SPACs flip the usual process on its head. A SPAC is formed by wealthy sponsors who come together and create a company with the purpose of listing it on a stock exchange. They then have two years to find a target company to merge with who wants to go public. People are able to invest even before a target is found, despite there being the SPAC having nothing to sell. Eventually, the SPAC and target company merge, which in effect takes the company public without needing an IPO.
The market has grown considerably in the last decade. In 2013, there were 10 SPACs with roughly $144 million in assets. When you fast forward to 2020, 200 SPACs went public and raised more than $70 billion. This is a massive increase to rival the IPO market.
There have been several high-profile companies to go public via the SPAC route in recent years, such as Virgin Galactic, DraftKings and Nikola. These are all multi-billion dollar companies that shone the spotlight on the method. The question of SPAC vs IPO is now a real dilemma for founders. Will the boom continue into 2022?
Money looking for a company
The IPO is well-known to be a long, difficult process whereby a startup can spend months dealing with investment banks to get everything ready. It demands a lot of effort from the founders and their teams.
On the other hand, SPACs bring the money to them. As the sponsors are usually industry leaders or experienced financiers, it makes the job much easier and cheaper for the founders. These third parties have all the information and know-how to guide the startup to where it needs to be to initiate the reverse merger.
High-flying SPAC sponsors are also great members of the team for startups even once the company is public. It’s a way for a startup to add a valued and trusted advisor to their team who has a vested interest to help them succeed.
Sponsors themselves may prefer investing through SPACs because they can find out more about the future of a company before investing whereas this isn’t allowed in a traditional IPO process because of the liability risk associated. The reduced formality can be a boon for those who like to get their elbows dirty.
Another advantage for founders is that the initial volatility of a SPAC public offering is usually much lower than an IPO. We’ve seen huge surges in the stock prices of IPOs such as Bumble and Snowflake in 2020, which leaves money on the table. Traditionally, companies have put off their IPO for significant periods when the market is volatile and they wait for favourable conditions. Going through a SPACs takes out any reason to delay and means the startup can get the funds it needs in a more timely manner. If harmony with the shell company’s leadership is there, the speed of the process can be lightning fast.
The tried and tested method
There are compelling reasons for startups to stick to the IPO method though. These tend to get far more coverage in the press, and this visibility can be a major lead generation source for companies. Potential customers and retail stock investors may have only heard of them because they were in the news about their IPO. As SPACs are relatively new, they foster less of an attraction for long-time entrepreneurs who dreamed of an old-school public offering.
There’s the potential for long-term gain, too, with an IPO for investors and this is reduced with a SPAC. One comprehensive study by Renaissance Capital showed that the common shares of companies that went public via a SPAC on average lost -9.6% vs the average return of an IPO, which was 47.1%. Only 31% of the SPACs in the study had positive returns. IPOs may be favoured by general investors because they are able to get in at a lower price.
The transparency aspect is another major signal for potential investors. Going public through an IPO signals the company has nothing to hide and has been investigated thoroughly by its partner institutions. This can increase trust when it comes to requesting loans. Those who invest in a SPAC before it has chosen its acquisition target are almost going in blind and are heavily dependent on the competence of the managers to make it pay off.
When market conditions are favourable, the IPO route is more favourable for investors who may turn away from SPACs to invest their money actively instead. Until a SPAC has chosen its target, investors see minimal returns at best.
The big picture
While a SPAC might be seen as a shortcut to going public, it still has to be a successful business to perform well as a growth stock. It ends up in the markets all the same, and if the fundamentals or potential isn’t there then it can collapse all the same. The method of public offering doesn’t change a huge deal in investor’s minds after the initial hype cycle.
The longer process of an IPO can actually be beneficial to a company as it ensures all the correct due diligence has been done. SPACs seem to be decreasing the time from formation to merger, which could backfire spectacularly. As a public company, the startup will need to report its data and be transparent. Rushing this through a SPAC could lead to more headaches in the future.
While the growth in the number of SPACs has increased significantly, there are growing signs the process is already less hot than it was a few months ago. There were 300 SPACs formed in Q1 2021 but less than 50 in Q2 and only 16 in July. As of yet, this slowdown isn’t spooking those in the market, but it should give those who are predicting a revolution reason to pause.
While SPACs are likely to form a larger part of the market in the long run, it’s far from certain 2022 will be the bumper year. With everything related to the pandemic hopefully settling down, the conditions for an IPO will likely be more attractive than it has been in 2020 or 2021, so we may see a slight slowdown in fact.
Paul Naha-Biswas, founder and CEO of Sixley, shares some of the outcomes of the 2008 recession and how a similar economic downturn could lead to greater innovation and success in UK businesses.
On 12 August, the worst-kept secret in the country came out, and the UK entered a recession for the first time in eleven years.
Few were surprised by the news. In the months preceding the announcement, the economy went through a period of unprecedented disruption due to the COVID-19 pandemic and the subsequent lockdown, culminating in GDP plummeting by 20.4% within the first three months of the year.
But, while the ‘R’ word might send a shiver down the spine of most businesses, it may surprise you to learn that many of the household brands we use today were formed in the last global financial crisis (GFC). Uber and Airbnb were just two businesses founded during the 2008 crash and used the recession as an opportunity to innovate within their sector.
So, with this in mind, what lessons can businesses learn from the last financial crash and where are the opportunities for innovation this time around?
Lessons from the 2008 financial crash
In the last recession, the consumer businesses that did well were those that offered services or goods at a far lower cost than pre-GFC.
As budgets tightened, people were increasingly prepared to change their consumer behaviour and explore new digital-first businesses to save money. As a result, we saw a significant rise in casual dining and low-cost retail – such as Boohoo – and also a spike in digital businesses, such as Airbnb and Uber that, through their use of lateral business models, brought quality services to people at a much lower price than competitors. Who could have imagined before 2008 that you could book a whole apartment for less than a hotel room or get driven around town for half the cost of a black cab?
In the last recession, the consumer businesses that did well were those that offered services or goods at a far lower cost than pre-GFC.
How COVID-19 is changing consumer behaviour
A similar trend is emerging during the COVID-19 recession, with Britons cutting back hard on their spending – both out of worry and due to a lack of spending opportunities.
