PSD2 imposes new legislation on Payments Service Providers

diagram showing the compponents of complianceThe Second Payment Services Directive (PSD2) is due to become UK law on 13th January 2018 and it imposes huge penalties on non-compliance.

These EU regulations are intended to improve consumer protection and digital security for online payments and cover the processing of online payments.

Despite Article 50 the UK will still have to comply, not just until it leaves the EU but afterwards if we are to do any online business with the EU.

How do firms comply with PSD2?

SME and larger exporters using digital Payments Service Providers, not to mention those PSPs in the Fintech and traditional financial services sectors, need to keep their businesses active and viable so they would be advised to look at their current processes and payment systems and amend them where necessary.

PSD2 has four main stated purposes:

* Improved EU integration
* A strong regulatory framework
* Enhanced consumer fraud protection
* Encouraging lower prices for payments

Compliance with the new regulations means that PSPs will have to provide information and transparency for the parts of any transaction for which they are responsible with regard to the charges and conditions relating to national and international payments.

Compliance also focuses on the need for strong mutual authentication of payments, the sharing of account and financial information and financial transactions.

Surcharging will be banned for card payments in the majority of cases (including consumer debit and credit cards), both online and in shops, such as when booking flights or paying in a newsagent. This will apply to domestic as well as cross-border payments.

PSPs will also be held liable in the event of a problem being attributable to them or their lack of compliant systems.

To comply with the new PSD2 regulations, PSPs will therefore need to review their passwords and authentication solutions, IT systems and customer interfaces. This may also help them to identify new potential products and services none the least that provided by a K2 investment: SafeLogin™ by

Marketing materials and customer terms and conditions may also need to be reframed to comply as will complaint handling and alternative dispute resolution procedures.

PSPs will also need to review and possibly strengthen their fraud, security and risk management processes as well as their reporting requirements. It may also be necessary to review staff resources and training.

Finally, they should also be aware that the scope of the new regulations has been widened to include not only private consumers but also business customers, so many of the new regulations will no longer be subject to corporate opt-out provisions.

Is another tech bubble looming?

tech bubble about to be burstRecently, I heard Sam Altman, president of the start-up incubator Y Combinator, who had come over to the UK from Silicon Valley to preach to the tech faithful about the sunny uplands of the world of tech.

According to an article in The New Yorker in October 2016, “Like everyone in Silicon Valley, Altman professes to want to save the world; unlike almost everyone there, he has a plan to do it”.

He is also the co-founder with Elon Musk of OpenAI, a non-profit that the same article describes as “a hedged bet on the end of human predominance—a kind of strategic-defence initiative to protect us from our own creations”

In London, Altman’s followers converged on Shoreditch Town Hall, all of them having pre-registered for tickets to hear him. Many of them could not get into the hall, even though they had tickets. The queue was hundreds of yards long. It was a sell-out that had been over-sold

The message and why I see another tech bubble

Altman’s message was all about how Silicon Valley is the only place to be because they have the vision to change the world and have the solutions to the world’s problems. He predicted that within 10 years, 70% of the world’s jobs will be done by AI. But he also argued that the cleaver people in Silicon Valley were going to ensure that everyone in the world would have food, income and fulfilling jobs to sustain them so no one should worry.

The audience loved it, but all I could see was a bubble close to bursting. It is like the later stage of a cult at the point when it isolates itself from the world.

There is a precedent in the dot-com bubble that collapsed in the late 1990s, when the valuations of companies in the tech sector increased very rapidly thanks to a cult-like belief in its infallibility. The focus was on user numbers instead of profit. Over the period 1999-2001 many companies failed completely while the value of others, such as Cisco, plunged by more than 80%. Some, such as Amazon, Microsoft, Apple, Cisco and Google survived and eventually became some of the largest US corporations.

The bubble involves two elements, the belief that all entrepreneurs can participate, and the investors to sustain them. Like in the late 1990s it is obvious that only a very few entrepreneurial companies will survive. And picking the winners is difficult, only hindsight makes it easy.

In March this year the Guardian was the latest in a number of news media, including and Bloomberg, in October 2016, asking whether there was another tech bubble looming. The evidence cited included that the rental housing market in San Francisco had plateaued and there were signs that Venture Capitalists were making fewer investments, start-up valuations were falling, and recruitment was slowing.

