Mark Horgan has been CEO of Moneycorp since 2012. Our CEO Daniel Webber sat down with Mark last week for a detailed discussion on Moneycorp and the payments industry. We’ve picked out our highlights of the discussion below.
Moneycorp’s International Payment Strategy
Mark: I joined in 2012 and the business was effectively half retail [shops], half payments at that time, which is quite hard to believe when you think of the journey we have gone on.
The profit contribution of the business then was 50% shops and 50% payments. And then we had fixed costs to get to net operating profit. The business had just gone through a relatively painful transition, it was owner founder managed. RBS had just bought it back after 2011. Also people had joined the business with relationships with the owner/founder that they didn’t have with the private equity owners.
Since 2012 we have quadrupled it in size. And within that, the retail business is the exact same size now as it was then. And the corporate business is about five times bigger. In so far as how we did we do that. We did a technical upgrade in January 2012, with our Moneycorp online business. We have strengthened our supply chain, so we had one pay away bank, now we’ve got four. We had three supply chain banks provide liquidity, we’ve now got fourteen. And we’ve got currency corridor specialists. We’ve got banks supplying for Asia, Scandinavia, North America…we’ve really strengthened our supply chain on a number of dimensions.
We’ve invested in our staff, there’s actually a pretty high level management development program where senior management go on multiple modules. We’ve broadened horizons, we’ve extended careers. Retention rate at that level is really high. We’ve taken equity participation from zero in 2012 to 20% today, so management own a fair chunk of the business.
In terms of what we’ve changed really since 2012. We’ve clearly refocused the business on the payments environment. We’ve clearly determined internationalization is where we’re headed, hence North America’s recent acquisition of Brazil and other potential acquisitions.
Daniel: How would you say your strategy is different from the other major players in the space?
Mark: I think if you work backwards, our equity participation within management is high for any group. Giving its employees shares from the start, that’s a very difficult thing to do. In terms of a technology platform, we took a decision back in 2008 on the technological architecture of the system, which was effectively to segregate fully client funds and I think increasingly our corporate business appreciates the merits of that. It means that if we ever have a demise situation that their funds are safe. When you give us a margin, we actually put it with your account we don’t post it with the bank. We only ever post company cash for banks side liquidity. The day after Brexit we actually posted 28 million pounds of company money, we didn’t touch one penny of clients money. Some of our competitors used client funds to do that, which is a much less robust environment.
So, in terms of the guys around us, we’ve been more corporate, and are generally more international.
And I point towards compliance a lot. Because we’ve got a bank license, because right at the beginning we decided we needed to be international. If you’re going to be international South America takes a long time to do, so you’ve got to kind of do it first, not because you want to do it first, but because it takes a long time to do.
We decided we were going to be a bank, the bank brings a lot of benefits, the ability to fundraise and deposit raising. It also presents us to the business as one of two things, you can work with us as a payments institution or you can work with us as a bank, which allows you to take your own compliance. So we’ve had some bank parties that only on-board us as a bank and not as a nonbank financial institution, so that’s been helpful.
And we’ve got a few other ideas with what we’d like to do with the bank over the next three or four years.
Moneycorp’s Transition to a Bank
Daniel: We’ve been writing a lot about payments companies becoming banks, as more nonbanks release multicurrency accounts and similar products. You had a vision for the banking world before it was something people had their sights set.
Mark: We will come back to lending…working a balance sheet is much different than working profit and that’s not necessarily for the management team running a payment business. My view has always been that we are dependent on banks for supplying liquidity and our distribution of payments. Increasingly, we need to operate at compliance standards which are above that of a supply chain bank and or distribution bank. Because if we operate beneath their standards we cannot be in their network at any level. So in many respects, we’ve got all of the disadvantages of being a bank with none of the advantages.
So I had a view that, if you’re going to act like a bank, you’re going to be treated like a bank, you’re going to structured like a bank, you’re going to have IT systems like a bank, you may as well have a license because it will give you access to the upside. And the upside is, you can pay interest on your deposit accounts, you can hold deposits for a long periods of time, you can raise liquidity and if you’ve got the right people and the right systems, you can choose to lend.
And we’re at the very start of that journey, which is about payments, multi currency accounts and transactional banking, and we’re now playing with raising a deposit.
I think if I was being candid I would say the regulators said what’s your business plan. Do you want to lend? If you did want to lend, Nick [CFO & COO] and I are not the right people to run your bank. We’re not experienced bankers in that respect. I think to get to that lending phase will be a long journey and maybe indeed not a journey we will ever fully complete.
