ples of consumers changing banks or credit card providers when new and more ... Wal-Mart), grocery chains (such as Tesco), and utilities (such as gas or ...
Institutional
The new wave of liquidity: Impact of friction
Shahin Shojai Director of Strategic Research, Capco
Samuel Wang Global Head of Marketing & PR, Capco
Abstract On the fourth anniversary of the original paper by Shojai and Hahn we will look at whether any of the predictions made in that article have come true. The authors suggested that revolutionary technologies, such as the Internet and wireless devices, would over time make it possible to derive value from previously less liquid or even unrecognized assets, and that the aggregate effect of such value liberation would be ‘a new wave of liquidity, which will engulf the global economy and result in substantial increases in liquidity around the world.’ They further suggested that for this value liberation to take place, each of these previously illiquid, and in certain circumstances even unrecognized, assets would need to go through a four-step process: reduction in friction, value release, asset pricing, and asset recognition. We find in this paper that while a number of these predictions have come true, the degree of transformation that was envisioned in the original article are still far from becoming a reality.
51
The new wave of liquidity: Impact of friction
It has been four years since Shojai and Hahn (2001)1 first sug-
that previously relied upon customer loyalties, customer apa-
gested that revolutionary technologies, such as the Internet
thy, and market frictions, to retain clients.
and wireless devices, would over time make it possible to derive value from previously less liquid, or even unrecog-
Buyer empowerment has not been limited to individual con-
nized, assets, and that the aggregate effect of such value lib-
sumers. There are many examples of institutions and corpora-
eration would be ‘a new wave of liquidity, which will engulf the
tions either pressuring, prosecuting, or switching their financial
global economy and result in substantial increases in liquidi-
services providers when their needs have not been fully met.
ty around the world.’ Financial institutions have responded to these changes in cusThey further suggested that for this value liberation to take
tomer behavior by developing new tools and methodologies,
place, each of these previously illiquid, and in certain circum-
often using the same technologies that liberated their cus-
stances even unrecognized, assets would need to go through
tomers, to better meet client needs and improve how they
a four-step process: reduction in friction, value release, asset
price their services to the different segments of the market
pricing, and asset recognition.
[MacDonald and Caufield (2005)3, Holden (2005)4, Wuebker (2005)5].
This paper aims to review some of the suggestions made in that original paper, assess whether any of the predictions
In addition to facilitating transparency, new technologies
have come true, and determine what factors have been
should help mitigate, if not eliminate, many of the frictions
responsible for preventing the new wave of liquidity from
that exist in the markets today. For example, financial institu-
becoming a reality.
tions could operate in a much more efficient manner if their differing systems could talk to one another, and even yet more
The new wave of liquidity
effectively if they could communicate seamlessly with systems
A very important attribute of the Internet, and the many new
of other institutions [Dizdarevic and Shojai (2004)6]. To take it
mediums of exchange, has been the shift in power from sup-
a final step, seamless communication would become truly effi-
pliers of goods and services to buyers. Even within financial
cient with the elimination of fees and other related charges
services, we have observed that due to the increased trans-
that currently drain customer loyalty.
parency, brought about as a result of improved quantity and quality of information, and falling switching costs, assisted by
However, while creating seamless communications within and
more conducive regulation and increased competition, con-
between institutions is a noble objective, the potential value
sumers are now much more powerful than they were prior to
release that individuals could experience due to these revolu-
the advent of these new technologies. We have seen exam-
tionary technologies could be substantially more profound.
ples of consumers changing banks or credit card providers
These technologies should make it possible for individuals to
when new and more attractive offers are made available
release the value locked up within many of their everyday
[Furletti (2005)2]. Websites that rank different providers of
assets, from stocks and bonds to more intangible assets. In
retail financial services — including super retailers (such as
order to achieve this objective, the assets were suggested to
Wal-Mart), grocery chains (such as Tesco), and utilities (such
embark on a four-step process before their value can be truly
as gas or electricity companies) — have made it possible for
liberated. These steps are reduction in friction, value release,
consumers to quickly and efficiently compare and contrast
asset pricing, and asset recognition, and can be viewed as fol-
their offerings, and even switch providers instantaneously.
