Your money on autopilot

Being very much a child of the eighties, I am fortunate enough to have witnessed many of our science fiction fantasies from that period become real. There are countless examples here, but one striking example is self driving, talking cars – and, yes, you guessed it – I am talking about Knight Rider here. While the Teslas of today do not leap into the air quite the way KITT used to, and talking to Alexa or Siri one does not get the same kind of relationship and life advice like that was generously doled out by the legendary black Pontiac Trans Am, let’s face it, we are pretty much almost there.

The concept of the self driving, intelligent machine understandably holds a deep fascination for many – and in the fintech community the corollary vision is very much being able to put your money on autopilot. There are different interpretations here, but we can imagine getting a scolding look (or perhaps deep vibration) from our handheld devices as we reach for that extra pair of shoes we know we don’t really need in the first place.

Not surprisingly, tech companies big and small are working on various aspects of this vision, and while there is certainly plenty of opportunity here to create the first truly intelligent money assistant in the consumer space (we have some strong contenders in the QED portfolio such as Albert), there is also an equally great, if not greater, need for this in the world of businesses and large corporations.

In your typical company, there is that trusted individual called the CFO, that is entrusted with the proverbial strings to the purse, and sits there overseeing the ebbs and flows of money coming in and leaving the company’s bank accounts. It is their responsibility that the bills get paid on time, that the employees of the company have the financial tools and resources needed to conduct their day to day activities of making and selling goods & services, and that the financial infrastructure of the company runs seamlessly.

A well functioning CFO organization can be the differentiator between success and failure for fast growing companies. This is even more important for innovative companies that are growing fast, and looking to scale across several geographies. These growing organizations need a finance function and back office support that is as innovative as the core product they are creating to continue fueling the rocket ship.

At QED, we believe that this vast set of activities that CFOs manage, with everything from expense management, KPI tracking, bill paying, and all those other financial back office activities is an area that is ripe for more and more automation over time. And observing our investments as well as the market over time, we have noticed that the sheer number of big companies created in the SME and corporate back office automation space is truly impressive.

Your money on autopilot: The dream is coming true after all these years.

To this end, we are very happy to announce our investment into Payhawk today – a company that we believe meet all three criteria for success in this space, and is positioned to grow into the preferred choice of CFOs across the globe as they look to put their back office on autopilot and supercharge their operations. These three criteria are having product and tech in their core DNA, being regulation agnostic, and being able to scale very fast across international borders. Some more thoughts on these characteristics is unpacked below.

Firstly, the best players in this space need to be very much product and tech led. In the end, it is a crowded marketplace, and there are lots of generic technologies out there that can be put to good use to automate many back office tasks. But as with any good tech product, the devil is always in the detail, and we find that the best companies are the ones that really obsess about the customer journey and the best technology to deliver it obsessively. Automation is simple – automation that offers a transformative experience for its users is hard.

Secondly, we find that in the business of back office automation, it is very important to be regulation agnostic if one wants to be able to scale like a true tech company. This means that it is preferable not to cross the dual boundaries of bank accounts and local accounting regulation. Banks are made to keep your money safe, and there is not reason to try to challenge them on that front. Similarly, local accounting rules can be complex, so it best to do the automation up to the pre-accounting level, and then leave the exact accounting treatment to local players that know that better. Now this does not mean that there is anything wrong with being a neobank or a tech driven accounting software, but if you want to scale rapidly, it best to stick to the back office automation only.

Thirdly, and as a direct result of the point above, we see that the best companies can also scale very rapidly across national borders. Again, this is a direct consequence of choosing to tread a path of not touching banking and local accounting, but in addition to that, it also requires affirming and choosing international scalability as a true north star. After all, strategy is very much about what one says no to, and affirming publicly and loudly what one stands for. A lot of product design choices then flow from this, and the end result is the company that fit this criteria end up becoming ideal choices for any company with international operations.

So in a nutshell, this is the story of our investment into leading Payhawk’s A round. And before Tesla figures out how to get their cars to jump (to be fair I recall seeing a photo of one is space) I promise to write an update to let you know how the journey is progressing.

Cascading Failures and the Importance of Diversity

A cascading failure is a process in a system of interconnected parts where the failure of one or a few parts can trigger the failure of other parts in a chain reaction that leads to the system shutting down or collapsing.

