Entrepreneurs, Let’s Finance Businesses Better!
For 6 weeks in late 2017, I had the once-in-a-lifetime opportunity to work with Alice on her mission to produce a report for the French Minister for the Economy & Finance. The report aimed to analyze the pitfalls in the financing value chain for all kinds of companies — from startups to mid-caps — and submit proposals that we believe would improve the situation. You can read the report here (in French) and Alice’s wrap-up (also in French 🇫🇷) here. And do note that she ends her summary with a note to herself: “I know that if I want things to change, my energy has to be concentrated on the startups’ success. Period.”
Having witnessed things from the inside, I couldn’t agree more. And so I’d like to try and explain why it will be through entrepreneurs that the objective of financing businesses better will be achieved.
Simply put, there are huge and painful problems in the financing value chain; solving those problems will require bold moves and iterative solution building. That’s as entrepreneurial as it gets!
Let’s have a look at the various problems and the reasons why change will only come from entrepreneurial ventures willing to tackle them.
I) A Mountain of Problems
Of the six weeks we had to draft the report, five were dedicated to interviews: through the government and our own network, we had access to the top executives of all the organizations involved: insurers, banks, asset managers, institutional investors, general partners, professional syndicates, and entrepreneurs. They gave us their views on the frictions that exist in the financing value chain. Of course, their opinions on what to do were biased because they were all defending the interests of their own organizations. The frictions, however, are very real.
The best way to create a valuable startup is not to look for ideas, but to look for problems worth solving. Luckily, we did all that for you ;)
A) The public doesn’t know what’s going on
If you’re talking about financing businesses, you’re obviously going to talk with entrepreneurs; but you also need to talk with individuals about how their savings are allocated.
Both businesses and individuals aren’t particularly educated when it comes to understanding, on the one hand, how they can finance their businesses better, and on the other, how they can optimize their savings and investments.
This lack of understanding comes from the overlapping of a few complex sub-problems:
1 — The understanding of basic economics in France is subpar
French people and capitalism do not get along well. Whether this comes from the country’s history, political balance or educational system is not really the question; no matter what, the outcome is that corporations aren’t in the public’s good graces.
This makes the task of improving financing very hard for several reasons. As a rule, savers are not comfortable with risk. The risk-averse French thus invest in very liquid, low-risk, low-return products that cannot fuel the economy over the long term. This then makes it more difficult for entrepreneurs to launch and later recruit and align employees with the interests of their companies.
Tackling the subject is a matter of education: how to pragmatically and objectively teach children what the economy, industry and finance encompass early on? It’s not about influencing them (after all, we teach pupils about politics without saying they should be left- or right-wing), it’s about opening their eyes to different business realities: entrepreneurship, big corporations, local shops, freelancing, employees, unions, non-profits… Schools, so far, haven’t taken on this responsibility. That’s a problem.
2 — The rules are plenty and puzzling
Schools, however, aren’t to blame regarding the task of investing itself. When it comes to savings in France, the amount of products that exist, and even worse, the rules that govern them, are almost endless. Since we had a very specific mission, I spent my time reading thousands of — very boring — pages to try and sort it all out. But no regular citizen should have to do that.
Just like Payfit organizes and simplifies the humongous amount of payroll situations in France, there should be a tool to calculate expected returns, the optimal savings allocation according to your risk profile, the fiscal implications of choosing X over Y, or even to just clearly display the amounts that you currently have in a “PEA-PME”. Such tools exist (Bankin, Yomoni) but they struggle because of other problems in the value chain.
The unwieldiness of these savings products can be tackled in two ways:
- By the government: decreasing the number of products, laws and fiscal exceptions, and making the individual’s savings allocation more intelligible.
- By entrepreneurs: adopting an efficient communication and distribution style. That leads us to…
3 — Communications and distribution are inefficient
Down the line, communications and distribution represent another hurdle that has to be overcome to improve public education regarding financing.
