Fin-novation for our times

Over the past few months, businesses have been challenged beyond anything they could have imagined. Adaptability has been the key to survival, in some cases temporarily, in other cases the nature of the business has changed forever. Lucy Moss takes a look at some outside the boxfinancial thinking driven by the global pandemic.

Fin-novation for our times

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Countrywide lockdowns have become one of the major features of the Covid-19 pandemic of 2020. All over the world, countries are shutting down businesses to stop the spread of the virus. Some businesses – including PPE manufacturers, skip hire companies, supermarkets and signage printers – have boomed under lockdown; other businesses have simply fought for survival, some losing that battle. Governments have had to step up to ensure the economy and jobs are protected.

In unprecedented moves, many governments have created financial aid systems that, in normal times, might have taken years to set up. But they got them up and running in mere days or weeks during lockdown in spring 2020. The UK Treasury set up a job retention scheme to pay 80% of as many employee wages as necessary in the event that they werent able to work. Either because their employer didnt have enough work to keep them engaged, or had to close altogether during lockdown. At its peak, this furlough scheme supported over nine million employees, simply unprecedented in UK economic history.

It also set up a scheme to assist a large number of self-employed people, and included other financial initiatives such as government-backed business interruption and bounce back loans, VAT and income tax payment deferrals, as well as a six-month VAT cut for the hospitality and tourism sectors to support them coming out of lockdown. The cost to the government will be billions and billions of pounds to be repaid over generations to come.

Denmark introduced similar measures. Its furlough scheme paid 75% of employee salaries and 90% for hourly-paid workers up to DKR26,000 (£3,150) per month. They didnt cover self-employed or casual workers, but these sectors make up a much smaller proportion of the workforce than in the UK. Denmark stipulated that business loans would be dependent on a companys tax status. No bailout money would be paid to companies operating in Denmark but registered in tax havens, within the limitations of EU state aid law. It also put certain conditions on the financial support given to companies, such as profits not being used to pay dividends to shareholders. The Polish government went a step further and said government financial support would only be available to companies that pay tax in Poland.

Other countries, including the US, Canada and Australia, are making direct payments to citizens affected by the pandemic, of varying amounts and means. They’re also increasing welfare support schemes in scope and size, as well as common initiatives like tax payment deferrals, as well as a raft of personal finance measures.

In August 2020, Germany announced it was considering extending its job furlough scheme from 12 months to 24 months, in recognition of the fact that the pandemic and its economic effects will not end within the next couple of months.

Businesses have been forced to be financially innovative too. Some already had plans to introduce new initiatives and events forced their hand. Some have had to get creative about how best to support the most vulnerable people in the community, who make up the most-impacted part of the workforce.

New Zealand-based Xero, which provides online accountancy software, found that bookkeepers and accountants became the frontline for helping clients apply for finance, whether government backed-loans or discretionary grants. Within a few days of the March lockdown in the UK, Xero released a package of innovative reports including the Covid-19 Business Insights Pack, and aBusiness Loan Pack, to make potentially arduous application processes much easier.

A Xero UK spokesperson confirmed the rationale to us:As the impact of Covid hit, we wanted to quickly and easily equip our accounting partners with the information they needed during this challenging time. We wanted to help streamline processes so they could be freed up to focus on the most important areas like advising business. [Accountants and bookkeepers] have been stepping up to play an essential role in helping businesses survive and now plan a road to recovery.”

As well as the standard profit and loss report and balance sheet, the new pack includes a business snapshot, potential cash burn based on previous transactions and short-term cash flow reports – as well as apps to help manage finances, so any business owner can see instantly how their financials look, both at the time and in the immediate future. The pack, a new departure for Xero technologically, was set up so that the user could populate fields using report codes, and hit a button producing a raft of reports, supplying them with all the financial information they could possibly need.

Its not just businesses that are innovating in difficult times. Community organisations are stepping up too.

Community banks are not a new concept. They exist all over the world, and there’s a strong culture in Europe and the US, as there once was in the UK. Thanks to some still-controversial political decisions made in the 1980s under Margaret Thatcher, the face of banking turned away from community-style local branch banking to mainstream corporate banking, beholden to shareholders and big business. Now, branches are closing and banks are moving towards more centralised structures, mainly thanks to the popularity and convenience of online banking. You can be a customer of a bank or building society for years and never speak to anyone in the organisation.

There are now just a handful of community banks in the UK – some very new to the scene and some in development. These aim to bring banking back down to local level, run by and for local people and businesses. Wirral Council in Merseyside is in the process of starting up one of these new banks, the North West Mutual.

Lead on the project is Councillor Janette Williamson, Cabinet Member for Finance and Resources for Wirral, as well as lead for the Wirral Community Wealth Building Strategy. She’s also the first female leader of Wirral Council (and, in fact, the first female leader across any of the Merseyside authorities).

Following an approach by Preston City Council in neighbouring Lancashire, and agreement from Liverpool City Council, Williamson got the capital investment she needed to set up the North West Mutual Community Bank. Using a bank in a boxapproach set up by the Community Savings Bank Association (CSBA), the North West of the England (Merseyside and Lancashire) will open its own community bank by early 2022.

