Oral evidence: The Digital Economy, HC 571Tuesday 12 January 2016
Oral evidence, 12 January 2016.
Witnesses
Russell Gould, Chief Operating Officer, Everline, Gareth Mann, CEO, Digital Contact, Matt Hammerstein, MD, Customer and Consumer Engagement, Barclays Bank, and Olly Betts, CEO, businessfinancecompared.com, gave evidence.
Chair
Good morning, gentlemen. Thank you for your patience; we overran slightly with the first panel. That was very interesting; I have the impression that this will be interesting, as well. For the purposes of the record, could you tell us who you are and where you have come from?
Gareth Mann
I am Gareth Mann. I am the CEO of Digital Contact. We are a big-data company, focusing on the financial service industries, generating trading signals from online content and media.
Matt Hammerstein
I am Matt Hammerstein, Managing Director from Barclays. We are a bank. We have been serving the UK and many other markets for 326 years.
Russell Gould
I am Russell Gould. I am the Chief Operating Officer of EZBob Ltd, which operates as Everline and EZBob. EZBob provides small business loans online to SMEs.
Olly Betts
I am Olly Betts. I am CEO of a company called businessfinancecompared.com. We are an online marketplace that helps small businesses get connected to the finance they need to grow their business.
Chair
We have a lot to get through with this panel, but I will kick off with a broad question, if I may. How is digital technology changing financial services?
Gareth Mann
From the financial institutions we are working with, it appears that it is complementing existing services. I would not say that digital contact is a disruptor; it is a complementer. There are many methodologies of trading, looking at data across the industry, and adding other value‑added services to support them and make them profitable is an area where there is probably some of the biggest growth. That is where we are seeing most of the uptake. In the financial services industry, turning up with a new technology and saying that it is going to revolutionise things is always a bad idea. You need adoption. When you are dealing with this kind of money and this size of market, the complementing services are always the ones that will grow, especially with what we are seeing within our market space.
Chair
That is very interesting, because Antony Jenkins, former chief executive of Barclays, said that we are about to embark upon the Uberisation of financial services, where there will be massive disruption. You tend to disagree with that.
Gareth Mann
Sorry, was that aimed at me?
Chair
I wanted a brief comment from Gareth, and then I was going to come on to what Barclays thinks.
Gareth Mann
We deal with the active trader, rather than the big corporations, and we are finding that the adoption of new tech is easier when it is a complementary service, rather than trying to change someone’s whole data activities in how they trade in the market.
Matt Hammerstein
My interpretation, Chairman, of Antony’s comments is as follows: on the one hand, we have already seen, and are going to continue to see, a very significant shift in consumer expectations, whether it is individuals or businesses, in terms of what they want from a financial services provider. That is both in terms of products, the nature of services, and how those are delivered. More specifically, every institution is going to have to fundamentally reinvent the way in which it works. We as an organisation are facing challengers, particularly new digital start‑up organisations like Atom Bank, for instance. The chairman and chief executive of Atom Bank are very open about the fact that they will operate on a cost-to-income ratio—one of the key metrics of a financial services institution—of around about 25%. We operate at around about 52%. We have to respond to the fact that that is a very significant difference in cost that is going to make it easier for them to invest in providing better services, and we have to match that.
Chair
You referred to Atom Bank; the chairman said that, in terms of high street banks and traditional banking providers, trying to keep pace with the digital revolution was like “putting lipstick on a pig”. Was that unfair?
Matt Hammerstein
I do not really understand the analogy. I understand the point he is trying to make.
Chair
It is irrelevant; it is all going to be unnecessary, because these new people are going to sweep away the incumbents. You may have been on the high street for 326 years; you might not see 350.
Matt Hammerstein
It is up to us to make sure that he is wrong, on behalf of our organisation and our customers, and clients are pretty happy at the moment with the nature of the services they get from us. Someone recently referred to that challenge as follows, which resonates very well with me: we have to figure out how to innovate faster than someone like Atom Bank can get to the scale that we have, because we have 15 million existing relationships in the individuals space and a million existing relationships in the business space. He has zero in either, so if we can reorganise and reinvent the way in which we work before he can catch up, we will be in a good place. That is our challenge.
Chair
Russell, how is digital technology changing financial services?
Russell Gould
It is changing everything, every day, and it will continue to do so. We are a digital lender. We are a lender. Lending has been around for hundreds or thousands of years. We are not changing the process of lending money; we are just changing how it is done. We are using technology to do it in faster, better, more informative and much more customer‑friendly ways. I honestly think it will change the entire banking sector. It has already started: you are seeing payment providers, lenders, digital banks and e‑wallets. It is changing and it is changing very quickly, and it is difficult for some of the banks to keep up with that process, because they are tied to old ways of doing things.
Olly Betts
For me, it is about access for the customer to more choice and the customer getting more value out of the data that is, ultimately, theirs. In my business, we help a small business get access to more finance options that they would not otherwise be aware of and benefit from their data. Typically, what has happened historically or still happens to a certain extent in the market today is, if you are looking to get a financial product, you rely on the lender to review data that they are able to access about you and your credit history to make an assessment of you. Ultimately, though, that is your data, and I believe technology is going to help you get more benefit out of your data, either directly or indirectly, through a marketplace or a platform or an online lender, potentially, like Russell represents. Technology is enabling us, as consumers and then small businesses as an extension of that, to benefit from the data that is, ultimately, about you—about how you have performed from a credit perspective and how you transact day-to-day. For me, it is about access to a wider set of choices in terms of products and, ultimately, better products through innovation.