The first step in a cascading failure is typically an unexpected breakdown in one component of the system – this can be due to chance, human oversight, a black swan event, or any number of random reasons. Once this happens, other parts of the system must then compensate for the failed component. This in turn overloads these nodes, causing them to fail as well, prompting additional nodes to fail one after another. This is the textbook definition of a cascading failure.

While such failures can occur in nature, they are most often associated with manmade structures such as power transmission networks, computer networks, the world of international finance, and transportation systems to name a few well known and well publicized examples.

The reason that cascading failures are less common in naturally occurring systems is usually attributed to one overriding factor: Nature, in its literally infinite wisdom provides a seemingly redundant amount of richness and biodiversity embedded into its creations. In a normal evolutionary environment there’s enough diversity to cushion the system when something catastrophic happens. There is an abundance of compensatory pathways that can step in to rebalance the system.

Manmade systems, on the other hand, are different. In book two of the science fiction series The Expanse by James S. A. Corey, the scientist Praxideke Meng who is trying to create a farming ecosystem on Jupiter’s moon Ganymede says, “Nothing we can build has the depth of a natural ecosystem. It’s a simple complex system. Because it is simple, it is prone to cascades. Because it is complex, you can’t predict what’s going to fail. Or how.”

There are tons of implications of this, especially in today’s world where humans are willingly and knowingly destroying significant parts of the biodiversity that nature has generously given us over billions of years of evolution.

There are also very interesting parallels and insights for founders building an organization from scratch in the start-up world. Like building a farming ecosystem on a Jovian moon, creating a new company with a new product in new market is not easy. It is complex. But because of the limited resources the entrepreneur has available to them it also by definition has to be simple: You may want five different go to market strategies and dozens of sales partnerships, but in reality, you may be stuck with only a few. You may not want people to know it, but eighty percent of your revenue may be riding on one successful salesperson or one amazing sales partnership you managed to sign up.

Matt Damon made growing potatoes on Mars look easy in The Martian – starting a new business in a new industry can be just as hard

The key implication of all this for entrepreneurs is this: In a world where a diversity of sales channels and an abundance of resources are already scarce it is even more important to cherish and promote diversity wherever you may find it.

And the most important place to promote diversity is among the people of an organization and their way of thinking. After all, if the cascade starts happening, you will only have the people you have surrounded yourself with to help you stop it.

So at every chance possible, founders should try to promote a diverse culture with a richness of backgrounds and skills. When the time comes, it may be this richness and diversity that is the only thing standing between you and the cascade.

21st Century Lending

The earliest known records of lending date back about 4,000 years to Mesopotamia where the Sumerians were borrowing and lending livestock and seeds that would later be repaid from the offspring and yields harvested from the original “capital”.

Shortly afterwards the Sumerians discovered that it was more convenient to use silver as a medium of exchange, and not too long after that the Code of Hammurabi defined the price of silver and how the interest charged on silver loans was to be regulated. It seems that Hammurabi was quite concerned about usury and preventing abusive payday loan practices. If he were alive today, he may be disappointed (but perhaps not too surprised) to see that the need to regulate overly greedy lenders has not gone away. Four millenniums may have passed, but human nature does not seem to have changed much!

On the other hand, what has changed is the technology available to borrowers and lenders, and the good news is that there is now a new breed of lender emerging that uses this new technology to drive better outcomes for all parties involved.

This new type of lending is characterized by five main features: It is embedded, it operates in real-time, it unlocks and underwrites with sources of data that were previously locked up or inaccessible, the collection mechanism is “default on”, and the use of proceeds are laser targeted.

The net result of these five features is that the losses for this type of lending is orders of magnitude lower, in some cases approaching zero. Coupled with operational cost efficiencies enabled by technology, this in turn enables the lender to charge the borrower rates that are dramatically lower than other lenders, creating a virtuous cycle. Let’s now quickly examine all of these five factors in some more detail.

The first factor, embedded lending, has been written about and discussed a lot in the fintech community, including in my previous blog on the topic. In summary, it refers to the lending itself being invisible to the borrower and moving in harmony with the needs of the customer. An example we used in the past is how mortgages can be embedded into the property purchase to make the whole process last hours not weeks (or months as is the case in the UK). Imagine being able to buy a house with a few clicks!