However, with the examples of Google and Amazon there will be no shortage of believers. And while investors are willing to fund entrepreneurs then the tech bubble will continue.

Plainly there is no shortage of believers but eventually reality will kick in and the bubble will deflate if not burst. Investors will seek safer places for their money and entrepreneurs will find jobs or at least pursue more immediate profits. Very few companies will become the next Google or Amazon.

Pre-Exit Planning – A Summary Guide for Family Company Shareholders

retired couple relaxing on yachtMany thanks to John Buxton, of Kingsworth Associates in London, for this excellent, comprehensive contribution.

Family business owners are often so focused on making their business a success that any ideas not directly related to this goal are put on the backburner or ignored completely. Set out below are a number of issues which can and indeed should arise for consideration prior to embarking on a formal sale process.

Pre-Sale Grooming

It is instructive to address any possible so-called ‘grooming’ issues which can help to make the company more attractive to potential purchasers. There is no definitive or exhaustive list but issues which commonly fall for consideration include:

Management: the nature and quality of second tier management, in particular whether it is of sufficient quality that will allow selling shareholders to walk away and enjoy a clean exit.

It is also very important to anticipate how the management team may react once they learn of plans to sell the Company, especially if they might wish to propose a management buy-out. Vendors and, indeed, the eventual purchaser will need to consider how to reassure and possibly incentivise the management team in order to avoid future disaffection.

Administration: ensuring that a company’s statutory and tax affairs are in order.

Accounts: issues which typically arise include whether the accounting policies are in line with generally accepted practice; whether there any excessive provisions which could be released; and whether there are any excessive costs or non-commercial expenditure (including so-called “lifestyle” costs) which a purchaser would not wish to carry going forward. It might also be appropriate, if a formal disposal process is anticipated to be some way off, to review rather more sensitive areas such as marketing budgets and staffing levels.

Pensions: whether, in the event that the company has a pension scheme, there is a deficit or there are onerous post-retirement obligations

Restrictive articles of association: whether there are restrictive conditions attaching to any share sales, such as pre-emption rights.

Intellectual Property: whether the company owns patents, trademarks and other IP and has taken appropriate steps to protect them.

Existing contracts: whether there would be any problems in relation to contracts with third parties in the event of a change of ownership of the company’s shares. Indeed, are there written contracts in place with principal customers and suppliers.

Litigation: whether there is any threat of pending litigation, for example, from former employees/directors, and whether any provision has been made for such contingencies.

Taxation: whether the shareholders have implemented beneficial tax-planning measures, and whether they will qualify for existing statutory reliefs, an obvious example being Entrepreneurs’ Relief.

Staff communication: whether due consideration has been given to what should be disclosed to staff, how and at what stage in the process, in order to avoid damaging staff morale.

Structure of The Transaction

Prior to embarking on a formal disposal process, it is necessary to consider and agree shareholders’ preferences as the structure of any eventual transaction. In the overwhelming majority of cases, private company shareholders will elect to pursue a share sale rather than an asset sale, whereas purchasers usually prefer to acquire assets instead of shares. The principal advantages to sellers of undertaking a share sale revolve around the relinquishment of liabilities and a simpler, more beneficial tax treatment, thus they comprise vast majority of family company sales, barring exceptional reasons for pursuing an asset sale.


It is of course axiomatic that every company is worth what someone will pay for it, and that will be different amounts to different purchasers. Thus, notwithstanding any initial theoretical thoughts, clearly the real test as to the valuation range which purchasers are prepared to pay will only become apparent once a marketing exercise has been undertaken and initial, indicative responses have been received.

However, it is very important to discuss and agree with an adviser what would constitute a minimum “walk away” price before undertaking a formal sale process so that shareholders’ expectations can be properly managed.

Being honest with yourself and the power of saying “no”

untrustworthy-looking businessmanFar too many SMEs are not explicit about what their business does and make it harder for themselves when selling.

It may be that they need the work.  It may be a lack of clear, precise thinking about what business they are in. Or it may be over confidence in their ability or they simply want to help clients even if they don’t really know what they are doing.

However, all this can lead to costly mistakes, whether paying for external expertise or time spent on unfamiliar matters, disappointed clients and a damaged reputation.

