5 factors that must be considered when relocating an operation

24 November 2016 Consultancy.uk

Amid widespread uncertainty following Brexit, companies throughout the UK, in particular in the financial services sector, are considering moving some or all of their operations out of the UK to ensure preferential treatment and continued access to key markets. Relocation will however come with a hefty price tag, and requires careful planning and delivery, writes Naomi Crawford, a Director at Brickendon Consulting. 

Cost savings are not the only thing to consider when relocating your business. Applications, systems, hardware and people are all being moved and a seamless transition is essential to ensure there is no downtime and no risk to your reputation or finances. Most people see international relocation as a cost-saving initiative but if that is your only driver you could be left very disappointed. Many things such as the country’s infrastructure, legal environment, currency risks and ability for people to successfully relocate to that location, should be taken into account as they are all areas which pose a risk to the organisation. 

Five core factors that must be considered when relocating or establishing an operating base in a new market:

Infrastructure: From a technology point of view, one of the most important things to consider is the country’s infrastructure. Access to a 24/7 power supply is crucial for most financial institutions and something that many of us take for granted. It is important to consider how reliable the power supply is and whether a back-up generator is needed.

Five factors that must be considered when relocating an operation

In some locations it is normal for servers to be located in the basement of the same building the company is operating out of, and if you are based in a monsoon area that is susceptible to flooding you may need to have a back-up plan. Off-shore teams have in the past been unable to work in the new location as basement server rooms were flooded, and teams in the original source location have had to cover until the building gets back up and running. In other situations it may be necessary for local employees to work from home if they can’t get into the office, so a stable internet service is essential.

Legal and regulatory structure: A good knowledge of the target markets’ legal and regulatory structure is a must, as is finding a local trusted advisor. In some cases it could be easier to relocate partnering with a local vendor, for example local partnerships are the norm in Ukraine, whereas in India a captive market is much more enticing for resources.

Exchange rate and country risk: Complexity comes with exchange rate movements and government restrictions on movement of funds can affect the business case and profitability of the venture. For example, Russia and Greece have recently imposed capital restrictions which would affect business plans.

It is also important to consider where your data comes from, where it is going and not to overlook any data protection laws. In Switzerland, for example, data is not allowed to be used outside of the country. This can cause issues when it comes to relocation of technology. Legal terms and conditions need to be carefully reviewed and specifics such as intellectual property rights and contracts considered, as these could be used as enticements for that location for a short period of time, but change a few years later.

Infrastructure | Legal and regulatory structure | Exchange rate and country risk | People | Hidden costs

Your key resource, people: Seeding resources in the new location is standard, as this ensures the culture of the firm is embedded. Considering if the location is safe for families, is there a high level of corruption or is the country stable, can all influence your decision. Your location has to contain a good supply of resources, with the appropriate educational level and skill requirements. This can be done by yourself or with a partner organisation. Avoiding managing multiple people in multiple cities in the same country is a must, as it is hard to ensure critical mass in any one location. Ensuring that the local universities have courses in the development languages you are intending to use is crucial, being in an area where QA is studied at university won’t be much use if you use Java in your business.

Hidden costs: Travel costs, loss of knowledge and longer hand-over periods all make international relocation more expensive than originally planned. Every organisation plans for these, but always under-estimates the cost, especially around the loss of knowledge as this is very hard to quantify. Team morale is also affected, which makes hand-overs taxing, as the current location does not want to do the write ups as information is in people’s heads and handing over face to face is easier, rather than online training sessions and the like.

These are but a few of the risks which need to be thought through, as the reputational damage which can be done by moving out of a location can be long lasting, and should not be forgotten about.

Related: British bankers confident London will remain EU's financial centre.


The business and operating models of digital-only banks

04 April 2019 Consultancy.uk

In recent years, several digital-only banks have successfully managed to nestle themselves in the banking landscape, with their popularity continuing to increase. Looking at it from the customer’s point-of-view, there is little difference between these FinTech unicorns; looking at the bigger picture, however, reveals significant variation in their business models. Matyas Fekete, a consultant at KAE, explores some of the main similarities and differences in digi-bank business and operating models. 

What about the profit?

