Author: Nasir Zubairi
The following presentation was given in Tallinn, Estonia in March 2014 at a conference that brought together UK and Estonian financial services and technology practitioners to discuss the issues and opportunities in FinTech and UK-Estonia collaboration.
A big thank you to Chris Holtby (@HMAChrisHoltby), the UK Ambassador to Estonia, and his team for their hospitality, their enthusiasm for promoting Financial Technology, and for arranging the conference.
There are an amazing number of great tech businesses in Estonia and we look forward to working with some, if not all, in the future.
New Buckland will be back in Tallinn in June to present at the FinanceEstonia International Forum.
If you were not already aware, University College London (UCL), through the UCL Advances and UCL Enterprise programmes, does fantastic things to help small businesses. They run the awesome Goldman Sachs 10,000 Small Businesses Growth Accelerator Programme, a mentoring programme (UCL SMILE), amongst many other useful and free services.
I highly recommend the internship programme; a bright young thing(s) to help you with your business over the summer. They get paid (by UCL) you get an added pair of hands to help you to grow your business – win-win!
UCL Summer Internships.
If you have friends/clients/yourselves who are London-based SMEs with a desk in an office for 8-12 weeks this summer (value is £2000-£3000), you can apply for a fully-paid full-time UCL student intern. Yes, fully paid by UCL so the host doesn’t need to pay anything. Unless they need help finding a specific student to be the intern. We are holding 4 “fairs” at the end of March (24, 25, 27, 31) where companies can buy a stand (super cheap) and you’ll meet hundreds of UCL students looking for summer opportunities and there you can interview or meet them afterwards to find the one that you want. Together, you’ll submit a proposal for funding by the end of April and if approved, you’re ready to roll! If the company already has connections within UCL or has a student in mind already to be an intern, the fairs are not a requirement. Click here to find out more!
This presentation formed the basis of a business plan workshop with students interested in entrepreneurship at the London School of Economics. January 2014.
To summarise, the article talks to the lack of investment by banks into back office IT infrastructure. Given the very public issues with payment networks of recent months (lloyds, RBS to name but a few) the article is timely and points to a concerning issue – although the big banks have (finally) realised that they need to invest in technology driven user experience, they are still lagging, critically so, in upgrading their core banking infrastructure, which may have devastating consequences to their customers and, ultimately, to their own competitiveness.
The article echoes some of the issues I addressed in a piece I wrote for Entrepreneur Country magazine several years ago when I was beginning my entrepreneurial journey within financial services. My concern is that the bigger issue of incentives within banking still need to be addressed before we see the major banks put the right emphasis on IT strategy as a core driver of overarching business strategy and competitive advantage.
The analogy of “spaghetti” used to describe the state of bank systems within Chris’s article is one I have myself used in presentations describing bank IT and is appropriate. The front office (revenue generators) in a bank rule – they are the decision makers and define business strategy and tactics. IT managers are expected to implement what the front office says – the faster they do it, the more praise they will receive and the more likely and faster they are to progress in their own careers. Bolting on/fudging code to deliver new IT services yesterday becomes the norm as the IT leaders respond to the incentives put in front of them. Dare they suggest to do things properly? No, as it will lead to them being sidelined and suffering significant barriers to career progression until they conform.
The front office managers have no desire to suggest an overhaul of IT systems for the greater good of the firm. Although the cycle of promotion has lengthened since 2007 and managers are staying in their posts for longer, the average is still 3 to 4 years before a manager moves on. Do they want to be the ones seen to suggest and preside over massive capital investment in IT, in the 10’s of $millions (given the still prominent waterfall project methodology), without clear and tangible uptick in revenues? Unlikely, if they want to keep going on their trajectory of pay rises and increasing responsibility.
Pressure to conform and address the issues must come from the business leaders on the board. IT strategy must come to the fore and their team must be made to feel that they will be rewarded, not penalised, in their careers by making the right investments in technology. Changes in approach – agile, lean, experimentation – to ensure failure is fast and cheap, should be gradually cascaded through a bank to ensure capital is spent wisely.
The simple fact is this; my kids, our kids, will not want a bank branch, will have higher expectations of the e-services they receive from banks, and will be more likely to penalise a bank for inferior services by changing their provider. We ourselves, as we progress in life and increasingly become the core target market for capital markets, commercial and retail banking, will have moved along the line of normalcy in terms of the technology we accept and use and will demand and expect more from our service providers. Banks will become less sticky; they cannot rely on an apathy to change going forward. There will undoubtedly be more competition for services; pushing for change now, acquiring new knowledge and experience in best practice for technology design, development and delivery, investing in building a true competitive advantage and core capability in technology will ensure the longevity of a bank and its future competitiveness.
