Leave No Business Behind – Capitalise’s Covid Response

More than half a year into the Covid pandemic the grim toll on not just lives but also mental health and our economy continues to build with no end in sight. There will surely be much accounting to be done in terms of which responses were right and which misguided, with many learnings and lessons for the future. Part of this post mortem will surely also include how various business reacted, and what they did to help their respective communities.

In that spirit, Capitalise (which is also a QED investment) constitutes a very interesting case study as the team very much found themselves in the eye of an unexpected but nonetheless perfect storm.

By ways of context, Capitalise works with accountants to give them the tech enabled tools to better serve their small business clients. These tools are varied, but many of them center around helping the small businesses get the funding they need to grow and prosper.

Shortly before the pandemic was yet to hit, Capitalise had embarked on a fundraise as part of its normal fundraising cycle. Given strong traction in the latter half of 2019, the company had decided to push back the fundraise to early 2020. The logic behind this was sound: It would mean using up more of their capital cushion, but nobody had any doubt that they would complete a successful fundraise given the performance metrics they had under their belt.

The fundraise was progressing quite nicely when in February, in the span of a few fateful weeks, it became clear that the virus that had originated on the other side of the planet was now spreading across the globe and would soon be classified as a pandemic. The impact of this on Capitalise was immediate: Small business funding, and by extension Capitalise’s revenue took a big hit, and all the potential investors that had lined up decided to play for time to see how things would shape up.

With revenue falling and the funding round on hold, the team at Capitalise found themselves in a position any founder would dread. Of course, on top of all this came the stress of trying to run a business which was situated in London that was quickly becoming the global epicenter of the pandemic.  

There comes a point in every classic drama where the protagonist has to make a decision that will determine how the story will end and how the finale will unfold. This is commonly referred to as the second act turning point, and typically requires the main character to draw on their values, strengths, and powers in facing the adverse circumstances. The founders and team at Capitalise were now in for such an epic test, and without hesitation chose to focus on how they could give their accountant customers the tools to go out and help the thousands of small businesses that were now facing severe and in many cases existential cash flow issues.

The quick and decisive action by the UK Chancellor Rishi Sunak had already made a tremendous difference with their Bounce Back and CBILS initiatives, but these impactful initiatives came a long way from covering every impacted business. To address this gap, in conjunction with The Corporate Finance Network, Capitalise launched #LeaveNoBusinessBehind drawing from the UN’s similarly named initiative. The movement was supported by the Association of Chartered Certified Accountants (ACCA), AccountingWeb, Accountex, AVN, Clarity & Forgotten LTD. Its objective was to provide accountants resources to support their clients.

As they started working in tandem with the government programs to enable the accountants to deliver much needed lifelines to the small businesses, Capitalise faced the first of many choices it would have to take. To deliver the maximum level of loans to businesses in need would mean Capitalise having to forego its own commission income in many circumstances, and this at a point in time where every pound of revenue mattered immensely. Needless to say, the team decided to do the work needed to process many of these loans for free.

The Capitalise team: Helping accountants deliver for small businesses come rain or shine

In parallel to this, the company also got busy on the product side, and in the span of a few weeks took to market a new product that would enable businesses to litigate  on bad debts, which at this point in time was becoming a crucial priority for many businesses.  

The story is far from over, but after those initial fateful months in March, April, and May Capitalise closed a significant funding round with a mixture of its internal and new external investors, and after the initial hit and sacrifices, delivered record revenues in both June and July.

There are surely many such stories yet to come out, and what we do in the commercially focused startup world pales in comparison to the heroic efforts by the doctors, healthcare workers, delivery staff, all other essential workers that toiled so hard during this period. But in the end, every business matters, and it is the sum total of all these small businesses, whether they be pubs, restaurants, theatres, or retailers that make up the fabric of our modern society. In normal times, these businesses serve us on a daily basis, adding to our quality of life. As the going gets tough, it is important we do all we can to not leave any of these small businesses behind.

The Rise of the Workplace Bank

With the advent of the first industrial revolution in the late 18th century, millions of agricultural workers began a structural shift from agriculture to factories, setting in motion one of the most important events in human history since the domestication of animals and plants. While the overall impact on economic growth and productivity is undebatable, there is more controversy around what the impact was on the living standards of the workers that populated the factory floors, in some cases literally working day and night in very harsh conditions.

Some economic historians such as Robert E. Lucas argue that with the industrial revolution the living standards of the masses began to undergo sustained growth for the first time in history, while other historians argue that yes the growth of the economy’s overall productivity was unprecedented but living standards for the majority of the population did not grow meaningfully until the late 19th and 20th centuries. Some argue even further that living standards for the workers decreased initially, citing the fact that the average height of the population declined during the first industrial revolution as evidence that the nutritional status of workers was actually decreasing.

The perceived safety of having a 9 to 5 job is simply no longer there for a vast majority of workers in the 21st century.

It is actually quite easy to see the parallels to today’s debate about the digital revolution, also referred to as the “third industrial revolution” (the second industrial revolution being the advancements in manufacturing technology that took place in the late 19th century, also referred to as the “technological revolution”).