Chair
That is very helpful, because one of the key themes of technology is big data, and we would like to probe you on that. Craig is our resident expert on big data.
Craig Tracey
First, could you briefly tell me what big data your organisations work with, how you get it and what you do with it?
Gareth Mann
Our data is predominantly open, common data that you find in blogs’ content and social media. We consume that content and we process it in real time, effectively. The power of the big data processing for us is to identify the signals in a real‑time manner and pass them up to a trading desk or a set of traders for them to make an action on—to make a trade or understand the market. For us, that is the kind of big data. The scale of processing is what we call big data. The storage is one thing. There are lots of companies and sectors that can store huge amounts of data, but processing that in a real‑time manner to give the most accurate signal is the key to what we do.
Matt Hammerstein
Of course, we sit on top of a lot of very substantial information and data on behalf of our customers and clients. As Olly rightly says, it is their data, but we are the custodians of it. The opportunity, from our perspective and in many of the ways that Gareth just described, is to understand what that data tells us about their preferences and proclivities in a way that helps us add value back to them. I can give you a specific example. We have a partnership with a company called energyhelpline.com. Through the direct debits and other transaction information that we see on our customers and clients, we know what they pay for their energy bills. We can help them compare that on an anonymised basis with other individuals within their postcode or across the country, to understand whether or not they feel like they are paying more for their energy than they should. To the degree that they do, we can introduce them to our partner to help them switch and save them money. Many of you would sit around, I suspect, and ask what that has to do with banking. In my view, much to Russell’s point, everything, because that is just about us making sure that we make the most of the relationship we have with those customers and provide the most value back to them that we can.
Russell Gould
It is probably worth me explaining exactly how we operate, because it answers that question. We took a view that the business-lending model was broken, so we did not want to follow the traditional way of underwriting. We started looking at all the data that was available regarding a small business that might help inform making a decision on providing lending. We looked at properties, the individual worth of the entity, the individuals involved in the business and its e-commerce data—how it was transacting right now, today, yesterday, not 18 months ago. We looked at the bureau data, which is typically 18 months old, Companies House etc., HMRC and social—whatever data we could find—and we built a way of underwriting using that information. That means we look at businesses in a different way and are able to approve a lot of businesses that some of the banks would be a bit hesitant about, because they do not have the eBay data or they do not know how to use it because it is so new, for example. The more data we can access and the more open data that is available to allow us to utilise that to help inform decisions, the more times we can say yes and the fewer risky decisions we make. For us, big data is everything. It is what our business model operates on.
Olly Betts
For us it is an extension of what Russell has said, effectively; we are doing quite a similar thing. Big data in our business model is about building a very granular profile of a small business to understand everything about how they have traded historically and forecasting how they might trade in the future. We are effectively doing what probably Russell’s business is doing but across multiple lenders. With big data we are pulling in all the data we can get access to on the small business, with their consent, and then building a profile of that small business, which we match and assess against the lending policies of, currently, around 40 lenders that we work with, one of which is Russell’s business. We will look at all of the information we can understand about the small business, the policy and the decisions that a lender would make. The proposition to the customer is then presenting them with an understanding of which products are available to them—which products they could be accepted for based on how they are trading, how their business operates and themselves as a director of that business. That is one part of the big data we do. To sum that up, there are potentially 1,000 data items on a small business we would use to build that profile of them. Another part of big data we use is how customers interact in our marketplace. We use an awful lot of information around how they physically behave in the marketplace in terms of where they are clicking on a page, which pages, what content they are consuming, what products they are looking at and how they are interacting with information we put in front of them. That all goes into a big behavioural engine to understand whether, for example, if I put a green button at the top‑right of the screen more people click on it than a brown button at the bottom‑left, which is very commonplace: Barclays will be doing it on their sites. Everyone with an online website will be, to a certain extent, using big data to establish how customers interact with their journey.
Craig Tracey
How do you think it is possible to provide transparency about how data is collected? Is legislation the way to do it? How would that impact on your businesses?
Olly Betts
There is very robust regulation around how data can and cannot be used. We all have to comply with the Data Protection Act. We all have to register with the Information Commissioner’s Office and we have to be very clear to customers how data is being used, through privacy policies and through terms and conditions of using our website. We are very clear with customers on the data that we are using and how we are using it, and there is an awful lot of regulation around that. From a regulatory perspective, there is good consumer protection around how data is used. I will not go into the detail now, but there are some subtleties around where that is purely for limited companies; it can be different from a sole trader or proprietorship, which is covered by consumer data protection and consumer laws rather than limited companies being slightly different.
Craig Tracey
To pick up on a point you made before, and this was something that was suggested by a panel I was on, you specifically mentioned that the data is the customers’ data. Should they be able to charge you for using their data?
Olly Betts
I would love that to be the case, as a consumer. There is a long way to go, from a regulatory perspective, and maybe a lot more disruption to happen in the market before that would be possible at all. It is about people, as I said before, getting benefit out of that, and that can be economic benefit. For consumers, rather than trying to sell their data to the highest bidder, it is more about whether their data is being used to provide value to them. In our business, the more data you can share with us, as a business owner, the more accurately we can find you the best‑fitting product and, consequently, at the best rate. That would be how I would think about it.
Craig Tracey
I put the question about transparency to you, Russell.