I am convinced that the majority of people working in the banking industry do their best to explain the products and options to their clients. But not everyone is lucky enough to have a good advisor, and I doubt anyone has ever found it very enjoyable to talk with a bank clerk about savings products or read the conditions of a loan. And that shouldn’t be the case. Digital tools allow us to treat everyone with the care they deserve, and the customer-centric experiences startups have introduced in all value chains should be an inspiration for transforming communications for banking products. It should go from dull, serious talk about rates and caps and interest to something humans can easily understand.
It can work: the insurance company Alan has a clear, efficient and even funny way of talking to their customers about insurance products. That’s good communications.
Regarding distribution, the fact that entrepreneurs have no place where they can find out about all of the financing products available shows there is lots of room to do more: articles, videos, meetups, websites, comparisons, financing intermediation… Private actors can tackle the same issue with different methods, since the only thing that matters is the result.
B) The tools are outdated
A second set of problems in the financing value chain is that lots of the tools are outdated. The tax authority in France uses a 20-year-old technical standard (EDI, instead of XML or JSON) to transfer corporate tax filings. Core IT systems of certain banks date back as far as the 1970s, which poses serious threats to their competitiveness and now requires a formidable amount of boldness and foresight to make a sensible change.
Luckily, this gives entrepreneurs an incredible edge in building new, customer-centric banking products based on mainframe architectures with flexible, state-of-the-art standards. There’s just one tricky subproblem:
The data is shackled
Banks are in a monopolistic situation: they are the only ones allowed to perform credit operations, they own the banking data of their clients, and they are held responsible if anything malicious happens to their clients’ bank accounts. As a result, they are unwilling to collaborate with third-parties, especially fintech entrepreneurs, for three reasons:
- Strategically, they don’t want to share a precious resource (data) with their competitors, especially more agile and customer-centric competitors.
- In terms of risk management, they cannot afford to be held responsible if one of their clients somehow loses money through the operations of a third party.
- Technologically, they are sometimes unable to keep up with the best standards and simply cannot technically transfer data.
Entrepreneurs have very little control over those issues and it’s up to both the government and the banking authority to dig into them. But let’s be clear about what is in the best interest of the end-users — the savers and the entrepreneurs.
As a democratic principle, the data of the end-user is theirs. If they want to transfer it to any third party so that they can access services — especially services that perform better than the tools legacy players are offering — that is their right.
Banks should respect the wishes of their clients and transfer data when asked. If they are technically unable to do it, then it’s up to them to cover the costs of modernizing their IT infrastructure. Those costs are huge, it will hurt profitability, but in the long run it is the only option to prevent them from dying off anyway — the choice shouldn’t be that hard. (I might add, as a personal opinion, that legacy banks are well placed to build tomorrow’s Bank-as-a-Platform and should honestly embrace technological change instead of just pretending to care about it.)
The tricky part is the liability. If data is just there waiting to be fed into algorithms that can then analyze and provide certain conclusions to a user, then third-party players should be pretty much able to offer whatever service they can dream up. However, if those players are going to perform banking operations (automated savings, wires, investments, transfers…), then they should take responsibility for that in terms of fixed assets, liquidity and solvency requirements, insurance, etc. That is the only fair way to ensure security for end-users.
So these are all large-scale issues that exist in the financing value chain. The interesting thing is, just like fractals, the more you zoom in on the value chain, the more you’ll realize those same problems exist at smaller scale: in life insurance, in equity products…
Entrepreneurs thus have the space to create solutions for very niche problems, and then grow by solving the same problem for the rest of the value chain or by solving the rest of the problems for the same niche. There’s a lot of work to be done ;)
II) Play, Don’t Pray
Surprisingly, the most interesting insight I collected throughout the mission had nothing to do with the content of the report itself. I was shocked at how change-resistant political bodies were and how little could be expected from the country’s institutions in terms of making actual changes in the way companies are financed.
I’m not saying our mission and report were useless. The proposals we made are dear to our hearts and we firmly believe that they will have a positive impact if they are implemented. What I am saying is that we can’t wait for better financing to simply come to us from the benevolence of the government, the regulatory authorities, or the legislature. The job will fall to pragmatic organizations that will implement changes on a small scale and grow big enough to improve the situation, while the aforementioned institutional players will oversee, regulate, and facilitate their development.