Secondly, these new lenders operate in real time. In practice this means that they in real time ingest not just the data from the borrower, but also the third-party sources of data about the borrower, and hence can also make and communicate their decisions in real time. To take small business loans as a case study, consider how those were made in the past. The business owner would have to print pages and pages of financial statements that were already out of date at the time of submission, the loan officer would review these, and make the loan some weeks later. The business might have ended up in a totally different state by then, but again the loan officer would only find out once the new set of financial statements were prepared, reviewed by an accountant, and submitted some months later. Now contrast that with having real-time access to not just the customer’s bank account but also their sales data. Quite a difference!

One can only hope for lower interest rates in the future!

Thirdly, yes, the data is in real time, but crucially it also contains new and relevant information that is usually locked up inside the business. This can include anything from recent bank account movements to real time sales data or data on how many shifts an employee has worked that week. This incremental data not only provides better performance from a credit underwriting perspective, but it also ensures way better customer outcomes by making sure calculations like affordability and the potential vulnerability of the borrower can be made with superior precision.

The fourth factor is a collection mechanism that is “default on”. In simple terms this means that in the ordinary course of business, the collection of the loan is automatic and does not require any extra effort. Following the insights of behavioral finance that have emerged over the last decade thanks to Professor Richard Thaler from the University of Chicago (where I had the good fortune to take his class) and his mentors Kahneman and Tversky, this actually makes the loans much easier and painless to collect, resulting in substantial costs savings that can in turn be passed onto the borrower. A good example of such a mechanism is collecting a portion of sales receipts at the point of sale to repay the loan, but there are many other examples.

Finally, the use of proceeds is targeted with laser precision. The loan is not made as a general disbursement for the borrower to spend as they wish, but rather for a specific purpose. Another way to look at this is that the lender understands very well why the borrower needs the funds, and how that fits into a sustainable pattern where the borrower can pay back the loan without falling into distress. This leads to a much more borrower friendly situation, where funds are only drawn down subject to affordability and a sensible use of proceeds.

In closing, it is also very important that one does not lose sight of the most crucial element of the narrative: Done rightly, 21^st century lending enables far superior borrower outcomes where consumers and small businesses can borrow money when it is most needed, at a fraction of the cost, with minimal disruption to their lives, knowing that affordability and sustainability has been embedded into the process.

Building the Unbuildable

An interesting concept in architecture is the idea of “unbuildable buildings”. These are designs that when once finished would be able to stand on their own as sustainable structures yet cannot be built as the intermediate steps needed to create them are not technically feasible.

A good example of this may be a building that rests on concrete pillars in a wavy sea. Once built this may be a beautiful and stable structure, but if the intermediate step of pouring concrete into the sea and letting it solidify is not technically possible it cannot be built. Only as technology improves and develops sufficiently, pouring concrete into the sea may become possible, at which point the building can then be built.

Another example could be a colony on Mars – while a fully functioning dome with solar panels and atmosphere control could be a sustainable and self-standing structure, the intermediate steps of setting up a construction site on Mars and shipping workers and materials there is not economically and technically feasible, at least not as of yet.

The same concept actually exists in the world of evolution as well. There are theoretical organisms that could possibly exist in our world, yet do not because the intermediate steps needed in their evolution were not possible. Put another way, any species that exist today (e.g. birds) do so because each step in their evolutionary journey (e.g. developing wings) was sustainable. Prior to wings, the ancestors of today’s birds developed wing-like appendages that enabled these bipedal species to leap higher into the air, and thanks to whatever small advantage that gave them, they were sustainable as an intermediate step to developing the full-fledged wings of today. If the intermediate steps had not been sustainable, wings would not exist.

There is clearly a very interesting parallel here for the startup world. A founder’s end vision for their company may very much be possible, but if the intermediate steps needed to build the company from zero to one are not possible, the founder may never reach their end vision. These intermediate steps may not be possible for a whole host of reasons and include the current state of technology, availability of financial infrastructure, the funding environment, and the applicable legal and moral rules, to name just a few.

For example, if the intermediate step of creating the end vision requires a multiyear journey with heavy losses and lots of big investment along the way, that particular company may not be buildable in a bad funding environment, but could in fact be built in a situation where there are deep pocketed investors willing to fund these losses for many years. Similarly, if the technology or regulatory license needed is impossible to obtain for a small company, until the regulatory environment or technology improves, the company cannot be built.

The big takeaway here is that for a founder to have an end vision that is self-standing and sustainable is not enough. The intermediate steps needed along the way also need to be self-standing in their own right, and the founder has to pay very close attention to what those steps are.

