4 July 2023
“How safe is your (e-)money?” reveals that the number of e-money accounts has now outgrown that of current accounts in the UK, but finds transparency and regulatory focus lacking given consumers with money in these firms do not benefit from FSCS protection
London, UK – A new report from fintech and payments consultancy Dsruptiv examines how the number and use of electronic money (e-money) and payment institutions in the UK have grown significantly in the last year:
- Over 250 electronic money institutions (EMIs), and almost 1,000 payment institutions (PIs), are now licensed by the Financial Conduct Authority (FCA) in the UK
- The number of e-money accounts alone now stands at 76 million at the end of 2022, up 108% in two years, outnumbering UK current account estimates
- £16.3 billion was held in e-money accounts at year end, up 191% in two years – equates to 7% of all non-interest bearing bank deposits in the UK
- 2.7 billion e-money transactions conducted during 2022 calendar year, worth over £630 billion (up 169% in two years) – equivalent to approximately 70% of the volume, and 20% of the value, of FasterPayments transactions
Despite a number of popular non-banks providing bank-like services, consumers using EMIs and PIs are not protected by the Financial Services Compensation Scheme (FSCS). Instead firms are expected to perform “safeguarding” of customer funds, and to hold adequate investments or insurance to protect customers should these businesses fail. However, recent insolvencies have shown that such measures are deficient: customers can face significant delays and may not get back all their funds once wind-up costs are taken into account.
With an industry that is lightly regulated and growing in size and significance, and an increase in business failures anticipated due to deteriorating economic conditions, action is needed. This report calls on EMIs, PIs and the FCA as their regulator to do more to educate and protect consumers, and maintain trust in a sector that has been an important source of innovation and competition – with a specific focus on three areas: greater sector transparency, enhanced regulatory focus and improved consumer protection.
James Sherwin-Smith, Managing Director, Dsruptiv commented:
“The UK has led the world in its use of e-money and payments to drive innovation and competition. As alternative providers continue to blur the line by offering bank-like services without being banks, consumers are perhaps unknowingly bearing the risk of firms benefiting from a light touch regulatory regime. Given the explosive growth of the sector, this report calls on stakeholders to do more to maintain trust in this increasingly significant part of the UK financial services landscape.”
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Dsruptiv is a fintech and payments consultancy based in the UK that advises operating firms and investors.
The widely vilified UK pay day lending industry is about to face it’s toughest test yet. If something as uncool as regulation could ever be dialled up to eleven, the overseers are certainly giving it their all. The scrutiny firms are facing is quite unlike anything they’ve experienced before, with a quarter of firms expected to leave the market as a result.
Some commentators will take satisfaction, if not delight. There has been no shortage of prior antagonists: journalists, consumer affairs organisations, MPs, even the Archbishop of Canterbury queued up to take shots (even if some backfired).
A few brave souls have spoken out in defence of the sector, recognising the value of transparency offered in a wider financial sector that appears to con people by design, pointing out the middle-class hypocrisy within a generation addicted to credit, or expressing their concern that an outright ban could force the desperate into the arms of even less savoury characters (as acknowledged by the Archbishop of Canterbury as part of an embarrassing climb down).
While there has been much wailing and gnashing of teeth, it could be argued that few commentators possessed either sufficient insight into the inner workings of the industry or the motivation to take a fresh look. That is until now.
This is the last month under which pay day lenders in the UK fall under the remit of the Office of Fair Trading (OFT). Charged with responsibility for the issuance (and revocation) of Consumer Credit Licences under the Consumer Credit Act, the OFT hands over it’s regulatory powers to the Financial Conduct Authority (FCA) on 1st April 2014.
Following a period of consultation, the FCA have set out its initial policy for regulating the sector, tightening the rules on some key issues of concern, such as credit extensions and collection practices. The FCA has now also announced it will review in detail how firms treat customers when they fall into arrears from day one. Thanks to government intervention, the FCA has also been tasked with setting a cap on interest rates.
About time, some might say. The OFT has been heavily criticised for not excising its (admittedly more limited) powers to interrogate and regulate the sector with more zeal. Whatever its shortcomings, the OFT did have one brilliant final card to play: it referred the pay day loans industry to the Competition Commission citing various concerns.