Much better and more impressive is the business that knows precisely what it can do, can ask the right questions to clarify what a prospective client is looking for and, if it cannot supply it, has the confidence to say “no”.

Even better, if it knows its sector well enough and works with others in the sector then suggesting another firm can yield the benefits of referral and collaboration.

The honest plumber

A plumber might be asked by a potential client: “Do you do tiling?” Several might answer “yes” to this question but rarely do plumbers specialise in all aspects of tiling.

First there is the preparation of walls or floors and need for them to be stable and or waterproof, few plumbers will be aware of the alternative waterproofing systems that might be used in shower walls as a base for tiling. Again, few plumbers will know much about the different types of tiles, tiling cement and grout that might be used in different circumstances, let alone have experience of using an electric tile saw or laying out tiles so they will look right at the edges and corners.

The same plumber might be asked by a client to fit a bathroom, kitchen, boiler, unvented water heater, central heating and any number of other jobs involving water in the home. And how tempting it must be to say “yes”. Better is to either say “no”, or offer to do the plumbing elements and introduce other specialists, or to retrain and become a tiler, or become a project manager of the various trades, but never say “yes” unless you really do know what you are doing.

The honest broker

Finance brokers are a particular group of people I meet who seem incapable of being clear what they specialise in. Trying to find out what they sell would involve conversations about sales ledger finance, vehicles, plant & machinery, mortgages, even grants and investment but despite the promise they all too often were only offering sales ledger finance solution.

It is always better to develop a reputation as an outstanding expert in a defined product or service than as a generalist “jack of all trades and master of none”.

It is also more impressive when a business has the confidence to say “no” when what a client is looking for falls outside their remit.

Why business owners should have an exit strategy from the start

statue of man thinkingIt is the last thing a business owner is likely to think about at the start or in the early stages of a new business, yet many consultants advise that an exit strategy should be part of the start-up plan.

They argue that knowing their eventual goal will determine how owners structure and develop their business and the kinds of people they may employ.

Among the eventual goals could be:

* A large income
* Wealth from a sale of the business
* Ego by providing evidence of your success to others
* Power from having influence over others
* Lifestyle being your own boss, doing something you enjoy or making a decent living to fund something else you want to do
* Security or legacy by building a business that can be passed on to children

These goals will determine both exit strategy and business structure

Fundamentally the choice is between building a business that can be managed by others, or one that will die when the owner ceases to be involved.

Legal identity tends to be key as a Limited Company is easier to sell than a sole trading business.

Consider, also, what is a realistic time frame in which to achieve these goals. There are plenty of stories about young entrepreneurs who started a business in their early 20s, made a fortune and were able to retire in their early 30s. Do you have a unique idea for a product or service that will be snapped up rapidly?  If not the time frame to bring the business to a saleable point may be longer but these days retiring at 50 with a comfortable income for many is an attractive proposition.

Having clarified the goal, it is also important to consider anything that might limit its saleability. Do you intend to have shareholders? What long-term contractual agreements is the business involved in?

There are generally three categories of buyer for a business: a trade buyer who knows the industry, a finance investor who likes the income, or existing management.

The type of buyer is influenced by your goal and at an early stage the expectations of key people will need to be managed. Managers and family in particular will need to be trained if they are to become directors and owners, which is very different to what will be expected of them if the business is sold to a private equity company as a finance buyer.

There are many other factors to consider at start-up. A key one being the brand and the culture needed to establish a solid and reliable reputation that justifies a loyal customer base.

Being your own boss and making a decent living depends more on sales and margins than investing in the future of the business. However, while you may be making good money and enjoying what you are doing, it is still wise to plan for exit which may be retirement. Investing in a pension may be more important than investing in the business but still requires planning long before any decision to sell the business or indeed to close it down.

Include the exit strategy in the business plan

Whatever the owner’s goals, the exit strategy should be included in the business plan since this is the end goal and essentially the main purpose of the strategy.

Along the way, you will need to assess whether the business is still on track to meet the exit strategy and if necessary to make adjustments to either the exit strategy or the plan.

In a second blog, coming soon, John Buxton, of Kingsworth Associates in London has kindly prepared notes and a checklist covering the considerations and steps for implementing an exit strategy once the actual decision to exit has been made.

Collaboration – even with competitors – can be good for business

people fitting jigsaw pieces togetherCollaboration is about maximising power.  It can bring real benefits to SMEs to work with other businesses, even when those businesses could be regarded as competitors.

