IBSi Blogs

By Adam Matuszewski, Head Equity Products, The Swiss Stock Exchange, SIX

Throughout 2020, European MTFs were unable to trade Swiss stocks – because the EU had denied the Swiss Stock Exchange equivalence in mid-2019. So, when the COVID-19 pandemic caused highly volatile stock price movements that lasted for several weeks, the Swiss market felt the full brunt of trading in Swiss shares, setting us up for an extraordinary 2020.

Despite the uncertainty, fair and orderly trading was ensured at all times within the Swiss ecosystem while managing to keep spreads tighter and recover more quickly than many European markets. Investors of any size and provenance could swiftly adjust their positions in Swiss shares based on their strategies, ultimately minimising the damage for the economy as a whole. This reliability and resilience allow financial market participants to be optimistic, should volumes surge again during a potentially sudden and vehement recovery in 2021.

An unpredictable 2020
Stock exchanges have traditionally been subject to – and designed to handle – fluctuation depending on external variables, but 2020 took this to new heights. COVID-19, international panic around geopolitics, and general uncertainty in global markets hit Switzerland like we hadn’t seen since January 2015, when the Franc was de-pegged from the Euro. Six years ago, the shock only lasted a day, whereas the impact from the pandemic has lasted months, albeit including unprecedented volume spikes in March.

Last year, some exchanges have tried to sit out the storm by closing their market and suspending trading. However, when they re-opened, all the temporary closure brought was further uncertainty in a time when investors were looking for open markets able to cope with crises. We saw this in the Philippines when the PSE closed for two days only to be followed by stock prices tumbling 30 per cent immediately after reopening. This is why scalable infrastructure has become increasingly important; it allows for a more seamless response to unforeseen circumstances, and is one of the reasons why ensuring functional market infrastructure continues to be a key focus for us in the coming year.

Lessons learnt
Besides offering the Swiss Financial Centre a chance to prove its stability and resilience, the extraordinary circumstances caused by the pandemic against the backdrop of non-equivalence also provided a unique opportunity to investigate the impact of liquidity consolidation on the market quality. Ever since the Market in Financial Instruments Directive (MiFID) entered into force in 2007, liquidity in equity trading was fragmented across several trading venues; now the effects of liquidity consolidation could actually be assessed on key areas such as trading activity, order book quality and prices. The results clearly show that spreads have been largely unaffected, and depth of liquidity has actually improved. Further, trading became more efficient as evidenced by lowered Order-to-Trade ratios and less ghost liquidity spread across venues.

So, despite the undeniable benefits of competition introduced with MiFID I and MiFID II, what has been clearly confirmed by our research last year is that liquidity consolidated in one place tends to be more resilient to volatility shocks than liquidity that is fragmented over several venues; and obviously, search costs are reduced to zero. Based on these facts, I think we should embrace a new debate on market structure that addresses the question how much competition is beneficial for the market and at where we might reach the tipping point where its downsides outweigh the benefits.

This debate about the future of trading should include the perspective of exchanges and all market participants, including the buy-side, mid-tier and smaller market participants.

Outlook for 2021
When looking back at 2020, it makes it hard to predict with accuracy what’s to come in 2021, as the past year has shown that anything can happen. But despite all the new uncertainties that Brexit might bring, it could end one – by reigniting competition for market share in Swiss stocks in 2021, even if the equivalence status of the Swiss Stock Exchange will not be reinstated by the EU. The reason is simple: most MTFs where Swiss shares could be traded are located in the UK, so we expect the market will start finding its new balance between liquidity on the primary exchange and alternative trading platforms.

Ultimately, we hope to see a return to normality within the trading ecosystem, and more healthy competition for stock exchanges. We know 2020 has been a difficult year. However, opportunities await, and we’re optimistic for the future developments in Swiss and European equities for the years ahead.