We are absolutely market focused in helping our clients with their growth strategy. Although we do work on refining operational and finance strategy as part of client engagements, we find that marketing is the core driver for achieving a client’s business potential.
Below, we share a few of the frameworks we use to help build out practical marketing strategy and associated plans. We hope you find these useful – please tell us if you do, or if you have any suggestions to refine the models further; we welcome feedback!
We work with a number of SMEs helping them to define and implement their growth strategy. Unsurprisingly, given the nature of the entrepreneur, they are bristling with ideas for growth. Also unsurprisingly, given the nature of the entrepreneur(!), they will use any and all arguments to justify that their favourite ideas are the right strategies to follow. A process that involves a lot of luck rather than logic and will ultimately result in some hit and miss.
What we ask each and every business/entrepreneur we work with is to blank their minds and start at the top of the funnel: understand their business, their customers, their competitors and the world around them, to work down to ideas and implementation plans. This technique leads to some pleasantly surprising results – strategies that seemed obvious become weak and new ideas/strategies are uncovered that are far more robust then any previously conceived.
The Science of Growth Strategy can be a complex discipline. We simplify and make it practical as well as easy to understand. We also believe in transparency; the template/guide below is a generic overview with some examples of how we take firms through a strategic process down to actionable plans. We hope you find it useful. Don’t hesitate to contact us via the form below to find out how we can train you and your team to make the right decisions for future growth.
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The original article was published by Entrepreneur Country on 01/11/2013.
Cash flow problems account for a huge percentage of corporate bankruptcies and are a major cause of financial distress to UK businesses. £36 billion was owed to UK SMBs (small and medium sized businesses) at the end of 2012 due to unpaid and overdue invoices. More than 124,000 businesses said they have come close to shutting their doors permanently as a result of cashflow problems resulting from extended invoicing terms and late payments from their buyers.
Cash flow worries have led to a surge in adoption of alternative financing services. Crowd funding, invoice financing, angel investors and even government grants have emerged as options for businesses struggling with cash flow concerns. However, though easier to access than traditional finance such as bank overdrafts and loans, these forms of credit are more often than not relatively more expensive for SMBs than for their larger customers.
Championed by the UK government, Supply Chain Financing (SCF) is quickly emerging as the best alternative solution for low cost working capital finance for businesses.
In many ways SCF is the same as Invoice Financing/Factoring – the practice of receiving short-term credit against the security of an invoice as yet unpaid.
The critical difference between SCF and Invoice Finance (IF) is that it is the customer not the supplier that works with the lender, historically a bank, to enable seamless early payment of the invoices to its suppliers. Suppliers are offered the opportunity to receive early payment and can choose to opt in to the scheme or not. The “credit” comes in the form of a discount on the value of the invoice. For example, if a customer typically pays on 60-day terms, a supplier could receive immediate/early payment if they accept a small discount on the face value of the invoice.
The benefits of SCF to both the customer and supplier far outweigh those of other working capital solutions.
Firstly, the credit risk and thus the cost of the financing are related to the customer, not the supplier. Due to the direct relationship with the customer, the lender’s fraud risk is also reduced – there are no “ghost invoices” to worry about, no worry around disputes over payment or returned goods. These factors help make SCF the lowest cost option for working capital finance for a supplier. Suppliers can receive early payment on close to 100% of their invoice value. With IF, early payment is generally around 60%-80% of the invoice value.
Furthermore, SCF provides for total transparency in the use of the credit facility; the relationship between supplier and customer often becomes strained when a lender is chasing the customer for unpaid invoices in an IF solution. Invoices are pre-approved for financing as opposed to a supplier struggling to obtain the evidence they need for IF.
For the customer, SCF helps cement a robust supply chain and can actually make their cash work harder, enhancing their own working capital, and can potentially help generate a new and small income stream.
Win-Win for all involved.
SCF has traditionally been targeted at large corporates with a large supplier base. This is changing as technology and processes to assess risk are improving. New services, such Tradebridge, aim to facilitate SCF for medium sized businesses, helping them, and their suppliers, to access the benefits of SCF.
Mark Coxhead, Managing Director of an innovative new SCF business called Tradebridge said to me, “We utilise proven technology to help us deliver a simple, easy to use solution designed for medium sized businesses, typically with between £20million and £100million in revenues.
