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CROWDFUNDING – Will new rules on Crowdfunding have a significant impact on UK SMEs and start-ups who are reliant on alternative finance?

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Republic Crypto adds two new high-promise Startupsto Crowdfunding Line-up

By David Ridley, solicitor at law firm Womble Bond Dickinson

Background

Ridley David

Ridley David

I first became interested in crowdfunding when I wrote my University dissertation on the legislative framework in the UK and US at that time.  Broadly speaking I was attempting to give a view on whether the legislation was fit for purpose (to surmise, it wasn’t) and could accommodate the growth in demand for crowdfunding. I have followed the growth of Crowdfunding since then, which in 2017 had grown to an estimated £6.2bn in the UK, according to the Cambridge Centre for Alternative Finance.

I have been most pleased by the growth of its use by Small and Medium Sized Enterprises (SMEs) and start-ups seeking external investment.  The UK is heavily reliant on SMEs, who made up 52% of all private sector turnover in 2018 and 60% of all private sector employment.  The number of start-up businesses in the North East (where I and many of my WBD colleagues are based) is growing at one of the fastest rates in the country – there were 45,498 start-up businesses in the North East at the end of the 2017/18 financial year, an increase of 20.8% compared to the previous year.

These companies are more and more often looking at Crowdfunding as a method of solving a perceived lack of external financing (known as the ‘funding gap’) available for such companies. Whilst the factual evidence surrounding the existence of the ‘funding gap’ is not conclusive, the rules on alternative external funding can be hugely important to such businesses, potentially unlocking the investment to get them through those “touch and go” initial years.

Regulatory Framework

In the UK the Financial Conduct Authority (FCA),  regulates two forms of crowdfunding:

  • Loan-based crowdfunding – usually called peer-to-peer (P2P), where investors use lending platforms to lend money directly to consumers or businesses; and
  • Investment-based crowdfunding, where investors can invest directly in businesses by buying investments such as shares or debentures.

The FCA has recently launched various consultations on changes to the FCA Handbook to reflect the developments in the crowdfunding sector.  The Treasury and BEIS have also focused their attention on the sector, undertaking an inquiry in 2018 on the state of SME finance, with particular consideration of crowdfunding. These enquiries have often focused on similar themes, such as:

  • whether there should be more explicit rules around governance arrangements, particularly on areas such as credit risk assessment and risk management;
  • what happens if a crowdfunding or P2P platform fails;
  • whether such platforms should evaluate investors’ knowledge and experience before permitting investments; and
  • evaluating the mandatory information that platforms need to provide to investors.

Importantly, the FCA has, following these various reviews, confirmed its proposals for new rules and guidance coming into force on 9 December 2019.  They are introducing a package of rules and guidance to improve standards, seeking to find an “appropriate balance between advancing policy objectives and enabling future innovation in products and services”.  These rules, whilst targeted at the P2P and Crowdfunding platforms themselves, could have an impact on the extent to which SMEs rely on some form of crowdfunding to raise money, and such companies should be taking notice.

What is changing?

The changes introduced by the new rules extend the application of the marketing restrictions that currently apply to investment-based crowdfunding platforms to loan based crowdfunding.  In particular the FCA is to tighten the nature and extent of the due diligence each platform undertakes in respect of prospective borrowers, in order to better assess their credit risk.  The platforms will need to provide more information to investors of how the loan risk is assessed and to assist them in determining whether they able to properly make such investments.

Further to this, P2P platforms that communicate financial promotions directly to consumers will, from 9 December, only be permitted to direct such promotions to prospective investors that:

  1. are certified or self-certified as ‘sophisticated investors’ or are certified as ‘high net worth investors’;
  2. confirm before a promotion is made that they will receive regulated investment advice or investment management services from an authorised person, or
  3. are certified as ‘restricted investors’, i.e. they will not invest more than 10% of their net investible assets in P2P loans in the 12 months following certification.

What is the potential impact on SMEs?

