Plug and Play Finance

This article was originally published in Business Age on 6th July 2022

Plug and Play (PnP) Finance is a new term, but it has been a long time in the making. It has its roots in the world of embedded finance, which refers to financial products becoming so ingrained in our everyday applications and experiences that they become virtually invisible.

However, there are important differences between embedded finance and PnP Finance.

Firstly, embedded finance is a result and can be achieved in a number of different ways. Some of those ways can be quite hard and costly to implement. For example, a marketplace may be able to facilitate payments on its platform, which are then embedded, but the marketplace in question may have to deal with a lot of thorny issues around customer onboarding, KYC, payment flows, settlements, etc. This requires a lot of work for the marketplace, both in terms of developing software, as well as dealing with the implementation and management of regulated products.

Conversely, Plug and Play Finance refers to the means by which one achieves that same embedded result. And in the case of PnP Finance, the solution is already modularized and implementing it takes weeks, not months. So one way of thinking about plug and play finance is that it is a subset of embedded finance, but a particular subset that is much more easy for businesses to use and integrate.

PnP solutions are easier to implement because they contain all the elements needed to on-board customers, provision financial instruments, and conduct financial activity without innovators (the businesses using PnP solutions, such as the marketplace in the above example) having to get into the details themselves.

Specifically, onboarding is easier because the plug and play finance provider takes on the risks and responsibilities associated with onboarding customers such as KYC and other AML requirements. This in turn is possible because the PnP provider tokenizes sensitive customer data, and the innovator hence never has to handle this data in its raw form, which saves them the burden of being subject to more regulation.

Similarly, the provisioning of financial instruments such as cards, accounts, insurance policies etc. is all done by the PnP provider, and the innovator using the plug and play services does not need to get into the details of doing any of that. On the other hand, a customer that wants to simply embed a financial service may have to get into a lot of nitty gritty detail around the specifics of each product. PnP Finance means that the business just gets ready to consume modules where all key decisions and parameters have already been taken care of.

A good example of such a plug and play finance solution in the market today is Stripe Connect, Bolt, or Weavr where the innovator is taking the financial solution as is. Big tech is also moving into this space one giant step at a time. For example, Apple, who had entered the payments space with Apple Pay has now taken one step further by announcing it will let its users in the United States benefit from a buy now pay later service to split their purchases into instalments.

So what of the future? What will come next?

The next step in this evolution will be the emergence of PnP platform providers. Most PnP solution providers today only offer one solution. For example, Klarna delivers one solution around Buy Now Pay Later (BNPL) that can be integrated into an online checkout experience, Stripe Connect delivers a PnP solution for marketplace payments, etc. PnP Finance platform providers will enable the creation of multiple PnP solutions in one place from one vendor.

Another likely outcome in the not-too-distant future is that financial institutions will realise that providing an embedded finance solution such as Banking-As-A-Service (BaaS) is difficult because it requires a very high level of supervision of the innovator and their end customers. They may then start migrating to a more PnP approach, where parameters and use cases are pre-determined, any sensitive data is tokenized and hence not accessible to the innovator.

Finally, Because PnP Finance is easier to implement, it will become a driving force for more and more products and services having financial modules ingrained inside them.

While these new developments clearly come with significant customer and societal benefits by making commerce even more friction free and ubiquitous, there are nonetheless significant risks and warnings to which one needs to pay careful attention.

Warning one is that we are at an inflection point today, and the rules we set in place will reverberate well into the future, magnifying in significance and scale over time. Regulatory bodies such as the FCA cannot ignore the implications of these developments and need to think carefully about how concepts like customer outcomes, affordability, and competition translate into this new world. For example, is Apple offering BNPL good or bad for competition? How much bargaining power will merchants have? How does one define regulatory jurisdictions? The key here is to find the right balance of letting the market develop while intervening in the key areas.

Warning two is to do your homework carefully when using a plug and play finance service provider. If you are a business owner or manager looking to reap the benefits of plug and play finance, be mindful that all is not always as advertised. Do your diligence carefully before choosing your PnP provider. Reach out to those who know the space well to ask their views on which providers to use. Hold your service provider accountable. Many companies have a nasty habit of over-promising and under-delivering.

Warning three, and perhaps the most important one, is to not get left behind. Innovators that successfully embrace the full potential of PnP Finance will be able to offer embedded finance solutions faster, with better user experiences, and by taking on less regulatory risk. It stands to reason to think that these businesses will leapfrog those that are slower or do not offer embedded finance solutions in the first place.

Whether it be making payments or providing any other financial service, we need to keep up with the latest developments as business owners, managers, regulators, or law makers. The world is moving forward at ever increasing speed, and the future of finance belongs to those that adapt the fastest.


From multibillion-dollar valuations to regulatory scrutiny, and Apple now boldly entering the space, it seems we don’t go a day without reading some story about Buy-Now-Pay-Later, or BNPL as it is commonly known.

Amidst all this noise, activity, and chaos, it seems prudent to take a big step back and ask a simple question. What is BNPL? What exactly makes a loan BNPL – and consequently, when is BNPL not really BNPL but just plain lending?

After all, I could call any loan, such as my house loan, BNPL as well. I buy my house now, and pay it off later, over thirty years to be precise. But as we all know, that is not called BNPL, it is called a mortgage.

While there is no official definition out there yet (yes, the regulators in various jurisdictions are working on it) there are a few specific things that make BNPL what it is, and work as it should.