Our goals are to allow these businesses to realise the benefits of SCF without adding any friction or cost to their existing processes and to help their suppliers overcome cash flow worries. Our service also gives more control to the supplier, allowing them to get cash early for their invoices when and as they need.
Our technology enables us to cut out a lot of the overhead that larger lenders/banks have to cover in their lending rates. As such, we are able to offer market leading finance that is lower cost than that of other providers.”
Automation around invoicing is core to optimising the SCF process, and to invoicing in general. E-invoicing should, particularly in this age of technology, be the defacto method of billing between the supplier and customer; many solutions, such as Invoiceable, are free, others are in-built to common accounting packages.
Paper invoicing is the source of a great amount of confusion on invoice status. Paper invoices are difficult to track and thus create inefficiencies in the invoice approval process. PDF attachments to emails are not much better; they are invariably at risk of being ignored.
A clear, robust and automated process around invoice handling can even free up previously hidden cash within an organisation. For customers, greater clarity about what has been spent, what’s outstanding and invoice status can lead to more rapid processing, helping them to avoid late payment. A transparent system also fosters greater collaboration between suppliers and customers, leading to new opportunities.
Invoicing terms are the main driver of cashflow issues facing SMBs in the UK today. The lack of cheap and accessible credit further exacerbates the issues SMBs face. Managing finances does not need to be so difficult; Supply Chain Finance offers a myriad of benefits to both suppliers and their buyers and is now accessible to a wider community of businesses. Technology has made SCF relatively pain free to implement and use and has helped to lower the financing costs. Implementing SCF should be a top priority for any Financial Director.
The e-journal is a must read – a fantastic collection of thoughts on the future of financial services from the likes of Rohan Silva (former senior policy adviser to David Cameron), Edward Lucas (The Economist, International Editor), Dr Christopher Sier (Director of The Financial Services Knowledge Transfer Network (FSKTN)) and Gavin Cleary (COO for the Financial Services Investment Organisation) amongst others.
How does the technological evolution shape demand for financial products?
Technology is becoming a core component of our habits and behaviours and therefore a driver of our needs. Looking forward, the young are growing up in a world that is ruled by iPads, smartphones and other touchscreen devices, Facebook, Twitter and other social media are an important part of their every day. My own two children are constantly on a screen of some sort. Their lives, our lives, are increasingly ruled by technology and it is hard to imagine a world going forward where the services we engage with, such as financial services, are not delivered through digital channels.
However, we are still only at the dawn of financial services digitization; mass market adoption of digital financial services will take time. I often hear the calls of Financial Services disruptors who say that the branch is dead, I disagree – branches will exist for quite some time yet; the “normal” level of acceptance and use of technology innovations in the mass market has not shifted far enough yet. Too many people still want to have a relationship, to go into a bank, talk to people and manage their financial requirements. Perhaps it is the physical branch that is the substance for the trust between the customer and service provider.
Things are changing, and rapidly, but we still have a way to go and need to be constantly looking at changes in consumer behaviour and habits along the way. I doubt we can even imagine the way we will engage with Financial Services in 15-20 years time, the major industry participants nor the role financial services will play in our lives.
I’d argue that in smaller societies, like Estonia, the traditional branch banking model is closer to expiration than in countries like the UK and USA. The crux is in REALLY understanding market segments – Estonia has a relatively small and concentrated population thus there is more correlation in behaviours and habits among that population and therefore more homogeneity in needs. In the UK there are approximately 46 million people with at least 1 bank account.
London has become a beehive for disruptive financial services, both those types that compete with banks and those that seek to service and enhance the traditional participants in the industry. With the former, I feel there is some level of myopia that results from their peer group – a bias to technophiles they cross paths with in London’s exhilarating tech community. Hearing that your service is innovative and cool from peers may be a danger sign that you are too advanced for mass adoption now or in the near future. Fine if you can build a business targeting a technologically savvy market, not so great if you need massive scale, as is often the case to be successful with financial services.
If you go outside London there is much more diversity around digital acceptance. From a financial institution perspective, the big consumer revenue generators have been found to be less accepting of tech than the norm, they still want to engage with the physical bank. Virgin have launched their bank in the UK – Virgin Money. They chose a strategy that involves an extensive branch network when they could have sought to build a digital-only bank, a pitch I myself made to them a few years ago. Virgin is a very smart company, they have a lot of people who worked really hard on analyzing the market and constructing the strategy to enter the industry and they concluded that branches were needed.
