AFME publishes new report on the challenges of raising pre-IPO finance
AFME has today published a new report examining the specific challenges associated with raising risk capital for small and mid-size high-growth companies in the European Union. The report aims to inform policymakers about the challenges facing Europe’s high growth companies in obtaining crucial early stage financing.
“The Shortage of Risk Capital for Europe’s High Growth Businesses” was authored by AFME with the support of 12 other European organisations representing all the different stakeholders involved in pre-IPO finance. These include the European Investment Fund (EIF), seven other European trade associations representing business angels (BAE, EBAN), venture capital (Invest Europe), accountants (Accountancy Europe) and crowdfunding (ECN), as well as stock exchanges (FESE, Deutsche Bӧrse, LSE, Euronext, Nasdaq).
Simon Lewis, Chief Executive of AFME, said: “Europe’s shortage of risk capital for high-growth businesses is a pressing issue, particularly given the enduring low growth environment. Collectively, we are pleased to present this pan-European report providing data and recommendations on improving access to equity and venture debt financing for high growth companies. The industry looks forward to working with the Commission to help further the Capital Markets Union and growth agenda and boost EU companies’ competitiveness.”
Olivier Guersent, Director-General at DG FISMA, said: “The European Commission welcomes this new pan-European study on the shortage of risk capital for ambitious firms seeking to expand. This is one of the core challenges that the EU’s Capital Markets Union seeks to address. The inadequate supply of risk capital has been a longstanding constraint on European firms with high growth potential. Under CMU, the Commission has tabled several initiatives to improve the functioning of these markets. However, there is no quick fix. European policy-makers need to stay focussed on this structural challenge in the years ahead. This report is very timely as the Commission prepares to refresh the CMU action plan through its mid-term review.”
The report identifies the main barriers preventing the creation and growth of businesses in Europe and makes the following recommendations to address them:
Fragmented start-up market
Establishing a single EU framework for start-ups with standard rules across EU Member States would enable young businesses to scale-up across borders and facilitate access to 508 million customers. This could be done through the establishment of an EU expert group to focus on the revision of the various EUlegal frameworks, insolvency laws and tax incentives for investors. There is already momentum for such a transformation with the recent Commission Start-up and Scale-up Initiative, including the proposal for an Insolvency Directive
Lack of awareness of risk capital benefits among businesses
Improving awareness among entrepreneurs of how to gain and retain risk capital investors would reduce business failure rates. Better business structure and governance from the start would increase the chances of raising subsequent rounds of financing from professional investors. Businesses with stronger cash positions would emerge, leading to higher chances of survival;
Under-developed business angel and crowdfunder capacity
Unlocking business angel and crowdfunder capacity would allow them to invest in companies across the EU. Creating a single market for business angel investors by aligning best practices and ensuring consistent tax incentives in the EU28 could be one way to provide more risk capital to Europe’s innovative businesses. Education, training and certification of individual investors, as well as the promotion of the role of syndicates and networks with a European reach, would also increase the number of crowdfunders and business angels;
Insufficient business angel exit opportunities
If business angels and crowdfunders are to invest more, they must have access to better exit opportunities. The development of networks and training, as well as the development of secondary markets for private shares at EU level would enable such access;
Insufficient venture capital funding
If Europe’s VC industry is to provide more funding, it needs to scale up. This could be achieved by providing incentives for investing in VC funds, encouraging investment in the asset class and promoting pension savings in the EU28 generally. Achieving a workable EU-level marketing passport for VC fund managers (as part of the review of the EuVECA) and the launch of the pan-European fund of funds are good steps forward;
Small venture debt market
Developing the venture debt market in Europe could provide the necessary funding for VC-backed businesses to reach their next milestone. Venture debt can fill the gap between two VC equity rounds.
Favourable environment for businesses to access public markets
Building a favourable environment for access to capital markets would help small businesses access the information necessary to initiate long-term growth financing strategies. To do this, the development of SME advisory ecosystems of issuers, advisors, entrepreneurs, academics and European centres of innovation is recommended;
Sluggish primary equity market
There is a need to tackle the decline in IPOs, which play a crucial role in Europe’s economy. The proposed Prospectus Regulation is a great opportunity and further initiatives should be undertaken, such as supporting new categories of investors to invest in high-growth companies.