Adam Matuszewski
Head Equity Products
The Swiss Stock Exchange, SIX

By Ted Sausen, Subject Matter Expert, NICE Actimize

On September 20, 2020, just four days after the Financial Crimes Enforcement Network (FinCEN) issued a much-anticipated Advance Notice of Proposed Rulemaking, the financial industry was shaken and their stock prices saw significant declines when the markets opened on Monday. So what caused this? Buzzfeed News in cooperation with the International Consortium of Investigative Journalists (ICIJ) released what is now being tagged the FinCEN files. These files and summarized reports describe over 200,000 transactions with a total over $2 trillion USD that has been reported to FinCEN as being suspicious in nature from the time periods 1999 to 2017. Buzzfeed obtained over 2,100 Suspicious Activity Reports (SARs) and over 2,600 confidential documents financial institutions had filed with FinCEN over that span of time.

Similar such leaks have occurred previously, such as the Panama Papers in 2016 where over 11 million documents containing personal financial information on over 200,000 entities that belonged to a Panamanian law firm. This was followed up a year and a half later by the Paradise Papers in 2017. This leak contained even more documents and contained the names of more than 120,000 persons and entities. There are three factors that make the FinCEN Files leak significantly different than those mentioned. First, they are highly confidential documents leaked from a government agency. Secondly, they weren’t leaked from a single source. The leaked documents came from nearly 90 financial institutions facilitating financial transactions in more than 150 countries. Lastly, some high-profile names were released in this leak; however, the focus of this leak centred more around the transactions themselves and the financial institutions involved, not necessarily the names of individuals involved.

FinCEN files and the impact

What does this mean for financial institutions? As mentioned above, many experienced a negative impact to their stocks. The next biggest impact is their reputation. Leaders of the highlighted institutions do not enjoy having potential shortcomings in their operations be exposed, nor do customers of those institutions appreciate seeing the institution managing their funds being published adversely in the media.

Where did the financial institutions go wrong? Based on the information, it is actually hard to say where they went wrong, or even ‘if’ they went wrong. Financial institutions are obligated to monitor transactional activity, both inbound and outbound, for suspicious or unusual behaviour, especially those that could appear to be illicit activities related to money laundering. If such behaviour is identified, the financial institution is required to complete a Suspicious Activity Report, or a SAR, and file it with FinCEN. The SAR contains all relevant information such as the parties involved, transaction(s), account(s), and details describing why the activity is deemed to be suspicious. In some cases, financial institutions will file a SAR if there is no direct suspicion; however, there also was not a logical explanation found either.

So what deems certain activities to be suspicious and how do financial institutions detect them? Most financial institutions have sophisticated solutions in place that monitor transactions over a period of time and determine typical behavioural patterns for that client, and that client compared to their peers. If any activity falls disproportionately beyond those norms, the financial institution is notified, and an investigation is conducted. Because of the nature of this detection, incorporating multiple transactions, and comparing it to historical “norms”, it is very difficult to stop a transaction related to money laundering real-time. It is not uncommon for a transaction or series of transactions to occur and later be identified as suspicious, and a SAR is filed after the transaction has been completed.

FinCEN files: who’s at fault?
Going back to my original question, was there any wrongdoing? In this case, they were doing exactly what they were required to do. When suspicion was identified, SARs were filed. There are two things that are important to note. Suspicion does not equate to guilt, and individual financial institutions have a very limited view as to the overall flow of funds. They have visibility of where funds are coming from, or where they are going to; however, they don’t have an overall picture of the original source, or the final destination. The area where financial institutions may have fault is if multiple suspicions or probable guilt is found, but they fail to take appropriate action. According to Buzzfeed News, instances of transactions to or from sanctioned parties occurred, and known suspicious activity was allowed to continue after it was discovered.

Moving forward
How do we do better? First and foremost, FinCEN needs to identify the source of the leak and fix it immediately. This is very sensitive data. Even within a financial institution, this information is only exposed to individuals with a high-level clearance on a need-to-know basis. This leak may result in relationship strains with some of the banks’ customers. Some people already have a fear of being watched or tracked, and releasing publicly that all these reports are being filed from financial institutions to the federal government won’t make that any better – especially if their financial institution was highlighted as one of those filing the most reports. Next, there has been more discussion around real-time AML. Many experts are still working on defining what that truly means, especially when some activities deal with multiple transactions over a period of time; however, there is definitely a place for certain money laundering transactions to be held in real-time.

