On the road to somewhere

A week of holiday this week (so no video this week) and I have been sampling the delights of the North Wales countryside.

Despite some, what appeared to be near vertical footpaths, the weather held… it was a good break.

It also meant some spare time for a few observations too!

The roads

The roads in North Wales seem to be one of the few places in the UK where the words “ARAF, SLOW” really mean what they say and are mandatory no matter the speed limit posted.

To navigate anywhere near the posted limit you seemingly have to be a rally driver or maybe just a local… So apologies to everyone on the A458. The massive tailback was not in fact due to the rail strike, nor the school holiday traffic, it was just my driving.

The fuel price

Imagine my surprise, to find that the cost for petrol or diesel was over 10 pence per litre cheaper than back home too.

To be fair it was not all petrol/gas stations, but certainly, those that were independently owned (even those supplied by mainstream oil companies) seemed to follow this pattern.

After some research, it did not appear to be driven by tax, although maybe the cost of the premises could be a factor.

Some reports in the media seemed to also point to fuel pricing and the relative readiness for passing any reduction in oil prices to the consumer…. all very interesting.

Mind you I had to drive around for at least an extra hour at this point, to be able to empty my gas tank enough so I could fill it up cheaply… all to save some money! [joking of course].

Pre-pay or post-pay restaurants

An important question over lunch… why exactly are cafes pre-pay, whilst restaurants post-pay?

I always thought that this was due to politeness, with customers in restaurants being less likely to run off without paying… but, it turns out if you pay at the end, you are more likely to buy more… and, of course, it gives the owner the perfect signal to tell you to leave… the bill. All it not what it appears!

Maybe this is the reason fixed price is more popular than a daily rate in the business world… we all tend to like certainty, although deep down really like flexibility, if we can afford it!

The Consumer Duty

This week, of course, I also missed the final publication of the confirmed rules for a new consumer duty from the FCA. With 12 months to now implement (31 July 2023), the clock is now really ticking for the industry, and promise to [quote]

  • end rip-off charges and fees 
  • make it as easy to switch or cancel products as it was to take them out in the first place 
  • provide helpful and accessible customer support, not making people wait so long for an answer that they give up 
  • provide timely and clear information that people can understand about products and services so consumers can make good financial decisions, rather than burying key information in lengthy terms and conditions that few have the time to read 
  • provide products and services that are right for their customers  
  • focus on the real and diverse needs of their customers, including those in vulnerable circumstances, at every stage and in each interaction 

The measures, of course, were broadly trailed and welcomed, why would anyone disagree with the regulator exactly, but as ever the devil will be in the detail.

Certainly, the sections on cross-cutting rules, sludge practices, and evidencing outcomes are all interesting and still in the final guidance…. although admittedly it was hard to read halfway up a mountain by torch, so something to take a little longer look at this week…

I have no doubt there is still plenty to do, consider and process to transform. The starting signal has now been well and truly fired.

This being said, I am not sure the consumer duty will apply to restaurants or gas-stations mind you… although thinking about it… maybe it should.

Have a good week everyone.

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The Land of Make Believe

Being at a loose end over the weekend, I finally succumbed to purchasing the latest version of Microsoft Flight Simulator.

Maybe I was reliving my youth and fantasy parallel career, or simply that after 2 years of being stuck at home, a subliminal message from my subconscious, that I need to get out and about again… a good omen to a business trip in my near future maybe!

Either way, by Saturday afternoon I was high above the Alps, running my A320 down to Italy, hoping for that strange sense of satisfaction you get when you are actually able to land the thing.

The view, graphics of course, were simply stunning and a huge upgrade on the last version I had from around 2004.

Workplace simulation

As fun as this was it did also get me thinking about the role of immersive simulation in the workplace.

What I mean is, that if I (was younger &) fancied being a pilot, it is something that I could now realistically try and get a much more immersive, authentic experience, than I ever could 20 years ago.

It is plausible to try, and see if you like it, before fully committing to in-person training than ever before. (and understand the sheer volume of pre-flight checks, air traffic control, and navigation tasks needed as part of the job too).

Similar, if I want to be a racing driver, train driver, truck driver, bus driver or excavator driver these are all things I can try beforehand… even medical professionals and surgeons have simulators too.

But what about the collections professional or contact centre agent?

Now I know these are not going to make the next video game bestseller list.

In fact, it may not ever be more than even moderately interesting… but as a concept, virtual-like reality, giving potential employees a sense of what a role is, could be really powerful in helping them understand what is involved… to try before they start…

And, with the ability in a simulation to make as many mistakes as you like, it could really help with training too.

All of this leads to the potential for lower costs to hire, more committed employees, reduced attrition, and higher quality of work on the job… and the benefit may not only be one way!

