Futurismic

Many places across the planet lack basic commercial infrastructure. Kenya is serving as a case study of how banking by mobile phone seems to fill (or leapfrog?) the gaps. Since a phone-text bank service called M-PESA was introduced in 2007, almost 40% of Kenyan households have one user, while only 22% of adults have traditional bank accounts.

M-PESA charges fees for transfers, and doesn’t pay interest on savings. It might, though, spur development by making it easier to move capital around. The impact of the system is being watched by Tavneet Suri (MIT/Sloan) and William Jack (Georgetown U.).

In a 2008 survey of 3,000 households in areas representing 92% of Kenya’s population, Suri and Jack found that despite M-PESA’s fees, large numbers of Kenyans are using it for basic banking functions. About 38% of money transfers originated in rural areas. According to Suri, farmers are one group that employs the technology to lend each other money in lean times.

“Many of these people work in agriculture where you have highly variable incomes because of the weather,” explains Suri. “That means banks also don’t want to lend to them because the risk is much higher. So people insure risk, by making informal agreements: ‘I’m going to lend you money if you need it.’ And if you were not able to feed your family, you would receive transfers from people in your network. This happens in a lot of developing countries.”

The researchers’ data also shows that 41% of M-PESA money transfers are sent to parents, and only 8% to children, which also strongly suggests that M-PESA fills a classic role in a developing economy; children who leave home to work may be sending money back to help their parents.

The physical separation of people has always made money transfers difficult in developing countries, however, notes Suri, a Kenya native whose family lives outside Nairobi, the capital. Sending money from one place to another has often been “hard to do, costly, not very safe. You might send money with a bus driver and it wouldn’t get there, because he might get robbed. Now it gets there within five seconds, as soon as it takes a text message to arrive.”

And despite their inability to earn interest, Kenyans appear to use M-PESA as a savings tool. In a current working paper summarizing their results, “Mobile Money: The Economics of M-PESA,” Suri and Jack note that 77% of Kenyans say they keep money “under the mattress” at home, so to speak. About 11% of households say they have had savings stolen or become lost, though, meaning that tucking cash away is a money-losing strategy. By contrast, under 2% of M-PESA users believe they have lost money through the system (by sending it to an unintended recipient). That means Kenyans without access to banks should, on aggregate, retain more of their savings through M-PESA.

The next wave of research will look at whether M-PESA really does speed the spread of capital. Freeing up small packets of wealth makes a difference where it’s needed, as Nobel Prize winner Muhammad Yunus, or Heifer International, can attest. (And maybe writers, artists, or musicians, wherever they are, need to see if they can get their 1,000 fans on Twitpay.)

[Mobile Phone With Money in Kenya by whiteafrican]

George Dyson has an excellent and compelling essay on game theory, economics, information theory, computer science, banking, finance, technology, and John von Neumann:

We are surrounded by codes (some Turing-universal) that make copies of themselves, and by physical machines that spawn virtual machines that in turn spawn demand for more physical machines. Some digital sequences code for spreadsheets, some code for music, some code for operating systems, some code for sprawling, metazoan search engines, some code for proteins, some code for the gears used in numerically-controlled gear-cutting machines, and, increasingly, some code for DNA belonging to individuals who serve as custodians and creators of more code. “It is easier to write a new code than to understand an old one,” von Neumann warned.

The monograph over on Edge discusses von Neumann’s intellectual antecendants and the development of game theory and statistical modelling. It also includes some interesting commentary on our recent economic difficulties. Definitely worth a read.

[image from kevindooley on flickr]

Remember that story we ran a few weeks back about the alleged theft of the Goldman-Sachs automated trading code?

Well, thanks to said case, Goldman-Sachs and the high-frequency automatic trading (HFT) practices that they dominate are increasingly sliding into the spotlight of Congressional scrutiny, so Ars Technica have knocked up a brief guide to what it’s all about. If you thought “the markets” were those guys in suits shouting at each other on the trading room floor, think again. [image by Coffee Maker]

If you look under the hood of the markets in 2009, you’ll find that the trading floor has been replaced by electronic networks; the frantic, hand-signaling traders have been replaced by computer systems; and all of moves in the trader’s dance—a thousand little tricks and techniques (some legal, some questionable, and some outright illegal) for taking regular advantage of speed, location, and information to generate profits—are executed hundreds of times per second, billions of times per day. And the whole enterprise is mainly powered by the same hardware from Intel, AMD, and NVIDIA, that Ars readers use for gaming.

[...]