When all these specific attributes are in place, BNPL can create very favorable consumer outcomes. However, as one deviates from these pillars, a sort of cascading failure takes place where the various components that all rest on each other stop working, and what could have been a BNPL starts morphing into something else such as “mere” point of sale finance, a.k.a. POS finance.

So let’s take a look at the eight key attributes that make BNPL work as it is meant to, and why they all simultaneously need to be in place.

1. BNPL is free

POS finance, as alluded to above, has existed for a long time, and you can always go into a retailer and apply for a loan once you have bought your couch or your bicycle (the latter being a better idea if you want to work on your figure).

This usually involves a loan application which can feel like a proctology exam in the worst case and involve filling out some quick forms in the best case. The loan is then approved or declined, and the borrower goes on to pay interest over a pre-determined period of time.  

BNPL on the other hand is free, meaning that if the bike cost me nine hundred dollars, I can pay for it in three installments of three hundred dollars each over three months. Given the concept of time value of money (money today is more valuable than money tomorrow, all else being equal), this is an NPV positive proposition for the consumer and as such has great appeal.

2. In BNPL, the merchant pays a discount rate

As economists often like to point out, there is no such thing as a free lunch, and since the consumer is not paying for the loan, somebody else has to. In BNPL, this is the merchant, and they pay for it with what is called the merchant discount rate.

In simple terms, this means that if the dress we bought cost one hundred dollars, the merchant only gets something like ninety-seven dollars for selling it. The BNPL provider gets the remaining discount rate. In this example we used three percent, but in reality, this can range from something as high as eight percent to a low of less than two percent.

But why is the merchant willing to pay this discount rate? This brings us to the third attribute of BNPL.

Big tech is now entering BNPL as well

3. BNPL results in higher sales conversion for the merchant

Yes, the merchant is only willing to pay the discount rate because they can sell more goods and services if they use BNPL.

Especially for bigger purchases, being able to spread the payments over several months lightens the burden on the consumer’s cash flows, and a result they end up buying more. The merchant, who is after all in the business of selling goods, likes this, and is hence willing to pay for it. They would rather sell eight dresses and collect ninety-seven dollars per dress than selling five dresses and collecting a hundred dollars per dress.

Even so, how much of a discount the merchant is willing to pay depends on several other factors as well. Which now brings us to the fourth attribute.

4. BNPL works best when the purchase is discretionary

If my boiler breaks down, the merchant that comes to my home knows I will need to get it fixed very soon unless I am particularly keen on cold showers in the frosty London mornings. Hence, these merchants knows that their “sale” is easy to make and will likely be less interested in offering BNPL. They know that the consumer will pay for the new boiler whether BNPL is offered or not. Nobody likes cold showers, except perhaps Wim Hoff and his followers.

If, on the other hand, I am contemplating buying new windows, that is a discretionary purchase. It is nice to have more modern windows installed, but I can always do it next year. In fact, in London many people seem to wait about a century before contemplating putting in new windows.

The merchants who are in the business of selling new windows are aware of this, and if they can make the purchase easier by offering BNPL, they know they can get a much higher conversion. Hence, it is no surprise that these merchants like BNPL. In fact GreenSky, a QED investment that was recently acquired by Goldman Sachs for something close to $2.2bn built their multibillion dollar business on this very insight.

Of course much more is needed to build the ideal BNPL business. Which brings us to:

5. BNPL works best with good credit quality customers

The discount the merchant is willing to pay is not infinite, so whether it is three percent or eight percent, the BNPL provider needs to fit their entire unit economic equation inside that discount.

And the BNPL provider has many costs such as operational and salary costs, but also very importantly, credit losses. If a consumer does not pay back, the BNPL needs to foot the bill, and still make money from the merchant discount they get.

So let’s assume that in a simple example, the merchant discount is three percent, the BNPL now has to pay for its own cost of finance (which cannot really be much less than two percent), its operational costs (which even at scale will be tens of basis points), and the credit losses.

If the credit losses go to two percent in the example above, the BNPL provider suddenly starts losing money. What’s worse, if losses go up, the banks and capital markets that fund the BNPL provider start charging a higher borrowing rate.

A cascading failure or death spiral can very quickly set in, so watching the loss rate is existentially important for the BNPL provider, and the key to that is good underwriting and having an underlying population of positively selected high credit quality consumers.

If not, the BNPL may have to start charging interest and fees to covers its losses, and the whole thing then starts to morph into POS Finance as we saw earlier.

Having a high credit quality population is also important for insuring the sixth element of BNPL, conversion.

6. BNPL has high conversion

If the merchant offers BNPL to one hundred customers, it is important that at least seventy-five, but ideally something close to eighty percent plus of these consumers are approved for the BNPL product.

This is because customers that apply and get declined tend to not take it so well, and the merchant does not want to lose their sale or otherwise annoy their customer because they were declined, which can be embarrassing.

This particular point illustrates how all these attributes rest on each other. In order to have high approval rates, yet low losses, point number five from above, good credit         quality once again reveals itself as a crucial component of an ideal BNPL equation.

Again, this does not mean that lending would not work in a general or high risk population – but to have the purest form of BNPL you need to control your losses with a combination of superior underwriting and a positively selected population. Otherwise your BNPL proposition can quickly start to morph into something else.

7. BNPL is frictionless

The seventh component is that in order to avoid the merchant worrying about customer friction, the BNPL process itself has to be tech driven, seamless, and embedded for the end user.

