Archive for March 2013

Regulators encourage competition in UK banking and payments sectors

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Hot on the heels of last week’s Digital Sizzle, two important (and welcome) pieces of news from the regulators regarding the UK financial services.

Firstly, the FSA and the Bank of England have released their review of the barriers to entry into the UK banking sector. The key changes being introduced as a result of that review are a relaxation of the capital and liquidity requirements for new banks, and a reduction in the timetable for achieving authorisation, to six months.

As I wrote last week, the lack of innovation in the UK banking sector is the result of a lack of competition. Making it easier for new entrants to achieve the authorisation they need to start offering banking services should lead to greater competition and, indirectly, to more innovation, as the new entrants create service offerings that have a better product/market fit than the incumbent banks. For example, there’s a clear opportunity here for the creation of a new “branch-less” bank targeting SMEs who don’t need to handle physical cash or cheques. Once you remove the physical component from a bank’s business model, the cost structure changes drastically.

Secondly, HM Treasury has launched a consultation on “Opening up UK payments“, soliciting feedback on the government’s proposals for a “new competition-focused, utility-style regulator for retail payment systems”.

The brass ring for payments would be the introduction of a regulatory regime that makes it significantly easier for new payments schemes to plug directly into the UK payments infrastructure (i.e. Bacs, Faster Payments, the LINK ATM network), in the same way that the regulations supporting liberalisation of the telecoms market in the 1990s required that BT interconnect with new telcos, thereby attracting a slew of new entrants and spurring both competition and the development of new business models (e.g. Freeserve’s dispensation of the tradition subscription-based model for dial-up Internet access in favour of a model based on interconnect revenue). Such a move would create opportunities for companies like Transferwise and Droplet to reduce the friction caused by the “air-gap” between their services and their customers’ bank accounts.

These are significant steps forward for the UK and should ignite even more interest in the space.

Written by jackgavigan

March 26, 2013 at 3:08 pm

London’s Fin.Tech Opportunity

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This article first appeared on the 3 Beards’ blog ahead of Digital Sizzle 8.

We're gonna need a bigger boat...

Finance and technology have been inextricably linked – and entrepreneurs have been exploiting that link – since the introduction of the telegraph in the 19th century.  Until 1851, news was carried between England and the Continent by ships. That year, however, a telegraph cable was laid across the English channel. A German-born entrepreneur named Paul Reuter (who had previously used homing pigeons to bridge a hundred-mile gap in the telegraph links between Paris and Berlin) opened a “Submarine Telegraph” office in London and negotiated a deal with the London Stock Exchange to provide stock prices from European exchanges, in return for access to the London prices, which he then sold to stockbrokers in Paris. Over the next 150 years, London grew to become one of the world’s top financial centres and the company Reuter founded grew along with it. By the time it was acquired by Canada’s Thomson Group in 2008, the Reuters Group was worth $17.6bn.

For decades, the phrase “financial technology” referred to the institutional finance sector that deals with the capital markets – broker-dealing, sales and trading of shares, bonds and derivatives. Many large, established companies started out as startups.

In 1981, Michael Bloomberg (now the mayor of New York) was made redundant from the investment bank Salomon Brothers. He used his severance package to found a company called Innovative Market Systems to provide market information to Treasury bond dealers. In 1986, it was renamed Bloomberg LLP and by 2008 it was worth over $20bn. Also in 1981, a company called Intercom Data Systems was founded in London. It later changed its name to Fidessa and by 2008, 70% of equity trades in London were being processed through trading systems built on Fidessa software. Today, Fidessa is listed on the London Stock Exchange, with a market capitalisation of over £700m.

By the late ’90s, investment banks were embracing Internet technologies and incubating startups. Tradeweb, an online platform for trading government bonds, was founded in 1996 by a group of dealer-brokers, led by Credit Suisse First Boston. It was acquired in 2004 by Thomson Financial (now Thomson Reuters) for $385m in cash, plus an earn-out of up to $150m. Three years later, a group of investment banks reinvested in a deal that valued the company at over $1bn. MarketAxess, a platform for trading corporate bonds, was incubated by JP Morgan and spun out as an independent company in 2000. It went public in 2004 and is worth $1.5bn today.