Russell Gould
Matt made an interesting point that was very nice to hear coming from a bank, which was that they are a custodian of the customers’ data, and that is key. From our perspective, a customer should be able to access all of their data and to pass it to us if it is going to help benefit that customer. Whether it be banking data or HMRC data, whatever, we always ask the customer’s permission. In fact, they log in for us to access the data or give us the ability to get the data or give us permission, with a cloud‑based accounting platform, to extract all the data. I am a big believer that it is the customers’ data and they should own it. Whether they charge for it or not is a whole other question. From my perspective, that data helps us inform ourselves and make better decisions, offer better rates and say yes more often, so it is very powerful from that perspective.
Craig Tracey
Do you think it is realistic to be transparent in how we currently think about it, or do we need to move attitudes on about how data is going to be held, if it is going to be to the benefit of the consumer?
Russell Gould
We can always be more transparent about what is and is not kept. As a consumer myself, I would like to be able to access all information about me to see what is out there, but at the same time I am not saying that is the case. If there were some things I did not like, I would also like to have the ability to influence those.
Matt Hammerstein
Obviously, we have a very deep sense of responsibility because of the custodian role that we play with our customers’ and clients’ data around making sure that we handle it in the most appropriate way. It is absolutely right that consumers, individuals and businesses have a very clear understanding of what data organisations hold that is theirs, what they do with that data and, to the degree that they are working with any parties, what they are doing with those third parties and why. To me, the challenge ultimately comes down to it being relatively easy to sit with a group of people, I suspect, like the four of us—we are probably at the very advanced end of understanding what big data and data analytics look like—as opposed to the general population, who I do not necessarily think have a very deep level of awareness and understanding of that. The experience for the individual or the small business in terms of being presented with questions that say, “Can we use your data to do this, that and the other thing?” can sometimes be very off‑putting. Consequently, there is a risk that we end up prompting people to exclude themselves from a part of the digital economy that is going to be fundamental in terms of making their life better and providing very significant value back to them. We need regulation and we need standards, but we also have to make sure that we use the technology as best we possibly can to make that experience as easy as it is and as intuitive as it possibly can be, so that people, subject to understanding what the risks are, participate in the economy in the best way.
Craig Tracey
That is a fair point, but how do we educate the public then, in your opinion? It is going to be the end user who does not understand, so how would you suggest that we start to educate people?
Matt Hammerstein
My own view is: just get started. I have a personal view that to date, rightly so, the focus from a wide spectrum of stakeholders but especially the Government has been too focused on what I would call the extremes, either the digitally excluded or the digital businesses that sit at the very advanced end. If we are going to get the productivity uplift for the economy from transitioning to a digital economy, it is going to come from that big mass in the middle. That is hard work and it is going to require concerted public and private partnership to be able to tackle it. The Government has a role, private companies like mine have a role and some of the start‑up companies and challengers coming to market also have a role to help build awareness, build confidence and build experience with using some of these things so that people get much more comfortable with it and, therefore, are much more likely to participate and get the benefit from it.
Gareth Mann
It has been covered by the rest of the panel, but we tend to deal with B2B—other businesses, other tech companies—and they really understand the value of their data and how we are utilising it anyway. You are right that, with the consumer part of the business, there is a lack of understanding of what the data is and how it can be utilised but, from where we sit, we are quite comfortable with how the regulation currently sits.
Amanda Milling
Are we talking about the financial services sector being affected just by an evolution of technology or is this disruptive technology? Is there a difference? Can you give any examples of where you would genuinely say it is disruptive technology rather than just this evolution?
Gareth Mann
From Digital Contact’s point of view, as I said, I do not think we are a disruptive company. We are an evolution. We are taking a set of data that has been available and a set of technologies that allow us to process that data and create signals from it. Especially, when you look at our sector, which is active traders and banks, that is where we found the most success and the way to pitch it in, because if we believed we had the golden egg to make everyone money off the markets, we would not be selling the data on. We believe it is just a set of complementary methodologies that are going through. I stick to my stance that we are a complementary technology. With the evolution of technology, we have been able to drive the sector forward in our area.
Matt Hammerstein
I do not know that I am an expert, Ms Milling, in the distinction between innovation and disruption, but my suspicion is that, if you think about the traditional things financial services players have provided in terms of products and services to individuals and businesses, the technology we are talking about here is not going to fundamentally change those. It is going to fundamentally change the way in which customers go about interacting with those, the nature of the players that are able to provide them and, ultimately, the way in which those get integrated in their life. I talked about the example in big data terms of the relationship we have with energyhelpline.com earlier. I will use another example for businesses. Exactly on the same theme of big data, we have now taken all the transactional data we hold on a small business and turned it back to them. We have said, “This is your data about your business. We can help you to better interpret that data to understand what your average customer looks like, the average transaction value, where they come from in terms of where they live and the socioeconomic background they have. We can connect that with social media data so we understand what their likes and dislikes are, and we can help you build a better targeted marketing plan to grow your business.” That is disruptive to my business, from the perspective that traditionally we would have sat down and talked to that individual about whether or not they want an overdraft and now we are talking to them about whether or not they have a social media campaign to drive the growth in their business. In terms of how we go about running our business, it is hugely disruptive. I do not know whether that is disruptive in the grand scheme of how the world works.
Amanda Milling
There is part of your business I specifically wanted to focus on, which is the consumer side. Listening to this discussion about data and being able to identify customers’ needs, I am sitting here thinking that is what you should be doing as an industry anyway, in order to be compliant with TCF. I suppose it goes back to my point: is this not just a natural progression that is being driven by the regulator anyway?