Unlike in the UK, in most of continental Europe, bank accounts and corresponding banking services are historically paid-for services. The fact that digital banks offer most of their services free of charge has undoubtedly helped them build a large customer base. On the other hand, despite comparatively low set-up and minimised operational costs compared to that of traditional banks, and given the lack of revenue stemming from the typically no-fee model, profitability has proved difficult to achieve. Monzo, for instance, recorded a net loss of £30+ per customer in its most recent financial year. 

In the start-up world, it is customary to focus on expansion rather than profit – see the case of Uber, for instance. Still, while profitability might not be their number one priority in their early stages of development, it must be a long-term goal of any business. With their ever-growing customer base, digital banks are increasingly under pressure to turn their business from loss- to profit-making. 

Credit where credit is due

Digital banks pride themselves on their fair (often meaning “free”) proposition and have so far stayed clear of offering loans (including credit cards & overdrafts), traditionally amongst the most lucrative products for traditional providers. Though somewhat reluctantly, newcomers are also realising that offering lending products is one of the most straightforward ways to offset losses made on their free, often high-cost services (e.g. overseas ATM withdrawals). Monzo, N26 and Starling have recently started offering credit products to their customers, with their loan offering expected to be extended to a wide range of services, from mortgages to overdrafts. Correspondingly, creating a lending portfolio can also pave the way for launching an interest-paying savings offering – a proposition seen as a basic banking product that is yet to feature in most digital banks’ portfolios. 

The business and operating models of digital-only banks

The premium customer

While most digital banks offer most of their products for free, some have extended their offering by paid-for premium services in order to create a revenue stream. As these premium features – including different types of insurance, unlimited free transfers/withdrawals, faster payment settlement or concierge services – are often offered in a subscription format, customers are typically prompted to pay for the full package rather than just the desired service(s), providing a significant revenue stream for the bank. Revolut, for instance, was amongst the first digital banks in Europe to break even earlier this year, a feat largely due to revenue from its premium subscription.

SMEs like digital too

Traditional banks typically service small and medium sized businesses under their retail rather than corporate banking arm. Having their product offering tested with consumers, and consequently gaining a reasonable customer base, digital banks have also identified SMEs as an ideal segment to extend their target audience to. The five FinTechs profiled have already gone, or plan to go, down this path by following up their consumer solution with a business account. While both propositions are typically built on similar features, some providers charge businesses a monthly subscription (e.g. Revolut), while others apply additional fees to specific services (e.g. TransferWise), banking on the expectation that businesses are more likely to be willing to pay for banking – something they are already used to doing. 

The marketplace model

While most digital banks offer a wide range of banking services, some of these tend to come from partnering with third-party providers. For instance, Starling Bank’s only proprietary product is its current account, which serves as a basis for the provision of ancillary services, ranging from loans to insurance, to investment opportunities. Instead of developing these services in-house, Starling enables a select group of partnering financial service providers access to its platform in exchange for a fee. In effect, Starling is using its customer base to create a market for its partners, charging a commission for each acquired customer. 

In such cases of digital banks applying this marketplace model, the majority of their income often comes from partners rather than customers. Naturally, only banks with a large enough customer base can be successful in this set-up, underlining the current intensity of competition amongst digital banks.

Banking as a Service

While customer-centricity is heralded amongst the main USPs of digital banks, some are looking beyond offering consumer-facing services to diversify their revenue streams. Starling, which is among the few digital banks built on its own proprietary platform, has recently leapt into the Banking as a Service (BaaS) industry, making its technology available to other start-ups looking to launch a digital bank. Naturally, this raises the question whether the two offerings could threaten each other’s success. Generally, as long as such partners operate in different markets, the two business lines should be able to thrive alongside each other. Further along the line, however, such partners could easily end up expanding their banking solution into the same market(s) as they aim for global success, and by doing so, becoming direct competitors. 

Different approach, same result?

It is fair to say that consumers in Europe looking to bank with a digital-only provider would have a difficult time finding relative advantages/disadvantages amongst the leading players in the industry. Still, despite the limited surface-level variety, exploring the business models of leading digital banks reveals different approaches to the challenge of making money. Alongside the more straightforward method of offering paid-for premium features/subscriptions, some are banking on the value that access to their customer base offers to third-parties, while others outsource their technology to neobanks wanting to focus on the Fin rather than the Tech. With competition amongst digital banks heating up, it will be interesting to see which business model(s) prove to be the winning formula in the long term.