By Neil Johnson is CEO of Duke Royalty
The global pandemic has dealt yet another blow to business in general, and Small and Medium Enterprises (SMEs) in particular.
Even at the beginning of the year, the level of indebtedness across this community was untenable. To make matters worse, recent research has highlighted that a quarter of a million companies are at risk of collapsing under £35bn ($44bn) of unsustainable debt taken on during the COVID-19 pandemic. This is foreboding, to say the least.
However, the outlook need not all be doom and gloom. Alternative and more flexible forms of finance have been on the rise since the Global Financial Crisis sent shockwaves through the markets in 2008. Now, 12 years on, businesses have more options than ever before when it comes to finding an innovative capital solution which promotes, rather than encumbers, growth. Evaluating these will be essential for management teams as they look to stabilise their business in a post-pandemic world and create a stronger growth platform for 2021.
The biggest sector you have never heard of.
Royalty Finance is one such solution. It is probably one of the biggest sectors you have never heard of. Popularised in North America, this form of alternative financing is estimated to be worth around $50 billion in the region and has been recognised as a viable capital solution for companies operating across a range of sectors since the 1980s.
The solution sees well-established companies receive capital in return for a slice of their revenues. Models vary, but typically royalty financing works as a type of ‘corporate mortgage’, where a business exchanges a small percentage of its revenues over a long period of time in return for capital today. It is because of its ability to provide supportive capital which does not saddle the business with re-financing risk that its relative obscurity in the UK and Europe is quickly changing.
The advantages are clear: because it is passive, unlike other options, royalty financing is the only source of capital which enables business owners to realise their long-term business goals without compromising owner control, adding amortizing bank debt to the business or, in most cases, diluting equity shares.
Since the royalty company is taking a slice of revenue from the business, it also means that the interest of the two partners are aligned (arguably, unlike other traditional finance methods), with the repayment percentage adjusted annually to reflect any movement in an investee’s revenues. This means that it represents a true partnership model.
As an additional benefit, the company’s repayments cover the principal as well as the interest. Many companies use the money to replace existing short-term debt to allow them to grow. Royalty financing eliminates re-financing risk because it has a payback over decades, hence the analogy to a ‘corporate mortgage’. As well as being used to refinance debt, other common applications include M&A, shareholder restructuring and organic expansion.
A transatlantic shift
The transatlantic jump for royalty financing originally came as a result of a shift in how SMEs perceived and dealt with their banks on the back of the Global Financial Crisis. Just two years ago, the UK’s Federation of Small Business (FSB) reported that small credit business approvals had fallen to a 30-month low, with only 60% of small firms that applied for credit being successful, establishing a significant SME funding gap and frustrating growth.
Fast forward to today, and the coronavirus has shifted this sentiment of stagnation a full 180o to the other extreme. The UK government’s decision to act as a guarantor for business loans to prop up the private sector during the pandemic, however well-meaning, has created a staggering debt mountain. Worryingly, the implications for the SME sector, which employs 60% of the UK’s private sector workers, and its future growth prospects are even more eye-watering.
Banking industry executives fear that the loans will lead to widespread corporate failures in 2021 when companies must start paying interest on the debt, leading to a swathe of job losses. Even among businesses that can afford to service their loans, debt impedes a companies’ ability to invest and grow, thereby creating a significant drag on any economic revival after the Covid-19 pandemic.
The UK government has already started work on how to tackle the corporate debt mountain. A likely solution will be to enable the debt to be swapped by the government for equity stakes in businesses, much like we saw during the global financial crisis. This will make many of our SMEs accountable to UK Government, presenting an array of new potential headaches for management.
This raises the question: is this the only way? After the initial drop in revenue experienced by companies almost across the board in April 2020, when the pandemic first struck UK shores, many have started experiencing a relative upturn in trading. For those businesses which have a proven, long term track record of profitability, but have taken a hit during unprecedented times, there lies the opportunity to evaluate their options, refinance this debt and once again make themselves the masters of their own destiny.
A new tomorrow
The accelerated adoption of pre-existing trends, whether it be flexible working or digitalisation, during the pandemic has been a hot topic over recent months. In my mind, this extends to the application of alternative finance as well. In times of short-term uncertainty, long term capital, which does not need to be continuously repaid or have an identified exit strategy in place, represents a no-brainer for management teams.