Lastly, the ability to share information between financial institutions more easily will go a long way in fighting financial crime overall. For those of you who are AML professionals, you may be thinking we already have such a mechanism in place with 314b. However, the feedback I have received is that it does not do an adequate job. It’s voluntary and getting responses to requests can be a challenge. Financial institutions need a consortium to effectively communicate with each other while being able to exchange critical data needed for financial institutions to see the complete picture of financial transactions and all associated activities. That, combined with some type of feedback loop from law enforcement indicating which SARs are “useful” versus which are either “inadequate” or “unnecessary” will allow institutions to focus on those where criminal activity is really occurring.

We will continue to post updates as we learn more.

Ted Sausen
Subject Matter Expert
NICE Actimize

By Pim Koorn, Product Director, Business Banking at Backbase

With the fourth quarter quickly approaching, banks are increasingly tasked with the difficult project of evaluating how to best support their small and medium-sized enterprise (SME) customers, all of whom are working diligently to re-emerge from 2020’s challenges and adapt to the new normal that is taking shape.

Responding to today’s current demands means that flexibility, innovation and personalisation are key requirements of any technology partner. Banks are considering how to best provide the customisable solutions their clients need in today’s current environment. SMEs are increasingly seeking partners that can provide the specific working tools that meet their fluctuating requirements. No one SME is alike. Whether they are reaching for new digital invoicing tools or seeking real-time onboarding solutions, banking partners that can best support their customers at every turn in their digital journey will remain a trusted partner during the collective recovery period.

The coronavirus pandemic has also put a newfound strain on how SMEs are managing their day-to-day operations and has significantly shaped the way SMEs are looking at their technology. In a PwC study from April of 469 SMEs on how banks can help businesses manage the rocky waves of the pandemic, the majority of respondents noted that the ability of a banking partner to tailor its support was critical to retaining the SME as a client. More than half of respondents (61 per cent) said personalised customer experience was core to the banking relationship.

These survey results underscore how a customer-centric focus, instead of a product-centric one, is the key to banks being able to optimise client relationships. Banks are already working to better understand their SME customers’ specific ways of working, but being able to efficiently cater to these needs lies in embracing technology and innovation.

By digitising paper-based banking processes, SME’s will be able to reallocate their limited time toward more important business-critical tasks. SMEs spend 74 per cent of revenue on non-core activities like bookkeeping and legal and 26 per cent on core activities that make them money, according to McKinsey. Implementing slick and user-friendly platforms can help banks remove friction and provide a more seamless experience for their clients, creating the efficiencies these businesses require.

Another way banks can help support SME clients is by prioritising optimisation. Digital-first banking platforms help solve some of the day-to-day hurdles that SMEs currently face, with solutions such as digital onboarding, digitised loan applications and digital customer signing processes. By empowering SMEs with the digital tools they need to reduce processing times from days into minutes, banks can make themselves indispensable as value-add technology partners.

Every business is currently looking for ways to streamline their operations. But banks that operate within legacy systems run the risk of not meeting the expectations of modern SME owners. By offering digital-first platforms, banks can provide SMEs with the underlying technology infrastructure that helps take the stress out of their finances. Providing access to secure and seamless mobile money management tools, banks can make SME’s lives easier – from bill payments to invoicing, and payroll to card management.

Lastly, banks that integrate new processes around transparency and real-time data will be better placed to cement themselves as long-term partners. Accessible, actionable data is how SMEs stay up to date, and leveraging real-time liquidity management tools that are backed by reporting and analytics are key to the financial health of these businesses.

With Q4 upon us, banks are understandably focused on how to best support their clients during this pivotal time. And as SMEs turn to technology to help them navigate these challenging times, banks can put their best foot forward by continuing to prioritise digital-first, customer-first services.

Pim Koorn
Product Director, Business Banking
Backbase

by George Brostoff, CEO & Co-Founder, SensibleVision

The launch of the Samsung S20 phone (and the release of the new Apple phone that’s expected to come out in the fall) have once again brought facial recognition back into the public eye.

It’s one of those technologies that we all just take for granted, but how does it actually work not only for phones but for devices such as door locks, security cameras, or even automobiles? And are the common perceptions of facial recognition even accurate? Let’s look at some of the myths and facts:

Myth #1: Facial recognition is racially biased.