Just like back then, there is today a very important debate going on about income inequality, living standards, and worker’s rights. And for good reason, too. Widely available statistics tell the story of how more than half of all workers in developed countries are today effectively living what could be best described as “paycheck to paycheck”, without a buffer to meet an unexpected expense as low as GBP 300.   

The dangers of being a delivery person are not limited to traffic: Increasingly financial distress is becoming the bigger peril.

This is clearly a big societal problem and causes great stress and suffering on the working people that toil so hard to make sure our modern economy functions. These are in many cases the nurses, teachers, factory workers, delivery drivers, and countless others that are the glue of the modern economy, yet to an increasing extent they are facing great economic hardships and financial distress.

Finding a solution to this problem will ultimately rest with the politicians that we collectively elect, and one can only hope that our leaders will implement inclusive and progressive solutions as opposed to some of the darker paths that have been trodden tragically in the past. There is however also much that can be done at the level of the companies that employ these workers, and I believe many of the fintech companies of today will have a role to play in helping employers solve this problem.

I refer to this phenomenon as “the emergence of the workplace bank”, and to best illustrate what this means there is a very useful case study from one of the big west coast tech companies. This company contracts with millions of gig economy workers globally and used to pay them on a monthly or fortnightly basis as they completed their work.

Several years ago, it became apparent that these workers wanted to get paid real time as they completed their work (driven by the financial stress referred to above), and the tech company arranged with a fintech start up to help achieve this in what we today refer to as income streaming. It turned out that this was such a critical and strategic area for the tech company that they decided to actually bring all income streaming functionality inhouse. Given that they had the tech and developer resources, this was in fact relatively easy for them, and before long they were paying their contractors on a real time basis.

However transferring money each time the worker completed a task (or in some cases at the end of the shift) had a cost associated with it, and the company realized they could save money if they issued their contractors their own cards. This was welcomed by the workforce, and this new card had great (and quick!) adoption. With the advent of embedded payments and advancement in fintech infrastructure, it was also increasingly easy for the company to do this.

Then something very interesting happened. The contractors increasingly started to close their accounts with their former bank, reverting to live their financial lives fully within this newly issued “employer card”. Once that happened, the next logical steps started falling in place like dominoes. The workers wanted to pay their bills from that card, send money from that card, and pay for their groceries with that card.

And it did not stop there. As we know, these workers were very much living paycheck to paycheck, and they started asking their employer for advances or overdraft facilities on this card as urgent financial needs related to their work or personal lives started cropping up. The employer had now become their bank!

The morale of this case study is manifold, but some things are especially worth pointing out. Firstly, while it is ultimately the government’s responsibility to make sure workers are treated fairly and get to live lives without financial stress, the employers will not be able to avoid having to help their workers deal with the new financial challenges of the 21st century for long. I imagine a big vacuum or gravitational pull that will irresistibly pull employers into being part of the solution, making sure their workers can have access to the new financial tools to help them.

Secondly, as increasingly more and more employers will find themselves in this situation, they may also realize that they do not have the resources of this big west coast technology company to develop and create all these solutions inhouse. Hence, they will look to the rapidly emerging fintech companies of today that are active in the HR-tech space to provide those solutions. Some of these companies such as Wagestream have come at this problem from an income streaming perspective, while others such as Ben have come at it from a benefits perspective, and yet others have come at it from a debt consolidation or credit perspective. In the end, the ultimate driver and impetus here will be the crucial day to day financial needs of the workers, so it is reasonable to expect a big convergence as the workplace bank emerges.

Technology and financial inclusion: Wagestream as a case study

Being a venture capital investor in the fintech space, I see amazing ideas and innovations on what feels like a daily basis. As these ideas gain traction and mature, the successful ones make it into the mainstream, enabling the wider society to experience the power of this innovation, albeit probably not at a pace that feels like the world of finance is changing on a daily basis (which, incidentally, it is).

While the pace of innovation and change is only getting faster, it is important to take a moment to slow down to think about our values, and how they impact the change that is happening around us. Our values as investors, entrepreneurs, consumers, and citizens will clearly impact the world we leave behind for our children, and some of the value judgments we have to make often involve difficult tradeoffs. I will explore some of the more difficult choices in future blog posts, but today I wanted to start somewhere easy, in a place where I hope we can all agree: More financial inclusion is better.

Neither finance nor new technologies are necessarily inclusive or exclusive by design. Rather, it is how we use them as a society that determines the ultimate utility of a technology. A brick can be used to build an exclusive wall, but it can also be used to build an inclusive plaza that is open to all, or a brick road that connects people.

Today, lots of people are excluded from the immense wealth and prosperity that is being created in the world. And the list of people impacted is vast: Women, minorities, the elderly, the financially disadvantaged, immigrants, members of certain religions, nationalities or racial backgrounds have all been excluded from access to wealth and prosperity during the course of history, and still find themselves in this position today.

No one person or organization can solve all the problems in the world. However, they can tackle one problem at a time, gradually improving the world for the better. In this spirit, today I want to highlight one specific example that I happen to know very well: Wagestream.