lows:
These technologies have made it difficult for organizations
1
52
Shojai, S., and N. Hahn, 2001, “The new wave of liquidity,” Journal of Financial Transformation, 2, 7-21 2 Furletti, M., 2005, “Credit card pricing developments and their disclosure,” Journal of Financial Transformation, 13, 57-66 3 MacDonald, K., and S. Caufield, 2005, “Propensity-based pricing,” Journal of Financial Transformation, 13, 17-18
4 Holden, R. K., 2005, “All banks are not alike, Getting out of the commodity trap,” Journal of Financial Transformation, 13, 22-24 5 Wuebker, G., 2005, “Powerful pricing processes: How banks can escape the profit crisis,” Journal of Financial Transformation, 13, 25-29 6 Dizdarevic, P., and S. Shojai, 2004, Integrated data architecture — The end game,” Journal of Financial Transformation, 11, 62-64
The new wave of liquidity: Impact of friction
■ Reduction in friction — For assets that are already highly
Proliferation of liquidity
liquid, such as financial assets, achieving optimal liquidity
One of the main contentions of the original Shojai and Hahn
requires transaction processes to become substantially
article was that there are far too many stock exchanges in the
more efficient.
world and that consolidation could help reduce fragmentation
■ Value release — For assets traditionally recognized and
priced, such as cars and property, efficiency of information
of liquidity and costs — such as those incurred in trading, settlement and clearing, and other explicit fees.
dissemination and the competitive environment within which they are exchanged must be significantly improved.
In the United States, the New York Stock Exchange recently
Furthermore, owners of these assets must have options
bought a major electronic trading firm, Archipelago Holdings
available to them that are alternatives to selling the
Inc., giving the NYSE an enhanced electronic trading platform
underlying asset, such as securitization, which we see as
to compete more directly with its rival NASDAQ. The very next
one of the most profound innovations within the financial
day, NASDAQ announced its intention to buy Instinet, in which
7
services industry . ■ Asset pricing — For assets that are recognized but not
Reuters has a majority stake. NASDAQ intends to keep Instinet’s electronic trading platform but sell its institutional
priced, such as collectibles, transparent and liquid markets
brokerage unit. Both deals are intended to generate scale and
need to enable correct pricing. Companies such e-Bay
liquidity, improve pricing, and diversify products, such as
should be commended for significantly improving the liq-
options and exchange traded funds. The result will be a mar-
uidity of these types of assets.
ket environment in which the NYSE and NASDAQ engage in
■ Asset recognition — Some intangible assets have as yet
truly direct competition. However, neither deal was cheap,
not been truly recognized, such as human capital, ideas,
notwithstanding the fact there will be offsetting benefits from
earnings potential, and excess capacity of various kinds.
greater public accountability by investors and regulators, par-
Identification of these assets is essential if we are to make
ticularly for the NYSE. As we detail below, it is too early to
full use of the Internet’s potential. When these assets are
determine whether the anticipated operational scale, efficien-
recognized, valued, and traded, we will accomplish our
cy, and cost savings will actually materialize.
goal of liberating the full potential value of all assets [Shojai and Hahn (2001)].
In Europe, the announcement of the creation of Euronext, the merger between the Paris, Brussels, Amsterdam, and more
Shojai and Hahn (2001) maintained that once the asset recog-
recently Lisbon, exchanges, was expected to be followed by a
nition and pricing process had been completed, individuals
number of other combinations in this space. However, this has
could liberate the value locked within their assets through
not transpired. While there are discussions that the London
either outright sale or, more importantly, securitization, by
Stock Exchange might merge with one of its European coun-
selling ‘the future revenue potential of the underlying asset
terparts, Euronext or Deutsche Borse, it has still not tran-
without relinquishing ownership.’
spired, and with Mr. Seifert’s recent departure from the latter the chances of a combination now seem even slimmer.
While the types of assets that were suggested as suitable for value release are of interest, this paper will focus on the major
Interestingly, while most of the major exchanges have been in
changes that were suggested in the original paper and deter-
merger discussions, smaller exchanges have generally
mine whether or not they have taken place.
remained independent, despite having a lot more to gain from consolidating with major exchanges. Nevertheless, the question remains as to whether investors gain as a result of these
7 Interestingly, reverse house mortgages have recently taken on life in the United States with senior citizens seeking to enjoy their golden years.