Look on many high streets and you will likely find that most of its estate agencies can be found next door to each other. Why would they do this?

The simple answer is to bring more customers through the doors. But it also means that each individual business saves on the cost of promoting its location to customers who more likely will visit the street where all the other estate agents are located. This analogy goes further where often independent estate agents in an area produce a joint publication that each distributes so that they can compete with the large estate agents that have many offices.

Collaboration can be found in both the natural world and the business world. Wales often hunt together and fishermen tend to work the same fishing grounds, in both cases because the locations are known to provide the most prolific source of their quarry but also through collaboration the fish are herded into one place making it easier to catch them and jointly profit from the collaboration.

Collaboration can even the odds

There are several other scenarios where it makes sense for otherwise competing SMEs to collaborate.

It is often the case when tendering for larger contracts, particularly in the public sector, that the small players are regarded with suspicion, particularly in IT supply. “Will they be able to handle this job?” is the question.

In this context, by forming a consortium or joint venture for the purpose of the bid, several small IT companies, each with its own strengths may dispel such doubts and improve the chances of success. Equally, they can benefit from pooling their marketing resources for the benefit of each business when looking for projects.

Another case where collaboration brings benefits to the smaller business is where each is supplying a much larger client and if negotiating alone may be vulnerable to being bullied over prices. Obvious examples of this are cooperatives such as farmers or independent small producers supplying, or hoping to supply, the larger retailers, who are notorious for the pressure they apply.

In the same way, buying cooperatives can bring down the cost of supplies and bought-in products by consolidating their purchasing power. An additional benefit here is the cost saving in terms of time by having one party represent the cooperative instead of everyone spending time on negotiation and buying.

The power of belonging to a professional association or even a franchise organisation should not be discounted. There are many such organisations whose branding is well-known and recognised.  Again, these offer scope for promoting their members in a way that cuts down on the individual members’ marketing costs but can also help with purchasing and standardisation such as documentation which all contributes to increased profits.

Equally, when lobbying government or where there are issues of unfair treatment between larger organisations and small independents, the power of a self-interest group collaborating cannot be discounted when it comes to getting a fairer deal.

The SME world can be a lonely place, but will be made more so if each owner regards all their competitors with suspicion.  Never discount the power of a group pooling resources to collaborate for mutual gain.

Restructuring is not a dirty word

dial pointing to optimisationThere is a saying: “If you always do what you’ve always done, you will always get what you’ve always got” variously attributed to Anthony Robbins, Albert Einstein, Henry Ford and Mark Twain.

Whoever said it, the phrase is particularly appropriate for businesses, from SMEs to larger corporates, in that no business can afford to stand still, even when things are going well.

Economic environments and business circumstances change as time passes and so should business plans, models and methods in a process of continuous improvement. If not, a business that was previously performing at the top of its abilities compared with its competitors can rapidly start to drift through inertia into potential failure.

An obvious example of this drift has been the well-known chains in the retail sector, which went through phases of presence on every High Street to shifting to large stores in edge of or out of town retail parks.

Then, when the pace of closures started to accelerate, it became clear that they had failed to factor in the growth of online shopping or react with agility to the challenge it presented.

Inevitably some went into administration and could not be saved, such as Woolworths and more recently BHS. Could they have been saved if they had been less complacent?

A proportion of consumers say they would still prefer to be able to inspect goods before they buy them, but it took a while before the retailers restructured and developed a model that satisfied both online and in-person shoppers – whether easy return by post or click and collect – and those that did have survived and remained profitable in what is a difficult market.

Manufacturing, banking,  estate agency, even legal services are all examples of industries that are undergoing a radical transformation with many individual examples of businesses that are going bust having failed to evolve.

So why does restructuring have such a negative image?

Sadly, many businesses that end up in need of restructure and turnaround leave it too late, until after an insolvency practitioner has been called in because they are in financial difficulties.

This, we believe, is why there is such a stigma attached to the word “restructure”, when actually it could be seen as a positive, agile and forward-looking initiative.

It may be that some have practised continuous improvement to update their business plans, but have lapsed in their rigour.

One issue is that change tends to involve investment in people, premises, equipment, process and marketing which can be expensive and tends to have a negative impact on short term profits. Incentive packages for professional managers have contributed to such short term thinking.