Creating better jobs that fit

Being fully transparent on a role, and providing a realistic immersive experience, could also be highly instructive letting employers know what works and what does not…

Getting the data, can force robust thinking on role structure, office environment, and especially employee-customer interactions, something that can be difficult today. Having all this in a VR-type environment could really help.

This may make for better roles, and environments… all the more attractive to gain and retain staff…

Maybe there is a future in this metaverse thing after all…!

(… although given my subsequent rather bumpy landing in Bologna, just be glad I will be sitting in economy, heading off to a business meeting, rather than upfront behind the controls on the flight there!)

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Big Bang or Big Crunch for BNPL?

Buy Now Pay Later (BNPL) was a hot topic of a couple of conversations last week.

Over the last couple of years, it has been an area of significant growth, and one that recently has had a lot of media coverage. This is especially true regarding concern for consumers who may borrow too much and get into problem debt… but are the dynamics all they really appear? A few observations from the week.

  1. The market segment is, at the moment, smaller than may appear – with around 8 or so main BNPL players in the UK, total receivables are far behind the credit card sector.
  2. The original business model is driven off, closed loop relationship with merchants – higher fees for more sales. Most of these stores appear to be high-end or brand direct-to-consumer retailers… think BOSE or Nike, rather than Curry’s and Sports Direct… how many of us have main retail relationships outside big-box retailers… for something special, maybe, for everyday spend probably not… this has largely limited market size, up to now.
  3. Most purchases have been low balance, low ticket items, spread over a few payments over a period of weeks… total outstanding liability has been low and payment history can be built up quickly before lending more.

However, all is not necessarily well in the BNPL world and despite early profitability many are now losing money. Administration expenses and bad debt losses exceed merchant fee revenue in many cases, and with no interest charged, the resulting cash flow does not look great in the short term.

You get the sense that the current strategy, with investment, is to outgrow losses – Ie “okay lose money now, but for returns at a later date”.

With some players already exiting the market, you wonder how robust a strategy this really is, and with this push for growth comes the real risk for many.

Risks with Growth

To expand the market there are a couple of big levers that can be pulled.

  1. Extend time between payments, making it more attractive for consumers. However, the longer the time to pay the greater the inherent risk of non payment. Afterall, the greater the time between installments, the higher the likelihood a consumer’s situation changes and they cannot pay. Currently Zilch is at 6 weeks (similar to a credit card), Klarna at 3 months.
  2. Expand to more retailers, especially big-box retailers. The more mass-market retailers, the more transactions, spend volume and hence merchant fees. However, the risk profile of customers who spread the cost of buying specialist products can be quite a different profile from those doing this for food (not in all cases, but for some). The more mainstream spend captured, the more risk that will be encountered.
  3. Increase transaction value. Current values are typically low, below or in the hundred, not in the thousands. Moving to higher values means more fees, however it also concentrates risk and loss if the customer cannot pay.
  4. Loyalty programmes. As we have seen in credit cards, these can capture more spending, especially diverting from competitors. However, these also cost money to provide, and were heavily squeezed due to pressure from merchants to lower fees (especially from big-box retailers)

In the search for growth, each of these trends seem to be being explored across the industry.

Whilst there is undoubtedly a profitable niche in the market at a smaller scale, scaling this up to a wider mass market, especially without the infrastructure, the question needs to be asked if the business model is really sustainable.

Will it in fact all go crunch… collapsing and impacting some customers as collateral damage along the way?

Managing with fine margins

From my time at Amex, many years ago, I remember just hard this management can be. Relying on merchant fees as a primary source of income results in very fine margins, requiring many sophisticated risk management and collections hoops to make it profitable.

It seems these techniques are currently missing in BNPL at the moment… (and we have not got to the pressure from lowering merchant fees fully yet either)

So where next?

Despite these challenges in the market, more mainstream banking players, are also now moving in, no doubt in search of their own growth in lending.

I do wonder if this evolution is actually the path we will see to mainstream profitability for the mass market business model.

For example, I have just been given the option to spread the cost of my fuel purchase by my banking provider. It was 3 installments for free (apart from the personal data I had to provide). As a consumer (and given the cost of fuel) it is a great deal and you think why not!

What is more, if I need to spread over more payments I can… at 19% APR… it really is an intro to mainstream consumer lending… some financial services players know how to do.

We have seen this approach before in the credit card market, which already has up to 6 weeks interest-free and often 0% balance transfers to spread payments too… I do wonder if this is where we will end up here too… is it the same in a different wrapper

Is this is future? And is this sustainable? It could be. Watch this space.

… and if you are running a BNPL collections process, getting ready today with modern collections techniques and processes can really help your business to manage within its profit margins… all of this will help for this future.

Have a good week everyone.

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