53
The new wave of liquidity: Impact of friction
stock exchange mergers. According to Malkamäki (1999)8,
1999
2000
2001
Percentage change (1999-2001)
25.17 28.73 24.55 30.5 71.74 36.51 24.87 34.16 33.28
22.06 29.28 28.39 38.81 72.74 33.58 33.83 38.97 36.34
19.92 30.67 32.18 35.93 69.01 36.65 36.95 37.24 38.60
79.14% 106.75% 131.08% 117.80% 96.19% 100.38% 148.57% 109.02% 115.99%
merging two national exchanges would result in operational cost savings of around 40%. Translating these savings into reductions in costs of trade are not, however, easy to ascertain. Similarly, we are unable to determine the potential implications of aggregating the two sources of liquidity into one on the market impact of large institutional trades. The alternative investments market is another example of a market that could benefit from increased liquidity. We have seen that regulations are being introduced to make this a real-
Japan Germany US - NYSE UK - sells UK - buys Switzerland France Italy US - NASDAQ
Figure 1 — Overall cost of executing trades (basis points) Source: Elkins/McSherry
ity. For example, there are now vehicles that allow retail investors to invest indirectly in hedge funds. However, retail
Efficient operations
participation in alternative investments remains low, mainly
As mentioned above, the main anticipated benefit of consoli-
because transparency, standardized pricing, accurate valua-
dation among exchanges, is the reduction in operating costs,
tions, performance measures, and operational risk manage-
which should in theory be passed on to market participants.
ment are still not at the levels that will make retail investors truly comfortable. In addition, as more hedge funds are
However, as we can see from Figure 1, this is not necessarily
launched, margins will likely shrink, as more participants fight
the case. Between 1999, the year before Euronext was estab-
for a smaller number of profitable opportunities. Neverthe-
lished, and 2001, the cost of trading French stocks in Paris has
less, in those markets where retail participation has occurred
gone up by around 50%9, 3 times the average of the other
the benefits have been quite tangible.
major exchanges. In fact, the increase has been so pronounced that the cost of trading shares in Paris has gone from
Disruptive technologies have also left their marks on the fixed
being around 30% less than Frankfurt in 1998 to being 20%
income, currencies, and derivatives markets, with online trans-
more in 2001. This goes against the logic used to justify con-
actions increasingly taking on more prominence. However, in
solidation among exchanges. Unlike Paris, however, the Tokyo
order to achieve the level of liquidity that issuers and investors
Stock Exchange seems to be the market which has become
demand, these online markets must open their doors to retail
very efficient for investors. It has reduced costs of trading by
investors, by creating the kind of environment that will make
over 20% during this period10.
them feel sufficiently comfortable and safe. We have attempted to ascertain the cost savings that could Ambitions for greater liquidity should be matched with
accrue if all markets were as efficient as Tokyo. However, given
increased efficiency in how the support mechanisms operate,
that what matters, or at least can be influenced by the effi-
such that over time currently prohibitive costs can come down
ciency of the market, are the explicit costs, we compared the
and further reduce barriers to entry.
explicit costs of a return trip (buy and sell) within all markets and found that NASDAQ is by far the cheapest market. Paris, by contrast, is the most expensive market, with costs over 8 times those of NASDAQ. In order to ascertain the savings that could accrue from all
54 - The
journal of financial transformation
8 Malkamäki, M., 1999, “Are there Economies of Scale in Stock Exchanges Activities,” Bank of Finland Discussion Papers, 4/99 9 Kindly note that these figures include both explicit, such as commissions and taxes, and implicit costs, such as market impact. 10 Of course currency movements also impact these rates, but not in the case of Euronext, Italy, and Deutsche Borse, which all use the Euro.