Only about three percent of the trading volume on the NYSE is actually carried out by means of traditional “open outcry” trading, where flesh-and-blood humans gather to buy and sell securities. The other 97 percent of NYSE trades are executed via electronic communication networks (ECNs), which, over the past ten years, have rapidly replaced trading floors as the main global venue for buying and selling every asset, derivative, and contract. So the ECNs are the markets in 2009, and those pit traders who pose for the cameras are mainly there for the cameras.

In other words, Josephine Average Stock-Trader is going head to head with supercomputers every time she dips a toe into the game. The ECN algorithms specialise in making millions of tiny trades, each making fractions of pennies of profit – small beer when considered in isolation, but big profits when scaled up to the sheer volume of transactions that these systems can handle.

It’s like a vast virtual ecosystem of predatory code-critters; go find out more about it. Know thy enemy, and all that.

Proof (if such were needed) that the financial sector is utterly batshit insane: Wells Fargo is suing Wells Fargo over a condominium mortgage.

Being a taxpayer-subsidized, too-big-to-fail institution, it’s possible that one of the few ways for Wells Fargo & Co. to know what it is doing is to notify itself with a court filing.

In this particular case, Wells Fargo holds the first and second mortgages on a condominium, according to Sarasota, Fla., attorney Dan McKillop, who represents the condo owner.

As holder of the first, Wells Fargo is suing all other lien holders, including the holder of the second, which is itself.

“The primary reason is to clear title and ownership interest in a property to prepare it for sale,” Waetke said in an email exchange. “So it really is not Wells Fargo vs. Wells Fargo.”

Yet court documents clearly label “Wells Fargo Bank NA” as the plaintiff and “Wells Fargo Bank NA” as a defendant.

If you tried to write that into a story, people would think you were doing satire. The truth really is stranger than fiction. [via SlashDot; image by TheTruthAbout]

Yeah, so we’re all tired of hearing about crooks in charge of banks shafting their depositors and borrowers at the same time… but this story’s a little different, given that the bank in question exists in the virtual universe of science fiction MMO EVE Online.

That’s not to say no real money was involved, though; RMT, or Real Money Trading, is one of the few things frowned upon in EVE’s laissez-faire economy, but it still takes place – and as such there may be a lesson for real-world economists in the story:

Because players often do not have the interstellar credits — abbreviated to ISK, also the official abbreviation of the Icelandic kroner — they need to expand their fleets, an enterprising player created a bank that would accept deposits and lend to players who would pledge assets, like their spacecraft, as collateral.

The bank was a success. According to its Web site (yes, it has one), Ebank accumulated about 8.9 trillion ISK in deposits in 13,000 accounts belonging to 6,000 users. That was far more than it was able to lend out — there were around 1 trillion ISK of loans.

Somewhere along the way Ebank’s top executive, who went by the online handle Ricdic, apparently got greedy. According to CCP, he made off with deposits, which he then sold for real cash to gamers on a sort of black-market exchange separate from Eve.

CCP kicked Ricdic out of the game. And Ebank has temporarily shut down while its board of directors (yes, it had one of those too) tries to sort out the mess. Depositors, meanwhile, appear to have pulled 5.5 trillion ISK of deposits.

It’s not clear how much of that virtual money was embezzled and now needs to be found, somehow, by Ebank. But if the Eve chatter is accurate, it could amount to 10 percent of deposits withdrawn. That could wipe out whatever capital was used to finance Ebank’s loan book. As in the real world, that would spell insolvency.

[...]

As in the real economy, the customers could be tempted to appeal to a higher authority — Eve’s creators. That would probably involve appealing to the Council of Stellar Management — a body of nine members chosen by Eve players to represent them in discussions with CCP.

But the word from Reykjavik isn’t likely to comfort Ebank’s depositors. Eve’s creators at CCP — which employs its own economist and philosopher — take a laissez-faire approach, leaving most such matters to the game’s users to sort out. Unlike the Icelandic government, which allowed three local banks to nearly bankrupt Iceland with unchecked expansion, CCP is determined not to encourage entities to become too big to fail.

This is similar to a nasty incident in Second Life a while back, but SL’s banks are governed by US banking law, and so Linden Lab takes a much more hands-on approach to its economy.

It’ll be interesting to see how this pans out; it’s easy to dismiss the travails of a metaverse bank as irrelevant, but as they become more complex (not to mention valuable in real-world terms), metaverse economies may become a valuable testing ground for alternative economic theories. Anything that helps us avoid another real-world clusterfuck has got to be worth keeping an eye on, right? [via MetaFilter; image by Pentadact]