Both those companies are based in New York but over the past few years, London has emerged as a prime location for a new generation of financial technology startups like OpenGamma and Kurtosys.

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Written by jackgavigan

March 22, 2013 at 3:49 pm

Foursquare does a down round

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11th April 2013 Update – Foursquare have finally announced a $41m round of debt and/or convertible debt. Union Square Ventures’ Fred Wilson has blogged about the round

Keith Rabois appears to be enjoying his birthday. After a Twitter tête-à-tête with Foursquare founder/CEO Dennis Crowley (which was amusingly misreported by Business Insider as “Square-bashing”), Rabois referred to “another down round” (emphasis mine) at Foursquare, which intrigued me, so I asked the obvious question:


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Written by jackgavigan

March 17, 2013 at 8:15 pm

Examining how Paypal makes money on cross-currency payments

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Making cross-currency payments can be expensive. The mark-up (or, more accurately, the spread to inter-bank FX rates) applied to transactions that involve a currency conversion can be as high as 4%. In the past, it could be argued that the cost of processing international payments and the FX risk that banks assumed when providing the cross-currency component justified such high mark-ups. However, advances in technology now mean that the processing of such transactions can be almost entirely automated, which drastically reduces the cost per transaction, and the FX exposure can be tracked and managed in real-time, which reduces the risk. Furthermore, growth in transaction volumes means that economies of scale can be harnessed to further reduce the costs and risk.

However, mark-ups have remained stubbornly high. An example is the  “Non-Sterling Transaction Fee” that most UK credit card issuers apply when a card is used to make a payment in a foreign currency (card issuers in other countries apply similar fees). This fee is typically in the 2.75-2.99% range and is supposed to cover the costs associated with the currency conversion. However, the fee charged to card issuers by Mastercard and Visa for processing such transactions is just 1%. I’ve never been able to find out the justification for that extra 1.75-1.99%. If anyone can enlighten me, let me know!

Those juicy fees present an opportunity for companies that process credit card payments to persuade customers to pay those fees to the credit card processor instead of their card issuers. Last August, I grabbed some screenshots to demonstrate how Paypal does this.

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Written by jackgavigan

March 12, 2013 at 11:42 pm


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The three most over-used, yet misunderstood, words in the business vocabulary are: innovation, disruption and leadership. It’s incredible how many people throw these terms around without being clear on what they actually mean.

Leadership, in particular, can play a massively important role in determining an enterprise’s success or failure, so it’s critical to understand it properly.

The most experienced and consistent practitioners of the art of leadership are the military, who operate in situations where lives (and victory) depend on the willingness of men to follow orders. As a result, business has much to learn from the armed forces, not least an accurate and concise definition of leadership.

Discussion of leadership is so often overloaded with vague but emotive ideas that one is hard put to it to nail the concept down. To cut through the panoply of such quasi-moral and unexceptionable associations as “patriotism”, “play up and play the game”, the ever-asking-your-men-do-something-you-wouldn’t-do-yourself” formula, “not giving in (or up)”, the “square-jaw-frank-eyes-steadfast-gaze” formula, and the “if… you’ll be a man” recipe, one comes to the simple truth that leadership is no more than exercising such an influence upon others that they tend to act in concert towards achieving a goal which they might not have achieved so readily had they been left to their own devices.

– Norman Dixon, On the Psychology of Military Incompetence (1975)

Or, to express it more simply:

Leadership is the phenomenon that occurs when the influence of A (the leader) causes B (the group) to perform C (goal-directed behavior) when B would not have performed C had it not been for the influence of A.

– William Darryl Henderson, Cohesion: The Human Element in Combat (1985)

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Written by jackgavigan

March 2, 2013 at 6:29 pm