A bit of fun for a slow August. We promise at least 20% Return on Equity (ROE) if you help fund this particular startup bank idea; most established banks are giving 4% to 8% ROE. Internal Rate of Return (IRR) of around 100%. Get in touch if you are interested in learning more about and investing in this or one of our other, perhaps less zany, bank concepts!
- We employ some currently unemployed bankers (adding value to the economy).
- We raise £1 billion of equity (fuelling capital flows, perhaps even internationally).
- We use the £1 billion to purchase as much high-grade securities as we can (minus set up costs), paying circa 4-5% coupon (Supporting the Govt/Treasury).
- We use the securities as collateral to borrow £9 billion from the BofE at overnight rate of 0.5% (Providing revenue to the Treasury).
- We buy another £9 billion of securities at similar rates as the first batch. At this rate, we are earning at least £400 million per annum from the interest payments alone.
- We continuously roll the overnight position with the BofE, pledging more of the security pool in collateral if required on margin calls.
- We go public. After costs, the bank is earning at least £200 million a year with a high capital ratio (10% equity-to-debt), and the balance sheet will be clean (all low risk securities). Potential valuation of 20-times earnings: £4 billion. We sell 25% of the company for £1 billion. (Give the man on the street an opportunity to share in our success and realise a return for investors)
- Put the £1 billion raised to good use – go back to Step 3
- When market cap hits £10 billion, sell another 10% of the company for £1 billion. Go back to Step 3 again.
- Expand to US. Fed is lending at 0.25%. Repeat formula.
- Start focusing on PR and social issues, buy branch networks from defunct banks and start making actual loans to retail and corporate consumers (Social, Economic and Cultural good).
- Exit for a ridiculous valuation. Everyone wins! 🙂
New Buckland founder Nasir Zubairi has been named one of the top 40 movers and shakers in financial services within EMEA by Financial News and the Wall Street Journal. He’s in good company with a raft of major players from London and abroad, including:
Eric van der Kleij (Head of Level 39)
Taavet Hinrikus (Founder of Transferwise)
Sean Park (Founder of Anthemis)
Nick Hungerford (Founder of Nutmeg)
Oliver Bussman (Group CIO at UBS) and
Jan Hammer (Partner at Index Ventures)
to name but a few!
Originally published in The Huffington Post on 5th March 2014.
Although I agree that Banks and Financial technology firms should be looking to partner and work together where possible to improve the proposition for customers, I don’t necessarily believe that this strategy will make banks more innovative and provide better services for you, I and our businesses.
As I have stated before, innovation occurs at 4 levels correlated with increasing returns for the business and customers:
- Business Model
- Industry – changing the way participants compete
My experience in financial services is that banks are pretty good at Level 1 – by buying in tech to improve process – and not too bad at Level 2 in certain areas.
Just look at the advances in process and products around capital markets such as electronic trading, algorithmic trading and prime brokerage. They are pushed to be innovative in these areas as the buyers, other financial institutions, hedge funds, etc. have significant power.
Downstream, in commercial and retail banking, there is less evidence of innovation in practice; chip and pin was a startling improvement that put the UK ahead of most other countries, but then we look at areas such as international payments, where the correspondent banking system from the 70’s is still in place, or invoice finance, where I have personally seen green screen terminals in a bank that run core processes.
It is still far too common that banks, rooted in tradition, try and keep the benefits of innovation for themselves rather than sharing with the customer equitably. This has to change; when it does, it will be the foundation of a new evolved industry.
For banks to become more innovative requires them to adopt a change in approach (be it slow and adaptive) to the way they do things, to the way they frame their role as a service provider, to they way they define and then execute their strategy.
This change requires buy-in from the top, from the board. It will take time and needs to be planned and controlled to fit with the bank’s culture and to avoid widespread disruption. Openness and collaboration with the rest of the bank is key; not just for others to see the benefits in the new approach, but to be inclusive and create a stakeholding. Segregating the (innovation) team is the biggest mistake that can be made – it will stir resentment that will lead to failure.
The CEO of one of the larger European banks I have worked with put it to me quite eloquently,
“Our business is like a large oil tanker, it takes a lot of effort to make it change course. What we need are a few agile speedboats that buzz around the tanker. Eventually, as more speedboats catch the tanker, the wake of these boats will help make the tanker turn more easily.”
We have not really seen a major bank challenge the industry with innovation at Level 3 and 4. Saxo Bank and Well Fargo are recent examples of business model innovation, but it has not called the larger players to account.
I am certain that, as has occurred in other industries over the past 20 years, a new entrant or existing player will grasp the reigns of innovation, be it organically, or, more likely, acquiring capability through external talent, so wholeheartedly that it fundamentally changes the way the industry competes – Level 4. This is where real value is delivered to all – Apple (Music industry), Ryan Air (airlines), Skype (communications). We are on the verge. I am so excited to be involved in the new dawn of financial services.
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.
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.
The tipping point has been reached – banker bashing has gone too far. The hysteria and portrayal of the “despicable” individuals that work in financial services is yet another story that the media has spun beyond the realms of reality and reason.
Sure, there are unscrupulous and venal individuals in the industry, but no more than in any other. Labeling all bankers as evil incarnate, motivated by greed, is ridiculous. The “99%” are ordinary hard working people that live down your street, that take days off to attend their kid’s sports day, that would rather be at home with their family then jumping on a private jet for a hedonistic all-nighter in Monte Carlo.
I have never met anyone in the industry like those that have been described in the press of late. The attacks on the culture and, more worryingly, individuals and groups, is creating a sideshow that is stealing the focus away from the real issue – how to change financial services for the benefit of the customer and the UK economy.
It is not the fault of individuals that financial services is failing. The industry is not structured in a way that suits today’s business and consumer needs. We should not be focused on demonising people who are typically as honest as the rest of us. We should instead be looking at the wholesale change to banking structure, and business models therein, that is needed to improve customer service, transparency, trust and to lower costs.
A movement is already under way. We are living in an age where change in the management and delivery of financial services is occurring at lightening speed. However, it is not the legacy banks that are at the forefront of this evolution, nor the policy makers and regulators that are simply applying cheap sticky tape to gaping fractures. It is “New Finance” that is gaining momentum; entrepreneurs and small businesses that are leveraging technology to address the fallacies of the system and to improve the industry for you, I and our businesses.
Perhaps the current hysteria will finally be the catalyst to encourage customers to vote with their feet, as that is ultimately what is needed to make change happen. It is astounding that 85% of business banking and a similar proportion of consumer/retail banking is still conducted with the 4 major UK banks. In a recent survey conducted by the Payments Council, 2 out of 3 people in the UK said they were still loyal to their bank despite the brand and trust destruction the industry has suffered over the past few years. Over the five years to 2010, 80,000 customers switched their banking provider – that’s less than 1/8th of a percent of the 64 million+ accounts held in the UK.
Competition, innovation and a re-focus on the customer is the key to improving the practices in financial services and to deliver better services, fairer services, for consumers of financial products. Rather than holding all bankers to account, lets drop the hype and focus on the real and practical change that can cement an era of New Finance. The power is in the hands of the customer – you must embrace the new, alternative, cheaper, more transparent providers of financial services and thus feed the seeds of a better system.