The Back Office Bank — RBS, FreeAgent, RocketSpace and The Corda Team — A Potent Cocktail of Entrepreneurs & Digital Disrupters!
This blog explores the potential disruptive innovation that can be unleashed by combining a Bank, an Online Accounting Platform, A Distributed Ledger Network and a Start-up Incubator. Before we consider the impact of the combined capability and the potential for Banks to become the Smart Back Office for Businesses, let’s consider each individual ingredient
1997 — Digital Banking Launched
In June 1997 Royal Bank of Scotland (RBS) became the first UK bank to launch an online banking service (Nationwide was May 1997, but is not technically a bank). So RBS has a long history of digital innovation. Having said that, between 1997 and May 2018 how much has really changed? I can’t quite remember the functionality back then but today you can check balances, print statements and make payments - it’s probably all you expect from your banking app but in terms of the total number of back office processes it’s a relatively small set.
2007 — FreeAgent Launched
2007 saw the launch of FreeAgent and by 2011 it had a huge following of loyal customers. I say following because, as one of those early customers, you really did love the product. I can’t remember exactly when I switched but it was definitely a word of mouth recommendation and, once I’d tried FreeAgent there really was no turning back. I remember speaking to my accountant who was reluctant for me to change as it would be disruptive to him but I was sold - the whole user experience was fantastic.
Later on, perhaps 2012 (guessing now) bank integration was enabled and, having an RBS account, I activated the feature and this was another nice step forward.
However, despite the digital banking and the beautifully designed accounting package; life was still heavily manual with significant accountancy costs and hours lost to reconciliation, paperwork and manual joining up.
2012 — ESpark Incubator Launched
What’s an incubator? ‘In simplest terms, it’s a program that fosters new-company growth by centralizing functions like HR, legal and finance, in order to free up company founders to focus on their core competency’ Forbes
E-Spark is Scottish start-up incubator that has now scaled throughout the UK and internationally. I remember when ESpark started; it was really revolutionary for the UK, bringing a healthy mix of Service Design, Business Model Canvas type ideation with a focus on the entrepreneur, it was great fun and a bit like X-Factor meets Dragons Den.
RBS was a very early supporter of E-Spark, funding events, offering prizes and providing free business mentoring to start-ups. In addition to banking advice start-ups got access to other key services at discounted prices such as legal support from @HarperMacleod.
In 2017 RBS continued the start-up / entrepreneurial focus by partnering with RocketSpace to open a UK Campus ‘RBS is boosting its strategic commitment to UK innovation and enterprise by backing a state-of-the-art centre designed specifically to help fast-growth firms become the technology giants of tomorrow.’
The upside to both parties is tremendous. On one hand, small businesses would receive support and guidance through financial education, potential access to loans, access to peers and entrepreneurs that could validate their business model, offer feedback, share their network and provide referrals. On the other hand, banks would develop trusted relationships with solid businesses that could one day become safe, sound and ideal prospective customers. — Forbes
So we see here that without any real business automation, just by acting as a ‘business broker of services’, banks get a return on their investment in business incubators not only as new customers but also in terms of deep customer insight, understanding exactly the back office processes that small business need to execute and the associated pain points. Now imagine if this trusted incubation sponsor started to offer a set of back office services bundled with their online platform, services that allowed new forms of business transactions and digital asset transfer; more on this later…
2016 — Corda Distributed Ledger Launched
Corda is a distributed ledger technology created through the collaboration of a number of banks (see history here). The Corda White Paper states
‘A distributed ledger made up of mutually distrusting nodes would allow for a single global database that records the state of deals and obligations between institutions and people. This would eliminate much of the manual, time consuming effort currently required to keep disparate ledgers synchronised with each other. It would also allow for greater levels of code sharing than presently used in the financial industry, reducing the cost of financial services for everyone. We present Corda, a platform which is designed to achieve these goals. This paper provides a high-level introduction intended for the general reader. A forthcoming technical white paper elaborates on the design and fundamental architectural decisions’.
We know from the R3 website that RBS has been working with R3 and the FCA on project Maison
‘Project Maison is a CorDapp developed by RBS, the FCA and R3 for creating and transferring mortgages on a distributed ledger. Fully supporting almost real-time regulatory oversight using Corda’s observer functionality. This project has shown that DLT, and specifically the Corda platform, can give the regulator a new tool capable of overseeing mortgage activity much more quickly and efficiently than before whilst greatly reducing data inconsistencies.’
So we now have a Bank, an Online Accounting Platform, A Distributed Ledger Network and a Start-up Incubator….
How might this cocktail of capability enable new Innovative Services for small and medium businesses?
The Problem
Small Business never have enough time and usually cash is very tight, so the burden and cost of back office administration is a significant problem; a necessary evil.
Purchase to Pay Pain
Just to paint the picture of how onerous simple administration can be consider a small food business. The business ‘Bob’s Burgers’ orders food daily to avoid waste. So in the evening, Bob phones up his meat supplier to order 100 beef burgers, the veg supplier to order 50 tomatoes and then he realises he’s almost out of packaging so he calls up his packing supplier to see if they could deliver 200 burger cartons.
Bob then jumps on email and sends an email to the 3 suppliers to confirm the order. The Burger supplier emails back saying they just realized that Bob is past his credit limit so must make a payment on account before another order can be placed. Bob logs into digital banking, makes the payment and then emails the meat supplier, the meat supplier confirms delivery for next morning.