The businesses of today benefit from a financial landscape that is more diverse than ever before. Now that the dust has settled following the initial shockwaves sent through the business community at the start of the outbreak, management teams have the perfect opportunity to take their future into their own hands and ensure that their capital structure works for, not against, their business.
With its aforementioned advantages and amid a quickly changing finance environment among SMEs in particular, royalty financing is set to grow from strength the strength across the UK and Europe. You could call its sudden rise a surprise, but all the right conditions have been there for growth of the industry.
FSS and India Post Payments Bank AePS Partnership Advances Financial Inclusion in India
New Delhi, January 12th,2020: FSS (Financial Software and Systems), a leading global payment processor and provider of integrated payment products, today announced partnering with India Post Payments Bank (IPPB) to promote financial inclusion among underserved and unbanked segments. As part of the collaboration, IPPB will use FSS’ Aadhaar Enabled Payment System (AePS) to deliver interoperable and affordable doorstep banking services to customers across India.
FSS’ AePS solution combines the low-cost structure of a branchless business model, digital distribution, and micro-targeting that lowers acquisition costs and improves reach. This strategic partnership offers significant opportunities to bring millions of unbanked customers into the financial mainstream. Currently, there are nearly 410 million Jan Dhan accounts in India. A primary reason for low usage of banking and payment services is the challenge of accessibility in rural areas and the cost of maintaining active accounts — including transaction and transport— outweigh the benefits. In rural and peri-urban areas, the average time to reach a banking access point potentially ranges between 1.5 and 5 hours, compared with the average of 30 minutes in urban areas.
Leveraging its vast network of over 136,000 post offices, and 300,000 postal workers, IPPB has been setup with the vision to build the most accessible, affordable, and trusted bank for the common man in India to deliver banking at the customer’s doorstep. With the launch of AePS services, IPPB now has the ability to serve all customer segments, including nearly 410 million Jan Dhan account holders, giving a fresh impetus to the inclusion of customers facing accessibility challenges in the traditional banking ecosystem.
Speaking on the tie-up, Mr.Krishnan Srinivasan, Global Chief Revenue Officer, FSS said, “We are proud to be IPPB’s technology partner in this monumental nation-building exercise. The collaboration is evidence of FSS’ deep payments technology expertise and commitment to bringing viable, market-leading innovations that promote financial deepening. FSS’ AePS solution combined with IPPB’s expansive last mile distribution reach empowers citizens of the country with a range of digital payment products and advance India’s vision towards less-cash economy.”
“Through the vast reach of Department of Posts network along with the advent of the interoperable payment systems to drive adoption, IPPB is uniquely positioned to offer a range of products and services to fulfil the financial needs of the unbanked and the underbanked at the last mile. Having launched AePS services, the Bank has become the single largest platform in the country for providing interoperable banking services to customers of any bank. The strategic partnership with FSS provides us with an opportunity to expand the portfolio of financial services and improve customer experience whilst maintaining operational efficiency, thus building a digitally inclusive society,” said Mr. J. Venkatramu, MD & CEO, India Post Payments Bank.
The infrastructure created by IPPB addresses the accessibility challenges faced by customers in the traditional banking ecosystem. It fulfils the Government’s objective of having an interoperable banking access point within 5 KM of any household and creating alternate accessibility for customers of any bank.
The operation of FSS’ AePS solution is based on agents performing transactions on behalf of customers using a tablet, micro-ATM or a POS device. The system is device agnostic and can accept transactions originating from any terminal. Customers of any bank can access their Aadhaar-linked bank account by simply using their fingerprint for cash withdrawal, balance enquiry and transfer of funds into an operating IPPB account, right at their doorstep. FSS’ AePS exposes APIs to third parties to develop an expansive services ecosystem and extend a broad suite of financial products and tools including micro-insurance, micro-savings, micro-finance, mutual fund investments, enabling the bank to further services adoption among low and moderate-income consumers.