By extension, successful founders are those with a very keen eye for changes in these constraints. Things like infrastructure, regulations, and funding environment are very much dynamic and in constant flux. As laws change, new technologies become available, or central banks decide to pump trillions of dollars into an economy, previous constraints may suddenly be lifted. The best entrepreneurs are the ones ready to pounce quickly when they sense these changes that make their previously unbuildable visions buildable.

To illustrate this point, an interesting example worth taking a deeper look at is the building of a new exchange for residential real estate investment properties. Known as buy-to-let investing in the UK, these are the kinds of properties where landlords buy them to rent them out for a profit.

Currently this is a fairly illiquid market, and rather than being traded on an exchange, it is traded in one to one transactions where buyers and sellers find each other via property listing sites such as Zoopla (which are a big improvement in their own right as in the past one would have had to go to the listings sections in newspapers). Once buyers and sellers find each other (after lots of viewings) and agree on a price (after tense negotiations), it may still take weeks, if not months before the transaction actually closes. When all is said and done, the process will have involved real estate brokers, lawyers, viewings, tons of paperwork, and lots and lots of costs for both sides.

Contrast this with somebody that has invested in a company via the stock market – they can buy and sell their shares instantly because the ownership certificates (shares) are standardized and their trading is regulated by the exchange (e.g. London Stock Exchange). We can think of these standardized certificates as “securities” and the process of taking a non-standardized, clunky asset and turning it into an easily tradable security as “securitization”.

But why should one not be able to “securitize” buy-to-let investing? The end vision is surely feasible with today’s technology: Each property could be owned within a legal structure (a company) with a standardized legal contract. Then the shares in those companies could be traded on a big exchange that lists thousands of those companies with standardized and regulated ownership structures, and one could browse and filter properties, make an offer online, and trade it with a few clicks. While this process may still not be instantaneous like buying stocks today, the time to transact may nonetheless be cut down from the months and weeks that it takes today to days or perhaps even hours.

One obvious difficulty here is the intermediate step of bringing together the supply and demand (the buyers and sellers of property) under one roof on day one. If there is not enough supply then the demand will not show up, and vice versa. Hence, the entrepreneur that wants to build this new exchange will have to find a way to solve this conundrum by bringing the sellers and buyers onto the platform in incremental yet sustainable steps. If this can be cracked, the pot at the end of the rainbow surely is full of gold: buy-to-let properties represent an asset class of GBP 1.2 trillion in the UK alone and are currently housed in very illiquid structures. Solve the intermediate step, and the end vision is yours for the taking!

To summarize, having the courage and stamina needed to be an entrepreneur is one thing, but the best founders also need to be the kind of visionaries that see changes as they are about to happen, understand how those changes enable cracking the difficult intermediate steps, and imagine what kinds of future structures all this enables. With that kind of vision, what was once impossible and in the realm of science fiction, becomes reality.

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.

Embedded Lending

There has been a lot of interesting discussion in the fintech community in the last year around embedded finance. It typically refers to financial products being seamlessly integrated into any non-financial business or service, with a common example cited being how Uber and Lyft integrated payments into their ride-sharing and mobility offerings. Many industry insiders are now predicting that this trend represents the next stage of the evolution of fintech and will spread beyond payments into all of banking and finance.

Based on some of the new business models that have been emerging in the last couple of years, embedded lending represents a particularly interesting subsegment worth highlighting here. Embedded lending is by no means a new phenomenon, and to understand how powerful embedded lending can become in the future, it is worth doing a short recap of the journey thus far.

Early examples of embedded lending include products such as the credit card, which one can think of as a payments product with lending embedded into it. Likewise, Fintech 1.0 companies such as QED investments GreenSky and Klarna are both great examples of how lending can be seamlessly embedded into retail and e-commerce, enabling a very smooth point of sale finance experience for end users.

Today’s embedded lending builds on this rich heritage of financial innovation and uses modern technology to take the product and user experience one step further. These new and innovative companies are characterized by three key features that they have in common.

The first key feature is seamless operational integration. With the APIfication of data, cloud computing, and all other innovations taking place in the info tech and data tech space, financial products can now be integrated with operational processes so seamlessly that much like the invisible man of H.G. Wells’ famous book of the same name, they are very much there but one cannot notice them. This integration is in turn supported by the rich ecosystem that has emerged in financial infrastructure and reg tech, where modular business processes can be used like Lego blocks to build new business structures, all connected to each other with API calls. Needless to say, it took decades of innovation in information technology to get here, from the emergence of C++ and Java as modular coding languages to today’s academic work on how to create abstraction layers from any computer language.