Fact: There has been a lot of news coverage about how facial-recognition systems only work for people with lighter skin, and some have concluded the technology is racially biased. This is has been partially fostered by what turned out to be a controversial art project collaboration between a Microsoft researcher and an American artist.

Perceived issues with racial profiling and AI are often the result of the lack of diversity in the database that occurs when developers prioritize creating a large database over a more varied one. Lighting can also play a part, as evidenced by research of Joy Buolamani. The MIT Media Lab researcher found that some cameras had difficulty interpreting the composition of facial features on individuals with darker skin tones, leading to inconsistent results. However, there are currently facial recognition solutions available that provide consistent results, regardless of the subject’s complexion, as developers learn how to work with a variety of faces and lighting conditions.

Myth #2: Facial recognition can be easily hacked.

Fact: While many implementations have proven to be insecure and can easily be hacked by photos, masks, or videos, this is not inherent to face recognition as a concept, but to the vendor’s technology and approach. Simply put, bad technology doesn’t work very well, but good systems do.

Facial recognition technology is rapidly improving to the point that many systems can detect minor changes in appearance, such as glasses, facial hair, makeup, and even partial obstructions. Advances such as “active liveness detection,” where a user executes an action such as squinting, blinking, or making a face, can render it far more difficult for hackers to spoof a facial recognition system; combined with “passive liveness detection,” which employs internal algorithms to detect imposters, it’s no easy feat for hackers to successfully bypass facial recognition systems.

In some instances, storing biometric information, such as face templates, locally and subsequently sharing that information only with authorized devices, may be more secure and less susceptible to hackers (albeit potentially less convenient) than storing that info centrally on the cloud. If vendors are cognizant of potential issues and implement preventative security measures accordingly, facial recognition technology is no easier to hack than other, comparable systems.

Myth #3: Facial recognition will always be a fringe technology because people are worried about their privacy.

Fact: While face recognition privacy is a hot topic in the news, hundreds of millions of people use it daily to access their phones and interact with other devices. Where transparency, speed and high security is desired, almost nothing can provide the same level of convenience and accuracy.

Facial recognition tech is already far more ubiquitous than one might think. While some jurisdictions, such as the city of San Francisco, have placed a ban on agencies such as law enforcement and transport authorities from employing facial recognition tech, it’s exploding in industries and fields as diverse as retail, road safety, home security, and even agriculture, where farmers are using it to identify and track animals, help mitigate the spread of herd-killing diseases unintentionally transmitted by workers, and measure an animal’s vital health information.

While the general public is often wary of the implementation of facial recognition tech by sectors such as law enforcement and the military, its unmatched expedience, precision, and practicality mean that people are increasingly open to incorporating such technology into their daily lives.

Myth #4: Facial recognition doesn’t work well in low-light situations.

Fact: Ironically, Some facial recognition technologies actually work better with less light! This may sound counterintuitive, but with the right technologies the darkest night or even the brightest sunlight need not reduce the accuracy or performance.

Low light conditions shouldn’t be a barrier to the functionality of 3D imaging. Problems with elements such as accuracy and depth manifest when infrared oversaturation occurs – such as when users whip out phones or other devices in full sun or near highly reflective surfaces. These options tend to test well in the lab, but not so well on the beach or next to plate glass windows. Fortunately, many developers have taken note of this and managed to work around the problem to ensure that the technology functions in a range of settings and locations – be they a cave at midnight or a desert at high noon.

Myth #5: Facial recognition is only for high-end devices.

Fact: Cameras are being included in most everyday devices. And the computing power to accurately process those images is already present.

This means facial recognition technology is only likely to increase in popularity – and decrease in cost. You’ll find it embedded not just in law enforcement security tech but in products as common as door locks and restaurant payment systems, as well as in health care screening devices and programs and in retail stores. You may be surprised to learn that your phone, laptop, or tablet already feature facial recognition software, or the capacity to incorporate it. Essentially, if a device has a camera, it’s probably capable of employing some kind of facial recognition technology – if it doesn’t already.