FSS (Financial Software and Systems) is a leader in payments technology and transaction processing. FSS offers an integrated portfolio of software products, hosted payment services and software solutions built over 29+ years of experience. FSS, end-to-end payments products suite, powers retail delivery channels including ATM, POS, Internet and Mobile as well as critical back-end functions including cards management, reconciliation, settlement, merchant management and device monitoring. Headquartered in India, FSS services leading global banks, financial institutions, processors, central regulators and governments across North America, UK/Europe, Middle East, Africa and APAC. For more information visit www.fsstech.com.
About India Post Payments Bank
India Post Payments Bank (IPPB) has been established under the Department of Posts, Ministry of Communication with 100% equity owned by Government of India. IPPB was launched by the Hon’ble Prime Minister Shri Narendra Modi on September 1, 2018. The bank has been set up with the vision to build the most accessible, affordable and trusted bank for the common man in India. The fundamental mandate of IPPB is to remove barriers for the unbanked & underbanked and reach the last mile leveraging a network comprising 155,000 post offices (135,000 in rural areas) and 300,000 postal employees.
IPPB’s reach and its operating model is built on the key pillars of India Stack – enabling Paperless, Cashless and Presence-less banking in a simple and secure manner at the customers’ doorstep, through a CBS-integrated smartphone and biometric device. Leveraging frugal innovation and with a high focus on ease of banking for the masses, IPPB delivers simple and affordable banking solutions through intuitive interfaces available in 13 languages.
IPPB is committed to provide a fillip to a less cash economy and contribute to the vision of Digital India. India will prosper when every citizen will have equal opportunity to become financially secure and empowered. Our motto stands true – Every customer is important; every transaction is significant and every deposit is valuable.
Be Future-Ready: The Case for Payments as a Service (Paas)
By Barry Tarrant, Director, Product Solutions, Fiserv
Over the years, financial institutions have faced a myriad of changes in regulations, technology and customer expectations. Banks are now having to deal with the competing demands of maintenance and compliance on the one hand, and the need to innovate and deliver value-added services on the other. The balance of effort is increasingly consumed by the former with the share of investment in innovation and value generation being squeezed.
COVID-19 has changed customer behaviour, which will accelerate the need for more digital innovation, adding further to the demand on technology resources that are already stretched to the limit. While future investment plans may remain uncertain, banks need to consider several factors for their technology strategy, such as efficiency, where to invest and how to reduce capital expenditure.
It is apparent that the traditional approach to implementing and updating technology is no longer sustainable in the long-term.
The true cost of outdated technology
Maintaining technology has always been a challenge. What makes it more important now than ever is that innovation expectations have become far greater and exist on multiple simultaneous fronts. Today, there is more demand for product innovation, alongside the need to deliver consistently across multiple channels. On top of this, banks are facing structural changes, such as the convergence of payments.
Faced with this combination of imperatives, many banks are finding that continuing to maintain their payments technology in-house is no longer the most viable option.
Banks that persist with existing in-house infrastructures are in many cases spending large sums just to keep up, with little left for innovation. This can put them at a distinct disadvantage in today’s digital environment, where challenger banks and fintechs are fully embracing tools like the cloud to optimise operations while delivering truly transformational customer experiences.
Maintaining technology can be quite costly, and leveraging shared payment innovation can result in notable cost savings. Additionally, there are savings to be had in the areas of capital costs, opportunity costs, regulatory or payment scheme compliance costs, and the inevitable one-off costs from technology or infrastructure upgrades.
And as the options available for customers to initiate payments across card and non-card payment rails increase, this will drive a convergence of the technology that supports the processing of those payments, further increasing the demand for change.
In this environment, migrating to an alternative technology strategy, such as PaaS, can be a strategic and cost-effective decision.
One solution to mitigate the risks and costs associated with maintaining technology is to outsource payments activity to a PaaS provider. The most obvious advantage here is cost reduction. However, there are many other positive and significant financial benefits that can be realised in terms of reduced capital expenses and the associated effects on balance sheet and free cash flow. This is particularly important in the current environment as capital investment comes under even more scrutiny.
Running a robust platform is a PaaS provider’s primary business, whereas for a bank it is just one of the many areas in which it has to invest. A PaaS provider is compelled to continually reinvest to ensure their technology never stands still long enough to become outdated, while also recruiting high-calibre personnel to support and advance it.