The Invisible Man of H.G. Wells – he’s there but you cannot see him

The second key feature is a realignment of business relationships and incentives to enable better commercial outcomes for all parties involved. Because legacies weigh heavy on institutions (and societies too in many cases!) some of the business and commercial relationships of today are shaped by the technological constraints of the past that no longer exist. There are countless examples of this, but just to pick a random one, consider the signature. In today’s world of Face ID and digital documents, why do I need a wet signature to prove my identity? Or why do I even have to show up in person to prove who I am in the first case? Undoubtedly, the list can go on, but the point here is that the new models that are emerging not only use new technology, but use that new technology to challenge the business logic and conventions of the past, especially where these were driven by constraints that no longer exist.

The third key feature, which is a direct consequence of the two prior ones, is that losses tend to be an order of magnitude lower compared to a legacy lending product. Both because of the closer integration as well as the new alignment of incentives, where in many cases significant credit risk existed, this credit risk starts to approach levels close to zero, instead being replaced by various levels of operational or systemic risk. Alternatively, in some cases an entity’s high credit risk gets replaced by another entity’s significantly lower credit risk. Again, there are countless examples one could give here, but just to consider a fairly common example, one can think of supply chain finance, where a small business is selling products to a large corporation, for example a small supplier selling tomatoes to Tesco. In the legacy world, when the small supplier would go to the bank to request a loan for working capital to fund its tomatoes, it would be charged a high rate of interest because it would be seen as a risky business due to being small and having little capital. But with the right kind of integration and fintech product (such as an invoice finance solution), the risk of the small supplier can be substituted with the risk of the big client (Tesco in this example), so the supplier can now borrow close to the low rates that Tesco can borrow at.

Another interesting example of embedded lending is Wayflyer, which provides e-commerce companies with software to optimize their marketing spend on platforms such as Google and Facebook. Wayflyer’s software is fully integrated with the e-commerce companies, and it helps them allocate their marketing spend online to best capture new customers and grow online sales. However, as a function of doing this, Wayflyer also sees where these e-commerce companies hit pay dirt when for example a new segment of customers that are very hungry for that particular product is uncovered. In this particular case, Wayflyer, which is integrated with the company can seamlessly offer its client extra marketing dollars, which quickly get converted into sales, and then get paid from the proceeds of this incremental sales automatically when the sale happens. From the e-commerce company’s perspective the financing is almost invisible – they just think of Wayflyer as a partner who helps them grow faster by making better marketing decisions and serving as an extra pocket to boost their marketing spend where needed. There are certainly many more examples of this, and some of these businesses are yet to emerge at scale, though they will undoubtedly do so in the not too distant future. Two particular areas that are very interesting are student finance and property purchases. In the case of the former, Student Finance is working on a model where anybody can go to a vocational training program with no upfront payment, and only pay back the cost of the education when they get a higher paying job as a result of that training. While this is technically a student loan it is very much embedded into the education process itself, and from the perspective of the student they are investing in their intellectual capital and getting a better job in the process – the loan itself is invisible!

The Rise of the Workplace Bank

With the advent of the first industrial revolution in the late 18^th 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 19^th and 20^th 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 19^th 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 21^st 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.

Of Tsunamis and Tech: How Wagestream Responded

Tsunamis are a series of waves caused by a large and sudden displacement of water that is triggered by earthquakes, volcanic eruptions or underwater explosions. Rather than resembling ordinary sea waves that are caused by wind, tsunami waves resemble rapidly rising tides that can reach up to ten meters in height. The series of waves usually hit in periods ranging from minutes to hours, arriving in so called wave-trains. While at first they can appear as a big wave on the horizon, as people living in ocean basins can tell you, they are not to be taking lightly: The 2004 Indian Ocean tsunami was amongst the deadliest natural disasters in human history, with at least 230,000 people killed or missing.

When I think of the Covid-19 pandemic that erupted in early 2020, I in many ways cannot help to think of a giant tsunami. I remember seeing it rise slowly but surely in the distant east, thinking it was scary but unlikely to have such an impact on our distant shores. But with the unrelenting force of nature it was upon us before long, and all that was left to do was to seek higher ground and respond in the best way one can. Whether the worst of it is now behind us, or whether what we have just been through in the last three months was just the initial installment in a longer series of powerful waves, one thing is clear – our society, in fact the entire world, is continuing to go through a trauma, and as the waves recede there will be much reckoning and rebuilding that will need to be done.