Consumer spending fell by 36.5% in April compared with the same month last year, which followed a 6% drop in March. During the same period, spending on travel nearly halved, and outlay on pubs, clubs, and bars dropped by 97%.
However, the unique circumstances of COVID-19 have created a new trend in consumer behaviour that wasn’t apparent in the GFC. The Government lockdowns actioned around the world has shown businesses how much of our economy can shift online. And the longer restrictions go on for, the less likely it is that businesses will return completely to their post-COVID-19 setup.
With more people staying at home, there will be increased demand for digital, online services and more opportunities for businesses to innovate. Take Hopin, a virtual events company, for example, the brand spotted a gap in the market created by everyone staying inside during the pandemic and raised over $170 million from investors and built up a $2 billion+ valuation since lockdown began, despite only being founded in 2019.
Hopin isn’t the only business success story from COVID-19 and with the pandemic likely to bring about permanent changes in consumer behaviour, there are plenty of opportunities for entrepreneurs to establish businesses that will disrupt their sector in a similar way to how Uber and Airbnb did in 2008.
The availability of excellent talent
However, increased consumer demand for digital services, isn’t the only reason why now is an opportune moment for innovation.
In the GFC, labour turnover fell significantly – from 18% of the workforce in 2006 to a low of 10% in 2013 – as workers looked to hold onto secure jobs and employers put a pause on recruitment.
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Once again, a similar trend is emerging, with employment opportunities falling by 62% across the UK in the three months to June compared to the same quarter last year.
While this isn’t the ideal situation for jobseekers, businesses now have a huge and diverse talent pool to choose from. For example, start-up founders can bring in highly experienced, motivated employees without having to poach or hire on full-time contracts, something that many start-ups may otherwise struggle to afford.
And there’s promising signs that current prospects for jobseekers will change soon. Following news that two potentially effective vaccines will be rolled out in the new year, shares in businesses skyrocketed on newfound optimism suggesting they will bounce back. Similarly, in the aftermath of the GFC, spend on recruitment agencies bottomed out at 75% of pre-2008 levels before eventually exceeding pre-recession levels by 2013/14.
The great American writer Mark Twain once said that history doesn’t repeat itself, but it often rhymes, and, in this instance, the saying rings true. Although the circumstances may be different, the COVID-19 recession, like the GFC, has opened new markets that businesses, if they are fast enough, can take advantage of. With a swell of excellent, experienced candidates available and changing consumer behaviour, the environment is perfect for new start-ups to emerge and become this decade’s Airbnb and Uber.
Artificial intelligence has already made a significant, positive impact on the financial services ecosystem and we can only expect this trend to accelerate in years to come. AI has the potential to radically transform businesses but only if they deploy it with appropriate diligence and care. A 2020 report by EY and Invesco anticipates that AI will expand the workforce in fintech by 19% by 2030 as the industry stands to be one of the largest to benefit from the efficiency gains and innovation the technology can bring through operational optimisation, reduction of human biases and minimisation of errors in anomalous data. Alex Housley, CEO and founder of Seldon, further analyses the recent changes in the role of AI and the impact it is set to have on the finance sector in years to come.
Talent Shortage Within FS
According to a report by Bloomberg, listings for AI-based jobs within the financial sector increased by approximately 60% from 2018 to 2019. This demand for workers with AI expertise is not only seen within the financial industry but across a variety of other professional sectors, such as e-commerce, digital marketing and social media. The jobs market has had little time to respond, resulting in a shortage in access to talent. A study by SnapLogic found that whilst 93% of UK and US organisations are fully invested in the use of AI as a priority in their business, many lack access to the right technology, data, and most importantly, talent to carry these goals out. This ‘skills shortage’ is a major obstacle to the adoption of AI in business, with 51% of those surveyed acknowledging that they don’t have enough individuals trained in-house to make their strategies a reality. Machine learning can offer benefits in many forms and different businesses have varying needs. There is no ‘one size fits all approach’ when adopting and deploying AI, which can make it a costly process for many organisations not equipped with the right tools.
Fortunately, there is ample opportunity to enhance the responsibilities of numerous roles within their organisation or let employees get on with more strategic work. SEB, a large Swedish bank, uses a virtual assistant called Aida which is able to handle natural-language conversations and so can answer a trove of customer FAQs. This means customer service professionals have been redeployed to focus on complex requests and their more meaningful responsibilities. Even employees currently working within the industry are looking to broaden their skills to become more versatile across new technology-driven roles. In particular, financial services companies are looking to upskill their data scientists and analysts. They have the base skill set required and can do tremendously well with the right engineering support. Deploying artificial intelligence within a business’s infrastructure means it can take care of mindless, repetitive tasks and free up employees to focus on other, more rewarding parts of the business, maximising automation and cutting costs.
There is no ‘one size fits all approach’ when adopting and deploying AI, which can make it a costly process for many organisations not equipped with the right tools.
Enhancing Fraud Detection
One of the biggest use cases of artificial intelligence within financial services is fraud protection. With the rise of online banking and the exponential growth of digital payments, banks have to monitor huge swathes of transactions for fraudulent behaviour. This huge influx of data points poses major issues for the human brain but actually maximises the effectiveness of ML systems. We’ve seen significant growth in the use of deep learning, with most major retail banks now relying on machine learning tools to recognise and flag suspicious activity. To keep up with the pace of criminals and comply with stricter regulations, service providers have to look beyond traditional methods and implement hybrid strategies built around holistic understandings of behavioural and anomalous data.
Indeed, research by AI Opportunity Landscape found that approximately 26% of funding raised for AI startups within the financial services industry were for fraud or cybersecurity applications, dwarfing other use cases. This number is expected to rise as fraud detection and mitigation continues to be one the highest priorities for customer-facing organisations as consumers increasingly hand over their data in exchange for services.