Geographical scale can also add value and increase opportunities for innovation. A PaaS provider with clients around the world sees and delivers innovation globally, which can be redeployed elsewhere rapidly and at a lower cost than custom development. Also, a global processing network can serve as a worldwide payments intelligence network, detecting trends, such as new payment types, consumer payment behaviour and cyberthreats.
One further consideration is how payments have become increasingly commoditised in recent years. As traditional revenue streams from payments have declined, it makes even less financial sense to retain payment processing in-house. By adopting PaaS and benefiting from the associated cost savings, retained payment margins can be maximised, simultaneously freeing up resources that can be diverted to innovation and value-added activities, such as enhancing customer experience and building the franchise.
Debunking the myths
Despite the compelling business case for banks to adopt PaaS, some remain reluctant to do so because of various myths. One example is the belief that outsourcing data is inherently risky. The reality is, in fact, the opposite. PaaS providers have the scale, resources and procedures to address and invest in key priorities – for example, cybersecurity. Keeping things in-house can actually create greater data security risk if resource constraints are an issue.
Budgetary considerations aside, experience and specialist tools are also major points of difference here. A typical bank IT manager might experience two or three major transition projects in their entire career. In contrast, teams at a PaaS provider collectively will have experience successfully delivering many major transformation projects, and will have also developed a whole range of specialised implementation adapters and toolkits that are continually enhanced and expanded.
Be more agile and tactical
When technology becomes outdated it can easily go from an asset to a liability. While COVID-19 has emphasised this reality for some, truly appreciating it requires a comprehensive assessment of existing technology and its long-term impact on business. Outsourcing through PaaS has a wealth of benefits that can radically transform this situation. Financial institutions can become more agile and tactical so they can continue to innovate and provide services that customers demand while differentiating themselves from the competition.
Teaching Your Kids to Build Good Credit: The One Tool You Never Knew You Needed
Teaching your kids about money can be tricky. You want them to understand the value of a dollar without putting undue pressure or stress on them too early on. It’s essential to have productive conversations with your children around money so they can have the knowledge to guarantee their own financial well being when they become adults. One of the most important conversations to have with your kids is on the importance of building good credit, the steps they can take to do so, as well as techniques for avoiding the risks of poor credit. While you may have already thought to educate them on credit cards and loans, there is one tool you may have never considered that can help you underline this lesson. Read on to find out more.
Tradelines – What Are They?
A tradeline is defined as a record of activity for any type of credit that has been extended from a lender to a borrower and is also reported to a credit reporting agency. In short, a tradeline is a record-keeping mechanism that tracks all of the activity associated with that borrower’s account. For each credit account you have, you will have a tradeline. Generally, tradelines are one of the most widely used tools credit agencies use to calculate an individual’s credit score.
Tradelines typically include the following information:
- The name and address of the lender
- The type of account
- Partial view of the account number
- Current status of the account
- The date the account was opened
- The date the account was closed (if it has been closed)
- The date of last activity
- The current account balance
- The original loan amount or credit limit
- The monthly payment amount
- The recent balance (only applicable for credit cards)
- The payment history
The Type of Tradeline You Never Knew You Needed
When it comes to educating your child on the logistics of building good credit, there is a specific type of tradeline that can help achieve this goal: AU tradelines. In this case, AU stands for authorized user. In this type of tradeline arrangement, a parent can add their children to their tradelines as a means of aiding in building their credit. In other words, AU tradelines are the perfect tool to get your kid’s finances started on the right foot as they enter adulthood. By providing your child with this assistance early on, you will not only boost their credit, but you will teach them a valuable lesson on how to “futureproof” their credit management and use such tools to their benefit.
Ultimately, holding constructive conversations with your kids around responsible financial practices is an essential step in guaranteeing their future prosperity. Not only will you enhance your children’s understanding of valuable financial tools, but you will set them on the path to financial security and freedom. The more freedom and stability they have, the sooner they will be able to achieve their financial goals of buying a car, a home, or paying for their education. At the end of the day, you cannot put a price on that kind of peace of mind.
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