Investment like continuous improvement can involve constantly updating to stay current with the latest developments in an industry, where all too many treat it as a one-off activity that plants the seeds of future failure.

In a fast-changing economic world it does not take long before performance, sales and revenue start to slip, supplier prices perhaps start to rise and before they know it they are facing a cash flow crisis.

In fact, calling in a restructuring adviser when things are going well means a business has access to an objective outsider with the knowledge and expertise to assess their business model and processes and suggest improvements that will help a business to remain prepared for whatever the future may bring and to plan ahead for the investment they may need to make in such things as automation and new technology.

Whether restructuring, turnaround, change or transformation it should be seen as a positive initiative.

Are apprenticeships affordable for SMEs?

young apprentice learning to operate a mechanical sawAt the start of 2016 the Federation of Small Businesses (FSB) calculated that of the 5.5 million businesses in the UK an estimated 99.3% of them were SMEs, employing around 15.7 million people and accounting for 60% of UK employment.

Of these SMEs, which have increased by 59% since 2000, 95% fall into the Microbusiness category of those employing fewer than 10 people.

Representing just about every industry sector, SMEs are clearly a crucial part of the UK economy and, like their larger compatriots, many complain of skills shortages particularly in key sectors such as construction, engineering and catering.

No surprise then, that SMEs could be a fruitful location for apprenticeships and in August 2016 the FSB produced a report on the potential barriers to increasing their involvement.

While they found that a quarter of SMEs that currently have no apprentices would consider getting involved the FSB concluded that “more information and financial support are needed to help SMEs understand how apprenticeships work, what the costs are, what the benefits might be, and how to go about finding the right talent to help their business.”

Are grants enough to make apprenticeships affordable for SMEs?

Employers can receive up to 90% towards apprenticeship costs under the new Government scheme to be launched this May, one month after the apprenticeship levy on larger businesses begins on April 1.

The Government has also said that “Businesses with under 50 employees won’t pay anything if they employ apprentices under the age of 19, and will receive a £1,000 payment with an additional £1,000 payment to the training provider.”  In the recent budget, there was also a pledge to overhaul by 2020 the system of post-16 educational qualifications in areas such as engineering, design and construction, to just 15 so-called T-levels.

However, the smaller SMEs are often time and cash poor and it is debatable whether there is the spare capacity, regardless of the help towards the training costs, especially given the time and resources needed to train and administer new staff, let alone apprentices.

Concerns about the literacy and numeracy levels of school leavers could also add to the costs of taking on an apprentice and it must be remembered that apprentices are also employees so there will be additional costs such as NI contributions.

The Government issued a large collection of guidance notes earlier this month on the 15 funding bands, how the scheme will work, guides for employers, parents, approved training agencies, standards for specific industries including everything from fence installers to banking relationship managers reportedly with more to follow. This may help with the FSB’s concerns from last August.

But do SMEs, whose employees tend to be multi-disciplinary and fully occupied, have the time and capacity to also do all this additional online research as well as providing the in-house day-to-day management of schemes and the compliance rules that must be met?

The FSB analysis, perhaps not surprisingly, showed that numbers of SMEs are higher in Southern England relative to the resident population.

So, a warning this week from the Institute for Public Policy Research (IPPR) is particularly timely. It suggests that the apprenticeship levy, will raise less money and have a smaller impact in the areas that need it most, those that have been hit by deindustrialisation and suffer from low levels of qualifications, low productivity and low pay.

The new focus on upskilling young people to join the work force without a university education so that they do not end up in the cul de sac of unstable “gig” economy jobs and have some hope for future career progression is to be welcomed.

But there are plainly many questions about the costs in time and money before SMEs can feel confident that taking on apprentices is for them.

Can care homes be viable businesses?

elderly people in art activity in care homeThe provision of residential care for the elderly when they are no longer able to live independently is understandably an emotive issue.

But it must be remembered that however compassionate care home owners may be, they are primarily running a business.

The UK care home sector is largely composed of SMEs, with a few large-scale providers. They are businesses increasingly beset by financial, employment and compliance problems that are making it difficult for them to survive.