The report outlines the various sources of EU financing available to Europe’s high-growth businesses, (including family and friends, accelerators, equity crowdfunding, business angels, venture capital, venture debt, public markets and public funding), but highlights that many of these are underused:
- Europe could invest more in risk capital: three million EU citizens hold non-real estate assets in excess of €1m – if even a small part of this were used for business angel investing, it would make a huge difference;
- European companies received €1.3m on average from venture capital compared to €6.4m in the US;
- Venture debt is underused: only 5% of VC-backed EU companies obtain venture debt financing compared to 15-20% in the US and 8-10% in the UK.
The report also includes an analysis of the main providers of risk capital for small innovative companies in Europe, showing that there is room for improvement in the European risk capital landscape:
- Business angels invested in half the number of businesses in Europe compared to the US. Only 12 EU Member States have tax incentives for early-stage investments;
- VC funds in Europe invested €4.1bn compared to €26.4bn on average in the US between 2007-15;
- Only 44% of EU VC investments went to later stage businesses compared to almost two-thirds of all VC investments in the US;
- Equity crowdfunding is growing in Europe with €354m invested;
- Origination activity in the EU has remained subdued since the 2007 crisis: in 2005-2007 an average of €11bn was raised annually through 300 IPOs per year. Since then, the annual average has fallen to €2.8bn with 161 IPOs per year between 2008 and 2015.
- A majority (61%) of European listed companies have market capitalisation of less than €200m compared to just 46% in Hong Kong and 39% in US emerging growth companies.
The report is part of AFME’s broader growth initiatives and is the third in a series of publications focussing on unlocking growth and jobs in Europe. Earlier publications include Bridging the growth gap, which highlighted the gaps in equity financing for small and mid-sized companies. This was followed by Raising finance for Europe’s small and mid-sized businesses translated in six languages.
Regulating innovation: the biggest challenge in payments
By Fady Abdel-Nour, Global Head of M&A and Investments, PayU
Over the course of the last six months, the payments industry has been lauded as one of the most impressive in its agility responding to Covid-19. Consumers and merchants have flocked online and safety has been a significant driver of the move to digital as entire countries discourage the use of cash – but what of financial and data security?
As digital payments adoption accelerates, there’s no time to waste. The pressure is on for governments and regulators to not only ensure security keeps pace with new consumer demand, but to look ahead and clear the road for future innovation.
Acceleration in digital payments
At PayU, we operate in 20 markets across the globe. Since the start of the pandemic, every single one of these markets has seen a seismic shift in consumer habits. In Poland, for example, the number of new onboarded e-shops was three times higher between March and May than in previous months. And in Colombia, e-commerce activity was 282% higher than pre-lockdown levels. Some merchants across our markets saw year-on-year revenue growth of a staggering 500-1000% during April and May.
New merchants are seeing this potential, moving online to increase their customer base and keep economies ticking. But with great innovation comes corresponding regulations. How can regulators keep up?
Innovation vs. regulation: an incompatible duo?
New ideas and technologies are undeniably critical to ensure services keep up with consumer behaviour. However, for this to happen safely, there needs to be collaboration between our industry’s innovators and regulators. Progress requires us to challenge and expand existing boundaries, holding our shared goal in mind.
Important as this concept is, it is by no means revolutionary. The widely pedalled narrative that innovators and regulators are at loggerheads is, quite frankly, outdated. It is not true that innovation in financial services has to disrupt existing systems and infrastructure. We have already seen countless examples of regulators working with the fintech ecosystem to enable and support innovation.
Across the emerging markets that PayU operates in, innovation initiatives are in place to educate entrepreneurs on the regulatory environment in which they operate. In Brazil, the central bank has established a sandbox, the Laboratory of Financial and Technological Innovation, to help fintech startups work more closely with regulators and government and accelerate the development of their ideas. The aim is to create a more efficient financial system, increase financial inclusion and reduce the cost of credit through better regulation. As the country rolls out Open Banking, acknowledging fintech’s potential to drive better socio-economic inclusion is incredibly encouraging.