Daniel: What type of customer are you hoping to bring in with your 90-day interest-bearing deposit account?
Mark: High networth individuals with euros or sterling that are spare. I think the reality now is that if you’ve got liquid cash right now, you’re earning no interest, if you’ve got money in the bank that’s covered by the deposit guarantee, people spread their risk and if people see a reasonable interest rate, we are just another source of income. We actually pay interest on euro deposits, whereas most people charge interest – that’s another weird thing which is going on. So essentially, the funds we have raised so far have come from high net worth individuals.
Daniel: What’s the plan for the corporate side, that’s even more sophisticated?
Mark: We’ve set out to raise 20 million. Ironically we had one corporate who wanted to buy the whole lot up. That’s a different level of sophistication if you have one person running your balance sheet so we turned that down. That’s not really where we intended to be. To get corporate in, you have to change the ticket price up to 100-200m. We are really looking at fifty to one hundred thousand deposit levels.
We automatically give you a multicurrency account alongside your deposit account. But the reality is you could go in sterling and out in sterling or in euros and out in euros. The deposit account is quite different from the transactional multi currency account that moves funds from Point A to Point B.
Competing or Cooperating – a complex relationship with the banks
Mark: I don’t think we regard ourselves as competing with [the banks]…our segment that we target is really medium enterprise, small enterprise, microenterprise. Increasingly, the high street banks don’t want medium – they definitely don’t want small and they definitely don’t want micro. So for the vast majority of our customer coverage, we have got no competition with the banks – we provide the services that they are not going to provide.
Daniel: How does your cost base change as a bank?
Mark: We ship payments out over bank rails – we have compliance as high as a bank, it can’t get any higher. If you wanted to move money, if you wanted to launder money, you don’t want to do it here. We’ve got 56,000 high net worth individuals and we’ve got 50 people that work in compliance, there’s one per 1000 – there’s no way you’re getting that out of any high street bank. High street banks have 24 million customers.
The reality is, I think if you look at something like 3% of high street banks payments are international today, 97% UK. So the high street banks in the UK and Spain and Brazil and the USA, they are really really good at domestic payments clearance, and they have to be, because they are doing it everyday. The 3% they do internationally is clunky. It’s not clunky by design, it’s a consequence of domestic clearly being so slick, that if everything is going through Vocalink and it’s all instantaneous, then suddenly I need an IBAN and I’m using SWIFT and I have an intermediate banking relationship to think about – it’s not easy – the high street banks don’t know how to do that. It’s not a motorway, it’s like a country road. The banks like motorways.
I think the reality is, increasingly we offer a service which the banks don’t really want to do.
How Technology could change International Payments
Mark: I think you need to start with what your specific customer needs. If you’re doing high volume remittances, then the cost of your distribution becomes central to your operating model, or the speed of your distribution becomes central to your operating model or both. If you think of what we do at Moneycorp, we make a commitment that we deliver your funds whole and the reason that’s important is that we’ve grown up paying utility providers in Spain for example and if you don’t pay them on time and whole, your electricity gets cut off.
Clearly, it would be good to reduce costs at all times from a competitor position, but if a lower cost equals less reliable delivery, then we probably would go for the higher cost with more reliable delivery – we are quite different from our competitors in that respect.
The Opportunity in Mass Payments
Mark: The fastest growing part of the company is actually bulk international payments. Which are essentially payments. And as our payments have to deliver whole, that gives us other opportunities such as for gig economies. We may make for example bulk international payments for a delivery company, that frankly UK high street banks can’t do. They can’t do it at price that is economic for the customer that is trying to get the service delivered.
These payments need to be delivered in sometimes relatively exotic countries – at least exotic from a London perspective. Singapore dollars isn’t very exotic, but it is if you run a high street bank.
Competition from the low-cost providers
Mark: So I go back to an old boss who said “Anybody can sell a fiver for four quid but there’s no future in it.” There are a lot of people in this space selling a fiver for four quid. You either have to have very deep pockets and you need to make sure your service is spot on as you fail to make one payment and your customer is gone.
So you can do some pairs like sterling Euro in a zero cost environment but try doing Sterling Hong Kong dollar or Sterling Singapore dollar or try getting money out of India in a zero cost environment, I think that’s going to be difficult. If your business model is in the remittance end and you’re focusing on low cost and are not so concerned if the recipient doesn’t receive a whole payment – well there’s many people offering that business model today but that’s not our business model. We tried to buy a remittance business but we couldn’t get it done – it’s too big a compromise on our service model.