Next morning the meat supplier arrives, Bob inspects and counts the food, cross references the order and signs the paper work. Next the tomatoes arrive and then finally the packaging.
A week later, Bob gets some quiet time and decides to do banking, looking through email he realises he has not received an invoice from his vegetable supplier for last week’s delivery, so he emails to request it.
A week later Bob receives an email from his supplier stating payment is late; Bob downloads the invoice, logs on to digital banking and pays the supplier.
Two weeks later Bob gets an email from his accountant stating it’s quarter-end and the VAT return needs to needs to be completed so can he upload all invoices and receipts to the accounts package.
Then Bob goes into email, downloads the receipts and invoices but can’t find the invoice for the packaging - he knows he had it but he must have deleted the email. Bob emails to request a copy. Next day Bob logs onto FreeAgent and attaches all receipts to the transactions. Bob’s Accountant then goes through the ledger and assigns each of the transactions to a category cost of goods; marketing and HR, calculates the VAT and emails bob the return to approve.
I could extend this out — but hopefully what is evident is that with multiple systems and duplicate facts about transactions, the manual overhead in keeping things in sync is significant. This is an area where small businesses often fail to keep on tops of things, and this failure leads to cash flow problems; which (behind poor market fit) is the number one reason start-ups fail.
Solution — The Back Office Bank
Now Imagine a new world — a world where Bob had access to one platform that gives him access to a business network with his bank, his suppliers, and his accountant; a network that enabled Bob to:
- Administer his business — check bank balance, check status of finances, view financial, commercial and legal documents
- Transact his business — place orders, issue, receive and sign legally binding agreements, register trade marks and copyright, issue, receive and sign shareholder agreements; employee terms and to contract
- Execute Financials — make payments, schedule payments
Now Imagine if this could be enabled with proforma documents and templates and then optimised, streamlined and automated with smart contracts.
This is where the ‘Acceleration of Business Performance’ described in this HBR article comes in.
On top of this ledger, many blockchains will provide “smart contracts.” These are representations of business processes in code; they extend the opportunity to have not just attestable data shared between multiple parties, but also attestable processes. Organizations can agree on the contract that defines HOW their business will be done, and that implementation will be executed consistently with attestable recording of the interactions by the participants. When fully automated, blockchain can enforce consistency in execution, assist with dispute resolution, increase accountability, and deliver end-to-end transparency that can inform better business decisions.
Scenario 1 — Taking the scenario above, Bob logs onto his ‘Bob’s Burgers Node’ via FreeAgent; selects his meat supplier from the Network Map, selects the order ‘flow’ to execute the ordering smart contract. Bob can see that his supplier’s ledger is showing his account at maximum spend, so he executes a cash transfer. Bob then executes the order which kicks off the pre-agreed flow between each business. Next day food arrives, Bob confirms acceptance and updates FreeAgent. This triggers the standard contract payments terms and payment is automatically made on the due date. Ledger, Bank Account, Invoices, Receipts all automatically reconciled.
Scenario 2 — Once Bob has his new back office capability he can now use this capability with his suppliers to ensure they are all compliant with regulations. Let’s take a look at the UK Food Standards Agency Cooksafe Manual.
Both the Meat Supplier and Bob’s Burgers have to keep records of the temperature of the food at critical points e.g. the point of delivery. For anyone who has worked in kitchens this is often a great big folder stuffed with A4 sheets (this is what the Food standards inspector will look for when they visit — often rapidly populated the day before the inspection).
Now imagine if, at the point of receipt along with acceptance of food, Bob’s Burgers and the Meat Supplier agree the temperature of the food and write this to their ‘blockchain’ a blockchain that the regulator can see (more on this next post).
An immutable, shared, digital record of the food safety check points would reduce costs to restaurant and suppliers, improve standards and ultimately, if there is a food safety issue, allow immediate traceability.
These are two really simple scenarios so much more will be possible; we know R3 Corda is working with legal firms (see article on R3 Legal Center of Excellence — LCoE) and regulators. A big feature of the platform is the ability to attach legal prose to smart contracts, so it’s clear which prose applies to which code. In the same way, it is possible to apply policy, regulation and standards to transactions so everyone is clear what applies.
Therefore, a point-to-point business network for executing commercial arrangements that are legally enforceable and meet regulator needs is in the DNA of Corda.
Substituting email and manual intervention (the current methods for connecting systems and business networks) with distributed ledger technology will eliminate much of the time consuming effort currently required to keep disparate systems synchronised with each other, thereby significantly reducing time, effort and cost of back office administration.
So the next steps are all about connecting front-end applications like FreeAgent with the backend smart contract transaction platform like Corda Enterprise, you only have to look at the Demo of the client interface for ChainThat to imagine how this could fit into a beautifully designed interface like FreeAgent. This single window to business administration, transactions, compliance and financials will remove friction, time, effort and cost, freeing up founders and start-up teams to work “on” their businesses rather the getting stuck “in” the weeds of back office administration.
Of course, all of this is just guess work based on publicly available information, but what’s certain is when you put arguably the UK’s most accomplished entrepreneurs, with the brightest in Banking, highly disruptive emerging technology and a pot of cash, there’s going to be a disruptive explosion! I don't know how deeply lost in the design squiggle they are right now, but when they emerge everyone providing Financial, Legal, Accountancy, HR Software or Services better be prepared for the arrival of the Back Office Bankers!
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