These changes are clearly targeted at protecting potential investors and this is important if the crowdfunding market is to remain a reputable source of raising finance. Crowdfunding has understandably come under greater scrutiny since the FCA forced P2P investor Lendy into administration, and lessons should of course be learnt from this.  Critics of the new rules have however raised the view that these regulations may put off investors who would otherwise have provided a source of financing to those companies that need it most, and restrict crowdfunding to institutional investors such as mutual funds, pension funds, banks and asset managers.

My view is that the additional hurdle of certification outlined above is not necessarily a significant barrier to prospective investors. The inclusion of the “restricted investor” criteria is an important one, without which the pool of prospective investors would become much smaller and crowdfunding would become far less accessible to new investors – certified high-net-worth investors and sophisticated investors are concepts generally seen as restrictive and it can often be difficult to find persons who are willing to certify as such.  On the other hand a “restricted investor” simply needs to confirm that they will not invest more than 10% of their assets. The FCA has also stated in its policy statement on the new rules that investors can re-classify as sophisticated investors (thereby removing the 10% investment limit) when they have made two or more P2P/Crowdfunding investments over two years.

What is more difficult to assess is whether the due diligence each platform undertakes in practice in respect of prospective borrowers, in order to ensure compliance with the new regulations, will result in an increased burden upon prospective borrowers.  A borrower will likely be required to work more closely with the platforms in the run up to their crowdfunding project and this could make crowdfunding less attractive to start-ups and SMEs, if it requires a greater allocation of their (already limited) resources

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Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna

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Black Friday payment data reveals rapid growth of ‘pay later’ methods like Klarna 1

Payment processor Mollie reveals the most popular payment methods for Black Friday

Mollie, one of the fastest-growing payment service providers, has revealed insights into the most popular payment methods used this Black Friday. The data, which provides a year-on-year comparison of 2019, shows that payment methods allowing customers to pay flexibly – like ‘pay later’ service Klarna – has more than doubled in 2020. The study spans 101,000 merchants across Europe, primarily from Germany, U.K., France, the Netherlands and Belgium.

Black Friday trends: 

  • In 2019, Mollie saw a 36% increase in the overall number of transactions on Black Friday versus the previous year. In 2020, this shot up to a growth of 56% on the 2019 numbers, representing a difference of 20%.
  • And this year, even in the four days leading up to Black Friday, there was a 58% YoY growth in transactions.
  • Use of ‘buy now, pay later’ services on Black Friday (such as Klarna or ClearPay) has more than doubled from 1% of all payments in 2019 to almost 2.5% in 2020.
  • Use of mobile payment methods on Black Friday is consistent on the previous year – 0.20% in 2019 to 0.25% in 2020.

“There is a lot of pressure on consumers’ wallets at the moment, which is making people look to payment methods that offer them financial security,” said Ken Serdons, Chief Commercial Officer at Mollie. “It makes sense that fintechs like Klarna, who have performed phenomenally well this year, have been so popular this Black Friday. The increase is in-line with this growing trend towards more flexibility in how consumers pay for goods.”

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Beyond Transactions: The Payment Revolution

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Beyond Transactions: The Payment Revolution 2

By Marwan Forzley, CEO of Veem 

The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.

As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.

For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.

With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.

A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.

If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.

Putting the user in the driver’s seat

Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.

The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.

For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.

With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.

Marwan Forzley

Marwan Forzley

Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.

Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.

In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.

Relentless transparency

Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.

Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.

This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.

Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.

Separating the signal from the noise

2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.

As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.

Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.

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Finance

The UK’s hidden payments crisis: why businesses should rethink their payments strategy

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The UK’s hidden payments crisis: why businesses should rethink their payments strategy 3

By Edwin Abl, Chief Marketing Officer at Modulr.

As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.

A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.

Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.

The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.

Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.

The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).

These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.

The 5 key steps UK businesses can take to drive payment efficiencies

There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:

1 – Locate hidden payment process inefficiencies

Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.

Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.

For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.

2 – Make payments key to stakeholder experience management

Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.

Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.

Edwin Abl

Edwin Abl

Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience

3 – Integrate and automate to support payment innovation

Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.

Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.

Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.

A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.

4 – Bring business leaders together

Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.

5 – Innovate by adding finance and payments to vertical services

Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.

This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.

Moving forward – engaging technology to drive efficiencies

If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.

However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).

By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.

To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.

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