There will surely be a particular reckoning in the area of public healthcare, and whether a majority of Western societies were right in running their healthcare systems with a business minded “Just In Time Inventory” mindset borrowed from globally integrated and cost focused supply chains. These are complex questions, and rather than diving into them here, I’d like to focus on something more upbeat and optimistic, and something that is also much closer to what I do. How did the start-up world respond when the wave started hitting? I’d like to focus in particular on the companies where I serve on the board here in London and the first case study I’d like to bring up is Wagestream, on which I had also done a blog last year.

One of my friends used to say that when under stress and pressure, there is a very strong tendency in people to revert to their comfort zones. He had said this in the context of businesses and their leaders undergoing stress, so for example in a financially and quantitatively focused organization the tendency may be to open up the excel spreadsheet and start sharpening the pencil on costs, whereas a more sales and marketing focused one may be more focused on opening up PowerPoint to draft a new story, etc. Startups are by definition nimble and agile organizations, and hence it is no surprise that when under pressure they would rely on their tech, innovation, and product development skills to respond to the crisis.

Wagestream’s response was in fact a prime example of such product innovation under pressure. One salient memory that will stay with me forever was the Friday before the lockdown was announced, in Wagestream’s Holborn head office. Life was by no means normal and we all had a sense that something big was happening, and the crowed sidewalks for High Holborn would not remain so for long. The cadence and intensity of bad news was rising sharply, and one could almost touch the fear spreading through all segments of society.

It was under these circumstances that Wagestream announced that they were to host their first ever companywide product innovation competition. Everybody was to be involved and were allocated to a number of smaller teams that would compete to come up with new product ideas with the winning ideas to shape not just the future of the company, but also their response to the Covid crisis. I was asked to join the jury for selecting the winners along with the cofounders, and the competition was on!

I have to say I was incredibly impressed with what the team had produced in a very short time! Every idea was amazing, and all of them had the same laser like focus: How can we use our strengths and positioning as an organization to better help our customers and their employees, many of which were incidentally key workers for the NHS, BUPA, and other organizations. I don’t like spoilers, so I will not give away the winning answers here, but you can check out the results yourself from Wagestream’s web page.

Karl celebrating his two year anniversary at Wagestream, just weeks before the product innovation competition. Photo courtesy of yours truly.

One anecdote that really stands out which I’d like to share was regarding one of the winning ideas that was submitted by Karl, one of the very first employees at Wagestream who had actually just recently celebrated his two year joining anniversary (he was the first one to celebrate this milestone at Wagestream). As we were announcing the winners, we asked Karl how long it would take him to implement it and bring it to life. It should incidentally be noted that the competition had only been announced twenty-four hours ago. His answer was a simple shrug of the shoulder, nonchalantly stating “I’ve already done it”. This is probably one of the most brilliant responses I’ve ever heard, and in that time of crisis it was a much-needed morale boost for the entire team.

There may yet be many more waves that come to hit us, but as David Deutsch says, problems are inevitable, but problems are also solvable. As I continue to work with amazing startups such as Wagestream I cannot help but believe that whatever the world throws at us, we can overcome it together.

Dissecting a Bank and the Ghost of 2008

If capitalism were a religion, it would not be too far-fetched to think of banks as its temples, with the likes of Jamie Dimon, Ben Bernanke and Christine Lagarde the high priests and priestesses that guide the masses and interpret the will of the gods to deliver humanity peace and prosperity.

Thankfully, at least for now, nobody is making us go to banks on Sunday (except perhaps if you are an investment banking analyst working on Wall Street). However, banks still play a crucial role in our lives (whether we know it or not), and this makes it somewhat surprising that the average person doesn’t really have a good conception of how a bank actually works. One good example of this is that most people are blissfully unaware of the fact that the money they think the bank is safely keeping on their behalf in fact does not actually exist (more on that slightly disquieting but also amusing fact in my next blog).

Hence it is useful to provide a simple framework of how to think of a bank, and then use that to put the recent decade into context.