Better Serving Customer Needs
Financial services companies are increasingly leveraging artificial intelligence to deliver tailored services and products for their client base. For those banks mining data effectively, AI provides the ability to serve customer needs across multiple channels, and in some cases to grow operations at an unprecedented scale. Tools such as chatbots, voice automation and facial recognition are just a few of the ways banks are using AI to streamline and personalise the user journey for their customers. Importantly, consumers are increasingly literate in automated services and their expectations are constantly rising as the technology improves, meaning organisations must constantly adapt or risk being left behind.
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Chatbots and voice agents are also able to detect and predict changes in consumer behaviour, giving feedback on each interaction with a customer. All the results from customer touch-points are shared across the organisation, ensuring decisions and recommendations involving a human or machine are more intelligent and precise. Over time, these analytics mean businesses can make real-time decisions with their customers in mind, boosting engagement and personalisation.
In order to detect customer data from online purchases, web browsing and in-store interactions, banks must have AI in place to collect the data and automate decision-making. By adapting these technologies banks can connect their data, amplifying their offering effectively across all channels.
Continuous Adoption of Artificial Intelligence
Artificial intelligence and machine learning have already enhanced numerous capabilities for the financial sector, improving recommendations, customer experience, and efficiencies via automation. AI will continue to dominate different parts of the financial sector, and the acquisition of machine learning and data science talent will become the norm. A recent survey from the World Economic Forum attests to this, with nearly two-thirds of financial services leaders expecting to be mass adopters of AI in two years compared to just 16% today.
Acquiring the right talent to drive machine learning and AI in organisations will remain a challenge as innovation is focused in different areas and new technologies are being implemented. In lockstep with this will be the constantly evolving regulatory landscape surrounding adoption of AI in financial services as each side races to match and often contain the other. However, the multiple benefits that come from implementing AI and machine learning are clear, and it will be a key area of focus and growth for businesses within financial services over the next decade.
eCommerce is booming and it looks like it’s here to stay, with some 24 million sites across the globe selling an array of products and services. There are many factors that have led to this phenomenon — from ubiquitous connectivity to the ease of building a website, right through to the millennial desire for more flexible, remote working arrangements. Plus, there's the added attraction of being your own boss from the outset. There is no doubt that the future is looking rosy for e-commerce. Nasdaq research indicates that by the year 2040, around 95% of all purchases will be online. The question isn’t if or when, but how to open an e-commerce business that can grant you the biggest gains for your investment. Below, Karoline Gore shares her advice with Finance Monthly.
B2C or B2B?
The two most common e-commerce business categories are B2C (companies selling items to individual consumers) and B2B (those selling to other businesses). Each has its upsides and downsides. For instance, practically anyone with an enterprising mind and a good business plan can set up a B2C business, since you can keep costs and production low until demand deems it is time to step up your game (and your investment). On the other hand, competition is high in this industry and your team has to be solid (and big) enough to answer questions quickly, deal with customer complaints, and the like. With B2B, orders are likely to be large but may be less frequent. B2B also imposes a stronger pressure on companies to lower profit, since other companies will undoubtedly aim to attract your clients with more attractive prices.
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Thinking Out of the Box
If you have a product that is in high demand or you find a niche market for something you are selling, it is key to utilise a model that will boost customer loyalty so you can have a sustained income while thinking of how to expand or broaden your target. One that is working quite well is subscription boxes. Within a period of just four years, this market expanded by an impressive 890%. If you are thinking of launching a subscription company, ask yourself if you can deliver goods on time, do so regularly, and include something that gives your clients real value. This could be an item that is difficult to access (such as a designer or bespoke piece), a discounted item, or a new product to discover. When calculating costs, don’t just think of the goods and packaging. but also of those involved in website and brand design, web hosting, and incorporation fees.
What Companies are Achieving Success?
Some of the most successful e-commerce businesses to date are following one of a select group of models, including dropshipping. Many startups choose to work with this model via Amazon, but competition in this marketplace is tough. It might be a better idea to use a platform like SaleHoo, Spocket, or Oberlo. The latter, for instance, will allow you to see how many page views, sales, and star rankings items have. Other successful models include private labelling (you order the product you develop from a manufacturer then brand, develop and sell it); and wholesaling (to private customers and other businesses). The model you ultimately choose depends on your target market, the nature of your product, your budget, and your short- and long-term goals.
Some of the most successful e-commerce businesses to date are following one of a select group of models, including dropshipping.
Finding Inspiration
Top e-commerce companies that started small may provide you with the inspiration you need. Take a model as seemingly simple but brilliant like Beer Cartel — a craft beer service that introduces urbanites to unique bottles from all over the world. See how sustainability and profitability can work hand in hand in companies like Bundle Baby, which makes eco baby diapers in the cutest colors and prints imaginable. Think of how the founders of Bella Bean Organics used their own farm-made products to enlighten gourmets on everything from homemade pasta to flavor-packed tomato sauce or traditional toffee treats.
The market for e-commerce is so wide that making your mark on it will involve research, vision, and commitment. Do your research before starting, so as to identify market and demand. Opt for a model that is going strong. Finally, put love and care into every aspect of your business, including your branding, social media, and packaging.
Obtaining a small business loan might seem scary at first, but it's easier than you might think. If you've never done it before, or if you've never spoken to a specialist regarding the matter, you might have heard a few things that are not only false but downright toxic when it comes to growing your business.
Before we get into the myths, you have to understand a few critical things about small business loans: they can vary by type and lender, which means that not all loans are the same. Each type of loan can have advantages and drawbacks. According to the nature of your business you're running, your track record, and how much money you tend to make every month, different types of loans might suit you better than others.
So let's get into the myths and why they're simply myths:
Myth #1: Obtaining a small business loan is a long and frustrating process.
False! As long as the amount of money you want to obtain falls below the million-pound mark, or even better, below the 500k mark, you can typically get a loan in just a few days. As long as you're transparent about your business and about what you intend to do with the money, you shouldn't have any problems applying for credit either at the bank or at private lenders.
Even better, if the amount you need is very small and if you want to get rid of the debt in less than a month, you can try out payday loans. You can apply online on a direct lender's website, and you don't even need to fill out too many forms.
As long as the amount of money you want to obtain falls below the million-pound mark, or even better, below the 500k mark, you can typically get a loan in just a few days.
Myth #2: Your credit score must be impeccable.