The new wave of liquidity: Impact of friction
markets being as cheap as NASDAQ, we made a number of
long, laborious, and risk prone process of settlement and
very conservative assumptions. The first was that the assets
clearing must ensue.
of each portfolio are turned over once a year, although the industry average is believed to be closer to two, and in fact
Every time an individual or an institution buys a financial
now probably higher due to the aggressive trading strategies
instrument, the transfer of ownership can take a few days and
of hedge funds. Secondly, we used the United States as the
can involve many hours of manual data entry. The number of
proxy for the proportion of the stock market capitalization
days it takes for the ownership of a share of stock to be trans-
owned by the major institutions, i.e. 55%. Using the national
ferred from the seller to the buyer, for example, can vary
stock exchange information available in the SIA Fact Book, we
between four days (T+3) to six days (T+5), depending on the
computed the total amount of stock exchange assets owned
market in which the transaction takes place.
by the major institutions in the aforementioned markets in 2001.
Given that the two largest stock exchanges, NYSE and NASDAQ, alone experience daily transaction volumes of in excess
We then multiplied the size of assets owned by the major insti-
of 3.4 billion shares means that the current system is fraught
tutions by the cost of a return trip, i.e. purchase and sale of
with risks. The true cost saving benefits from the acquisitions
shares. We found that in 2001 the explicit costs of trading equi-
by the NYSE and NASDAQ, while certainly desired by both
ties in the major stock exchanges came to approximately
exchanges, remain to be seen.
U.S.$96 billion. If the major markets were able to operate at the levels of the most efficient market, i.e. NASDAQ (6.59 Bps),
At the time of the original article, there were anticipations
that cost would have come down to U.S.$18 billion, a savings
that the U.S. markets would reduce settlement times and
of U.S.$77 billion. The NPV of that figure is U.S.$770 billion,
move to a T+1 environment. The calculated benefits of such a
which is equal to 3% of the overall market capitalization of
move for the U.S. was calculated to have an NPV of U.S.$19 bil-
these major markets. When we compare the savings that can
lion for the U.S. markets, and U.S.$40 billion globally. The
accrue from lower explicit costs in 2001 with those of 1999,
move to T+1 has as yet not transpired.
which was around U.S.$40 billion, we find that the situation is actually getting worse. The gaps in explicit costs of trade are
Improving banking operations
widening rather than narrowing. When you take into account
There is little doubt that the banking industry could benefit
that one of the exchanges has already merged with three of its
from consolidation, and there has indeed been signs of it in
peers to create Euronext, we see that unlike what many of us
recent years, although not at the levels many had predicted
would have thought, mergers among exchanges do not neces-
back in 2001. Nevertheless, the number of commercial banks
sarily benefit investors.
in the U.S., where the merger activity has been most pronounced, has gone down from 10,960 in 1993 to 7,769 by the
Overall, we can state that the stock exchange mergers have
end of 2003, a 30% drop. However, despite these activities,
not been as beneficial as we had expected and that the pace
the performance of the banking industry, at least from a
of consolidation among national exchanges that many had
shareholder’s perspective, has not been that impressive.
predicted has yet to materialize.
Figure 2, which compares the performance of the S&P’s banking stocks’ index with that of S&P 500 illustrates that despite
Of course, costs of trading equities do not end there. Once the
a number of efficiency generating mergers, the performance
transaction has been completed on the exchange, ownership
of banking shares is no different to the weighted average of
of the asset needs to be transferred, and consequently the
the top 500 stocks.
55
The new wave of liquidity: Impact of friction
140
fear that increased security measures (well beyond the cur-
120
rent ‘username’ and ‘password’ logins) will impair customer
100
loyalty, even with present guarantees of full reimbursement for any stolen funds.
80 60
Nevertheless, as was predicted in the original article, the 40
existence of online banking, and the associated increase in
20
S&P500 S&P500 Bank
June 2002 is set at 100
0 Jun-02
Sep-02
Dec-02
Mar-03
Jun-03
Sep-03
Dec-03
transparency, has helped improve the level of service clients receive and the rates they are offered. This is likely to con-
Mar-04 Jun-04 Sep-04 Dec-04
tinue as price wars to secure market share continue and Figure 2 — Comparison of the performance of S&P 500 Index and S&P 500 Bank Index
services, such as online bill payment and funds transfer, improve, particularly at online brokerages. In addition, online banking will transform as customers become more comfortable with its underlying technology and security, and as
The results are not, however, that surprising when one takes
banks learn how to brand themselves as new generation,
into account that very few bank mergers meet the objectives
customer-centric financial institutions.
set out at the time of the combination. In fact, bank mergers do not perform that much better than their peers in other
Outsourcing
industries.