Again, this also drives high conversion as well positive selection, illustrating once again how all these pillars rest on each other.

The best BNPL providers employ technology to its very fullest to achieve this goal.

8. BNPL has good customer outcomes

Finally, and perhaps most importantly, BNPL need to have good customer outcomes. This means that the BNPL provider has to focus very closely on affordability – can the consumer afford to pay back the installments over the agreed time period?

If the customer ends up buying too much, and becomes unable to pay back the installments, credit losses go up, the BNPL unit economics stop working, and everybody loses.

However, when assembled correctly, these eight pillars can support a win-win-win outcome where the merchant, the customer, and the BNPL provider all have great outcomes and are better off for using the model.

Five Fintech Predictions for 2022

2021 was such a roller coaster that making predictions for 2022 feels somewhat daunting. But as venture capitalists our jobs is to make bets on the future, so here it goes. Key predictions for 2022:

#1 Unit economics come back into fashion: 2021 saw frenzied deal volume and unprecedented valuations. A lot of this was driven by changes that took place so rapidly (sky rocketing e-commerce adoption, remote working, etc.) that many funds went into full FOMO. Our prediction is that 2022 will see investors sharpening their pencils on valuations, and hence we are unlikely to see the meteoric growth in valuations we saw in 2021.

The best case outcome for valuations is that any adjustment happens gradually, and in the context of sustainable economic models. No matter what happens, it is as important as ever for founders to keep in mind that the best immunity to market volatility is gained by the vaccine of solid unit economics.

#2 Embedded fintech in reverse: In 2021 we saw lots of non-fintech players using embedded finance to monetize their customer bases. A classic example of this would be a non-fintech company, such as a marketplace, using embedded finance to create lending or buy-now-pay-later solutions. Another example is a company like Shopify making a lot of its revenue from payments, etc.

A new trend we are expecting to see more of in 2022 is the reverse of this – companies going fintech first, and then building non-fintech businesses on top of this. One such example would be a company using fintech tools to initially attract customers, and then building marketplaces (or other non-fintech business models) on top of those customers. 

It is also worth noting that these trends in many cases can intertwine in many cycles. So in the first cycle, a company can start with some legal tech to attract a customer base. Then, in the second cycle, the company can enrich their customer proposition and monetization by adding embedded finance such as payments, currency exchange, or mortgages. This then deepens customer engagement and attracts new customers that value these tools. And finally, in the third cycle, having achieved stronger customer acquisition momentum and higher monetization, the company can develop a marketplace proposition, where the customers start trading with each other, creating a strong competitive moat in the process.

#3 War for talent heats up: Many of the top startups and growth companies are now flush with cash after having gone through a landmark year, and they need to deliver results. Expect the war for talent to turn into a battle royale!

Being able to attract top talent was the key differentiating advantage in 2021, and this trend will only get amplified in 2022. There are of course a lot of implications for this. For example, many companies will increasingly start looking across international borders, and companies that provide the infrastructure for such remote hiring and remote working will continue to benefit. Another beneficiary will be companies whose culture is better adapted to the ways of working that are quickly emerging. So expect to see a lot of continued innovation in work cultures and the “future of work”.

#4 More regulation and polarization in crypto: The crypto world will start to increasingly bifurcate, with some countries and regulators becoming increasingly more crypto friendly, and some increasing their level of regulation. Expect lots of continued debate within developed economies on how crypto should be treated and what exactly is and is not permissible.

#5 Big brother steps in: While developed countries will look to regulate crypto more on the one hand, we will also see Western central banks more openly committing to creating their own digital currencies. UK, Sweden, the ECB and many others are working on this frantically as Covid accelerated the disappearance of cash, and central banks need a currency they can control directly. 

As those of you familiar with the banking system know, central banks basically control the money supply indirectly via the banks that they regulate with all the monetary policy tools they have, while controlling it directly via the actual money they print. Even before Covid struck, cash was increasingly disappearing from developed economies (especially in places like Sweden), and hence that one part of the money supply that central banks used to control directly was becoming less and less relevant as a policy transmission tool.

As a result, central bankers will want to have a digital currency they have total control over, and we can expect lots of new announcements around this in 2022. This will make lots of new monetary policy innovations possible – for example when stimulus is needed it will be much easier for central banks to create more money supply by simply transferring new digital currency into the accounts of all eligible citizens.

Interestingly, this will also make things like highly negative interest rates and very strong consumption incentives much more easier. One example that has been talked about is that central banks would be able to hand out a digital currency that “expires” if not spent within a certain timeframe, thus creating a very strong stimulus for demand.

Undoubtedly, 2022 will continue seeing us living in interesting times. No matter what the future has in store for us, I wish a healthy and peaceful new year to everybody.

2021: A Cyber Space Odyssey

It has been fifty-three years since Stanley Kubrick’s landmark film “2001: A Space Odyssey” was first released, and exactly two decades since that particular year went from being fiction to history. While talking AIs in the form of Alexa, Siri and others have now become part of human history as well, we can all feel ever so slightly relieved that the antics of HAL 9000 still belong in the realm of fiction. 

Having said that, traveling recently on a London tube carriage with my daughter, she pointed out to me that every single passenger bar none was sitting, head bent at a forty-five degree angle, face fixated on the cool glow from their smart phones, totally lost to the outside world as the aforementioned AIs were busy stimulating the dopamine receptors in their respective brains. So while HAL 9000 may not have become reality, perhaps William Gibson’s dystopian vision from the Neuromancer trilogy very much has.     