While traditional banks care a lot about your credit score, alternative or private lenders don't take it into consideration that much. Instead of looking at your financial history, this type of lender analyses the financial reality for a certain business based on market trends, your area's economic status, and other similar factors.
In any case, don't limit yourself to just one offer. Instead, ask several lenders about their offers and try to negotiate what best suits your situation. You might stumble upon a far better offer than you were expecting.
Note that while your credit score doesn’t matter as much, you still need credit history. A credit history is different from your bank profile. It gives lenders proof that you can handle a loan. Having credit history also indirectly impacts your credit score.
A good strategy for increasing your credit score is to apply for a payday loan. While these loans offer only small amounts of money, it’s usually enough to cover urgent expenses such as taxes or health emergencies. And because we’re talking about small sums, you can pay them entirely within one month. And the best part: you can get them online from a direct lender. Bonus: they also increase your credit score by showing banks that are able to handle your finances.
Myth #3: If you ask for too much money, you'll be instantly rejected.
How much money you request doesn't necessarily impact your approval chances. In fact, lenders often prefer giving out big loans because they win back more money over time. Banks are especially more hesitant to give out small loans rather than big ones. It's generally a good idea to apply for just how much money you need while considering how much you can pay back monthly.
Afterwards, the lender is going to check if you have enough cash flow to make your payments on time. As long as you take these factors into consideration, you can grow your business so much that your profits might easily surpass the lender's interest rate.
Myth #4: Getting a loan for a start-up is nearly impossible.
Many aspiring entrepreneurs simply assume that you need to have been in business for at least a few years to build up a credit score before applying for a loan—nothing further from the truth. In reality, a lot of lenders offer start-up loans that are aimed specifically at businesses with little or no credit history.
Sure, your personal credit score will be taken into account. However, as long as you're in good standing and present yourself with a good business plan, you'll likely get approved. So do your homework and don't be afraid to ask for an expert’s help. You might be pleasantly surprised by the outcome.
Myth #5: The bank is the worst place to get a small business loan.
While alternative financing is usually great for obtaining small business loans, banks can often offer some advantages. For example, if you're in a fast-growing field such as IT, healthcare, or software consultancy, banks might not be that great. However, if you anticipate a steady growth over a couple of years, then traditional banks have great offerings.
They have several plans from which you can choose. Fixed interest rates and flexible interest rates might also play a big role in choosing what's best for you. Commissions, late fees, and early repayments also need to be considered. Yes, some banks often cut a small part of your interest rate if you pay a part of your debt in advance. That might just be what you were looking for your business.
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Myth #6: Online lenders are frauds with disgusting interest rates.
False. This one is simply false. If we were to go 20 years back in time, sure, such a statement might have made sense. However, the world has changed so much it's almost incredible. Think about all the things you do online every single day. Now think about how you used to do them in the past. It's not any different from loans nowadays.
More and more online lenders have appeared on the market in the last couple of years. Many of them offer single-digit interest rates. It's up to you to find the ones who offer plans that benefit you in the long run.
Closing Thoughts
We hope the information you have found here will help you make the right decision. To reiterate, what matters most is finding the right solution for you. To achieve this, never be afraid to consult with experts. And ask the lenders as many questions as possible before making a commitment.
So do your research and don't be afraid to try something that you haven't until now. The small loan you take out today might benefit you immensely in a couple of years. Or maybe even in a couple of months.
Below Zoe Wyatt, Partner at international tax specialists Andersen Tax, discusses the inevitability of blockchain, whilst exploring banks' attitudes towards the emergence of new financial technologies, and highlighting how the two can, in fact, work hand in hand.
The first industrial revolution in 1780 began with mechanisation. It was followed by electrification in 1870, automation in 1970 and globalisation in the 1980s. Today, we have digitalisation of the industrial process and tomorrow there will be ‘personalisation’ (industrial revolution 5.0): the cooperation of humans and machines through artificial intelligence (AI) whereby human intelligence works hand-in-hand with cognitive computing to personalise industrial processes.
This might involve the creation of bespoke artificial organs operated by computers talking to one another, automation of the manufacturing process, or self-executing contracts (smart contracts), and so on.
John Straw, a disruptive technology expert involved in developing the 5.0 model, recently claimed that blockchain could render the financial services industry irrelevant, thereby killing off the City of London and constricting the tax revenues that fund the NHS. Straw makes some headline grabbing comments, but do they have any substance?
Blockchain is the technology that underlies cryptocurrencies, such as Bitcoin, and whilst it has existed for approximately ten years, it remains relatively new.
In simple terms, blockchain is a digital archive of information pertaining to an asset, individual and/or organisation. But this is no ordinary digital ledger. Its technology features:
- the ability to validate data entered on the blockchain as correct and complete at the time of creation;
- data that cannot be changed; new blocks of data are added sequentially and chained to the last block. The story the data tells can be added to, but its past cannot be modified;
- multiple parties must consent by a majority or pre-defined basis on the validity of additions to the blockchain;
- multiple copies of the data, in encrypted form, are stored on the computer systems of numerous globally disseminated individuals/organisations participating in a particular blockchain network;
- respecting the privacy of that data;
- although there is potential for a malicious attack on a specific computer to successfully change data held on its copy of the blockchain, other participants in the blockchain network would be alerted and the true blockchain restored. In this sense, the blockchain is immutable
- an accessible audit trail.
These characteristics diminish the role of intermediaries who are traditionally used to validate data and ensure that it is kept safe. Therefore, Blockchain has myriad potential applications: investment in blockchain start-ups, which are developing solutions for the financial services sector, is staggering.
Blockchain has myriad potential applications: investment in blockchain start-ups, which are developing solutions for the financial services sector, is staggering.
Technical issues exist in overcoming scalability, transaction speed, and energy consumption. However, these will be resolved in the near future as companies develop ways in which the blockchain can be stored ‘off-chain’. This will ensure that it does not need to be downloaded entirely by a node to verify a transaction using AI, amongst other tech, to guarantee that the immutability of blockchain is not undermined. It also creates scalability and reduces energy to such a degree that even the idle computer in a car or mobile phone can be used to verify transactions.