By Brian Coburn, CEO at Bridge

The ability of COVID-19 to dramatically change consumer buying behaviour continues to challenge the e-commerce world.

Lockdown restrictions, customer anxiety over physical spaces, and increased screen time across all demographics has created an e-commerce boom of unprecedented proportions. Online operations have been tested to the limits and even the most traditional businesses have found themselves forced to pivot and innovate to find new ways of engaging customers. For many retailers, e-commerce has gone from a secondary channel to becoming the primary connection to customers, which makes a strong, resilient online payment structure even more critical than ever to capture every possible transaction opportunity.

Amidst the chaos, many fledgling payment trends have accelerated and previously niche innovations have received a boost.

Consumers have been prompted to try out new or alternative mechanisms such as mobile wallets, payment services, person-to-person transactions and order-ahead apps as they adapt to the new, socially distanced ‘normal’. As much as we all want to see the back of this pandemic, it is unlikely we will see a full retreat from online retail and many of the new payment provisions that have swiftly gained popularity.

Now the ball is in the e-commerce court to catch up and keep customers spending online. It demands a reliable mechanism to minimise cart abandonment and incomplete transactions, the ability to take payments in more varied, innovative and flexible ways, and processes for collecting data to understand what has worked – or not – and why.

None of this is simple or straightforward. In fact, a relatively new term ‘payment orchestration’ is likening the need for management and integration of the many active parts and processes involved in transactions to the task of conducting an orchestral performance. It reflects the challenge of accommodating a growing array of customer payment preferences while also navigating the increasingly complex and fragmented integrations associated with needing to connect to different payment services.

In times of uncertainty, we look for what we can control. The same mentality is apparently behind the rush to stockpile toilet rolls in the early days of the pandemic. But through the lens of e-commerce, control – and resilience – are exactly what businesses need to shore up. With payment orchestration, vendors regain ownership of their payment platform and it puts the complexities of dealing with multiple payment service providers back under their control. E-commerce vendors can then achieve a much clearer, consolidated view of the whole payments infrastructure and support the speed, convenience, personalisation and trust that customers want from online retail.

In the ‘new normal’, these will be the most important influences on the ways in which people choose to shop and engage online and, ultimately, pivotal in the success of e-commerce operations.

Brian Coburn
CEO
Bridge

Bridge is a new payment orchestration layer for e-commerce enterprises that want to unlock the potential of existing and new digital payment services. Bridge has been created to put payment control in the hands of the merchant. Its single integration layer delivers more control over payment service providers, consolidates internal reporting, builds resilience and enhances the ability to test new payment innovations and opportunities at speed.

By Daumantas Barauskas, COO at Genome

Some things change the world so rapidly and drastically, that no amount of statistical data and research can predict it. The COVID-19 pandemic proved to be one of such things. Due to it, the global economy may shrink by 5,2%, as shown in The World Bank’s recent report, meaning it would be the biggest global recession since World War II. The forecast is based on the assumption that the countries would lift domestic mitigation measures by the mid-2020, and global spillover effects would be mostly dealt with in the second half of 2020. And in a worst-case scenario, the global economy is to reduce up to 8%.

Now, when we have a global picture, let’s turn to the banking sector. In 2018, global payments revenues reached $1,9 trillion and were expected to hit $2.7 trillion by 2023 with continuous growth. Needless to say, the pandemic had a devastating impact on the revenue, as the industry can lose from $165 billion to $210 billion, even though before the pandemic it was forecasted to gain $2.1 trillion this year.

In the middle of March, the average global bank stock prices underperformance grew to a rate of the industries that are most vulnerable to the lockdown. If we use our baseline of 100% for bank stock prices on 19 February, then by the third week of March the prices dropped to 60%. At the end of April, the situation has improved a bit, as the index passed the 70% mark.

European banks might suffer one of the worst impacts of the pandemic, as the Eurozone economy is forecasted to decrease by 9,1%. The muted-recovery scenario, which will result in GDP shrinking by 11% across the Eurozone, is what every third executive believes will happen. The scenario may result in the banking sector revenue drops as severe as 40%, prompted firstly by increased margins and government stimulus packages, and ultimately by the rise in risk costs. Thus, the negative effects could be more damaging than during the 2008 financial crisis, and the European banking industry will need four years to recover.