In any case, turning back to the history and fiction of fintech, 2021 was a landmark year in many regards, and those of us who lived through it are left feeling dizzy, excited, and exhilarated. While it is hard to summarize a year in a few words, here are some of the key trends of this year.

  1. Valuations went sky high. 2021 was a year of record valuations, and records were being broken at such a rapid pace, that it was difficult to keep track of what a “market valuation” for a start up should really be. Many of us in the fintech community found themselves going back and forth between the extremes of struggling with the valuations of new deals, to celebrating the successes and progress of our portfolio companies as a result. 
  1. Invisible fintech becomes real. Embedded finance is now mainstream, and we now see more and more non-fintech businesses using embedded finance and fintech as their monetization routes. Your core business may not be fintech, but fintech increasingly became the route by which companies were looking to monetize their user bases. And we started seeing more and more proof that even the big tech giants will increasingly turn to fintech for monetization.
  1. A tale of two cities. In the rapidly evolving world of e-commerce, it was the best of times and it was the worst of times. While demand for e-commerce went through the roof, the supply side got so disrupted, it was simultaneously the best time and the worst time to be an e-commerce player. Fintechs that were funding and enabling payments for e-commerce merchants went through a similar roller coaster, and the best of them were able to capitalise on the volatility and turn it into a huge opportunity. 
  1. Everybody is now invited to the fintech party, and hedge funds were no exception. This was the year of the likes of Tiger Global and Coatue coming out in force, and becoming king makers and game changers, acting fast, decisively, and with big bazookas. Very few funding rounds went by where the stance of the big hedge funds turned growth investors were not a big topic of discussion. 
  1. Crypto goes boom. While crypto has always been a big part of fintech, this was the year where investments into crypto changed by an order of magnitude. Oh, and a sovereign country adapted bitcoin as legal tender. There was in fact a quantitative shift in the amount of money that flowed into crypto related start ups, and 
  1. Web 3.0 and Metaverse were big trends in the tech world, and their reflection in the fintech universe were NFTs that went right to the heart of this question: What does it mean to own something that only exists in the digital world? In the art world, Beeple was at the forefront of tackling this question, and profited handsomely, becoming multimillionaire overnight. In a world where so much content only exists digitally, the fintech world started tackling the questions of ownership and value attribution in earnest. One can only hope that this will continue to benefit the digital artists and creators out there. 
  1. Hiring is the ultimate competitive advantage: Forget proprietary tech or other moats around your business. Those that managed to hire top talent in this market had an edge nobody else could match. This was perhaps not surprising, since after record funding rounds, all these start ups and growth companies had to deliver on their ambitious plans, and AI or not, it turns out we all still very much need fellow humans.

So looking back at all these trends, 2021 was in many ways a year of extremes and contradictions, and this was very much reflected in our world of fintech as well. 

Next up will be predictions for 2022, so stay tuned, stay healthy, and keep your seat belts fastened!

Trusting the “Fin” versus the “Tech” in Fintech

The question of whether or not people trust Fintech has recently came up in the media.

This is indeed an interesting question to consider.

For the moment, let’s put aside the difficulty of defining what exactly is and is not fintech. Arguably printed fiat money is a relatively early yet very successful example of a financial technology and trust in that particular innovation has certainly ebbed and flowed over the years depending on the political and economic circumstances. So one could easily argue that “everything in finance will one day become fintech” but for our purposes here let us only refer to the new batch of tech driven startups that have been making the headlines over the last decade or so. 

In this context, one interesting thought that comes to mind is that it is very different to trust the “fin” versus the “tech” in fintech.

We can think of the fin part of fintech as all things relating to money, regulation, capital ratios, etc. and the tech part of it as relating to all things that have to do with mobile apps, APIs, data sharing – in other words all the things that have to do with the processing and sharing of information. 

What becomes clear with this framework is that different kinds of people may trust one side of this equation but not the other. 

A particular person may feel very comfortable opening up a mobile bank account, but may not entrust their whole paycheck to that new bank account, instead choosing their old and trusted bank for all major transactions. On the other hand, somebody else may trust the new bank as it is fully regulated by the PRA and their deposits are insured, but they may feel uncomfortable conducting transactions on a mobile app as it doesn’t feel natural to not be able to actually see and touch the money. 

So what are the implications of this for the founders and leaders in today’s fintechs? 

Most importantly, they must realize that they need to live up to the dual challenge of having both their fin and their tech trusted by their users. While building up the trust in tech requires things like transparent information sharing, intuitive user experiences, and an app that hopefully doesn’t crash when it is most needed, the building of trust in the fin sphere of things requires very different attributes. 

To gain users’ trust in the fin sphere, the product proposition must be fair, non exploitative, and transparent with regards to fees and charges. The company must also be solidly funded and exude the kind of fin trust that consumers have craved over the ages. It is no coincidence that bank buildings looked so secure and imposing while the bank managers had a dress code that radiated an aura of dependability. If people are to trust somebody with their financial decisions, they have certain conscious and subconscious expectations that have to be met.

It is very interesting to consider what the 21st century equivalent of a solid bank building with security guards is for today’s digitally native financial service providers. Surveying the landscape here a few commonalities stand out. For example the number (usually measured in millions) of users that already use the service in question is usually advertised prominently, and so is the various quality certifications and memberships in respected industry bodies.