Blockchain technology can be deployed by the financial services sector to:
- Assist with almost real time settlement and reconciliation of transactions as the intermediaries used to verify and authenticate parties to a transaction and the source of funds are removed
- Program self-executing commercial agreements
- Trade stocks and shares in real time
- Reduce costs for financial transactions through efficiency gains
- Remove time limits and payment failures
- Track financial transactions, preventing fraud and money laundering
- Diminish exposure to currency movement
- Minimise risk of inflation or currency depreciation where it is separate from the state and/or bank.
Although blockchain technology has the power to change the entire traditional banking system, it does not represent disaster for the City of London. Although traceability of transactions and, therefore, tax evasion cannot yet be mitigated entirely, blockchain can indeed help to resolve some critical tax evasion and avoidance issues.
HM Treasury has already developed a proof of concept for VAT using blockchain technology. This should eliminate large swathes of VAT fraud. Given the advent of digital identity, tighter anti-money laundering (AML) procedures administered on blockchain and a widely adopted digital currency, tax evaders will have nowhere to hide.
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Blockchain and smart contracts have the capacity to completely transform the audit and tax industries, including multinational corporations’ in-house CFO/finance functions. When coupled with AI technologies, this will enable the digital preparation of accounts and tax return, and the performance of audits. In turn, this facilitates absolute tax transparency, making it easier for tax authorities to raise and conclude enquiries more efficiently into, for example, transfer pricing on intra-group transactions.
Most importantly, the tax and regulatory systems need to evolve somewhat faster than we have so far seen on other new business models and supply chains.
To realise these benefits, seamless interoperability of different technologies is required, together with cooperation between multiple parties, as opposed to a single banking system. This will allow for comprehensive management of the risks that Straw prophesises.
First of all, you need to identify the industry you’d like to start your business in. And then you’d have to conduct proper market research in order to decide whether this idea will bring you fruitful results or not. Moreover, you’d have to talk to a few friends that could help you in pursuing your goals.
Usually, people are afraid of starting a business due to fear of failure. But there is another thing that can become a hurdle, and that’s a lack of money. Some people have enough money in their savings account to fulfill their start-up dream. But many people don’t have enough money to pursue their goals. Fortunately, there are several ways you can fund your start-up.
In this article, we’ll take a look at four of the most useful ways you can fund your start-up. And you won’t have to make any sacrifices if you consider these methods.
Crowdfunding
Start-ups and creative people have been using crowdfunding as a valuable option for years. These individuals don’t waste their time finding angel investors for hundreds of thousands of dollars. They use a creative approach to raise money through smaller contributions from the masses. If you want to launch a product or design without knocking down the doors of venture capitalists, crowdfunding can be the ideal solution for you.
The advantage of using this technique is that it helps in marketing your product way before you officially launch it. You can analyze the feedback and consumer interest to decide if your idea will work in the industry or not. Indiegogo and Kickstarter are the most common crowdfunding websites you can raise funds for your startup business on.
However, you need to understand the terms and conditions of these websites before sharing your idea. For example, Kickstarter only accepts the ideas of individuals that belong to a limited number of countries. Unfortunately, the residents of Singapore cannot avail of this opportunity. However, you can take help from a business partner that belongs to a country that is allowed by Kickstarter.
Grants
Getting a grant can be a great way of funding your business in Singapore. The Singapore government is continuously helping SMEs that are willing to bring change to the industry. The first-time entrepreneurs must consider going for the Spring Singapore ACE grant. For every S$3 raised by the entrepreneur, the Spring Singapore will match S$7 for up to S$50,000. In other words, you’d have to raise around $21,429 if you want to receive the maximum grant of S$50,000.
Spring Singapore will give the grant over 2-3 tranches, and they won’t take equity in your organization. The most remarkable benefit of using this scheme is that it also helps in finding a suitable mentor for your start-up in the first year. Depending on the sector or industry, you can use several other local grants that are particularly designed for start-ups. For clean and high-tech companies, the Spring Singapore offers additional funding schemes while the social enterprises can take advantage of the ComCare enterprise fund.
Grants like these, often offered by governments worldwide, can help in giving a great financial boost to your start-up. However, you must carry out the proper research to find detailed information about any grants available.
Incubators and Accelerators
The chances of obtaining seed funding can be increased if you consider getting into a business incubator or accelerator. The major difference between an incubator and an accelerator is that the incubator starts with organizations that are at an initial level of the development process. On the contrary, the accelerator requires you to work with the mentors for a set period before graduating.
Although there are only a few seed funding programs available nowadays, you can get the targeted resources and support for your startup by joining an incubator or accelerator. The chances of growing a startup business are ultimately increased when you work with successful entrepreneurs.
Loans
If your friends and family members are unable to provide financial help, you could get help from a bank or licensed money lenders to get a loan. A loan can be the right option if you want to retain full control over your company, as it makes you feel free from giving equity to investors.
OCBC has designed a collateral-free loan program that is available for start-ups. The loan is known as the OCBC Business First Loan. It provides you with access to $100,000, and this loan is particularly available for companies that have started around six months ago. The only problem with this loan is that it can only be approved if you have a guarantor. If you have a completely new and untested business model, you must be very careful about taking out this loan.
Similarly, you must think carefully before taking out a loan if you are not expecting revenues in the short to medium term.
Another useful option to fund your startup is taking out a personal loan. Some banks like Standard Chartered CashOne offer a low minimum income requirement with attractive interest rates. Similarly, the ANZ MoneyLine Term Loan comes with the interest rates of as low as 6.6% per year.
Entrepreneurs can now fulfill their start-up dream with the help of these funding options. You should do some research to find out the funding option that will better accommodate your needs. We recommend going for the options that come with lower risks. Thus, you’d be able to focus on the growth of your business thereon.
Amidst a large swathe of planned job cuts at Lloyds, at the beginning of November the bank announced that there was a silver lining - a £3 billion investment programme that will see the country’s biggest high-street lender radically transform its digital strategy. While 6,000 existing roles are being cut from a broad range of areas, 8,000 are being created to focus on areas of digital expansion, including in the group transformation unit. And, the CEO of Tectrade Alex Fagioli points out, it’s about time for Lloyds, as it begins to play catch up with an industry that has quietly been revolutionised by high-street banks and start-ups that have gone all-in on digital banking.