Matt Hammerstein
Do you mean in terms of making sure that customers understand what is happening with their data?
Amanda Milling
Not so much that; it is ensuring that they have the products they need, which is a fundamental part of TCF. I am hearing a lot of things here where I am thinking this should be happening and technology is just enabling it.
Matt Hammerstein
That was the same point I was trying to make. I am sorry if that did not come across as clearly as it should have. Technology is going to make it easier for customers to understand the range of products and services that are available to them, to Olly’s point, to understand the price at which they can get access to those products and services from various different providers, and to then make a decision about ultimately which product and service they need and what price they are willing to pay. It is going to facilitate all of that in a much easier way. From a service delivery perspective, is it disruptive? Yes. In terms of the nature of the products that are being provided, I do not see any evidence yet that those are going to be fundamentally different.
Russell Gould
Evolution and disruption are very intertwined anyway and I believe our business is massively disruptive, but disruptive in a slightly different way. We have taken something that has existed for a very long time. We have taken a process of banks providing business loans, which would often take, as I think Barclays quoted about 18 months ago, seven or eight weeks from the start to the funding. We do that now in 15 minutes, doing it in a completely different way. From my perspective, that is incredibly disruptive, but it is the evolution of technology that has allowed us to harness those bits of technology together to create the ability to make such rapid decisions, saving small businesses days and hours in valuable time.
Olly Betts
I am not sure I can add much more to that in terms of examples. That is a good example of what I would term disruption. Again, disruption and evolution are probably pretty close together. Maybe it is a speed thing or whether you notice. Disruption is probably innovation and evolution, but where someone or some market does it faster, so the incumbents notice. From most of the discussion that I have witnessed today, the disruptive bit has been the fact that one party or a set of parties has moved faster than another to an inevitable place. In this market specifically, everyone wants to treat customers more fairly and help customers get better service, so everyone is innovating: the incumbents like Barclays and the new entrants like Everline. The disruption will just be a by‑product of whether someone moves faster than the other so that the incumbent notices and reacts. That is the only difference. There is a lot of innovation going on, as in the example that Russell gave—just the speed of a decision and consideration that can be given to a customer. I run a small business and you do not have much spare time, so if it takes you eight weeks to get some finance you need and within three years you can get it in 15 minutes, I do not really mind whether that is disruptive or not; it is just good.
Amanda Milling
Can I just pick up on that point about innovation? One of the questions I was going to ask is: do you feel that the market is innovating? There was a period of time after Northern Rock when there were lots of products being innovated, then everybody just stopped and we went back to fairly standard products and being more conservative. Is there genuine innovation in the financial services market?
Olly Betts
I think there is. People have highlighted on this panel different areas where that is. As to whether it is genuine product innovation, that can be harder, because before what happened in 2007 and onwards, however you want to term it, there were good products that met people’s needs in financial services. You could make an argument that revolution or disruption was not needed. There has been product innovation. I can list a few: PayPal is pretty interesting. I use that; people can make payments to me and I can make payments to them. That is quite different as a product offering. The banks have innovated an inordinate amount in terms of service. Even I can remember a time when I could not do anything online with my banking, and on the train down this morning I did all my banking for the month on my phone. There has been a massive amount of friction removed from that process. I have not had to walk into a bank branch for four years and I have taken out a mortgage three or four times, remortgaged—you name it, I have done it. That is not because I do not like going into a branch; I just do not have time. Yes, there has been lots and it can get lost in the fact that, testament to the banks, they are innovating as well. They are driving quite a lot of it. If you took a big step back, you might say you would like to see a completely new bank there that is changing the world and doing things entirely differently but, going back to one of my points, there was not necessarily anything wrong with the service being provided. The way it is now delivered faster and more conveniently is the main innovation.
Chair
In response to that, I have a question directed at you, Matt, if I may. Olly was very articulate in saying, “I was able to get a mortgage, remortgage,” whatever, “and I have not had to walk into a branch.” On that basis, how many branches of Barclays and how many staff will have to be lost in order to compete?
Matt Hammerstein
I would say ultimately that is going to be down to customers and clients and their behaviour, and the basis on which they choose to make that an important part of the service offering they want from us, as an institution. It would not surprise you to know that over the course of the past two or three years the volume of customers who choose to go into a branch, much like Olly, has declined significantly. That is largely because what they have historically had to go into the branch to do is transactional activity that, in many of their minds, was an inconvenience, and the advent of mobile banking applications has taken that inconvenience away, again exactly in the way that Olly has illustrated. If I take our specific institution, three years ago we did not have a mobile banking application. Today, we have one; it has 5 million registered and active customers. On any given Friday, 4 million of those customers will log in to that application. If 4 million people tried to walk into a branch on a Friday, it would be a very significant issue for us. Interestingly, from my perspective, going back to the point about innovation—again it is service innovation not product innovation—10% of the logins on a mobile banking application happen between midnight and 6 a.m.; 7% of payments are made between midnight and 6 a.m. You would never have been able to do that in a bank branch in the past.
Chair
I want to bring Kelly in on the barriers to the digital economy, but if I just stick with you, if I may, Matt: who do you fear? Who is going to take your lunch in five years’ time?
Matt Hammerstein
The biggest fear I have on behalf of my institution is our own ability to change ourselves fast enough. I do not see anything in the marketplace that makes me worried about our ability to compete.