There is no doubt that if companies structure an outsourcing deal properly there are many benefits that can accrue from it.
If banks are not able to generate additional benefits by merg-
An extension of a typical outsourcing deal is offshoring, where
ing, how would they be able to generate greater efficiencies?
the services are outsourced to a third-party, or even a captive
The original article suggested two sources, online banking and
center, based in a cheaper offshore location. Structures of
outsourcing.
these arrangements are becoming ever more complex and innovative, such that now banks even outsource the manage-
Online banking
ment of their payments to peers [Gaertner (2004)11].
What we have learned in the past few years is that while
56 - The
online banking services do provide clients with a useful chan-
Shojai and Wang (2003)12 highlight many of the benefits of off-
nel to their accounts, online banks per se, those not tied to a
shoring and discuss how new technologies have made it pos-
brick and mortar operation, have not been very successful in
sible to arbitrage human capital. Through these disruptive
penetrating the market. We still believe, however, that the
technologies, Shojai and Wang argue, the world has been able
power of pure online players should not be overlooked, espe-
to export wealth to poorer countries in ways not even
cially as the use of digital money increases. More than 100
dreamed of twenty years ago. Of course, they also highlight
million households worldwide currently bank online, and esti-
the problems that the treasuries of the first world countries
mates show this number may triple by the end of this decade.
face when jobs are lost to overseas locations and the number
Added pressure on online banks has emerged in the form of
of productive immigrants falls. This is one of the few areas
security breaches and data theft, especially in the United
where disruptive technologies have been able to truly trans-
States, which has fewer and less effective security measures
form the world of business, and especially that of financial
in place than Europe. Ironically, costs to implement security
institutions — organizations that are very conservative in the
are a major hurdle in the United States, and its banks also
way they look at the world.
journal of financial transformation
11 Gaertner, W, 2004, “New models of collaboration in transaction banking,” Journal of Financial Transformation, 12, 116-119 12 Shojai, S., and S. Wang, 2003, “Transformation: The next wave,” Journal of Financial Transformation, 11, 11-16
The new wave of liquidity: Impact of friction
Individuals
U.K. government’s planned ‘pay-as-you-go’ road charge plan.
Many of the benefits that were predicted in the original paper
Under this plan, car owners would no longer be required to pay
concerning the revolutionary implications of disruptive tech-
annual road tax in order to be able to drive on the roads, which
nologies have not transpired. However, there are some distinct
significantly helps those that rarely use their cars. Those driv-
benefits that have resulted from the existence of these new
ers, however, who do use their cars more regularly would pay
media of exchange. In the original paper, Shojai and Hahn
for the amount of driving they do, with the fee rising during
highlight a number of assets that individuals hold which could
peak times and in peak areas. In other words, drivers that
be exchanged if the vehicles were available that would allow
rarely use their cars would no longer be required to subsidize
for their transfer. One of the most interesting developments in
those who drive a lot. Now, if the government also provided a
recent years has been the growing market for credit transfers
number of miles for free each month, and allowed these
between individuals. Given that credit ratings of individuals
excess miles to be transferable, a similar market to excess tax
have to a large extent become commoditized, individuals can
capacity could be created.
just as easily evaluate the credit worthiness of other individuals and lend to them directly, dis-intermediating the banks
Sadly, due to regulatory limitations, and perhaps lack of inter-
from the process. For example, a new market proposition
est, a product market has not yet developed that would allow
called Zopa, which has been authorized by the U.K.’s Financial
for these excess capacities to be exchanged. Of course, this
Services Authority (FSA), allows individuals to lend directly to
does not mean that over time such a market cannot be creat-
one another. The risk of default is reduced by spreading the
ed, as the size of the monies generated from these markets
loans provided across more than fifty borrowers and limiting
increase to a threshold that generates adequate interest.
the exposure to each borrower to £200 (approximately
Given the lower cost of entry that new technologies create,
U.S.$400). Each borrower decides the level of risk they are
should more conducive regulation be introduced that simpli-
willing to bear, which in turn determines the rate they receive.
fies the process of excess capacity transfer, the threshold
This is very similar to the credit capacity exchange that was
needed for creating such a market will be significantly lower
suggested in the original paper.
than it was just a decade ago.
