Monday, October 06, 2008

The Nature of Credit & Trust

Credit is Social

Rob Paterson over on the FastForward Blog has a deep insight to share about the very nature of credit. In an industry that sees credit as an empirical, deeply-scorable entity, it is easy to forget that fundamentally, it is a social object. By this we mean that it derives its value from the social contract, driven by our fundamental belief that this person will pay it back, and not by any insight into our belief that they can or have the ability, to pay it back.

Mr. Hempton over at Bronte Capital (HT Mr. Kinsella) has a related point that its not a shortage of cash that is creating a credit crunch but a shortage of Trust. I did some research on Trust a number of years ago and from what I can remember it had an awful lot to do with irreversible investments and historical behaviors patterns. There was a whole lot more buried in the depths of the theory such as the existence of relationship specific assets, but I wonder if at route, an awful lot of this current mess doesn't lie somewhere between losing the social context, and losing the relationship-specific assets.

Trust-Thee The Cloud?

Some fairly big announcements this week around "cloud computing". The issue of how open or not the cloud was going to be was a talking point, and then Amazon goes and says he, we're like, Windows-Centric, and why not use BEA webserver, to like, totally port your application to the Amazon cloud? I think we are seeing a traditional bridging strategy here: don't abandon your old installed infrastructure, but if you need to build anything new into it, why not build it or buy it from the cloud? And now, with no improved windows-cloud, it will scale too :)

The Semi-Permeable Physical Digital Membrane

Cisco released a study that revealed "Reveals Consumers Trust Online Payment Providers More Than Traditional Banks". eh hum. Big throat clear. By facilitating connected commerce around the point of sale, financial institutions can become more influential, by connecting payments, merchants, and other "data" (one presumes). What it boiled down to is that if you get more "connected digital experiences" within the store (i.e. search - compare activity) then the opportunity arises to disintermediate the banks. After all, if I have a paypal account and so does the store, why not just pay through that? I actually do believe that digital technology and social media will play a much more prominent role in everybody's purchasing behavior, but I think we all may have to re-think what it is a financial institution does, and the role it plays in society, before it becomes truly possible for them to grasp this connected opportunity. Companies like Google "get this" and build "edge competencies" that lead them to become "market co-coordinators" or indeed, market platforms (For more on this topic I can recommend Sean over at The Park Paradigm and The 6th Paradigm ). John Hagel has more on edge economics here.

What would it take for banks and other financial institutions to develop Edge Competencies? I don't know, but I suspect it isn't in their DNA to do anyway.

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