In its simplest form, banks exist on top of three fundamental foundations: trust and legitimacy, data and intelligence, and capital. Trust and legitimacy consists of the bank’s brand and public image (a bank must look secure and trustworthy, hence all the fancy suits and imposing buildings), and all its regulatory licenses. Data and intelligence used to be comprised of the bank’s employees and customer records, but in today’s world are rapidly being complemented (and sometimes replaced) by databases and algorithms. Finally, capital consists of all the funds that the bank is entrusted with from its customers, depositors and investors.

On top of these three foundations, banks build their products and services which they channel to their customers via a distribution network.

A simple framework to think about banks: Better frameworks exist, but this is the only one that looks like a combination of a bank and temple.

When we look at banks through this lens, we can easily see how fundamentally disruptive the events of the last decade and the crisis of 2008 has been for banks.

Let’s first consider the pillar of trust and legitimacy. With the onset of the 2008 financial crisis the trust and legitimacy pillar of the bank took a devastating one-two combo in the form of the trust and public image of banks being eroded severely as average citizens were being evicted from their homes, while the regulators also stepped in with new and restrictive regulations such as Dodd-Frank, not to mention multi-billion dollar fines.

As the pillar of trust and legitimacy was being shaken, there were meanwhile hitherto unprecedent changes taking place on the data & intelligence front. While in the past banks had relied on experienced loan officers and customer files with relatively straightforward data to make decisions, machines were increasingly stepping into the equation with powerful computers and complex algorithms creating an entirely new sort of decision science. And it was clearly not easy for banks to attract and nurture the kind of specialized talent needed to build those algorithms, especially given how scalable those technologies could be, and consequently how easy it could be to get funding from Silicon Valley for the top entrepreneurs and technologists.

Finally, the capital pillar came under attack from multiple directions: regulatory fines, higher capital requirements, more stringent KYC (“Know Your Customer”) requirements that resulted in a ballooning back office headcount, not to mention big losses from loans underwritten prior to the financial crises all exposed considerable cracks in capital foundation of the mighty banks.

While this all sounds bad enough in its own right, 2008 also saw the advent of a development that would add to the malaise: the invention of the iPhone by Steve Jobs and the friendly folks at Apple. So while the big banking houses were having all three pillars of their core foundations shaken, the invention of the iPhone and mobile distribution saw the roof starting to leak as well. Whereas banks had relied mostly on their vast branch networks to distribute their products and services, the iPhone enabled millions of consumers to start conducting commerce on the go, all from the palm of their hand.

To illustrate the magnitude of this challenge for banks, just consider that one of the savviest and most envied tech companies of the time, Facebook, was itself caught off-guard by the advent of mobile and it took Zuckerberg & Company a year or two to fully appreciate and adapt to mobile distribution. If the folks behind the slogan “move fast and break things” took a year to get it right, just try to imagine how things looked from the perspective of a centuries old bank, in the midst of a crisis that was shaking its foundations, with regulators and media beating down its door.

A graphical illustration of a painful decade for banks

It is easy to see why the decade since the financial crisis has not been kind to banks. So, what should the banks have done? Or what can they do now? Obviously, there is a lot of firefighting happening to strengthen the foundation and fix the leaking roof, and thousands of bankers around the globe are keeping busy doing exactly that at this very moment. But to get out of the predicament banks find themselves in, there is one area that should provide a silver lining.

Banks need to get back to the core of why they exist, and that is to provide products and services to their customers. Products like credit cards were invented in a world where the nuclear families of the fifties and sixties were driving their ’57 Chevy to the newly built shopping mall to buy new and exciting consumer products such as washing machines. But the world has moved on since then. New problems exist, and new products need to be invented to solve these problems. Banks would be the obvious players to invent these products, and if they want to thrive in the aftermath of the perfect storm of 2008, this is undoubtedly what they should focus on.

The other risk is that, if banks do not create these products, somebody else will. Looking at some of the most exciting new companies in London, one can see new products being developed at a formidable speed. Income streaming (helping workers access their earned wages real-time, and thus avoiding predatory lenders – e.g. Wagestream), income sharing agreements (enabling people to borrow for school or vocational training, and only pay back if they get a bigger salary and better job which incentivizes universities to offer more relevant and employment-friendly degrees), companies that give consumers power over their data while enabling them to monetize this data (e.g. Fidel API), and companies that solve the problems faced by the elderly in a world where many people may spend more time in retirement than working (e.g. Rest Less) are just some examples.

In summary, the conclusion is simple: innovate, or find yourself relegated to history. Now is the perfect time!