It would be remiss of me not to mention The Monetary Authority of Singapore (MAS) here. To date, it has excelled in driving positive change by ensuring new players and services can operate within regulatory constraints. If they are unable to do so, the MAS reviews its framework and, where appropriate, adjusts it to safely progress innovation rather than stifle it. In 2019, for example, it issued five new digital bank licenses. Later in the year, it launched the Sandbox Express to help create a faster option for testing innovative financial services in the market.
The open-minded and collaborative approach of these regulatory models marks the future of financial regulation to me. The world is changing quickly and the parameters that keep us secure have to adapt and morph more than ever before. The job is not simple, but it can boost innovation and build a safe and sustainable financial environment, where pioneers are empowered to set the pace for change.
Consumer demand is only one side of the (digital) coin
The other trend creating complexity for regulators is the move towards embedded finance and Big Tech’s involvement in this.
Broadly, embedded finance means that fintech services are expanding beyond the walls of banks and becoming part of other business models rather than a standalone entity. This is a challenge in itself, as regulators will need to be vigilant to ensure that payments, credit and other financial services remain secure and customers are protected.
Across Europe, the US, Latin America, Asia and Africa, governments have also been grappling with how to regulate Big Tech. Facebook, for example, has launched ‘Facebook Financial’ to pursue opportunities in digital payments and e-commerce. Similarly, regulators in Brazil and India have been trying to navigate WhatsApp’s attempts to establish its new payments feature in both markets. These features were suspended by Brazil’s central bank and have been in testing in India for over two years.
The good news is that regulators are paying attention. The pushback we’re seeing is not simply aversion to change, but industry experts exploring how these developments can keep consumer needs at the heart and enhance the current payment ecosystem. New business models and new players are important to keeping us all at the top of our game.
Regulating a changing financial ecosystem
We’re in a truly remarkable age, where the role of regulation is being tested again and again. I believe that regulators have a more vital role to play than ever. Covid-19 has been a powerful catalyst in the financial sector and there is some positive change to be harnessed from the disruption.
If navigated shrewdly, regulators will succeed in capitalising on new trends to retain their core purpose: to ensure the safety and security of the customer and support positive change. The whole industry will need to work together closely to build a regulatory framework that is fertile for innovation and allows us to realise the enormous potential of payments in this new decade. So, what are we waiting for?
How the financial sector can keep newly acquired customers returning time and time again
By Dicken Doe from Foolproof, a Zensar company
Covid-19 has changed the financial lives of millions; what worked for people and their bank six months ago might not work today. For some people savings have depleted and pensions withdrawn early. While mortgage holidays have increased the time required to pay back loans and emergency funds in the advent of job losses.
When combined with the fact that Covid-19 has rapidly sped up online migration, providers need to deeply question the design of their financial experiences. According to a recent survey from Lightico: “63% of US citizens said they were more inclined to try a new digital app for banking than they were before the pandemic. Also, 82% said they were concerned about paying a visit to their local banks.”
To be successful, both existing and new experiences must be assessed by using data and human insight to iteratively design and test solutions.
The swift response of many financial institutions to the crisis has created a number of changes to services and customer support functions. Things which have taken months of negotiation in the past have been made possible in days. However, speed does not always equal quality. Key considerations that need to be accounted for – to keep existing and newly acquired customers returning – remain. This can broadly be described under the auspice of consistent experiences that meet emerging customer needs.
Top tips to keep newly acquired financial services customers returning
Getting ahead starts with the ‘why’ customers are performing an action and ‘what’ they need. With this in mind, here are my top five tips for the financial sector on how to keep new customers coming back again and again.
Understand new and emerging needs:
People have been forced online in all-new circumstances. To respond appropriately, providers need to look at quantitative data and have a regular qualitative dialogue with new and existing online customers. This will help them spot emerging needs and behaviours which form themes and patterns in online browsing. To enable this, financial service providers must move from being reactive to proactive. This will help them to keep pace with the changes people themselves are experiencing in their own lives.
