FAANGS
One of the phenomena of the past decade has been the rise and rise of the so-called FAANGS stocks, so much so that the likes of Apple, Amazon and Google have not only dominated every moment of our lives, their founders now wield more power than many politicians, and indeed, some countries. Most of these companies are consumer focused: swallowing our cash, to enrich the management and their shareholders.
The flow of money and the benefit has been a one-way street in the FAANGS era, with these giants using technology primarily to boost their profits. The cost of course is seen all around us in the pandemic environment, with ghost town city centres, versus an online shopping and delivery boom. All of this is set against an economic slump, driven by the fall of the leisure, travel and hospitality sectors.
Double Pronged Disaster
We are therefore looking at a double pronged disaster, technology companies benefitting from and accelerating the decline of the old economy. Until now, none of the technology has seemingly been unable to do anything beneficial to either reverse the fundamental deterioration due to Covid-19, or even been applied to lessen the blow.
Indeed, if there was a one aspect that needs to be addressed over all others, it would be what is universally forecast to be a tsunami of job losses in the UK once the Government’s furlough scheme ends in the autumn.
In fact, we are already at the cliff edge. From the beginning of September employers will have to start topping up furlough contributions, ahead of the end of October when the safety net is removed completely.
Unemployment Armageddon
The problem of course is that there is no November 1 start date for the economy to revive to compensate for employers for having to pay their staff again. As payroll is the biggest drain on a company’s finances, it is likely that rather than having to financially jump off a cliff most employers will simply let their staff go, and so we will have unemployment Armageddon on an unprecedented scale – in the millions.
Hi’s Pay Asset Finance [PAF]
What can be done to prevent this scenario? Perhaps ironically, and uniquely, we may soon witness a tech company, in this case a fintech company, arrive just in the nick of time. Its mission is not to exploit the nightmare, but actually prevent it happening.
The initiative is the work of Scottish entrepreneur David Brown who has a background in invoice settlement and payment technology. He is CEO of fintech group Hi55, and proposes a Working Capital Jobs Retention Scheme (WCJRS).
Under this scheme the massive payroll burden of corporates would be underwritten by the banks and finance houses, once the Government agrees to WCJRS. The Hi system works because existing legislation already guarantees any arrears are paid in the event of a company’s insolvency. Therefore, in theory, any payroll can be financed from that of your local restaurant to blue chip names such as British Airways.
British Airways
Indeed, BA is certainly a case study for our times, having felt the brunt of the nosedive in travel. If it fell victim to an October 31 / Halloween end of furlough nightmare, the UK taxpayer could be on the wrong side of a £500m hit in the first year, and £300m annually thereafter. Indeed, the 12,000 staff already let go mean that the British public are facing a £124m bill annually, not including welfare benefits and lost taxes.
The difference to a company’s balance sheet of not having to set aside payroll expenditure would be analogous to the difference between buying a car outright or leasing it. In current conditions with profits tumbling, the freed-up cash can make the difference between going bust or not, or investing into growing a business, or sitting on hands.
Night And Day
To illustrate the “night and day” difference, of with Hi or without, it may be worth investigating the following example:
Going back to BA a company with 30,000 employees, earning an average of £2,500 a month, would need to have £225m set aside to fund 3 months pay, whilst the future is very uncertain. Using Hi’s [PAF], rather than £225m BA would require just £56.25m with finance costs of less than £500,000 a month. As well as the release of £168.75m, BA now has a choice of either just enjoying being under less financial pressure or using it to invest in its future. Clearly, in many cases, given the present environment, Hi could mean the difference between staying afloat or going under. In contrast if BA did check out, not only would a further 30,000 jobs be lost and seeking benefits but also HMRC would also lose circa £300m per annum in tax revenue, the finance costs surely look small in comparison to what’s at risk?
Zeitgeist
Although Hi has both simultaneously captured the zeitgeist with its offering and is in the eye of the furlough hurricane, it is not an overnight sensation. It began in June 2019, with its technology platformed backed by Japanese IT services giant NTT. Hi already has a big chunk of the finance / funding ammunition it is ever going to need: partnerships with top supply chain finance firms which gives Hi access to over 100 financial institutions.
The Big Four accountancy firms were always going to be key, and Hi is already involved in advanced discussions, with regards to working capital / restructuring work. In addition, Hi’s infrastructure includes APi’s into all major timekeeping platforms such as Kronos, and API’s for all payroll providers I.e. Sage in the UK who account for over 8m UK employee payslips per month.
FTSE 250 Client
Hi’s first major client is a FTSE 250 company with 20,000 employees, so it has clearly hit the ground running. This is especially so given the way that the foundation work such as building its fintech platform with NTT, securing its legal frameworks, and building a liquidity pool are all in place.
Nevertheless, even though it is clear and logical that Hi is likely to be as significant an entity as the companies it is partnered with or has as clients, the urgency at the moment is all to do with what it could achieve on a practical basis. This is both as far as the UK jobs market in general, and in particular to prevent a surge in unemployment later this year at all.
Sunday Times Article
The Sunday Times has recently reported that Hi has caught the eye of the Bank of England, is being recommended to the Chancellor Rishi Sunak by the SNP, and has the support of former Chancellor Norman Lamont. However, with time rapidly running out until the end of furlough, the luxury of any leisurely consideration of the WCJRS has clearly come and gone. It seems paramount for jobs and the economy that the Government is able to act as quickly as possible to adopt Hi’s initiative.
Pay On Demand
Hi with or without an estimated £5bn value in WCJRS, should be just fine in a cash strapped corporate environment with new customers rolling in. It can truly be said that it will be a company which helps, rather than just takes, like the FAANGS brigade.
Going forward we are looking at innovation: Hi’s rollout will include weekly payroll, and then pay on demand, which effectively means that it will usurp part of the role and cost of banking services to consumers. Effectively, this will make Hi a challenger bank, but with the foundation of being a punchy financial entity in its own right via its new pay asset finance offering.
Swift Adoption
It is evident that Hi look set to grow rapidly. But without Hi’s WCJRS initiative, the Government’s finances and the economy could be staring into the abyss. The hope is Hi’s current campaign for the adoption of its initiative is successful as soon as possible.