Surely, this space will continue to evolve, and as today’s fintechs become more and more mainstream, we will see how they continue to build the trust of the consumers in both the realms of fin and tech.

In the end, all trust is underpinned by delivering on the brand and service promise day after day, and while building up trust can take years, if not careful, it can be torn down in an instant. Hence, the best advice for the operators out there is to be conscious about building trust and delivering on your promise, and only break that promise at your own peril. 

Good Growth and Bad Growth

If there is one metric the VC community seems obsessed about, it is probably growth. In fact, at times it seems that everything is measured with the famous “X” – 2x growth, 5x conversion, or the much coveted 10x, which is simply referred to as an “order of magnitude.” 

This is, of course, very much understandable. When you start a business with a small team and a big idea, competing against incumbents that have 100x (there we go again) your resources, it is only natural that you want to catch up as fast as possible. After all, we can think of incumbents and fintech startups as being in a race: startups are trying to get to get to scale before the incumbents figure out how to deliver digitally native, intuitive, and seamless user experiences.

But one thing that sometimes gets forgotten in this quest growth is that not all of it is created equal – there is such a thing as sustainable and unsustainable growth. In fact, nature offers us a lot of interesting parallels here given that most living things are in a life and death race for existence, and all things being equal, natural organisms, much like startups, are trying their best to grow exponentially at the early stages of their existence.

Consider for example early embryonic development. Once a zygote is formed, an eight week long embryonic development process starts, with the cells in the zygote doubling (that’s exponential growth for you), until a fetus is formed eight weeks later. If all goes well, this process then continues with the fetus developing further, until a baby human is born around 40 weeks after the zygote is first formed! The cell division that underpins this process is of course very much sustainable, according to a grand plan, and one that all of us have experienced though we certainly cannot remember it. 

Now consider a much less pleasant topic, and hopefully one that nobody reading this will ever have to experience – malign growth of tumors. In the early stages of tumor growth, cells also divide exponentially, creating two daughter cells each time. This, however, is very much an unsustainable form of growth, which if left untreated leads to the collapse and breakdown of its host environment, the human body. 

The analogy for startups is that you certainly want to make sure that your growth is of the sustainable kind, and one which will result in a fully developed and independent organism at the end of the journey, and not one that is at odds with the environment in which you exist.

The key to achieving this is complex, and involves several aspects, from human resources to finance, and from product to technology. We will touch upon two particularly crucial ones here, sustainable unit economics and the right human resource infrastructure. 

First, let us consider the business model and finance side. If your growth is not underpinned by solid unit economics, you can grow, but will forever be at the mercy of what can be very fickle capital markets. Yes, funds may want to come and invest in you in one round after the other as long as you are delivering your “X”s, but if you cannot manage to solve the simple equation of “revenues minus costs is greater than zero” eventually, you will never be able to control your own destiny.

In fact, back in the early days of scaling Capital One, we used to say one sometimes has to “go slow to go fast.” This referred to the fact that we would conduct tests on certain segments of the population, and then wait for as long as twelve to eighteen months for that data vintage to mature so we could get an accurate read of the risk characteristics of that segment. However, once a particular segment was proven, we would go from a test on two thousand customers to a full roll out on millions of customers overnight. That was going slow so that we could later go fast, and it was all about having a plan and about sustainability.

In fact, many of our UK investments have also utilized this very framework: ClearScore spent its very early days perfecting its model and assumptions, and once the team saw the path to sustainable unit economics, they scaled from a standing start to ten million customers in little over a couple of years. Similarly, Capitalise who is positioned as the super platform in the SME space, first fine-tuned its unit economic model, which then enabled it to not only survive the shock and dislocation of Covid in the SME space, but in fact come out of it stronger, with more customers and exponential growth in revenues. 

The second and equally important element of sustainable growth is on the human resource side of the equation. Setting up the infrastructure for hiring the right kind of people is of paramount importance, and never as easy as it looks from the outside. To use one last saying from the early Capital One days, we were “not in the consumer finance business, but in the people hiring business.” The whole organization at Capital One, from the first year analyst to the division VP, all spent a very significant part of their time recruiting, scouring college campuses for talent. 

And hiring is not just an exercise in throwing bodies at a new opportunity – it has to be done in a very deliberate and thoughtful manner, making sure the right people get allocated the right roles. Diversity is of paramount importance here, and as I touched upon in a prior blog, more diverse organizations also make for more resilient organizations. Sometimes surviving an unexpected but existential crisis is even more important than growth, and the kinds of organizations that have been able to cultivate an environment where people from very different backgrounds can flourish are much more likely to demonstrate such resilience. 

Growth is essential, but it has to be balanced with a solid master plan and a sustainable model for it to fulfill its true purpose: creating new businesses and industries that exist in balance with their environment. 

Digitization, Automation, and the Hierarchy of Human Needs

Real estate is one of those unique asset classes that has various forms of appeal to almost everybody. When you get right down to it, real estate appeals to our deepest rooted instincts of shelter, security and community. In an evolutionary sense, it even transcends our mammalian roots and gets deep down into our reptilian brain. 

It is no coincidence that Abraham Harold Maslow (20th century American psychologist famous for framing a hierarchy of needs for psychological health predicated on fulfilling innate human desires) put shelter right at the bottom of his pyramid, right above fundamental physiological needs such as breathing, water, food and sex. 