Digital banking provides a great deal of benefits to administrators and alike. Customers are given a more flexible way of banking, accessing their accounts and transferring their money without relying on bank hours. Managers have an unprecedented insight into the activity of branches and can offer services to their customers which they had previously been incapable of. However, the challenges and risks that come with digital transformation have led traditionally large financial institutions like Lloyds to poorly implementing such practices to the detriment of all involved.
In April, a routine systems upgrade at TSB went awry and left 1.9 million customers locked out of their accounts for up to a month. Similarly on Friday 1 June, 5.2 million transactions using Visa failed across Europe as a result of one single faulty switch in one of Visa’s data centres. This isn’t just a continental issue; Atlanta-based Sun Trust – a bank with 1,400 bank branches and 2,160 – experienced a significant outage to its online and mobile banking platforms in September due to a botched upgrade. In all of these cases, the outages weren’t the result of cyberattack or weather-related problems. Instead, these outages came as a result of seemingly insignificant technical factors that had been overlooked – and Lloyds would be wise to heed these cautionary tales.
The challenges and risks that come with digital transformation have led traditionally large financial institutions like Lloyds to poorly implementing such practices to the detriment of all involved.
In the first two instances, cause of the outages are very clear– and they were entirely preventable. TSB rushed into an upgrade by hastily initiating the update across its entire system. For a technical reason that we will likely never know, the update tanked the entire bank and left it at a standstill while it tried to pick up the pieces. Even when it managed to get everything back in place, TSB is now permanently scarred by the event, with its reputation still reeling. The prevention for this would have been a gradual rollout, as opposed to a sweeping installation. If the upgrade was initially piloted with non-essential systems, then the bugs would likely have been spotted early, with little fuss and no media spotlight.
Likewise, the Visa incident came as a result of a single faulty switch and that betrays a lack of understanding of its own systems. It is shocking how few companies have carried out any form of disaster recovery testing on their infrastructure. Administrators are incapable of having a full understanding of the systems they are responsible for without testing them in a controlled and simulated environment. With a controlled disaster test, that faulty switch would have been highlighted and those 5.2 million transactions would have been completed. It’s similar to a car – the reason that MOTs are essential is so that any issues can be highlighted well ahead of them having a serious effect on the vehicle’s performance. Banks must carry out a cyber MOT in order to keep their systems in check and to give IT teams a full working knowledge of any potential issues.
But this is all in the case of preventable issues, and in the modern day accepted wisdom is not if, it’s when outages will happen.
Thus far we’ve only addressed routine operations, but cyberattack is of course an omnipresent threat. Ransomware has spent the past couple of years as the ‘big bad’ in cybercrime, and it is an even bigger threat to the financial sector. Over the past 12 months, the financial services and insurance sector was attacked by ransomware more than any other industry, with the number of cyberattacks against financial services companies in particular, rising by more than 80%. If a bank were to be hit by a ransomware attack, all online systems for banking and insurance transactions will need to be taken offline, rendering that organisation unable to operate. According to a report from Osterman Research, there is a 50% chance of employees in this industry suffering productivity loss, a 30% chance that the financial and insurance services will shut down temporarily, and a 20% chance of revenue loss and adverse effect on customer perception. In cases of ransomware, data recovery can be very difficult as there is a large amount of customer information stored in a variety of disparate systems. As such, many organisations may feel they have no choice but to pay the fee demanded of them to regain access to the data.
Over the past 12 months, the financial services and insurance sector was attacked by ransomware more than any other industry, with the number of cyberattacks against financial services companies in particular, rising by more than 80%.
Equally as unpreventable are environmental factors. Areas like the Southern States of the USA are frequently dominated by hurricanes and tropical storms which can cause large disruptions to everything from schools to banks. Many of these buildings have to be built with this in mind, and network operations should be created with the same mindset. In the UK, by contrast, we don’t have to deal with such extreme weather conditions, but environmental considerations must be made with the potential for freak accidents. A burst pipe in a shared building or road workers drilling through electrical or network cabling, for example, could see a bank offline for an indeterminate period of time outside of its control. One example of this in action was with National Australia Bank, which suffered a power outage that downed ATMs, Eftpos and online banking across the country for five hours in May.
In all of these situations where outages can occur, banks must make sure they have the capacity to get their systems back online and fast. The best way to do this is by adopting a zero-day approach to architecture. Zero-day architecture won’t prevent an outage, but it will mitigate the effects. It allows organisations to minimise downtime and recover from backups without having to worry about lost data.
A zero-day recovery architecture is a service that enables administrators to quickly bring work code or data into operation in the event of any outages, without having to worry about whether the workload is still compromised. An evolution of the 3-2-1 backup rule (three copies of your data stored on two different media and one backup kept offsite), zero-day recovery enables an IT department to partner with the cyber team and create a set of policies which define the architecture for what they want to do with data backups being stored offsite, normally in the cloud. This policy assigns an appropriate storage cost and therefore recovery time to each workload according to its strategic value to the business. It could, for example, mean that a particular workload needs to be brought back into the system within 20 minutes while another workload can wait a couple of days.
Without learning the lessons of the high-profile outages that have come before it from banks that have undergone their own transformations, Lloyds is doomed to repeat the same mistakes.
As it begins its massive investment in digital transformation, Lloyds could very easily sink its budget into exciting features that promise to improve the lives of customers and employees. However, without learning the lessons of the high-profile outages that have come before it from banks that have undergone their own transformations, Lloyds is doomed to repeat the same mistakes. You can promise all the features in the world, but without a solid foundation the bank will essentially be a house of cards, ready to collapse at the slightest sign of danger. All banks, regardless of size, must prioritise the minimisation of downtime by having common sense policies in patch management, full knowledge of a system gained through disaster testing and a recovery strategy in place that enables it to get back online at speed.
With one in three bank staff now employed in compliance, and financial institutions groaning under the pressure of an ever-increasing regulatory burden, 2018 is set to be the year that RegTech rides to the rescue, stripping out huge cost from banks’ processes.
