that EU competition rules prevent the setting up of such an institution.

    >> The reason the current crisis is as bad as it is is because there was no bank that escaped, no bank acting as the safe pair of hands

    >HSBC?

    Indeed. But the consumer had no way of knowing three years ago that that bank, out of all of them, was the safe option. And indeed to the consumer, they were all the safe option, because the taxpayer has ended up backing all the losers. In actual fact, you could say the HSBC has lost out, because they’re having to finance their operation without help.

  7. >> It’s an argument for making sure there’s a bank with whom you can save, and from whom you can borrow, who make only enough to cover their costs and nothing more. A bank that offers uncompetitively low interest on savings and slightly uncompetitively high interest on loans,

    You mean, like a Building Society? 😉 This story started in the 1990s with Thatcher’s deregulation frenzy and the de-mutualisations and carpetbagging. Talking of which, don’t forget that the collapse of the banks did take a lot of peoples’ savings with them in the form of shares. The Halifax in particular had a very broad investor base.

    I am not enough of a socialist to go for a centrally managed organisation. Edward’s your bonobo for that one (which is probably what he meant by his comment). And think of Iceland where the whole bloody country failed. I must read up more about what happened there.

    I’m not yet disagreeing with you, I am just not yet convinced either. I am wary of the inefficiencies and opportunities for feather-bedding that your scenario would give rise to.

    Cheers

    Ben

  8. Actually, what I find interesting is the fact that when we were getting a mortgage, which would have been slap bang in the midst of the lets throw money at them willy nilly mortgage boom, but a good couple of years before the bust, HSBC impressed me by the way that they were the only bank who paid the slightest attention to whether we could actually afford our mortgage payments, rather than just applying a sort of computer said no (or rather YES, HELL YES) mentality. Slightly less excitable rate of interest than some of the others, but nothing too excessive. Admittedly I didn’t go through every product on the market, mainly because some of them seemed ludicrus and that was before I got B to crunch the numbers, but I did do quite a lot of leg work.

    Anyway, as a result, we went with HSBC. I now feel smug. Although not very smug, because, as SoRB says, they rather got punished for that sort of fiscal responsibility in the end. Still, I’d argue for there being some evidence that they were the safe option well in advance.

    Mind you, my Mum lost quite a bit on her shares in HBOS so clearly we aren’t that prescient (or even however that word is actually spelt).

  9. Oh FUCK! This is so obvious now I can’t believe it’s the first time I said it.

    If there is a Constant Drive to Drive Down Prices with The MARKET then the producers have a constant push to increase the market. This means there’s a constant growth model which is doomed to boom and bust and had a considerable enviromental input.

    In the middle ages prices were fixed and seeking to earn more than your fair share by increasing your productivity was seen as the sin of Avarice.

  10. One of the key groups for the shop-around mentality were the retired. These people typically rely on manipulating their savings more than people in work. They are also from a generation where the ethic of shopping around was strong, so even though they might not have been used to doing it in relation to financial products, they were easily converted to the concept (and often very successful, at least in the short term). They also had the time to think about the issues and read through the bumf. In my experience it was older relatives who were switching credit cards every six months, more so than younger ones anyway.

    • Should this post be entitled “Did Silver Surfers Bankrupt Iceland”? 🙂

      It’s a good point about older people being savvier with money, eyoki. Certainly, I’ve grown a lot more diligent about keeping on top of things financially as I’ve got older and … of course … as it’s got easier and the comparisons are done for me and it’s all online.

      Thanks for taking the time to read and comment.

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