Chair
You do not worry about the likes of Apple Pay or Google providing a Gmail payment service and, given the data that they have on individuals, competing with the likes of you, as traditional banks. You do not fear them. You think you can compete effectively.
Matt Hammerstein
We have a chance to compete effectively as long as—much to the theme of the prior panel—the regulation environment is level and the basis on which we have to comply with things like treating customers fairly or the Data Protection Act is held consistent across some of those players.
Chair
We might come on to regulation as a major theme of what we want to talk about.
Kelly Tolhurst
I would like to ask some questions around access to finance for digital companies and especially start‑ups. Mr Mann, what you are selling is big data. Can you tell me what the barriers were for you starting up and where your barriers are for access to finance?
Gareth Mann
Absolutely, and it ties nicely into innovation. One of the bugbears for us as a business around three years old and equity funded is the EIS and SEIS schemes. They are amazing in their tax breaks for the incoming investor. I personally think those tax incentives at seed should be greater to stimulate more inward investment in smaller businesses. We have an amazing set of equity investors, but there are certain rules about how much influence they can have within the business, and that is a real struggle for us. We have a hugely influential equity investment team, yet we cannot bring them in the business to help us grow and develop the business at the speed we would like. It is a real frustration for us and something that we are really challenged with. Secondly, we received funding from the Regional Growth Fund and that has been an extremely positive experience. It has really helped us out, but one point has been a frustration. The process of on‑boarding us into the Regional Growth Fund was fantastic. The processes where they mix business and the politicians in the same arena were amazing up until the last point when it was about to be signed off and the bureaucracy overtook. I cannot remember the date we were offered funding. It was around May or June, but because of all the committees it then had to go through it did not arrive until December. Effectively, my business had to put the brakes on for six months and was in hiatus, not going forward or back. That process could be streamlined. Touching on the innovation point that you raised, especially within the fintech sector, one of the things that gets missed a lot is the cost of data. When it comes to the ability for big data companies like us to validate our data against market data, exchange data is extremely expensive. Data fees for banks may not be a problem, but we are looking at data fees of between, say, £10,000 and £40,000 a month, if we wanted real‑time data. There is an organisation in the States called the FinTech Sandbox, where big corporates get together and they supply start‑ups that innovate around the financial data that already exists, so they remove the barriers to entry. For us, when we were funding we had to plan on huge data bills for ingesting data to be able to back‑test our product, because unless you can financially back‑test you cannot really guarantee that your big data signals are correct, and those costs are huge. That is something I would love to see moved in here. It should not always be about putting cash into business; maybe we should focus on adding services like data feeds into companies, not for commercial use but to be able to validate the business has legs, allowing the investors we have attracted to spend more time in our business and help drive growth and revenue. Those are the kinds of frustrations we have had as a company.
Kelly Tolhurst
Touching on the traditional model of financing for businesses, are there bigger challenges for start‑ups in the digital economy and big data that predominantly do not have a physical product, in that the traditional banking sector maybe do not understand the particular product they have innovated and are trying to create or tap into a market for? How do you think the banking sector and the financial services sector are looking at tackling that? How do you see that improving, and is there a good signal regarding more start‑ups and really creating that demand at a local level for digital organisations?
Matt Hammerstein
We have come a long way since the financial crisis with the common understanding of the spectrum of financing options that companies need to have available to them to be able to grow through the different phases. Gareth talked, rightly, around all the way from angel funders through to venture capital to private equity through to traditional bank debt and then, fundamentally, access to public markets. Banks do debt and they do not do equity, private equity, venture capital and angel funding, and I would posit that is a good thing, because we have had some experiments in the past where we have tried to do some of those things and I can tell you it was not a brilliant experience, from a shareholder perspective at the very least. We need to concentrate on what we are good at and make sure that we have good relationships with people so that, if we find a company that needs a part of finance that we do not provide, we can refer them very actively to people who can provide them with that finance. We have more to do, but we have become better at it over the past couple of years. Within what we do in the debt side of things, though, there is more banks can do to help. Traditionally, banks have got themselves into a pigeonhole where we lend on the basis of assets, and a lot of the high‑growth companies, particularly those in the digital economy, do not have physical assets to lend against, so we are starting to experiment. We just created last October a £100 million high‑growth fund. We have now lent £70 million of that to 15 different companies. That is focused on companies that are growing at greater than 20% per annum and do not have any physical assets against which to lend. The latest, as an example, is a company based in Edinburgh called NetThings. They are developing an internet-of-things energy management system product. We have lent them £500,000 to develop the commercial testing associated with that. We have every expectation that £100 million is the first tranche of money that we will put into those types of activities. It is different from what we have done in the past, so maybe it does fit back to Ms Milling’s point around innovation. That is a product innovation, at least from our perspective, and one that we want to continue to learn from and think about how we can do more of it.
Russell Gould
From our perspective, if I talk about it in two parts, the two founders put their money into our business at the start and built it up, and then we took some private investment. Subsequently, the Angel CoFund, which is supported by the Business Bank, was a key investor in the business, and indirectly the EIF have provided loan guarantees to allow us to lend more at lower prices, which has been helpful as well. Oaktree Capital is a major investor, and right now we are in our third major big round of funding to allow us to grow. From an SME perspective, our business is broken into three parts, effectively. There is our platform, which we believe is a clear market leader; there is our lending business, and we have lent £100 million, as of last week, providing 8,500 loans to UK small businesses; and then there is the data; as Barclays are using their data, we hope to use our data in that format. A lot of institutions are talking to us about how they might be able to use the platform we have created to enhance what they are doing and build on top of that. In the start‑up environment, because we are lending our own money, we have had to be really careful who we lend to, so we need more data than what is available for a start‑up, just from a pure risk perspective, but the platform we have is capable of providing a solution to businesses that want to enter into the start‑up environment, and we are talking to a number of them about how they might utilise our platform to support start‑up lending.