In the same way that nimble start-ups introduced FinTech to the financial sector, the stage is now set for the same tech-savvy entrepreneurs to apply the latest technology to help tame the regulation beast.
The challenge is even more pressing now, with the arrival of an alphabet soup of blockbuster regulation including GDPR, MiFID II and PSD2, which will stress institutions like never before.
What is RegTech?
Deloitte has set high expectations for RegTech, describing it as the use of technology to provide ‘nimble, configurable, easy to integrate, reliable, secure and cost-effective’ regulatory solutions.
At its heart is the ability of ‘bots’ to automate complex processes and mimic human activity. And RegTech start-ups are already using robotic process automation to translate complex regulation into API code using machine learning and AI.
The holy grail of RegTech, however, is to strip out huge layers of cost and dramatically lower risk by developing and applying complex rules across all business processes in real-time, automating what can otherwise be an expensive and highly labour-intensive job. Simply put, RegTech promises to do the job faster, cheaper and without human error.
Behavioural analytics
Just like its FinTech cousin, RegTech is already being used for a surprisingly wide range of applications, for example banks are using behavioural analytics to monitor employees, looking for unusual behaviour patterns that may be a tell-tale sign of misconduct.
Brexit will also present a golden opportunity for agile RegTech start-ups whose tech solutions can adapt and transform quickly according to the new regulatory landscape, while traditional institutions struggle with the pace of change.
Unlike FinTech however, which has largely been focused on B2C solutions, RegTech start-ups have to work much more closely with traditional financial institutions. That’s because capital markets are a highly complex, regulated area, where institutions are cash-rich and where access to funding is critical if vendors want to disrupt.
Bespoke solutions
Traditional institutions are also more likely to need solutions that are specifically tailored to the challenges they face, rather than the one-size fits many approach developed by FinTechs. For example, they rely on many different data systems, and this torrent of data often makes it difficult to compile reports to deadline for regulators – a perfect challenge for a RegTech start-up.
RegTech could well be the cavalry, riding in to save the investment management industry from the increasing amount of data being produced that financial regulators want access to. A significant amount of this data is unstructured, making it difficult to process, which adds a greater level of complexity. The flow and complexity of this data is only going to increase, and with it the challenge for banks.
Financial institutions are increasingly pulling out all the stops to crunch data and meet the regulator’s next deadline and in this high-pressure environment teams are not necessarily developing the strategic overview needed to streamline their IT architecture in order to reduce operational risk.
Compliance at speed
RegTech promises to automate these processes, making sense of complex interconnected compliance rules at speed, making compliance more cost effective, while reducing the chance of human error.
It also promises to dispense with the current time lag between a period end, the collection of data by the institution and assessment by the regulator – a process that is always backwards looking.
Under the RegTech model, powered by data analytics and AI, information is in real-time and self-correcting to ensure the regulatory process remains dynamic and relevant.
The scale of the advantages promised by RegTech, are such that banks successfully harnessing its power will strip out huge amounts of cost from their processes, which can then be invested in business-critical innovation, giving early adopters a clear competitive advantage over the rest of the market.
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John Cooke, Managing Director
As we herald a new era of banking, will PSD2 result in FinTechs challenging the dominance of traditional banking services?
13th January 2018 marked the beginning of the Open Banking era. The EU’s Second Payment Services Directive (PSD2) which took effect earlier this month forces banks to allow third parties, including digital start-ups and challenger banks, access to their customers’ financial data through secure application programming interfaces (APIs), and create a new way for customers to bank and manage their money online. If all goes to plan, PSD2’s main objective is to ensure maximum transparency and security, whilst encouraging competition in the financial industry. The Open Banking revolution aims to create a form of cooperation between banks and FinTechs – however, this doesn’t seem to be the case 18 days after the triggering of PSD2, with a number of banks that still haven’t published their APIs and incorporated the necessary changes. Naturally, the directive is good news for the FinTech sector. FinTech companies and digital payment service providers will gain greater access to high-street banks’ customers’ financial data – something that they’ve never had access to in the past. This will then undoubtedly inspire FinTechs to develop new innovative payment products and services and provide users with opportunities to improve their financial lives, whilst allowing them to compete on a more-or-less level playing field with the giants of the financial services industry, the traditional banks. Does this mean that traditional banks will need to up their game when competing with the burgeoning FinTech industry? Are they scared of it, and if not – should they be?
Traditionally, and up until now, banking has always been a closed industry, monopolising the majority of other financial services. The recent advancement of digitisation has shaken the industry, with FinTech start-ups offering alternative solutions to more and more clients across the globe. From a bank’s point of view, PSD2 will forever change banking as we know it, mainly because their monopoly on their customers’ account information and payment services is about to disappear. Banks will no longer be competing against banks. They will be competing against anyone that offers financial services, including FinTechs. And even though the directive’s goal is to ensure fair access to data for all, for banks, PSD2 poses substantial challenges, such as an increase in IT costs due to new security requirements and the opening of APIs. However, the main concern is that banks will start to lose access to their customers’ data. Alex Bray, Assistant VP of Consumer Banking at Genpact believes that a possible outcome of Open Banking is that banks could end up surrendering their direct customer relationships. If they don’t acknowledge the need for rapid change or move too slowly to adapt to the landscape, they risk becoming “commoditised payment back-ends as new aggregators or payment initiators swoop in”.
However, Alex Bray also argues that for banks to take advantage of PSD2, “they will need to find a balance between openness, privacy and data protection.” There is also a case to suggest that traditional banks who embrace and utilise the new directive to its potential could transform a potential threat into a huge opportunity. He also suggests that: “they [banks] will need to improve their analytics so they and their customers can make the most of the huge amounts of new data that will become available”. Only a well-thought-out strategy will help banks to survive the disruption to the long-established financial industry – and cooperating with FinTechs can be part of it. Alex Kreger, CEO of UX Design Agency suggests that “Gradually, they [banks] could turn into platform providers of banking service infrastructure… As a result, successful banks may lose in service fees, but they will gain in volume. Many FinTech start-ups will not only offer services on their platform, they will actively introduce innovative products designing new user experiences, thereby enriching the financial user’s journey and transforming the banking industry. This will attract new users and provide them with new ways of using financial instruments.”