Although the concept of a community bank existed pre-pandemic, Williamson says that Covid-19 has highlighted the reasons why a community bank is needed in Wirral. As well as dealing with a disproportionately high level of poverty and a large elderly population, the economy in Wirral, a coastal borough, is dominated by small and medium-sized enterprises (SMEs).

Of the 8,550 of them, only 20 have over 250 employees. And, because of their size, SMEs find it hard to access traditional bank funds. Research carried out in 2018 by UK Finance, the body that speaks for the banking and finance in the UK, claims that pre-pandemic, approximately 20% of loans to SMEs were rejected. The bounce back loans offered during the pandemic, specifically directed at small businesses, have not decreased that percentage much, despite being 100% government-backed.

One of the things Covid has done for me is laid bare the fault lines within the economic systems and our small businesses are really, really struggling. After the financial crash in 2008 banks were told to start lending again to kick start the economy and help businesses. They didn’t do that. The only lending that takes place is secure, so if youve got a house the bank will lend you some money. But they will secure it against your house,” says Janette. During lock down, this caused business owners even more anxiety as they faced losing both their business and home.

I always knew people don’t go into business to fail. They genuinely have a desire to start a business, serve the community and employ people, more so than the bigger corporations,” says the former insolvency examiner.

North West Mutual will step in where high street banks are failing people, either by closing local branches, disallowing current accounts due to poor credit history or financial situation and not lending to SMEs or securing lending. Its existence will also help tackle the issue of poverty premiums– which come about when people who dont have a bank account end up paying more because they cant have bill payments on direct debit, or have no internet access so need paper bills, for example. It’s estimated that the poverty premiumwill cost the average low-income household £490 a year, but can be much higher.

Although their existence is driven by a need to help the most vulnerable, community banks are for everyone. They offer a full range of banking services like savings accounts, loans and mortgages. They are independent and customer owned. They are democratic institutions, like the building societies of old. Members have votes and will use them to shape the banks policies. North West Mutual, like its increasing number of counterparts such as South West Mutual and Banc Cambria in Wales, will hold a full banking licence and state-of-the-art technology and online banking – everything you’d expect of a high street bank.

A community bank is local to the issues. Staff are aware of the challenges faced by their customers, whether personal, business or both, and can assess needs individually, thus fostering relationships. By way of an example, behavioural evidence shows that, where staff know their customers personally, defaulting on loan or mortgage repayments is much lower because of the established relationship.

Lending is discussed and assessed based on several factors rather than very specific parameters used by the big banks. This supports SMEs in the difficult times that most will face over the coming months, as the manager learns more about the financial needs of their business and how they can help, something Janette is sure the big banks have forgotten how to do on a human level.

As the effects of the pandemic go on and we see an increase in job losses and redundancies – I guess homelessness, too – there is going to be even more need for a community bank. The community has rallied around during the pandemic so far – its been heart warming and heart breaking – but local people, community organisations and small independent businesses have stepped up to do what needs to be done for their survival and the long-term existence of the community. Our aim is for the community bank to be at the heart of the communitys future. Its something me and my team are very passionate about,” she says.


Further fin-novations:

Starling Bank Connected Card

During UK lockdown, many people with health issues were required to shield. And people returning from some holiday destinations are now required to quarantine. Fortunately, most have friends, family and neighbours who can pop to the shops for them if they arent able to go. But what to do about money? Starling came up with the Connected Card: this allows an additional card on a current account that can be given to someone you trust to spend money on your behalf. The money comes out of a designated pot, capped at £200, not the main account. It can’t be withdrawn as cash, nor can it be used for gambling. The bank account owner retains control and it can be topped up as needed.


MSE/OU Academoney

The pandemic has presented a plethora of potential financial issues, some impacting now and some in the future. Martin Lewis – Money Saving Expert (MSE) – has long banged the drum about the importance of people understanding how to manage their personal finances. Lewis has funded both a financial education textbook for use in schools, and is the founder of the Money and Mental Health Policy Institute, set up to break the link between financial difficulty and mental health. And, right at the start of lockdown, he launched a free personal finance course, Academoney, in conjunction with the Open University. Available to all, it’s designed to educate us about making good sending decisions, budgeting, borrowing, investment, mortgages and planning for retirement. The course is endorsed by the Financial Conduct Authority.


Zoom and Tixoom

Zoom, the video conferencing app, cant have dreamed what 2020 held when it launched in 2013. Few had heard of it prior to lock down. In December 2019, 10 million daily meeting participants gathered online across the world. By March 2020, this had risen to 200 million, with 2.13 million people downloading the app each day. With public confidence still low and restrictions on gatherings in place, Zoom continues to be the most used video conferencing app around the world. Tixoom was launched to sell tickets for Zoom meetings. People could start monetising events, a move which has inspired comedy gigs, author Q&As and all manner of other paid events that might not be able to go ahead otherwise. There’s also a pay what you can affordoption and – in an inspired move – the app can also be used to take donations during a Zoom meeting, allowing charity fundraisers to happen too.

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