Small steps in banking evolution are occurring in the branch, slowly shifting the norm of technology acceptance along the right path. HSBC has rolled out some very high tech features within branches focusing on less interaction, reducing waiting times and generally engaging more efficiently with their customer. Personally, I do not see branches disappearing from the UK within the next ten years, potentially considerably longer. Yes there will be reductions in numbers as more people accept and use online/mobile services and engage less with the branch, but branches are still a core requirement.
Do consumers know what they expect from the industry and what are those expectations?
That is an interesting question because the word “expect“ is very different to “require” and the expectation, at the moment, is very low and is largely moulded by the current state of the banking industry. People’s expectations of banking are not high because the service delivery has been really poor. The gap between what people need and should be getting out of the banking industry, and what banks are delivering has widened significantly, particularly in the past five years as banks have focused inwardly. I think that will change, the requirement is a lot higher.
So expectations are very low but requirements are high; this has created the opportunity for a lot FinTech innovators – there was really nobody looking to challenge the banks 5 years ago, the “new finance“ industry has exploded since 2009. The banks are simply not providing the service consumers deserve.
Will telecoms companies participate in the financial industry more significantly in the coming years?
I don’t believe that large telecom companies, such as the mobile operators, have the core capabilities/skillset to enter the financial services market. Rather I see partnerships being the strategy of choice for telecoms to successfully enter financial services in developed markets and, perhaps more interestingly, servicing developing markets.
Developing markets, such as in Africa, are embracing innovation and technology in mobile banking beyond countries such as the UK as they do not have to battle with existing infrastructure. They can take a step change approach to solutions to meet market needs.
I see mobile becoming increasingly useful in terms of managing finances. My personal belief however is that, in the UK, mobile payments will not take off in the near future. I don’t think there is a strong enough proposition yet relative to the lack of trust in mobile devices and the mobile wallet. I see innovations coming in areas that offer marginal benefits over what we have today and require less behavioural change. For example, The Touch2pay Card is taking off but people are not really ready to do that with their mobile.
In what areas do you believe old economies and financial centers are still strong?
Ultimately the old economies (London, New York and I would add Singapore, Hong Kong and Tokyo into that batch as well) are very difficult to compete with in terms of accessibility to the capital markets’ core infrastructure, the pipes and connectivity on which banking is facilitated. London is a powerhouse of finance; we have a concentration of skill, resources and knowledge. New economies don’t have that.
New financial centres do benefit from not being burdened by existing infrastructure and by “shadow of the past” thinking – I cringe when I too often hear the phrase “this is the way we have always done it”. Agility is another key advantage in new centres.
I do feel that new centres could benefit by bringing in the right management and leadership expertise from traditional centres. For example, one of the big problems China has is the lack of highly trained and skilled white-collar workers of a senior management level; their development around management skills has only occurred over the past 10-12 years. They are learning fast, and this education is coming from senior managers brought in from Western economies where the management skillset is significantly more developed.
One of the highlights of rising economies is their ability to come up with creative ideas and actually implement these ideas with agility and success. Reiterating what I said previously, the mobile payment/mobile money revolution in Kenya is phenomenal – a leap in terms of innovation beyond the UK and US. For us in the UK to go from a fairly effective and efficient chip and pin card payment system to mobile payments is going to be extremely costly and the incremental benefit, as I say, is not quite enough to motivate consumers and merchants to adopt yet.
Do you think that Africa will skip some stages of development in the financial industry that the older economies went through, especially due to the fact that they are very heavy users of mobile?
Absolutely. African nations have the benefit of looking around to see what has and has not worked in the past and use this knowledge to help create the right solutions for their market based on current habits and behaviours and the likely path of change. They are essentially starting with a clean slate. Given that a lot of the population is under banked, the solution that they have come up with is targeted to, and facilitates the needs of, that market.
Where do you see that emerging economies could excel in terms of financial services?
I think there are a lot of shining lights in the emerging economies. If you look at Africa, Russia, Eastern European countries and what is coming out of these countries, there is a lot more creativity around solutions. They are almost becoming case studies for ‘this is what banking can become’. What comes to mind from Poland is mBank who are delivering a fantastic online user experience. Fidor Bank in Germany have a virtual online wallet that allows their customers to manage multiple real and virtual currencies from a single portal. They also have a very innovative approach to marketing, wherein the more Facebook likes they receive the higher the savings rate on their current accounts. They have the ability to create and implement at relatively low cost compared to large, traditionally bureaucratic banks in the UK.