Only time will answer all the outstanding questions related to the open-banking revolution. FinTech firms are expected to ultimately benefit from all these changes – however, whether the traditional banks will cohere to the new regulations quickly enough, whilst finding ways to adapt to them, remains to be seen.
To hear about FinTech and cryptocurrencies in Japan, this month Finance Monthly reached out to Kenji Hoki, Deputy Head of FinTech Promotion Support Office at KPMG Japan, who provides advisory services on financial regulations to financial institutions, as well as FinTech start-ups in Japan.
What have been the hottest topics in relation to FinTech in Japan in the past 12 months?
Not only in Japan, but globally, cryptocurrencies or virtual currencies have been what everyone’s been talking about recently. In Japan, they have been in the spotlight for a broad range of parties, including retail investors, FinTech start-ups, major financial institutions and authorities like financial regulators and central banks, while attitudes towards cryptocurrencies are varied across the sectors.
Retail Investors in Japan who trade cryptocurrencies are rapidly increasing and expanding their investments.
FinTech start-ups like a provider of personal financial management and marketplace to trade goods between users are seeking opportunities to incorporate cryptocurrencies as a mean of payment in enhancing their competitiveness.
Critical characteristic of the cryptocurrencies, when compared to traditional banks, is bypassing bank accounts to transfer money and the potential to disrupt their position in the financial industry. Large banks in Japan have plans to issue their own digital money, which can keep money flow via the account. In this context, Bank of Japan is conducting joint research with ECB on cryptocurrencies.
Japan has taken a very unique approach to emerging cryptocurrencies and has become the first country to give them legal status. The amendment of Payment Services Act (PSA) came into effect in April 2017, introducing new regulations that require virtual currency exchangers to register with the Financial Services Agency prior to setting up their exchange business.
What are the key recent developments in relation to cryptocurrencies?
Based on the amended PSA, 16 virtual currency exchangers were registered and are now subject to the regulations, while a lot of potential virtual currency exchangers are in the process of obtaining the status and are on the cue to register.
These companies include not only business operators that provide exchange services, but also various institutions, such as traditional financial institutions (banks, brokers, etc.), non-bank payment service providers, foreign virtual currency exchangers, etc. This increased interest to register highlights the potential of cryptocurrencies to become a business tool that can enhance the offerings of ordinary companies, which are not financial institutions.
New regulations have forced certain virtual currency exchangers that re not able to meet the registration criteria to close their business before the revised PSA came into effect.
As the cryptocurrency sector evolves rapidly, a study group from the Financial Council has started discussing a fundamental transformation of the regulatory frameworks in Japan - from focusing on entities like banks, securities companies, asset managers and insurance companies to functions like payments, finance and risk transfers, as well as redefining basic financial terms such as ‘money’, that will need adding ‘cryptocurrency’ to them.
Last but not least, global discussions on cryptocurrencies might affect the regulatory approach in Japan. In fact, coordinated regulations on cryptocurrencies are likely to be a priority on the global agenda for 2018. Discussing and considering how to face and use the cryptocurrencies, as well as fiat currencies, plays a new role in the future eco-system in the financial sector.
What would you say have been the best inventions of 2017 around the cryptocurrencies on an international level?
I would like to stress that these opinions are my own, and not the views of KPMG Japan.
Initial Coin Offering (ICO) could be a game changer at an international level, when it comes to shifting means of fund raising and hence, change the financial market/products (such as stocks) dramatically. A fundamental feature of ICO is to provide a broad range of parties an easier access (not easier money) to means of fund raising, in particular those who could not have had such access before ICO, including NPOs, start-ups, projects and even a divisions of a company.
These organizations and units who have had limited access to raise funds in the current financial markets can now benefit from fund raising via ICO and may facilitate innovation not only in the financial sector but in other sectors and markets too.
What have been the impediments on cryptocurrencies in Japan?
In facilitating business treating and/or using cryptocurrencies, many rules, other than regulations need to address cryptocurrencies. For example, accounting and auditing standards need to be reviewed to fit into this new environment and tax needs to be looked at too.
Furthermore, the regulations are still trying to keep up with the change. The above amendment of the PSA does not address ICO. As the sector expands continuously, differentiating digital currencies, including cryptocurrencies and fiat currencies, may be the next focus of the Financial Council and other similar organisations.
What does 2018 hold for cryptocurrencies in Japan?
Digitization in the financial sector will enter a new phase that will challenge the established systems. Banks will accelerate consideration or development of digital currencies which would be issued by themselves in order to keep the money flow in their hands.
Cryptocurrencies will be used more as a mean of payment from the current status, as opposed to an asset to invest in, while many FinTech start-ups that sell non-financial products/services are considering to add cryptocurrencies to their business model and expand the business in order to meet with users’ needs.
Token will be used more broadly to digitize existing non-financial products, while certain disciplines to sell Token without regulated intermediaries need to be introduced to the market. Distributed ledger technology might support the movement to replace certain goods like paper-based certificates with digital Token.
Any final thoughts?
In a digitized society, personal data and user interface is a critical source of competitiveness since every company, including financial institutions, has to customize its product and/or services to meet their users’ needs.
Meanwhile, digitization tends to remove the process of intermediation to deliver the products/services and payment, and bring old-fashioned processes to exchange directly between end-users.However, there’s the possibility of it falling apart both physically and electronically.
Until recently, it was impossible to transfer monetary value without trusted intermediaries and repositories who use expensive IT system and comply with strict regulations. However, distributed ledger technology enables the end user to do so directly by using cryptocurrencies as a mean of payment as well as Token as a digitized product/asset.
Financial authorities need to face that regulating intermediaries to be bypassed is not appropriate any longer in protecting users and markets.
Financial institutions need to know the above irreversible transformation and change their business model fundamentally and rapidly in order to keep up with an environment where personal data and user interface move to platformers to provide marketplace to users to exchange goods/services and monetary value instead of intermediaries.
E-mail: kenji.hoki@jp.kpmg.com
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