Better Joy Through Finance

The holidays are, for some, an unbearably stressful time of year.  The food, the parties, the relatives, and, of course, the gifts, all conspire to make miserable what should be fun and enjoyable.  Here at DRS Advisors we are always looking for ways to apply the power of financial engineering to making life more enjoyable, if ruthlessly practical and efficient, and we believe that the process of holiday gifting is in dire need of some restructuring.  We certainly understand that exchanging gifts with friends and loved ones is a joyful end in itself.  However, we also recognize that, from an economic standpoint, this act is profoundly irrational and fraught with inefficiencies, and that the bulk of holiday anxiety derives directly therefrom.  For the past several weeks we've devoted considerable resources to making the holiday season more efficient, and by borrowing a straightforward process from one of the core structures of modern finance (the swap), we have developed what we believe is highly workable solution: bilateral netting.

Bilateral netting, quite simply, involves consolidating multiple cash flows between two counterparties into a single, unidirectional cash flow.  That is, rather than structure a cumbersome series of one-off cash flows between counterparties, the transactions are "netted" out resulting in a single payment.  For example, Counterparty A owes Counterparty B $10, and Counterparty B owes Counterparty A $8.  Rather than exchange payments, Counterparty A simply forwards Counterparty B $2 and calls it a day.

How can we apply this to the holiday season?  Stripped of it's warmth and merriment, the holiday season can be seen as a vast commercial construct underpinned by millions of bilateral cash flows (gifts) between willing counterparties (givers/receivers).  With the notable exception of those treasures offered by Santa to the children of the world, most gifts are obligatory and only marginally appreciated, and many are, regrettably, unwanted.  This is an unfortunate waste of scarce resources, and only serves to stoke the smoldering fire of holiday resentment.  Rather than endure this personal torment (and perpetrate an economic travesty) year after year , we recommend that holiday gifting be restructured as a swap-like transaction, and unfold in the following manner:

• Valuation:  The counterparties shop as usual, developing ideas, perhaps even operating within a budget, and select an item that they would like to give.  They then value the gift (asset), taking into account shipping, custom gift wrapping, batteries, accessories, and any other costs to determine the notional value of the underlying.


• Contract:  Once the underlying assets have been valued, the counterparties enter into a gift swap agreement, identifying the assets and disclosing their notional values to each other.


• Execution: The transaction is netted out, resulting in a single cash flow between the counterparties.

Example: Let's assume that you are exchanging gifts with your cousin.  Let's assume further that, in a rare display of yuletide rationality, the two of you have established a spending limit of $40.  You each spend time shopping for what you believe would be a suitable gift for each other, taking note not only of the unit price, but any associated costs.  Your cousin has found an electric shaver for you which, including shipping, she has valued at $37, while you have found a decorative ceramic soup tureen at a local artsy boutique which you have valued at $29.  You and your cousin share your gift ideas with one another, and disclose their respective all-in notional values.  You then enter into a gift swap agreement which, via bilateral netting, results in you forwarding your cousin a single payment of $8.

Done.

And at the end of the day, that's what the holidays are really all about: getting it done.  Bilateral netting, while hardly a panacea, is a significant step toward a more efficient, and, therefore, more joyful time of year.

Season's Greetings!

Financial App Resurgence

For years the quality of Facebook financial applications has left a lot to be desired.  With a few notable exceptions - Fantasy Stock Exchange, for example, which went on to become KaChing and now Wealthfront - finance apps have been largely entertainment-oriented, unstable, and unsupported.

The tide seems to be changing with the introduction of two applications in recent weeks.  Loyal3, a social media-based transfer agent, offers customers the ability to buy shares in companies for as little as $10 through a "Customer Stock Ownership Plan" or CSOP.  Unlike an ESOP, which is designed to incentivize employees, the CSOP is essentially a stock-based customer loyalty program, the idea being that customers will be that much more loyal if they own a piece of the company.  There are no fees for the customer, as Loyal3 charges listing fees to interested companies.  The Loyal3 Facebook app enables customers to buy and sell fractional or full shares directly from their Facebook account.

Social discount broker Zecco recently launched Wall Street, an app which provides real-time stock quotes, charts, and trading via Facebook.  Users can "like" stocks, share comments and feedback via their wall, and place trades in their Zecco account.  The interface is clean, the functionality is smooth and robust, and the content relevant.

We wonder if these moves signal a new interest in Facebook as a distribution channel as opposed to simply a marketing medium.  We have maintained for some time that the sheer scale of Facebook can hardly be ignored in terms of its potential for financial services.  And with the SEC potentially allowing small companies to raise capital via social networks, we believe Facebook is a ready-made platform for disruption in corporate finance.

What Next for Credits?

The burning question on the mind of nearly every Facebook watcher is: What's next for Facebook Credits?  Over the past year Facebook has inked numerous partnerships with game developers and brick-and-mortar retailers, but the future of this virtual currency - often lauded as the best hope thus far for a "global currency" - is still a mystery.

Enter "Facebook Credits" in the Quora search box and you will find some 30 questions regarding technical issues such as whether users can send Credits to friends, or whether Page administrators can accept Credits to sell products.  Nearly all of these questions remain unanswered, while more open-ended, theoretical queries regarding the future of Facebook Credits often have several responses.

We believe that Credits remain a high strategic priority for Facebook, even in the apparent absence of any moves outside of the gaming space.  Recent news that Facebook has created a payments subsidiary, and growing rumors of a payments-related acquisition in 2011 seem to suggest that Facebook envisions a greater role for Credits in the near future.  But what will that role be?

E-commerce is of course the most logical use.  While leveraging Facebook's targeted advertising capability, merchants could use Credits to effect transactions without their customers ever having to leave the platform, thereby eliminating the spectre of sales friction.  Forrester Research analyst Sucharita Mulpuru, however, disagrees, citing a lack of genuine e-commerce success stories despite Facebook's enormous reach, and the fact that paid search and e-mail results in far greater customer retention rates.

Despite the uncertainty of its future in e-business, we believe that Credits could possibly have a future as a tool for raising digital capital.  SEC Commissioner Mary Schapiro recently suggested that crowdfunding via social networks might be allowable for aggregate amounts under $100,000 with a maximum commitment of $100 per investor.  To date, crowdfunding has been used primarily to fund "creative" projects as opposed to businesses, presumably to avoid running afoul of U.S. securities laws.  Small developers could tap the Credit marketplace to crowdfund their development efforts, using the proceeds of small offerings to purchase products or services from other developers working within the Facebook ecosystem.


Bottom line: We are bullish on Facebook Credits in the long term.