The reason why the mission of improving financing cannot lie with the government is because the process itself creates huge dissonances when you try to deploy it at a large scale, dissonances that morph into a kind of schizophrenia.
One: The distance between idea and action is huge.
We met with executives and decision makers from the biggest institutions involved in financing in France. These people obviously had an infinitely better grasp of the frictions in the financing value chain than we did. Some of them also had a very biased view of what should be done because they were defending the interests of their own organizations. But there were cases, fortunately, when the lobbying part of the discussion was less important (or at least less visible) and the comments seemed objective. Selecting the best ideas from that gigantic pile of — biased or unbiased — proposals to improve the situation of financing was a huge part of our job.
One itchy question I couldn’t quite scratch, though: If you have this idea and it’s so great, why aren’t you doing it already?
There were three categories of answers:
- Those that bluntly acknowledged that it was politically impossible, that it would create too much tension, or that it would mean changing a hard-won, or that it was part of another minister’s portfolio…
- Those that shoved off the responsibility, blaming X or Y for the alleged impossibility; or those that praised the status quo because other options were too radical…
- The interesting case of entrepreneurs (and I’m not only talking about startups) that were willing to make things happen but whose hands were tied by legal restrictions and legacy players.
If entrepreneurship teaches us anything, it’s that it takes boldness and radicality to create something impactful. Regrettably, radicality and politics rarely get along well, and the best ideas are watered-down to please divergent interests when implemented at large scale. This leads to suboptimal micro-measures, marginally improving the situation while not completely reshaping the landscape.
Fortunately, entrepreneurs have no distance between their ideas and actions and have no choice but to be radical and bold to stand out. They are not impacted by the first kind of schizophrenia.
But it’s really toward the second schizophrenic element that you have to look to improve financing.
Two: The job of an entrepreneur is preempt the future, imagining the possible and making it tangible. The government’s isn’t.
Entrepreneurs launch risky ventures made of successive iterations, ventures that can fail. The government cannot — and should not — proceed in the same way.
Government has to implement large-scale solutions that apply immediately to all citizens. If it fails to do that, then it will only overcomplicate the regulations and propagate exceptional measures that apply to a niche population without solving the underlying issues. This is why the job of government is mostly backward-looking: taking inspiration from what works or has worked and implementing the regulatory framework to oversee it.
There is little overlap between the two, but there are ways to reconcile both visions:
- The government can launch innovation cells able to work on small scale, low-cost experiments (sandboxes), inspired by the operational methods of entrepreneurs.
- Entrepreneurs can work freely to design and test solutions that the government will apply at larger scale if they prove efficient.
At the entrepreneurial level, breakthrough success will come not by collaborating with the government but rather by finding workarounds and struggling to solve small-scale problems in the financing value chain. Once there is a positive result to show, it is the government’s job to acknowledge it and make the necessary regulatory changes.
At the governmental level, it is important to be inspired by entrepreneurial methods. This is not only to improve public services with a citizen-centric approach (e.g. e-Estonia) rather than a bland Kafkaian administrative one, but it’s also to remain close to innovation and know when and where to take action to validate or correct entrepreneurial experiments. At the end of the day, this is where positive change will come from.
In conclusion, I give you a well-deserved tl,dr:
- The amount of problems in the financing value chain is surreal: the rules are many, the public is uneducated, the tools are outdated, the communications are dusty, the distribution is inefficient… Luckily, solving problems with a narrow focus and iterating to build efficient systems is the startup founder’s reason for being.
- At the end of the day, change won’t come from the government’s willingness to abide by proposals written by experts or non-experts: the process is too schizophrenic. First, the different actors are extremely capable at identifying frictions, but are politically unable to make bold moves. Second, government is a process that only works backwards by validating what exists, but that cannot — or will not — preempt the future. Entrepreneurs will be the ones building this future, pragmatically, by iterating, making mistakes, playing with the rules and making significant changes.