Two other less dramatic, yet quite interesting developments
Overall, however, we can state that despite the success of a
have come from the motoring industry. The first is the ‘pay-as-
number of online facilities for exchanging credit and certain
you-drive’ insurance schemes, where drivers only pay when
goods and services, we are still a long way from achieving the
they use their cars. By installing a box in the car that deter-
vision outlined in the original paper. The main problems still
mines how many times and at what times the car is driven, the
remain: the inflexibilities introduced into the system by regu-
insurance company can work out the appropriate premium.
lation, corporate restrictions, and of course human behavior. It
Norwich Union, the U.K.-based insurance company, launched
will take a long time before the degree of transparency and
this scheme to help younger drivers reduce their insurance
regulatory liberation will be at a level that allows many of the
premiums. As a bonus, they offer clients the first 100 off-peak
predictions in the original paper to come to fruition. And once
miles each month under the policy for free. Now if clients that
that is achieved, we still have to overcome our natural instinct
drove less than a 100 miles in a month, say due to summer hol-
of utilizing only that which we are already comfortable with.
idays abroad, were able to pass on their credits to others, a market could be created for exchanging these free miles.
Even within the highly automated financial services industry, a large proportion of financial transactions involve person-to-
The second development, although still in its infancy, is the
person negotiations, despite the availability of highly capable
57
The new wave of liquidity: Impact of friction
and user-friendly tools. It is, after all, still an industry based fundamentally on trust and security. However, the new gener-
Appendix
ation of technology-savvy individuals will further push bound-
New asset classes
aries and help realize the dream outlined in the original paper.
Conclusion The new medium of exchange will, over time, allow for the release of value from both recognized and unrecognized assets possessed by private individuals. The magnitude of value liberation from eliminating many of the inefficiencies that exist within the current financial system is becoming clearer. By consolidating the banking industry and improving the efficiency of the major national exchanges, the cost of funding and undertaking financial transactions will fall dramatically, resulting in substantial value release. Furthermore, through
It is with respect to these types of assets that the impact of the new wave of liquidity is most profound. These assets fall into the categories of being either unrecognized or one in which the potential to release value has been overlooked. The new wave of liquidity can help release the value of these types of unrecognized assets by allowing for both securitization and efficient disposal. Given the profundity of this impact for these types of assets, we would like to spend some time discussing each asset category: ■ Human capital — Within the new wave of liquidity, people would be able to
supply their services to anyone who needs them anywhere in the world. The extreme form of this value release would take the form of short-term, even hourly, supply of services through virtual networks. These opportunities exist both for those who are in full employment or those willing to supply their services on ad-hoc basis to whoever would pay the highest price for that service. To get the highest price, the providers of these services would auction their time and have those who demand it bid for it within a highly efficient market place. The advancement that will take place within the communication mediums would mean that the supplier and user of this service could be in different parts of the world.
the use of outsourced managed services, including ASPs and BSPs, the cost of settlement and clearing these transactions will fall, resulting in a further value release across the economy. Once the optimal level of efficiency necessary for the financial markets is achieved, we will enter a new era. An era in which private individuals can use these types of infrastructures to price and transact their recognized and unrecognized assets, or their revenue potential, through the process of asset securitization. The result will be a dramatic increase in global liquidity. However, an important question remains: ‘What would markets do with so much increased liquidity?’ That will be the focus of our follow-up study of the new wave of liquidity.