Olly Betts
I will try to answer quickly. There is personal experience and, as with probably three of the businesses on this panel, I was fortunate in being able to invest some of my own money in the business and find private investors to support that. With start‑ups, it is really interesting. People have described that there is not really a definitive answer to how you fund a start‑up: Russell has articulated not necessarily lending to start‑ups; Barclays do not necessarily lend debt financing to start‑ups for obvious reasons, because it is just so risky. In the start‑up area there is a small proportion of the market that is very fortunate to get private equity funding or seed investment. They are typically people, trying not to generalise, who are well connected, with a very good business plan and a good track record themselves, so people invest in them probably more than the business idea. The majority of people looking to start a business are probably relatively small. They might be someone who wants to become self‑employed or continue their own trade but on their own, as maybe a sole trader or start a very small business. For those people, it is about education on the finance available, but also making them aware of what is involved in starting a business. We could be going down the wrong track if we started to look at it and say there is not enough debt financing for start‑ups. Those start‑ups are very risky investments and the people starting those businesses need to be aware of how risky the process they are going through and the act they are taking of starting a business is. There is a lot going on. The Government have the Start Up Loans initiative, which is debt finance—a relatively simple instalment loan for a start‑up that has a good business plan and is resident in the UK, over 18, with a relatively good credit track record. That serves quite a lot of this kind of market I am talking about—the very small end. When you get up through to more technology‑led companies or companies that are very interesting to the banks, potentially, as threats or challengers, most of the banks have their own innovation funds that they are investing in those businesses, I would say with very high thresholds. You have to be a pretty amazing business to get that money. It is £100 million. It sounds like a lot, but it is not when you look at the amount of businesses that are potentially competing for that. Having said that, it is brilliant; it was not there before and it is really helping. It is a balancing act of how we educate people about what is involved in starting a business. Certainly we should avoid saying there is not enough money available for start‑ups to easily access, because that would be very risky and potentially lower the bar that is, rightly, quite high to start a business.
Kelly Tolhurst
Going back to innovation and how we drive innovation in the UK in regards to the digital economy and high-tech organisations that are contributing to the growth of the UK economy, are there any particular barriers that you are seeing in the UK that need to be addressed for the further evolution and the innovation of our digital economy? Is there anything in particular that any of you believes needs to be removed or helped to progress that?
Olly Betts
For me, in fintech specifically, not all the time but quite a lot of the time that is a financial product or offer and, therefore, it is regulated by the Financial Conduct Authority. That obviously is a massive barrier to entry. You have to be authorised by the FCA, which takes quite a long time. I am being generous; it takes a very long time to get regulated. If, say, you and I wanted to start a business today—we had a great idea for some really revolutionary financial product we were going to develop—the first thing we have to do is start thinking about how we write a business plan but also fill in an FCA application. I am relatively good at forming business plans and submitting paperwork, and it took me two months, pretty much, of all my evenings and weekends to submit an FCA application. It was an interesting process for me, because I was starting up a business, so I had an idea and the degrees of a business plan, but I had not proved it worked yet. However, to submit my FCA application I had to provide three years’ financial accounts and a view of exactly how I would be treating customers, although I had not really developed my product yet. I am not saying it is a bad thing, because we need to protect consumers and I am definitely supportive of that, and there are some good bits of work the FCA have done: they have the Innovation Hub, which is there to help you if you are starting up a business. I have worked with them. I have had mixed results. They have been able to help me fill in an application, but as I said the application is fit for purpose for a new bank. There is not a great difference between me submitting an application for my business and if someone wants to start a bank, so there is an opportunity to look at how that is done. I do not think it is the intent of the FCA that is wrong; it is capacity constraint. I have interim permissions for a part of my business. I wanted to start another new part of my business that needed different authorities. I submitted my application six months and three days ago. The rules say I should have had confirmation within six months of whether I would or would not be approved and I have not heard from them, and I am not joking or exaggerating when I say I phone them every week. That is stopping innovation, because I think I have a great idea.
Chris White
The digital economy is clearly a rapidly growing and changing sector. Do you think you have the necessary skills coming into that sector? What sort of skills do you need? Is there a shortage?
Gareth Mann
I would say there is, but there have always been skills shortages in every sector where there is constant evolution and innovation. That just creates demand, especially in our sector, where data scientists and very highly skilled developers and computer programmers are key, with the dotcom boom times over the noughties and recently. There are a lot of people who claim to be technologists on the market who can develop, but there are still very few brilliant people out in the market. We had to solve that by taking ourselves out of central London and putting ourselves in a regional county to give a better work‑life balance to our staff. We have been very fortunate, and I know it is unusual, to attract some amazing people who have really driven our business, but it was a conscious decision not to be based in London and to try to attract people through a different work‑life balance. That has complemented us with the Regional Growth Fund as well. That is how we have had to tackle it. I would say with anything that is bleeding‑edge tech there is always going to be a skills shortage, because you need that adoption curve. There is that time when any person will take on a new skill set, and a lot of people want to wait until it is established. As a bleeding‑edge company with bleeding‑edge tech, I am not sure how you could solve it, because anything that is taught, say, at university will be out of date when you finish. Everyone we find we stick on a six‑month intensive probation course within our business and we do not expect many outputs in that time, because they are using technologies they will have never seen before—maybe methodologies and ideas that just were not applicable when they learnt their trade.