The grounds for this referral may prove to be weak, and the Competition Commission may find few reasons for remedial action (its has a statutory deadline of June 2015 to compete its work, but has signalled its intent to conclude late this year). Regardless, the Competition Commission has used its legal powers to lift the lid on the industry, and is just beginning to share its preliminary findings in the public domain.
The working papers published over the last few weeks make pretty interesting reading, and are awash with statistics (although some of the juicier detail has been redacted). Some numbers confirm what others have already claimed: the market is highly concentrated, primarily served by just three players: Wonga at between 40-50% market share, with two US firms, Dollar Financial and Cash America, claiming the next two spots (both operate under a variety of brands including The Money Shop and Quick Quid).
One set of statistics shared by the Competition Commission at this early stage is the degree of repeat borrowing with the same lender, and the impact on customer outcomes. (Further analysis into borrowing across multiple lenders will be completed using credit reference agency data.) The figures are sobering: 30% of customers take a new loan within 30 days of their first, while over 20% take out 5 or more loans over the course of a year. As customers repeatedly borrow one loan after another, the high APR (which most pay day lenders argue is misrepresentative for a single short term loan) begins to look more appropriate.
Regulators ultimately care about customer detriment, and at this early stage the Competition Commission may have already unearthed grounds for concern. A simple analysis that compares the repayment profile of last loans to that of their predecessors shows that 64% of customers never repay their last loan. This suggests that firms may continue to lend to customers until they find themselves in difficulties and are unable to repay. Firms absorb the loss of the last loan, but this may still be a profitable outcome when compared to the revenues earned from the prior loans lent to the customer. The customer however defaults, and will likely end up in a substantially worse financial state as a result.
The Competition Commission is yet to pass any judgement: it is currently setting out some initial facts and methodologies for evaluation without drawing any conclusions, good or bad. More advanced analysis will undoubtedly follow. Even if the Competition Commission takes no action, it will have exposed the industry to even greater scrutiny, and given the FCA amongst others some hard facts to work from.
So I’ve been trying to open a new business bank account for Dsruptiv for a few days now.
My thought process was simple:
- Google search for “best uk business bank accounts“
- Identify a source I trust that has compared the offers available, in this case Martin Lewis’ Money Saving Expert (3rd hit)
- Choose a bank and apply online
According to Mr Lewis, NatWest stand out for offering free business banking for the first 24 months. Being from the UK, and therefore conditioned not to pay for my bank account, this was just what I was looking for. Plus I also have personal accounts with NatWest, so would get the added benefit of seeing all my accounts in one place under a single online banking login. I also hoped that being an existing customer would help expedite the application process e.g. no need for further Know Your Customer identity checks.
No such luck. I could start my application online, but the experience since I would best describe as multi-channel HELL.
These are the steps so far, noting that I’m an existing personal customer, I’ve had a business account with NatWest before (now closed), I’m the sole director of Dsruptiv Limited and I wanted their direct business banking service:
1. At the end of the online application process I’m informed that some details would need to be confirmed over the phone.
2. I missed the call back because I was busy. NatWest didn’t leave me a voicemail, but instead sent me a text message to my mobile:
“We have received your internet enquiry for a business account, to take forward call NatWest 08000282677, RBS 08000686939 quote INTERNET 9 to 5”
[Given I applied via NatWest, why confuse matters by including numbers to RBS? Why the weird text speak aversion to vowels in the sender id? The message copy is dreadful and a total turn off.]
3. I called the number requested and managed to get through to the right department after 4 IVR menus. [Why make new customers jump through so many hoops?]
4. I’m told that as I’d requested the direct business service, it’s likely that I might be moved over to “the new challenger bank we’re setting up in about 12 months time.” I explained that I wanted the direct business service because I wanted the ability to talk to an advisor outside usual branch hours (i.e. not when I was likely to be working). I was advised that the direct business service isn’t 24/7 and only operates 8am-7pm Mon-Fri, so only marginally better that standard branch service (plus some branches are now open Saturdays). Even on the branch service I would still get 24/7 telephone and internet banking, and there would be no risk of my account being moved into the challenger bank.