Abraham Harold Maslow, 1908–1970, American psychologist best known for modeling a hierarchy of human needs

While real estate has such fundamental appeal to humans, real estate investing takes this desire for safety and builds on it with complicated terms like gross yield, net yield, return on investment, and leverage to name just a bit of the jargon that usually goes along with real estate investing. So yes, as we start investing in real estate we transcend the reptilian brain, and start engaging our frontal lobe with cash flow projections and predictions around which country or which city will see rental incomes rise.  

In this context, it is no surprise that real estate is the single biggest asset class in the world. Just to take the UK as an example (otherwise the numbers simply get too big!) UK residential real estate is an asset class of GBP 7.4 trillion. Buy to let investing (where landlords buy property for renting, also knows as BTL) equates to a “small” subset of GBP 1.4 trillion. Just to put this in context, the FTSE all-share index (in effect the value of all publicly traded companies in UK, many of which are international and operate globally) is GBP 2.4 trillion and the value of all loans outstanding to UK SMEs (Small and Medium Sized Enterprises) is about GBP 0.18 trillion, or 180 billion.

But while real estate is big, and appeals to both our analytic and primal instincts, it is one of the least liquid asset classes out there. One can trade shares on the FTSE in a a matter of milliseconds, exchanging ownership in AstraZeneca with ownership in Unilever in an instant. Business loans can be traded in a matter of hours. However, trading real estate can take months in the UK. So ironically, the biggest asset class is also the one that is least liquid.

This is exactly where GetGround and companies like them operating at the intersection of Fintech and Proptech come into the picture. There is no intrinsic reason why trading real estate should take months – in fact, many of the constraints that slow down this process, which at times can be outright frustrating, can be solved with technology. And this is exactly what GetGround does: turning the currently slow and arduous process of owning and investing in real estate into one that is smooth, simple, and secure.

At its core, GetGround enables its customers to buy, incorporate, bank, fund, and manage their property with just a few clicks of their mouse. Let’s now examine each of these five steps in more detail, and why each one is so important.

First and foremost, the process of buying property involves tons of documents, legal agreements, searches, negotiations, etc. We will examine what GetGround does in more detail on the buying side in a future blog, but suffice it to say that the process just asks for standardization, and with its technology driven approach GetGround can standardize all these documents giving confidence to all parties that are involved in the transaction. More importantly, as GetGround is positioned in the centre of the ecosystem, there are tons of so called network effects where GetGround can leverage its central position to help its customers buy their desired property.

Buildings may change, but the human desire for real estate and shelter does not

Secondly, and this is one of the platform’s core features, GetGround helps landlords incorporate a company that holds their property. Many of us take companies for granted as something that has always been part of human life, but as Yuval Noah Harari states so elegantly in his book Sapiens, companies are nothing more than a shared fiction that humans all subscribe to. But while companies may be nothing more than a creation of our collective imagination, they have very real financial benefits in real life. When applied to properties, these benefits include more efficient tax structures, better inheritance planning, better governance, and more standardized and easily exchangeable ownership structures to name just a few. Hence, GetGround has built a product (including direct API connections to the UK Companies House) that enables their customers to incorporate a company with a few clicks, and put their property into this company, all with automatically generated, customized, and standardized legal documents. 

The third benefit follows logically from the first two: Once a landlord has bought a property and put it inside their newly incorporated company, it only makes sense to open a bank or e-money account dedicated to that company and property for collecting all the rental income into one dedicated place. This makes it very easy for the landlord to track all their rental payments affiliated with one company in one place, which in turn makes things like tax filing and expense tracking much easier.  

Funding the property is then the fourth area where GetGround helps, and it does so by connecting its landlords to all the various banks and lenders that are looking to deploy their balance sheets to fund these properties with specialized BTL mortgages. BTL mortgages are one of the fastest growing segments in the UK mortgage market, and GetGround creates the ideal platform where lenders and landlords can meet. From the landlord’s perspective, they have just acquired a property and they appreciate the introduction to lenders, whereas from the bank’s perspective, the standardized documents and e-money account GetGround provides makes everything more standardized and secure, all accessible in one centralized platform. 

Finally, in terms of managing the property, there are tons of needs ranging from furniture removal to renovation that need to take place, along with financial management needs such as tax filing. GetGround is in an ideal position to connect its customers to the experts that are needed in each different situation. 

When all is said and done, step by step and click by click, GetGround is digitizing and simplifying the process of owning property, taking us all closer to that utopia where we can buy and sell property in a matter of minutes and hours instead of weeks and months. This is the power of technology and data connectivity applied to one of the oldest and most primal industries known to humans, and it is a real privilege to be part of this epic transformation. 

Numerical Context on the Proposed Fiscal Stimulus

In my last blog I wrote about the immediate need for helicopter money and coordinated fiscal stimulus from governments around the world. Since then the US administration announced a $850bn stimulus package. I would like to share some numbers to put the figures being proposed by US political leaders into context.

The GDP of the United States was $21.4 trillion in 2019. This means that on average, the US produced a GDP of $1.8 trillion/month in 2019. Obviously, even with all the measures put in place in response to the coronavirus, we are very far from having shutdown the entire economy. But what percent of the economic output has been impacted by the partial shutdown and economic disruption?