Right now, some of the countries are reducing the lockdown regulations with businesses and shops opening and employees returning to their offices. However, it doesn’t mean that the world is ready to return to its previous state, as most of the companies need to adapt to a new reality, and financial institutions are no exception.

First of all, businesses need to be ready for another possible wave of the coronavirus outbreak. For instance, doctor Anthony Fauci, director of the American National Institute of Allergy and Infectious Diseases thinks that the COVID-19 will not be eradicated due to its widespread. Meanwhile, the director of the Centers for Disease Control and Prevention Robert Redfield voiced the concern that the second wave, which is expected to hit this fall or winter, will be even more dangerous, as it might coincide with the start of flu season.

Secondly, a lot of people have changed their day-to-day habits to protect themselves and their families: they use e-commerce services to buy products, minimize cash payments, and want their banks to provide online services. A survey conducted in April showed that more than half of customers prefer digital channels for banking with 52% and 54% using mobile and online banking during the pandemic accordingly. The attendance of bank branches, which wasn’t even high pre-pandemic, dropped from 22% to 15% during the lockdown.

Now, when we have covered the bleak economic forecasts for financial institutions, as well as the new preferences of banks’ clients, we can point out the main changes that banks and PSP are expected and required to make and strategies they should implement in the second half of 2020 and beyond that.

The need for digitalization is as strong as ever. Without a doubt, banks should bring at least some of their services online, as the demand for internet and mobile banking grows. Otherwise, traditional banks will face the sad reality of their clients switching to digital FinTech services. According to the Capgemini Consumer Behavior Survey, around 30% of customers are going to start using FinTech companies instead of banks after the pandemic, if the latter won’t be able to deliver proper customer experience.

Redeployment of employees and branches. The obliged relocation of staff due to the lockdown proved that bank employees can successfully work from home. And right now, not all banks are ready to allow their staff members back to offices. And considering the possible second pandemic wave, this return may be short-lived. Thus, the financial institutions better to use this situation to their advantage – some of their employees might start working from home permanently, but will need to be provided with technical and security means to do so. This, in turn, will allow to redeploy the remaining staff among the branches and, potentially, close some of the branches to cut rent and maintenance costs.

Customers’ convenience and safety are the top priorities. The lockdown led to the overwhelming number of customers using support chats, phones, and emails to communicate with their banks. The situation shows the demand for diverse usage of banks’ digital channels to always keep in touch with clients. Social media, push-notification, emails, apps, online chats, and call centers – all is fair game to keep the people informed. But to keep up with all these channels, financial institutions should make sure the support team (which can also work from home) has enough employees for the challenge.

But having digital communication channels open is not enough – banks and PSPs need to reach out to clients themselves, inform them about each new update or service, show the support to pandemic-vulnerable customers and warn people about potential COVID-19 risks.

If banks are deploying new online and mobile services, they’d better have detailed tutorials on how to use these, so that the clients will go through the process easily. And also, the online channels are great for quick surveys, with feedback allowing banks to improve the services if required.

The mutual support of businesses. Banks and companies need each other’s help to overcome the effects of the pandemic. To do this, financial institutions should analyze their clientage to determine, which groups of people or businesses require the support the most. Taking this into account, banks can make personalized offers to these groups to help in dealing with severe economic losses. In return, banks and FinTechs will get loyal clients, that are more likely to thrive again, when the pandemic is over.

For instance, Genome introduced the COVID-19 initiative in the middle of April to help all our current and potential low-risk clients. We have canceled all monthly account fees for three months, and believe that this offer will be especially beneficial for food and entertainment services, electronic and home appliance goods, toys, educational platforms. To find out more about this initiative and other services visit Genome’s website.

By Daumantas Barauskas
COO at Genome

Gary Dolman, Co-Founder and former CFO of Monzo, in conversation with Capdesk

Ahead of a webinar hosted by equity management platform Capdesk on the lessons learned by ‘startup to scale-up CFOs’, the equity management platform sat down with Gary Dolman, one of the Co-Founders of Monzo, who served as Monzo’s CFO from its inception in 2015 until February 2019.