5. So I agreed to set up a branch based account instead. I was advised I’d have to go into a branch, and was asked which branch I would like to visit. I asked for the nearest one and gave them them my post code, but the agent was unable to tell me which was my closest. [Weird given this service is available f0r me to use on the NW website.] The agent then puts me on hold while she contacts the branch I identified.
6. The telephone agent is unable to get through to the branch so has left a note for the branch to call me to arrange an appointment.
7. Frustrated, I walked to the branch, asked to open a business account and was ushered into an office within 5 minutes. I explained the situation. I was asked for the company’s certificate of incorporation which I emailed to the branch employee. He printed this out and then handed me a paper copy. He then picked up the phone and talked to the central banking team. [Perhaps this could have been done over the phone after all?] I was advised that they couldn’t open the account immediately, and that I would receive a call back to arrange an appointment to visit a branch. I asked what further information is required. I was told that everything was in order but I have to speak with a business banker. I was promised that I would receive a call within four hours (I visited the branch at midday), certainly by the end of the day.
8. A day later, I’m yet to receive a call back.
I’m struggling to understand the part of this process that cannot be fulfilled direct with straight through processing. A Companies House look-up to validate the business name, incorporation date, registered number and my association can be performed automatically. Further given I’m an existing customer, I could easily authorise the account opening after securely logging in online or verifying my identity over the phone.
While I recognise providing business banking to small and medium enterprises is not as profitable as as providing banking to consumers or big business, I would posit that most SME customers are also personal customers of the same institution. Therefore getting the experience right is critical, because you might not only lose the opportunity of further business (the SME) but also the customer and their personal accounts.
If banks can’t address their experience failings, I’m certain that others will on their behalf. Other organisations will step in, own the relationship to the customer, help identify the right service or product, and then negotiate prices down given their buying power. It’s an extension of a trend that has already begun in the UK – namely the use of aggregators in helping me choose the right bank at the beginning. In my case this was Money Saving Expert, but easily could have been the more commercially focused Money Supermarket, Go Compare, uSwitch, etc. It’s a natural extension for those firms to take more ownership of the relationship from the banks, in a similar way to car insurance, where they already help customers when it’s time to renew, and therefore control most of the value. (Car insurance firms typically only turn profit if you renew successive times with the same firm due to marketing costs.)
If you look to the USA, this trend has already begun. Simple and Moven are both what I would call “meta-banks”. They may not be regulated to hold deposits, so are not banks per se, but they are the brand that their customers trust to manage their money. Simple and Moven own the relationship with the customer, given the customer uses their interfaces – their website, apps etc. – to access banking services. Under the surface, meta-banks take white-labelled products from actual banks – whether that be bank accounts, debit cards, credit cards, etc.
And so banks may ultimately become dumb balance sheets, in a similar fashion to the way telecommunication networks have become dumb pipes. Yes, they provide essential services (saving and borrowing), but they will lack insight into, and have only a low impact relationship with, the end customer if they are intermediated. If this trend continues, their opportunity to help the end customer, and earn a profit from doing so, will be severely limited.
Reading this article on TechCrunch today (Putting Square’s $5B valuation in context), we couldn’t help but notice that after some fantastic growth of c. $2.3m in transactions per day, 2014 isn’t expected to be quite so stellar if these figures are correct.
The chart below and spreadsheet (available here) show our crude calculations that make the maths work, but taking the figures provided by TechCrunch, and interpolating and forecasting the results, to move from a rumoured $20BN annual transactions in 2013 to $30BN in 2014 would equate to a daily transaction growth rate of approx. $1.1m per day, 50% down on the organic growth rate of the preceding two years. This assumes an inorganic growth ‘jump’ in transactions of $20m per day thanks to the tie-in with Starbucks.
The real question in our mind is to what degree Square’s growth has been sourced from taking market share from traditional merchant acquirers vs. signing up businesses that previously only accepted cash and checks. If, as some commentators suggest, Square books 1% of transaction value as net revenue, a $5BN valuation based on $20BN of transaction volume in 2013 is a 25x multiple on net revenues of $200m. It’s hard to see how that multiple can be sustained if growth tails off, particularly if traditional merchant acquirers move to defend their market shares and card processing margins continue to fall. Now is a good time to raise a cool $135m.
[14 Jan 2013 9am: Edited following Bloomberg report]