To give us an idea, we can actually use the latest economic data shared by China yesterday. According to the National Bureau of Statistics, industrial output in China tumbled by 13.5% in the first two months of the year. As per the Financial Times, the same data also showed that retail sales plummeted 20.5 per cent year on year in January and February, and fixed asset investment fell 24.5 per cent. Services production also declined by 13 per cent in the first two months, and coupled with the industrial production figure, Capital Economics estimates that Chinese GDP contracted by 13 per cent during the first two months of the year. (Source: Financial Times, Chinese economy suffers record blow from coronavirus.)

However, while the data above suggests a 13 per cent drop over two months, it is important to note that China only went into full lockdown on January 23rd. Considering that February is a shorter month, the contraction primarily corresponds to a period of thirty-seven days. Putting this into monthly terms, a reasonable assumption is that China’s economy contracted by 10.5 per cent on a monthly basis during the lockdown period.

Taking this 10.5 per cent number and applying it to the US monthly GDP of 1.8 trillion, we see that the GDP impact of going into shutdown for one full month is about 190 billion dollars, or close to one percentage point of annual GDP each month the shutdown is in place. This sort of math is of course way too simplified, but it helps give a directional understanding, and it seems to imply that by proposing a $850bn stimulus package the current US administration is looking to make up for about three to four months of lost output from slowing down economic activity in response to the coronavirus.

What the numbers do not take into account is follow on disruptions that may be caused as people lose their jobs or companies have to go out of business permanently. It also does not take into account any disruptions from stress building up in the financial system such as the repo or commercial paper markets. Nonetheless, one can only hope that it will inject markets and people with a sense of stability. The delivery mechanisms will also be key, as the stimulus needs to reach the people and businesses that need it most in an expedient manner.

The most important thing to note here however is that the US is far from the only country impacted by the coronavirus. The GDP of the EU is close to $20 trillion, and their economic output have certainly been exposed to the same sorts of unprecedented shocks. Hence, it will be very important that other governments continue to take similar fiscal measures in the coming days, and do so in a coordinated manner.

It Is Time for Helicopter Money

We are living through unprecedented times. Never before has the global economy been this interconnected, and never before have the seven billion plus souls that inhibit this planet changed their collective behavior so suddenly and so dramatically.

The global wave of fear that the COVID-19 virus and the associated media coverage has unleashed has created a tsunami of reactions, with borders closing, factories shutting down, and both the demand and supply side of the economy going into what can best be described as shock.

The health and safety of the world’s citizens should be priority number one, and I would first and foremost like to express my eternal gratitude to the nurses, doctors and medical workers who are working on the frontlines of this pandemic to the point of utter exhaustion, putting their lives at risk on a daily basis to save ours. We are deeply grateful, and words are not enough to express the importance of the work that they do for all of our collective safety.

As for the global political response, I am neither a scientist nor an epidemiologist, so I will not get into the controversial topic of whether the response from the various national governments of the world has been an overreaction or an underreaction.  I would however like to point out that in times of crisis, coordination and solidarity is paramount, as is staying calm and levelheaded. Politicians globally face no easy choices in the coming weeks. It is the job of our leaders to make these incredibly difficult choices, always putting the good of society and the health of all the world’s citizens as the top priority. Sometimes the right choice might not be the most popular one, and it is the job of the leader to make that right choice in light of scientific knowledge and the long-term welfare of society. Open and honest communication that also prioritizes keeping the population as calm as possible will be key.

While nothing can be more important than preserving people’s physical health and wellbeing, I would like to focus here on the economic consequences of what we are going through. I will not go into the numbers here, but the analogy with regards to the global economy that comes to mind is a big airliner that has shut its engines in midflight. We now need to restart the engines and land the plane safely.

The Fed has announced that it has cut its rates to zero percent, so it is fair to say monetary policy is stretched to its maximum. However, while this will undoubtedly help, it will likely not be enough.

Given that the global economy faces an unprecedented challenge, global policy makers now need to focus on unprecedented economic responses. Given that the shock is driven by both the supply side (factories shutting down, supply chains breaking down) and demand side (consumers not spending money and postponing most purchase decisions), governments will have to take swift steps to address both sides.

The term helicopter money is derived from a thought experiment by Milton Friedman

One such step would be what is known as “helicopter money” a term attributed to a thought experiment performed by Milton Friedman, where a helicopter drops money that is directly picked up by the people. One key condition of his thought experiment is that everyone is convinced that this is a unique event that will never be repeated. This thought experiment has since been picked up by economists as an alternative (or supplement) to monetary policy including quantitative easing. Its proponents argue that it can be a very efficient way to increase aggregate demand, especially in what is known as the liquidity trap – or central banks reaching the zero lower bound on interest rates.

The proponents of this tool include Ben Bernanke, who has in the past stated that helicopter money should be on the table as an alternative of last resort.

In practice, there are clearly many ways in which helicopter money can be implemented. The spectrum can range from tax credits to individuals and small businesses (the mildest form) to actually transferring money directly into their bank accounts (basically a sort of temporary Universal Basic Income for the duration of this crisis).

Given the severity of our current crisis, I think policy makers need to immediately start assessing the various delivery mechanisms and preparing an action plan as soon as possible. The best option in today’s circumstances is likely to be one where small businesses and consumers get money put directly into their bank account. While the cost of this will undoubtedly be high (using a simple example, giving forty million people GBP 1,000 per month equates to a cost of forty billion pounds for each month that the policy is in place).