As QED we were in a unique (and very fortunate) position with Wagestream in that not only were we the first backers of its cofounders Peter Briffett and Portman Wills, but given our unique hands-on and entrepreneur first investment style, we were also effectively a cofounder with them, helping them build the vision and the business from day one.

The initial Wagestream proposition was simple. If somebody is working hard, has earned their pay, but have not yet been paid, that person should not have to go to a payday lender to meet an unexpected expense – they should be able to access their already earned wages! And just after a year since inception, that is what Wagestream has become today – a way for workers to access their already earned wages.

Now this does not mean that lending is bad, or that Wagestream can solve all the problems of the world. For example, if the unexpected cash need the person has come up against is greater than their disposable income, or the money they have earned in that month is not enough to cover their needs, they may need a lending solution. And in those cases, responsible lenders are needed (more on that in a future blog post).

But if the money that the person needs is less than their disposable income, and if they have already earned that money, they clearly should not go to a payday lender that will charge them more than 10x.

When you consider that close to 60% of workers in the UK (and the ratio is similar in the US) cannot meet an unexpected expense of GBP 200 before their paycheck, one clearly sees how something that at first may seem like a niche actually becomes a very big opportunity for a better solution that impacts the majority of the working people in the UK.

But why did this solution not exist before? And why are the other alternatives so expensive? The answer lies in how the founders leveraged new technologies and a superior product structure that is fully integrated with employers. We will examine each one in more detail below, as this is indeed a great case study in how technology can create more financial inclusion.

First and foremost, Wagestream used both new and existing technologies to create cost efficiencies and product differentiation in a number of different ways. One element of this was new payments technologies such as virtual bank ledgers and API banking, which is an area we had been watching closely as QED for some time. As a result, we were able to help the founders design and connect to a back-end banking infrastructure that leveraged some of the fastest, cheapest, and most secure solutions in the market. Whereas before there would have been a cumbersome process, requiring customers to actually switch their bank accounts, or Wagestream requiring access to existing accounts, using virtual ledgers and API banking we were able to create a cheaper and frictionless solution.

The Wagestream team celebrating a recent funding round

It also really helped that we launched the product in the UK, which is very much on the cutting edge of payments innovation, with new products such as faster payments readily available. Faster payments is not only fast (effectively instant) as the name implies, it is also much cheaper to its predecessor products in the payments space.

The end result was a state of the art back end technology, which when combined with the automation of most operational processes, resulted in Wagestream being able to operate faster and cheaper than any similar company that had ever come before it.

These dynamics make Wagestream’s income streaming categorically different from payday lenders who have to work in an entirely different manner – they have to process each payday loan separately, onboard each customer separately, and in many cases with less automation. In addition to this cost disadvantage, a payday loan is indeed a loan, which means in addition to having to charge a high rate because of its cost disadvantage, payday lenders actually go after customers that do not pay them back, whereas Wagestream is 100% non-recourse – but that leads us to the product structure, and more on that below.

The second element that differentiates Wagestream is indeed its innovative product structure. The key differentiators here lay in the tight integration with the employers and the fact that Wagestream is fundamentally a payments product as opposed to a credit product.

With regards to the employers, Wagestream is able to achieve a very high level of integration with both the time keeping (rota) and payroll systems. Going back to the point on technological shifts, this is also made much easier with the rapid spread of cloud accounting, which is driving a lot of change in the world of fintech. As a result, Wagestream is able to see exactly the moment at which a worker has completed a shift. Combining this with its automated back end infrastructure described above, Wagestream is able to help the employer stream a pre-determined portion of that wage to the worker that completed his or her shift, who thus gets access to that portion of their earnings instantly. Whereas previously it would have been very difficult (and expensive) for an employer to process a portion of the payroll for a subset of the workers, Wagestream has effectively automated the entire process, and it all happens at the click of a button.

And with regards to the payments vs. credit nature of the product, the main thing to note is that since Wagestream is designed more as a payments product, there is no credit risk (the employee has already earned the money), and hence also no recourse whatsoever to the worker that is using the product. The only risk that Wagestream really takes is either one of payments or payroll fraud (which, given the tight employer integration is difficult), or a counterparty risk that the employer will not be able to process payroll at the end of the month. And given that even companies that enter insolvency make their payroll as a first order priority, this risk, while real, is very low.

Moreover, when compared to a product such as payday loans which in fact have very significant credit losses, the benefits of being more on the payments side become clear. Just consider that in any lending product there is an inherent level of cross-subsidization: The people that pay back their loan have to “subsidize” the lender for the losses incurred by those that did not pay back their loan. This simply does not exist with Wagestream where the concept of consumer credit risk has been eliminated.

Most importantly though, the great thing about this product design is that it is inclusive to the maximum. There is no credit underwriting of the employee, or in other words no workers that fail to get access to this because they may have a bad credit score or have had difficulties in the past. As long as their employer is a Wagestream partner they can use the product, and when that unexpected cash need arises they can access their already earned wages instead of going to a payday lender. So here it is then, technology enabling better financial inclusion – Quod Erat Demonstrandum.