– How did you find going from a relative ‘lone wolf’ finance lead in Monzo to managing a bigger team? Did your previous corporate experience make it easier?

Being a CFO in a startup is never easy. Right at the beginning of my startup career I was told that every week would feel like the most important week in the life of the company. How true that proved to be. Without doubt my time at Monzo was the most challenging of my entire career. It was also the most enjoyable.

As a ‘lone wolf’ you often feel so far from your comfort zone that you need a telescope to see where you’ve come from. However, it’s incredibly energising to work with a massively talented team that has no fear of taking on new challenges to drive the business forward. Their support and encouragement was truly commendable.

At times my prior experience could hinder rather than help me at Monzo, as everyone was encouraged to think about how you would set things up if IT was not a limiting factor. This was a very different scenario to my prior life in the corporate world where IT resources were limited by the number of skilled people and maintenance of legacy systems.

That said, the problem-solving skills I acquired in the corporate world stood me in good stead, as did my ability to spot and resolve problems quickly. And as the team grew, my previously learnt managerial skills came to the fore.

– What are the major changes in culture between an early-stage startup to a scale-up growth business?

In an early-stage startup, you can have ten people standing in a circle talking about their hopes and fears for the day ahead. You know everyone in the company by name and quite a bit of their history. People can rotate jobs and cover each others’ backs. People accept that all jobs need to be done and muck in.

At Monzo I folded up hundreds of letters with prepaid cards to send out to customers; I answered queries on the help desk. It was great fun and there was a real sense of teamwork. As the business scales and slowly becomes more departmentalised, that can’t continue. The challenge is to maintain the startup ethos of being willing to experiment – to try five different things to find the one that really works. As the customer base inevitably increases, experimentation is still possible, but it needs to be managed in a controlled way.

– What are the key challenges that a CFO faces during the startup and scale-up process?

A CFO needs to wear many hats. At the outset they might be a team of one or two that needs to be able to undertake many tasks, many of which they will be new to and, frankly, have little interest in. Running the payroll is a classic example of this. They may well utilise an outsourced accounting firm for core processes but certainly cannot abdicate responsibility. Like the rest of the organisation, finance needs to be lean and accept that ‘scrappy is happy’. Many finance professionals find this very challenging.

As the business expands the CFO must continually evaluate whether they have the people and the systems capability to keep in step with the business. Hiring good people takes time and effort and if they fall behind it can be hard to catch up. The CFO also needs to keep an eye on the technical debt that their department is building up and have a plan and timescale to rectify this. Wherever possible the CFO should look to use automation rather than people. However, this requires IT engineering time – for which there will be fierce competition.

I’d encourage all startup CFOs to find a mentor: someone who has been through it before, who can help them avoid the typical mistakes made in early-stage businesses.

– How can a company keep employees motivated and engaged as it transforms from a startup to a scale-up, eventually becoming a large enterprise?

Options, distributed as part of an employee share scheme, typically play a large part in motivating employees, especially when the company seeks to conserve cash and pay salaries below market value. As the business expands it will face upward wage pressure for a few reasons, including an org structure that requires hiring senior managers who have higher minimum cash requirements.

Strong communication between founders and management teams is necessary to make sure remuneration is allocated fairly between people. I’d recommend setting up an equity rewards scheme and having it regularly reviewed by finance and HR. The two departments need to be joined at the hip on this, because the fallout from a dysfunctional equity scheme can be huge.

One of the other challenges of moving beyond the startup phase is fitting staff to constantly evolving roles. There are some people who only feel comfortable in an early-stage startup and can feel displaced or resentful as company needs change. This is not a crime! It’s very helpful if this is discussed openly within the company. There’s no shame in saying “I’ve enjoyed this leg of the journey and I’d really like to repeat it elsewhere”.

Equally, if more senior people are brought in to deal with the demands of a bigger company, staff need to be reassured that this is not a reflection of their efforts or abilities but a natural part of the growth journey. When assessing employees, there are two questions: Is this person able to grow in pace with the company? Do they want to be part of a bigger (often by necessity more ‘formal’) business?

– What trends have you witnessed for startups over the last five years in terms of objectives and milestones, particularly with respect to balancing growth and profitability?