Financial businesses should look to segment, analyse and speak to customers who have started managing their finances with them since the beginning of the year and interrogate their behaviours. This will provide invaluable insight into what people are looking for and why.
Banks have an advantage here – when compared to other sectors – because saving, lending and current account journeys tend to start in apps or sites. By connecting site browsing with new customer account data, we can see individual demands expressed in the use of content, and the sorts of journeys customers are undertaking. Are these people struggling to complete a particular task i.e. setting up a direct debit? Is there something they’re entirely overlooking e.g. ISAs or loans?
At both the individual level and at an aggregate level, we can see emerging needs and trends. For example, the mortgage market has tightened up. Prior to Covid-19 there were 700+ 10% deposit home loans available, now there are less than 70. As a result, a decline in interest and a lack of ability for younger people to buy homes could signal a move towards people putting savings into ISAs. Likewise, too many customers are shifting to expensive and unsustainable debt, meaning providers need to imagine better ways to help combat this. This means designing value-adding solutions which helps maintain trust with the customer as well as encouraging them to come back.
Optimise journey flows:
The amount of tooling now available to understand journeys, identify breaks and ultimately address these issues is huge. There is no excuse not to be working hard on this, too many companies see a journey as set and overlook moments where design can be used to enhance processes. For example, why does opening online banking take five clicks and not one, and why is it so hard to find information about my pension?
Financial service providers of today cannot rely on a paradigmatic shift to new journeys with mounting financial pressures – their current ones need to evolve. If they aren’t continuously enhancing what they have today, it’s easier than ever for people to go elsewhere. Especially when 36% of people in the UK now feel more comfortable managing money online and 23% trust online money management more.
However, enhancements to services must be based on both customer needs gathered from qualitative insight and quantitative data from analytics and tracking tools to expose key problems. What you find out might mean redesigning specific moments in a journey, but it could also be done by improving signposting and information architecture, remarketing better, or tweaking content i.e. improving the findability of information connected to mortgage holidays.
Reasons to return:
Understanding people’s needs and targeting them drives better outcomes for all. Now is not the time for generic market offers because people’s immediate financial needs are significantly limited by Covid-19. The key to encouraging people to return is having a range of solutions that meet the specific needs of today. The credit card you had planned might not be what people need right now, but a compelling savings product could be. User research and insight will help you form validated hypotheses about offerings to test, and it’s precisely the kind of thing quantitative data alone will struggle to tell you.
Financial service providers also have the power to engage or reengage customers. They have ecosystems that join up channels to improve the likelihood of someone coming back. For example, if a customer opened an ISA in the past but stopped making deposits, perhaps it’s because they’re unaware of the annual limit on that sort of tax-free investment. If buy-to-let rates were reduced, perhaps they can afford that loan application abandoned last month. Financial providers need to harness the power of design to remind customers of the benefits available today.
As always, knowledge about customers and their needs has to be exposed, and new solutions devised to offer people ways back into your funnel. To do this you need a mix of research and data science to expose the problems for designers to work on.
Ease of use:
Across the financial services sector, digital design maturity is improving, but many processes are still unnecessarily cumbersome. Companies that have introduced rushed processes to support customers at a distance are likely to have solved an immediate problem, but to the detriment of the overall experience. Here, design thinking and service design can guide organisations toward optimising journeys to promote ease of use and coherent customer experiences.
Even months after the start of the pandemic, many organisations are struggling to maintain their inbound call centres and chat functions. On the whole, Help & Support pages offer just as poor an experience. These functions are often incomplete and overlooked, but are now the crux of banking experiences everywhere.
Banks must home in on these moments and provide other experiences in keeping with the standards set by the likes of First Direct’s award-winning telephone banking service. Within seconds, you’re through to an operator trained to handle loan applications, mortgage queries and more. The trick is to follow the right formula. You’ll want to avoid customers having to retain lots of information at once, navigating complex menu systems and always provide the option to speak with an operator. Services which adhere to this closely often outperform their digital counterparts – helping to relieve the strain placed on your overall experience.