Chris White
You are suggesting that there is a lot of in‑house training that you need to do.
Gareth Mann
Yes. I would say it is more mentorship. We are creating a back‑test model to validate our data currently. It is not something that we can find anywhere else that anyone has created, and we find a lot of the tech bloggers who write about it do not do it. When you step through the methodologies and procedures as documented online, they are just incorrect or they have skipped huge sections, so we are finding that we have a culture of mentorship between the team and knowledge transfer. I would say tech that we used 12 months ago is now already in the bin and we are on to the next investment cycle and the next tech loop, because you have to, to keep up with your competition.
Matt Hammerstein
Similarly, at the very high end in terms of very specific technical skills, I would not necessarily say there is a shortage and that you cannot find it, but what you can find is very expensive because it is in incredibly high demand. My experience so far is that, when people tend to think about or talk about skills, they tend to think about formal education, i.e. people coming out with a degree in some of those technical areas. Very much like Gareth’s experience, our experience so far is the challenge is much more general than that and is much more around people’s attitude, their confidence and their willingness to be a part of something that is experimental. It is probably harder for us because we have legacy IT, but we also have, if you will, colleagues who come from a way of doing things and we are trying to convince them to now do things in very different ways. It is in their interest to learn how to do that from a, if you will, job protection and safeguarding perspective, but there is a lot of reticence as a consequence of a perception of either being embarrassed about admitting that I do not know what I am being asked to do or not having the confidence to go and ask for help and support. We very much find it comes down to a lot of very high‑touch skills mentoring to try to encourage people to just give it a go. That is true just from an employment perspective, but also then in how they work with their customers and their clients to try to get them to go up that awareness and that confidence curve as well.
Chris White
Do you mean soft skills?
Matt Hammerstein
Our experience is the need from a skills perspective is much more on the soft side than it is on the hard side. There is definitely a need on the hard side. That is a longer term one to solve from the point of view of building it from a home‑grown perspective. It is going to take partnerships with universities and things of that sort, again to Gareth’s point, to encourage more students into the degree programmes that are going to produce the relevant technical skills, but even then we have to put them through experiential training, because it is not just about what the textbook says. A lot of the things that the three colleagues around this table are doing do not exist in textbooks, because they are taking existing technology and applying it in ways that are pretty leading‑edge.
Chris White
Do you co‑design courses with universities?
Matt Hammerstein
We do not co‑design courses per se. We spend a lot of time building experiential programmes. We have an apprenticeship programme with a couple of different universities, where they split time between working with us doing real coding and applied learning and then go back into the university and learn, if you will, what the textbook says. We have had 314 people complete those programmes and enter full employment with us. The other thing we do, which you may be familiar with, is a thing called the Digital Driving Licence. We have used it with colleagues. That is not necessarily co‑developed with universities; it is co‑developed with other leading technology companies, such as Microsoft, which has deep expertise in X, IBM in Y, Apple in Z, Google in A. They write simple modules of content that are relatively basic, but we now have 34 different modules packed into it and we have 50,000 colleagues who are somewhere on the journey. We have done a partnership with City & Guilds so that if you complete a certain level of training through that the individual gets an accreditation from City & Guilds that is the equivalent of an O Level. Now they have the self‑confidence to put on their CV or talk in general conversation about the fact that City & Guilds has verified that they are digitally savvy. We find that has had a huge impact. It is entry‑level stuff of just getting people’s awareness and confidence up to a level where you can then start to talk to them about opportunities that go beyond that.
Chris White
This is something that the industry has developed itself.
Matt Hammerstein
We have, institutionally.
Chris White
That is really fascinating. Do you think that the Government have a role to play in any of this development?
Matt Hammerstein
Without a doubt. Generally, the Government have a role to set an agenda and the pace associated with that agenda. This revolution, if you will, is much like the two prior ones, moving from an agrarian to mechanised and mechanised to motorised economy. We are now moving to a digitised economy. That is going to happen whether Government want to help it or not. It is a global phenomenon and it is going to happen. The Government have a choice about whether they want the UK economy to be at the leading edge of that or just in the middle of it or at the lagging end and, therefore, setting the agenda and the pace of how the UK economy makes that transition is fundamental. Secondly, they have a huge convening opportunity. Because we have a national distribution and we come in contact with, as I said, 15 million people and 1 million businesses, we see a lot of very well-intended initiatives. They are trying to help, but they are pulling in marginally, and sometimes very significantly, different directions. Consequently, individuals and business end up somewhat confused. There are lots of people telling them about how they need to go in that direction or this direction, and the Government can help set a much clearer agenda as to how to convene those different interests, maximise the investment in resource and energy that is going into it and make sure that we get the progress at the pace that we need it.
Chris White
Thank you. That was very helpful indeed.
Russell Gould
I have a slightly different perspective. There is a skills shortage. I have hired 26 people since February, and a small business like ours is very different from a bank in that every one of those people has to be productive from the day they start. We do not have the money to spend a year training them, getting them to learn our ways, so we have to hire good people who know what they are doing. We have to hire people who not only have the education but the practical know-how of how to do the things we need them to do. From my perspective, the Government can do a whole range of different things and it works across a variety of things. Big business, academia and the Government need to share responsibility here. It sounds like they are, which is great. Additionally, education and immigration play a huge part. We need to be able to hire great data scientists from wherever they are in the world and we should not be restricted. If we want to be the market leader in the UK, we have to be able to hire the best people.