58 - The
journal of financial transformation
The risk that buyers of these services face is the same as those who purchase goods and services across national borders. The ability to determine the true capabilities of the person supplying the service will be improved as all the necessary information about current and previous jobs undertaken by the service provider is available to all who participate in this auction. In simple terms, this would be a marriage of a global services database and the current due diligence based model powered by e-Bay. ■ Ideas — The greatest asset of any human being is his/her ideas. In tomorrow’s
world the need for labor intensive works would be significantly diminished as automation and artificial intelligence undertake more and more of these types of jobs. The focus will, therefore, shift from the back-end to the front-end. People can distinguish themselves based on the quality of ideas and creativity they have. There would be businesses established around the exchange of ideas, such as ideaexchange.com. Great thinkers would even be able to securitize the future value of ideas that they are expected to have. Perhaps this also explains why some corporate boards contend that a portion of the compensation of chairmen and chief executives (Bill Gates immediately comes to mind) should be based on their ability to generate ‘vision’ and ideas for their companies, beyond shouldering responsibility for current revenue and operational results. ■ Bandwidth / excess capacity — The provision of excess capacity is slowly taking place within some markets. For example, Enron’s broadband services used to allow companies to sell excess capacities of their networks to other users. The same could be done for factories and other types of services, such as airlines (priceline.com) and other mass transit services, ISPs (bandx.com), ASPs, BSPs, and many others. ■ Content — Individuals should also be able to provide content to those who need it through an ASP. This allows for the release of value from those contents that are proprietary and have value to other people. The open source
The new wave of liquidity: Impact of friction
■
■
■
■
■
■
■
■
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platform Linux was created on this fundamental notion (and also to challenge Microsoft head on). Time — This could be personal or corporate time that is sold through the global exchanges. For example, an individual could sell six months of his or her time to a corporation in two years’ time. The revenue that can be obtained from that can be securitized so that its value can be released today. Future earnings — Individuals and corporations should be able to release the value tied within their future earnings potentials. Myrichuncle.com, for example, allows investors to share in future revenue potential of students by investing in them, rather than lend them money, as has been the norm for many years. Potential credit capacity — Most people have a certain credit limit that they are allowed to use. If you are unable to use the whole amount available to you, you can supply it to those who would have better use for that credit capacity. In this way, you can earn a margin on your superior credit quality. Info about transaction behavior — This type of information can be very useful in determining the kinds of offerings an organization needs to focus on, since they would know what goods or services need to be available all the time and which can be supplied at a later time. Information about personal characteristics — Information concerning individual traits can also be used to supply them certain services, such as travel insurance, based on real time. Individuals would be able to insure themselves not on annual basis but each time they use travel. For example, information about the current weather or security conditions combined with the typical driving habits of a driver can be used to price their insurance policy for that defined period. The individual can subsequently either hedge against the change in weather conditions or opt to buy the cheaper option and pay more should the weather change during his/her trip. In either case, the individual would only pay for insurance when they use it. This would release the value typically tied down in purchasing annual memberships. Points — Currently it is very hard to release the value of points that you receive from your credit card providers, airlines, and other frequent usage points providers. Within the new wave of liquidity, these points can be easily standardized across industries and competitors, and subsequently exchanged on the open market. Collectibles — These can be pretty much anything that people would be willing to pay for. For example, customers could sell Coke cans and cigarette boxes to those who would like to collect or reuse them. eBay is the first successful platform to determine the latest market price and release value from these types of assets. Personal float management — Similar to many corporations, individuals will be able to aggregate all their assets and invest them overnight at the highest possible rate. The next day, these assets will be returned to their respective sources for utilization. Scarce resources — In the future individuals will be allocated scarce resources such as health club memberships or time on specific transportation mediums, such as planes, highways, and trains. Individuals who do not need a specific allocation can sell their slots. The future revenues that can be generated from selling your slots can be securitized and sold. In this way, individuals would be able to release the value tied within the limited resources allocated to them.
This appendix should help illuminate the true potential of the paradigm shift that we are observing. The ability and technology to release value from almost all types of assets is currently at the disposal of most individuals. These assets clearly have values that need to be released. However, what is lacking is the level of comfort, security and standardization required to release these asset values. What the new wave of liquidity does is to provide the platform for exchanges of these assets so that either ownership or usage is transferred to those who have the highest valued use for them. It expands the ability of all individuals to not only provide and receive services that are currently reserved for only the largest of corporations, but also to release values from assets that were previously not even considered as assets. That is the true potential of this new wave of liquidity.
Assets Tangible Cash Land & property Cars Jewelry Home furnishings Art pieces (non-collectible) Intangible Investments Pensions Home insurance Social security payments
Liabilities
Personal loans Credit cards Mortgage Pending lawsuit Medical liability Family Children Elderly Home Car maintenance Tax Utilities Insurance
New asset classes Human capital Ideas Bank width/excess capacity Content Time Future earnings Potential credit points Collectibles Holidays Medical benefit Reservations Concerts Travel Restaurants School places Figure 3
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