Done well, conversational AI can make a big difference to customer experience and the likelihood of conversion too. Santander’s banking line harnesses this technology, and with a few vocal cues, you’re managing cash verbally. To succeed though, you must set up analytics, perform research and regularly optimise services to relieve friction and meet your customers’ ever-changing needs.
Providers are increasingly talking about optimisation but finding immediate opportunities to squeeze funnels and processes for more value cannot come at the expense of great customer experience. Now is the time for immediate changes but you need to make sure those changes are sustainable and consistent with everything else you have that supports your online ecosystem.
In essence, delivering efficiencies can’t overcome delivering a poorer customer experience long-term. Where this is true there is a customer-centred design job to be done in the better understanding of customers and behaviours, and therefore research and design more focussed on those needs.
Increased contactless spending could be linked to higher fraud and payment disputes, warns global risk expert
The rapid adoption of contactless payments during COVID-19 may be contributing to multiple strands of fraud
Monica Eaton-Cardone, COO and Co-Founder of merchant dispute specialist, Chargebacks911, and its revolutionary new financial institution brand, Fi911, warns of the chargeback and fraud risks associated with the increase in contactless payments following the COVID-19 outbreak.
In a bid to reduce human interaction, the use of cash, and the touching of contact points such as PIN pads and cash machines, the UK’s contactless spending limit increased from £30 to £45 in April this year.
Customers across the globe have also got onboard with the payment method following contagion concerns about using cash and cards. As a result, Mastercard reported a 40% increase in contactless payment activity in Q1 of 2020.
This dramatic increase in contactless payments may be contributing to the sharp rise in chargebacks that have been recorded since the pandemic began. According to Cardone, industries are now experiencing 10 times the amount of payment disputes that were taking place prior to COVID-19.
Monica explained: “Contactless payments present a number of fraud threats. For one, if a valid cardholder’s information is stolen, it can be added to a mobile device and used to make unauthorised purchases – leaving merchants covering customers’ losses. In addition to this third-party fraud, contactless payments present a greater opportunity for genuine customers to commit first-party (friendly) fraud and lie about whether or not a transaction was actually made by them.
“These scenarios pose even more of a threat while the retail landscape is going through this turbulent period and genuine claims are on the rise, so merchants are in less of a position to dispute false claims.”
Although merchants are the ones left refunding customers and losing valuable goods due to chargebacks and friendly fraud, the issue doesn’t start and end with them. Behind a payment dispute is an intricate network of merchants, acquirers, issuers, and card schemes that deal with disputes and adopt their associated costs.
And, when merchants lose money to disputes, the cost will inevitably end up back with customers, since merchants raise prices to cope with these losses. This is likely to become a necessity in our current period of economic uncertainty.
For this reason, Monica warns everyone involved in the payment process to remain vigilant when it comes to chargebacks that stem from contactless payments.
Monica continued: “If merchants want to reap the benefits of contactless payments, they need to be aware of the threats involved and have strategies in place to respond effectively.
“At the same time, financial institutions should watch for activity that is unusual and out of line with typical consumer behaviour – for instance, a consumer suddenly making a high-value purchase at a store that’s thousands of miles away from home. They should also be on the lookout for repeated use of the chargeback process, which might indicate friendly fraud, as 40% of consumers who commit this fraud successfully will repeat the practice within 60 days.
“I also urge consumers to be aware of their account activity and to keep a close eye out for anything that may indicate that a contactless payment account has been compromised.”
Going forward, Monica is anticipating that contactless payment adoption will continue to grow, especially against the backdrop of COVID-19. To help combat the growing chargeback problem and fraud associated with contactless payments, Chargebacks911 is working closely with merchants – particularly those in the most susceptible industries – and financial institutions to tackle the issue head-on.
If you’re concerned about COVID-19 chargebacks effecting your business, speak to a member of the Chargebacks911 team at: [email protected].
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