Chris White
Of those 26 people you have hired since February, how many of them are from overseas?
Russell Gould
I have staff from Greece, Turkey, New Zealand, Israel and Lithuania. I would say probably 30%.
Chris White
Is that because there are none locally?
Russell Gould
They were the right people for the roles at the cost that we could afford to pay for those individuals. I wanted to make a point today about education. Education is absolutely fundamental to get the right skill sets coming through. I have a daughter who, a couple of years ago, sent a teddy bear into space with her school as part of their code club. That experience got her into coding and that is the kind of thing we need to be doing with our kids, because it gets them excited about it. She has created a couple of very basic games now as a direct result of having that kind of experience of sending a teddy bear up with an air balloon. Some of the class were tracking its temperature and how fast it was moving. Some of the class were tracking where it was on the map, and another group of the kids were tracking it in two chase cars to go and get it when they popped the balloon and it came down.
Chris White
We are glad to hear that.
Chair
It is a bit rude to call Tim Peake a teddy bear.
Chris White
We definitely need to expand code clubs. I have seen them working and there is massive change. Young minds are so ready to absorb some very technical and difficult information. Do you have anything else to add?
Olly Betts
We have talked a bit about disruption today. Within the fintech sector, certainly skills is probably the most disruptive thing going on. To give an example, I have hired a technical team of 12 people in the last six months. I have not reviewed a single CV. I have not looked at what degree they have or which university they attended. I have got them to write me some code to solve a problem and we talk. The first question we ask is, “What IT stack are you familiar working with and what is your preferred coding language?” That is probably five minutes and the rest of the session, probably for an hour or so, is, “Build me something, show me something, solve this problem.” That is really disruptive in terms of how you think about how you hire people. If I were to say to someone when they were looking to choose a university, “If you want to work for me in five years’ time, this is what you need to do,” they would really struggle to pick which degree to do, and so it needs to be supplementary to that. There are some initiatives; my investors are involved in an initiative with Google, Squared Online, which is effectively a diploma for digital marketing and that part of the digital economy. It is a great example. With kids, my investors are looking at an interesting start‑up now to build on the back of Minecraft, which is widely used by kids. It is about coding. How do you turn that into something that is a general life skill? It is not that building rollercoasters and stuff is not, but that is massively important. How do we complement the value of university degrees in terms of business acumen, which is needed, with skills? It is all about the soft skills and I definitely echo the first point that was made around how quickly those skills become obsolete. You cannot design a five‑year university degree, because it will just be completely irrelevant by the time they graduate.
Chair
I have two questions, one big and one small. The big question is about regulation and how that facilitates innovation. In the minute that we have left I do not think that we can give that justice, so could I suggest, gentlemen, you provide us with some thoughts? How can regulation help or hinder your business? Obviously financial services are subject to some degree of regulation, shall we say, but how does that make sure that we can encourage new entrants into the marketplace whilst ensuring that there is not an uneven playing field? That would be very helpful. How is regulation helping/hindering your business model and allowing you to thrive? The second quick question is: I am very conscious that you are an all‑male panel; is that a problem? Is there inherent sexism in the digital economy and in respect of financial services? Should we be attracting more women in?
Olly Betts
Yes, there is a problem. You are combining financial services with technology. Anyone who can do maths works out the percentages and it is always against you in terms of the number of females in senior positions. I do not know the reason why, but it is a fact and I see it as a problem. It is a problem within my business. Even for a small business like mine, with a management team of five people, we only have one female member of that team. That does not necessarily give us the full perspective of our customers and what we are trying to solve.
Chair
Is that true across the board?
Gareth Mann
For us, it is exactly the same. The industry we are in does not lend itself well to women and there are just not the skills, so when we open up to interview it is predominantly male candidates who come forward. We are missing out on some real skills.
Russell Gould
We have a reasonable split. I was just trying to work out the numbers, but it is fair to say there is probably an issue in the sector we are in.
Matt Hammerstein
I do not think there is a financial services issue. If I just look at my own institution, the issues we face with respect to gender diversity are similar to any other large organisation in terms of very significant diversity at more junior levels and it becomes more male, if you will, as you get more senior, and that is a generalised issue we have to do lots institutionally, and work with others, to try to solve.
Chair
But it is specifically in the digital world.
Matt Hammerstein
Exactly. Similarly to what my colleagues have said, when we recruit it is hard to find females for the types of roles that you are recruiting into at the technical end of the spectrum. Again, I go back to the point I made earlier about partnerships with universities. We have also done partnerships in local communities with secondary schools to try to encourage girls specifically to come in and experience not the textbook version of what we are trying to do but the applied version of it, so they can get excited about the fact that this is not some esoteric sort of thing and it requires as much creativity as it does mathematical skills in terms of how to use code to create things.
Chair
Gentlemen, thank you very much for your time. We have overrun, but it has been incredibly interesting and very helpful for our Committee’s inquiry. What would be even more helpful, as I said, is if you could provide us with some key bullet points about how regulation helps or hinders the digital economy and the general role of Government. We would find that incredibly useful. Thank you again for your time. Oral evidence: The Digital Economy, HC 571 29