Like all employers, they face the increases in costs to meet the National Living Wage and for NI contributions alongside difficulties in recruiting enough employees willing to work in a low-paid sector not to mention training them. Inevitably, they face other increasing costs, such as energy supplies and food bills, both of which are in any case likely to be higher given the additional needs of frail, elderly residents.

Compounding the recruitment problem is the eventual outcome of Brexit, particularly relating to recruitment of workers from the EU, who make up a large proportion of care workers.

Why is finance such a difficult issue for care homes?

To some extent viability for the SMEs in the care homes sector depends substantially on the rate paid for their services, whether by private customers or by local authorities. Essentially local authorities have been reducing the rate they pay to as little as £350 per person per week while private rates can be well above £750 per person per week. This would suggest that those care homes that focus on private customers are viable while those focused on local authorities are likely to struggle.

It doesn’t help that many care homes are old and were not originally designed for the job, having been converted from a residential property with the consequent burden of maintenance, compliance and upgrading costs.

Much of the funding for small care homes is based on the value of the property rather than the underlying business, which suggests that failure and repossession are inevitable.

On the other hand, larger care home chains have increasingly turned to venture capital for finance, but many of them also derive a proportion of their revenue from local authorities exposing them to possible insolvency.

In 2016 the accountancy firm Moore Stephens found that the number of care home providers going out of business had been increasing year on year fuelled by reductions in local authority fees and rising property costs.

The Local Government Association has calculated that the spending gap in social care is likely to reach £2.6 billion by 2020.

Also, a Manchester University study last year questioned the appropriateness and sustainability of the larger chains using venture capital and amassing substantial debt when revenue is largely from government. It warned that at least one private equity owned firm could run out of money by the end of the year.

The increase in levels of debt is such that a BBC Panorama investigation this week revealed that one in four of the country’s 2,500 care homes is at risk of insolvency.

It also revealed that private care companies have cancelled contracts with 95 councils because, as one company said, they cannot do what is being asked for the money available.

The situation has prompted not only the Care Quality Commission (CQC), the industry’s regulatory body, and Martin Green, the Chief Executive of Care England, which represents independent providers of care, to warn that the whole sector is “at a tipping point”.

So, unless the rates paid by local authorities increase dramatically it seems that the answer to our title question is a resounding “no”.

In a digital world how useful are business conferences?

speaker at conferenceIn today’s global economy it is possible to use digital technology to share information or for face-to-face conversations with colleagues or clients almost anywhere on the planet.

This can cut down dramatically on business overheads, improve efficiency and at the same time demonstrate corporate social responsibility for the planet and the environment by cutting down on the air miles.

Yet this does not seem to have diminished the appetite for business people, academics or politicians to congregate at a physical location to exchange ideas or learn more about a particular topic.

But is attending business conferences really necessary?

Small business owners are busy people and fitting in a few days away from the office or works can be a challenge but while the information gleaned from a topic-specific conference may be available in other ways there are other potential benefits that can be gained from the human interaction at a conference venue.

Live meetings can reveal other and perhaps better new ways of conducting a business and when the possibilities and benefits of collaboration, even with competitors, are becoming more apparent a conference offers a chance to interact with and form alliances with other businesses in your sector.

It may also offer opportunities for connection with new suppliers and discovering innovative new products and services.

No matter how knowledgeable an individual owner may be about their sector, running a business can be an isolating experience and it is easy to miss new trends or ideas when immersed in the day-to-day activities of an operation, so the conference may also provide a welcome opportunity to take time out for some strategic thinking.

A good example of this is the annual conference being held in Manchester tomorrow (March 22) for members of Pro-Manchester, an organisation for businesses in the Greater Manchester area and one that is likely to be a key influencer for the prospects of a Northern Powerhouse. This year’s topic is the Challenges of Digital Disruption, something that is likely to affect many businesses thanks to the activities of virtual companies like Uber, Google, Amazon and others.

It is helpful also to bounce ideas off other people in the same or similar fields to refine an idea and work out what may be practicable.

For regular conference attendees, there is also the possibility that over time they may come to be regarded as experts in their field, leading to gaining a reputation and to invitations to speak at subsequent events, all of which can add value to the business the attendee is in.

Conferences are great places for making connections, often in the so-called “coffee machine” or “hallway” conversation.

All of the above boils down to one invaluable benefit of the conference, aside from its stated purpose of gaining up to date information on a specific topic – and this is networking.