However, if the benefit is to prevent a total breakdown of the economy, the cost may be very worthwhile indeed. The delivery mechanisms will also be key, and alternatives that help small businesses stay solvent also need to be considered. This can take many forms including a forcing mechanism to direct the helicopter money to be spent immediately, or other direct assistance to small businesses, including payroll support where the money in effect gets delivered via business payroll. One big benefit of this would also be to give consumers one less thing to worry about. Everybody is clearly very worried about their physical health and wellbeing, and adding financial worries on top of this only increases the level of stress.

Finally, it is also important to point out that one big benefit of helicopter money is that it would create less inequality and would thus help maintain social stability and cohesion in trying times. Quantitative easing primarily gets delivered via the banking system and tends to flow towards house prices and stock prices, which then tend to leave behind people that cannot afford to own a home or buy stocks.

We need to remember that (God willing) this too shall pass, and once it does, we want to wake up to societies that have made it through these troubling times with their heads held high, in solidarity with their fellow people and neighbors, and without sacrificing the fundamental values on which we have built our civilization.

Your Money Does Not Exist (and Why Your Bank Needs a Babysitter)

In my last blog, I mentioned the slightly disquieting and amusing fact that your money does not exist. People usually have one of two reactions to this statement. If they are an economist or a student of the modern banking system, they say “Yes, so what?” whereas if they are part of the remaining of 99.9% of the population the reaction is usually a mixture of “What have you been smoking?” and general disbelief.

The easiest way to prove the point is to use a simple example, and here it goes. To illustrate that this is not directly related to the digitalization of money which is a separate issue (i.e. paper vs. digital money), let’s consider a bank in an economy that only uses paper banknotes.

In this paper money based economy, imagine Customer #1, who now goes to a bank to deposit her $1,000 in banknotes. The bank happily accepts her money and gives her a little paper ledger that shows an account balance of $1,000 (effectively the bank now owes her $1,000). Our trusting Customer #1 may be thinking of her banknotes living a comfortable existence deep down in a secure bank vault, the equivalent of money heaven.

However, in reality, the bank is much more than a simple safe or a vault for locking up banknotes. The bank needs to make money as well, and to do so, it takes the vast portion (let’s use 90% for illustrative purposes) of Customer #1’s money and lends it out to Customer #2.

Now, Customer #2, who we can imagine to be a bread maker, takes the $900 the bank lent him, and sets out to use his $900 to buy himself a new bread oven for his soon to be opened bakery. Hence, Customer #2 goes to Customer #3 (who happens to be a bread oven maker) and gives him the $900 in exchange for the latest model bread oven.

Customer #3 who sells bread ovens has no interest in putting his money under his pillow either. Hence, he takes his new $900 and goes back to the bank and deposits it. The bank gladly accepts the money and gives Customer #3 another paper ledger that shows his account balance with the $900 on it (so the bank now owes him $900).

Let’s take a little break here and consider how the situation and all the various ledgers look. The bank only has $1,000 in its safe, but Customer #1 has a ledger that tells her the bank owes her $1,000 while Customer #3 has a ledger that tells him the banks owes him $900. If they both were to go to the bank to withdraw all their funds (a total of $1,900) the bank would have to tell them that all the money is not there.

So what gives – where is the money? Of course, the short answer is that the bank has $1,000 in cash, while Customer #2 (the bread baker who took out a loan), owes the bank an additional $900 that he will pay back with the profits from his soon to be opened bakery shop.

Of course it does not stop there. Once Customer #3 (the guy who sold the bread maker the oven) puts his $900 into the bank, the bank once again lends out a big portion (let’s again use 90% as an example). Hence the bank takes $810 and lends it out to Customer #4 who uses the money to buy bricks to build herself a new house, etc.

I’ll spare you the math and the repetitive examples, but when all is said and done, the bank is left with $1,000 in capital (cash in the vault), while the sum total of all the money in the customer’s ledgers is actually $10,000. In other words, Customer #1, Customer #2, Customer #3, etc. all collectively think they have $10,000 of cash in the bank, whereas the bank in reality only has $1,000. Hence, the bank has created $9,000 of “imaginary cash” that does not exist, except as a collective belief. (My math here is only directionally correct, as the real-life computations are complicated by centuries of banking and accounting regulations and customs.)

A bank run from the 1930s

One implication of this this is that banks are vulnerable to “bank runs” that occur when people for whatever reason believe a bank is no longer trustworthy (this kind of panic can occur for any reason but usually involve rumors about the bank’s viability). This creates a self-reinforcing herd behavior where all the customers go to the bank to get their money out simultaneously. As even the healthiest of banks would not actually have all this money as we saw above, long ques form up in front of the bank which make the bank run worse, resulting in a vicious cycle that ends with the bank going bust, and the depositors losing their money.

Times may change, but bank runs don’t

It is for this reason that government support and the associated regulation is crucial for banks. To prevent bank runs (which otherwise would occur quite regularly), the government steps in and informs everybody that they guarantee everybody’s money up to a certain amount (the money still does not exist by the way, but the government has the power to print new money if push came to shove – this of course would create inflation but that is a whole other story). But at least the government guarantee inspires confidence and makes bank runs less likely.

So what is the relevance of all this for entrepreneurs and operators in the fintech space? One big implication, especially for those longing to one day become regulated banks, is to realize that they cannot become one without accepting the protective embrace of their respective governments and bank regulators. And that protective embrace can easily turn into a smoldering bear hug if the regulators think the bank is not being run as it should be. Hence, while becoming a bank may sound tempting, know that it comes with the full weight of history and banking regulation behind it.

After all, everything, even creating imaginary money, comes at a cost.