At the outset the objectives have remained the same: to gather together a strong team of co-founders, to identify a market problem and solution, and to obtain funding to deliver an MVP. Proof of product and market fit follows on from that and then it becomes all about de-risking the proposition by increasing your base of paying customers.

Four or five years ago the main objective at this point would have been growth in customer numbers. That shifted towards a focus on reaching positive customer economics whereby the marginal revenue from each new customer was in excess of the marginal cost. Scaling up the business would then mean that the fixed costs were covered in due course. More recently, there’s been an increased focus on the path to profitability as well as growth.

TODAY’S FUNDING ENVIRONMENT

– Do you believe Europe needs an angel investor revolution to become more like the US?

Based on my experience within the UK, I’d say the angel investor scene certainly needs improving. Some of this comes down to a need for stronger financial education at all age levels and the need to appreciate that angel investing has a part in anyone’s investment portfolio – no matter how small. Think of Crowdcube, where £10 can be the minimum stake.

I think attitudes towards failure in the UK need to change. If a business fails in the US, people view it as a learning experience for the entrepreneur. In the UK it is just seen as a failure. As a result, investors become paranoid about investing in a failed company – which speaks to the need for angel investors to take a portfolio view and also be mindful of the tax breaks that exist.

There are some very talented people who would be strong angel investors – both from a strategic and operational advising perspective – but are unwilling to enter the community without a warm introduction.

Finally, the regulation needs a major rethink. Currently we seem to operate in an environment in which a loss represents an opportunity to sue someone, despite the risk of loss being fully advertised. As an example, SIPP providers are totally against a person undertaking angel investing from their own pension assets for fear of subsequent legal reprisals. Given the long-term horizon of angel investing, pension assets should be a sensible source of angel investing – albeit as very much part of a person’s overall portfolio. Seemingly SIPP providers are unable to accept the statement that ‘I know what I am doing, I understand the risk of losing this money and want to proceed’. If this is the legal position, that puts us in a bad place.

– How do you think the funding environment has changed in the UK in recent years? Has it become easier to raise capital in general?

If we consider the years prior to COVID-19 I’d say that the position has improved, and that capital-raising has become more available and the channels to access it more diverse. I was fortunate enough to become a Venture Partner at Antler, a global early-stage venture capital firm that invests in the defining technology companies of tomorrow.

In the last two years, Antler has made 190 portfolio company investments across 30 industries and has opened offices in 14 cities across six continents. I was blown away by the quality of the people on the investment side and the entrepreneurs it backed. Antler is practically mining entrepreneurs out of the ground and turning them into the successful business leaders of the future.

– Do you think the government is doing enough to support the startup ecosystem?

Generally, I think the tax breaks and support for the startup ecosystem within the UK are strong. My personal gripe would be that being a startup bank has some unfavourable elements that need addressing, including:

• SEIS and EIS are not available
• EMI share options scheme is not available (the alternative CSOP scheme, in my view, is inferior)
• VAT on costs can’t be reclaimed
• Offsetting corporation tax losses is more difficult (a hangover from past sins of bankers in the 2008 financial crisis)
• Bank levy (again, fallout from the 2008 financial crisis)

THE FUTURE OF FINTECH

– As the rest of the world catches up with the UK in terms of fintech innovation, do you think its crown is under threat?

I don’t think the UK has a divine right to wear a crown of fintech invincibility. That said, in the pre-coronavirus world if you wanted to hire world-class talent – which is what Monzo aims to do – London was where people wanted to work.

– Looking at Monzo as an outsider now, what do you think are its biggest challenges and opportunities?

Monzo is a fantastic company. It began life only five years ago yet has grown to a customer base of over four million people. One of the most admirable things about Monzo is its brand. It has a net promoter score of 75, putting it way above its competitors, and won nine awards in 2019 alone.

As with a number of businesses Monzo has suffered headwinds due to COVID-19 but it has a very strong management team with a plan to move forward. That plan will include the expansion of revenue-generating channels to move to profitability but also continuing growth. The market for current accounts that make money work for the consumer is huge and I see no reason why Monzo cannot make further headway both within the UK and overseas.

By Capdesk