The market here in the UK unique, we have five banks controlling 85% of banking. It is very hard to make inroads against the oligopoly. What is interesting and right is that the new finance world is focused on very niche products and on specific elements of the financial services value chain. There has been relatively rapid adoption of new services however ,one of the issues that may be a stumbling block in the growth of banking alternatives is that easy access is core to consumer needs. It is not pricing that matters to UK consumers in financial services (as long as it is in the ballpark), it is all about access to make it easy.
Banking utopia would be that banking services are invisible, consumers choose when to engage and we would not need to do so often. Although individually all new finance services coming to market are easy to use and access, they are each just a part of our overall requirement and therefore making the act of engaging with financial services on the whole more complex. We want something which looks after our money, can facilitate payments, do foreign exchange, lending, help with our investments, etc – having to engage with a different provider for each part is far from ideal. The less friction the more popular services will be, the people who can deliver that are the people who will win. Perhaps we will soon see a consolidation of multiple new finance services through single access points, a virtual bank. That will be VERY interesting.
There are a plethora of lists citing the most innovative companies in the world; all differ in their membership, but there are common principles of innovation that can be drawn from the companies that are expertly surfing ahead on the wave of creativity.
It was interesting to read the Fastcompany’s “Most Innovative Companies of 2013” article published last week. Avoiding the debate of who should be in and isn’t and who is in who shouldn’t be, there are some great insights into the approach these companies take to innovation and why they are good at it.
1) Understanding what Innovation is.
You have to get this right. Inventing is not innovation without the invention adding significant value. Clearly captured in Rube Goldberg’s cartoons that became well known for depicting complex devices that performed simple tasks, creating something new or doing something differently does not automatically mean it is innovative. It has to tangibly or intangibly provide greater utility for the user and/or customer.
Innovation can occur at 4 broad levels:
a) Process innovation – doing something differently that makes it easier/cheaper to complete a task/fulfil a need.
b) Product/service innovation – delivering something new to customers that significantly surpasses the value of substitute products/services.
c) Business model innovation – Changing the way your business works in a way that is different to competitors to enable scale, lower costs, greater profitability, more customer value.
d) Industry innovation – changing the way the industry competes, price focus to quality of service focus, premium pricing to freemium.
2) Understanding the customer.
So often we think we know what the customer wants without really asking them, or, better still, watching them and understanding them. Our own pain points may be representative of a certain demographic, but we must verify our hypothesis with the wider market, with other experts, with stakeholders. The most innovative companies really “get” their customers and innovate to improve their lives in the right way with the technology that they are ready for. Spending time in discovering needs and opportunities, analysing scenarios, modelling benefits and customer journeys and outcomes will save time and money in the longer-term development process.
Call it what you will, Rapid Application Development (RAD), Lean Development…..the idea is pretty much the same. Prototype, build a low cost demonstration of your product or service and test it with the market. Do it frequently and do it early on. Don’t waste money thinking your idea is right, going all out in development only to find no one really wants it.
4) Managing failure and learning from it.
It is not about eradicating failure; failure is actually crucially important to the innovation process as it provides even more insight into customer behaviour. No, it is about ensuring that failure, when it occurs (and it will), occurs early on the process of innovation, within the discovery phase as part of experimentation.
In the vein of the Black Swan, a belief that something works/is right for the customer should be validated by proving that other avenues are wrong or not as valuable. That is sound practice. Failure at the end of the process of development is costly both in terms of capital and people’s jobs. Creating an environment that encourages people to perform low cost experimentation that may or not work, without repercussion (as long as they learn from it) is vitally important to building a culture of innovation.
5) Aligning incentives.
Don’t reward risk taking, reward progress. Show that those that get ahead in the company are the ones that follow the right process for coming up with ideas and implementing them, not the ones that may have stumbled on a product that luckily hit the mark and made the business money. Not many are that insightful, not many have the genius to intrinsically understand human behaviour with the ease that most of us ride a bicycle. They are unlikely to be that lucky again.
Demonstrate to your team that it is the richness of sharing and working together to come up with the right solutions that builds the company and their careers. Give credit and rewards where they are due, but equitably, to all the people involved. Praise and openness contribute a lot to building a sense of ownership and instilling motivation – people like to feel they are contributing to their company’s success, that they are making a difference and that it is recognised.