Open Banking. Closed Minds.

A year ago we were told ‘Open Banking is about to change the way we bank forever’.

A year on….and we’re questioning: ‘what’s the holdup? Where is Open Banking?’

Just 1 in 4 people have heard of it, and only 1 in 5 of those people actually know what it means*.

So, it’s no surprise with such limited understanding that we’re not all shouting from the rooftops about the latest digital disruptor in banking. But are we wrong to ignore it? The likelihood is… YES!

By ignoring it, we could be missing out on better mortgages, cheaper household bills, better control of our own direct debits and extra spending advice.

The government-backed initiative launched just over a year ago and enables us, as customers, to log in to just one app, and have access to all our loans, credit cards, current accounts, and spending habits—even if those span across multiple banks.

PWC are predicting it as one of the biggest disruptors to traditional banking with 33 million of us expected to be signed up to Open Banking by 2022.

It relies on your bank sharing your current account data with regulated third-parties, and for it to work properly the more banks that sign up, the better. So, understandably, this has been met with reluctance from people who don’t want to share their spending habits with companies they’ve never heard of.

But surely giving up our spending habits is no worse than the Sainsbury’s and Tesco Banks of this world using our store loyalty card data to work out if buying avocado each week makes us a safer person to lend to? At least in this case the extra information could open doors to greater financial inclusion and more affordable, competitive loan services.

By giving up our data, challenger banks, fintech firms, and tech companies are forced to come up with more competitive deals for products like mortgages, overdrafts and insurance. All tailor-made around our newly available financial data.

So could this be the end of us trawling the internet for the best deals …. Instead we sit back while the companies battle for our custom?

The big names are on board – Barclays, HSBC and Santander are just 3 who have adapted their apps to include financial data from your other banks. And the fintech-savvy digital-only banks, like Monzo and Starling, are embracing it even more – allowing customers to choose from a range of products that can be integrated in to their existing accounts (e.g. Pension Bee to view pension balances). Debt management services are next; fintech companies have already started approaching credit score agencies to use the data to benefit the consumer by increasing levels of financial inclusion with debt management.

So is it just us, the consumer, who is lagging behind?

Is it time for us to realise that this isn’t just a gimmick, it’s the future. It’s dynamic, it’s disruptive, and it could really benefit the consumer.

The big question is, are we ready for this transformation?

*Source – Splendid Unlimited survey

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No bank? No problem!

Bank Clerk: How can I help you, young man?

Stan Marsh: I got a hundred-dollar check from my grandma and my dad said I need to put it in the bank so it can grow over the years.

Bank Clerk: Well that’s fantastic. A really smart decision, young man. We can put that check in a money market mutual fund, then we’ll re-invest the earnings into foreign currency accounts with compounding interest aaaand it’s gone.

[Blank stares and silence as it goes from the Bank Clerk, to Stan, to the Bank Clerk, to Stan]

Stan Marsh: Uh… what?

Bank Clerk: It’s gone, it’s all gone.

South Park geeks will remember the episode ‘Margaritaville’ where the US economy goes into freefall due to bankers behaving badly. All trust in the financial system erodes and chaos ensues. Ah yes, that’s right; this actually happened!

In the episode, Stan Marsh goes to bank a cheque and has his savings almost immediately wiped out by the bank. The bank clerk then dismissively asks him to move along. In the real world, many people, like Stan, don’t trust the US banking system.

The Federal Deposit Insurance Corporation (FDIC) has conducted a yearly survey since 2009 to assess the inclusiveness of the US banking system. It’s astonishing to us that 6.5% of US households (that’s over 20 million people) have no bank account whatsoever. They are dubbed the “unbanked”.

Reasons for Not Having a Bank Account, % of Times Citied 

Source: 2017 FDIC National Survey of Unbanked and Underbanked Households

Imagine life without a bank account and all manner of simple tasks become complicated.

It’s the norm to get paid and pay others through a bank account. We can purchase things at shops and online with a single piece of plastic. If you do want the physical stuff, just take it out of a hole in the wall. We can set up direct debits to pay bills and forget how much we are paying for the sports channels. Using a bank account protects our money from fire, theft and accidently throwing out the cash-stuffed mattress. It can also help us access credit for larger purchases, like a house. Heck, they even pay us interest for all of this goodness!

So who can the unbanked trust? One place to turn could be Green Dot, which has been providing an alternative solution since 2001.

Green Dot began life as a tech company before buying a bank and we believe this gives them an edge over the industry’s incumbents. Possessing the ability to build and distribute their own financial services products directly to the consumer has proven successful; they found their niche in pre-paid debit cards and largely helped develop the market into what it is today.

The idea is simple – it works much like a credit or debit card, except 1) you pre-load the card and 2) you do so at your local grocers. This has proven massively popular with the unbanked for the following key reasons:

  • Pre-paid cards are not linked to a bank account and there are no credit checks as no credit is on offer;
  • They can be used to receive wages and government payments such as social security and unemployment benefits for people without traditional bank accounts;
  • Transactions are made on a pay-as-you-go basis;
  • No overdraft allowance and no overdraft fees. Only use what you load onto the card;
  • Access the card at convenient places and convenient times, rather than queueing forever at your local branch

They aren’t perfect and certain fees still apply. But they can provide a great solution for the many millions who are currently excluded from the traditional banking system in the US. This hasn’t gone unnoticed; Green Dot won the Economics Inclusion Award 2017 at American Bankers Association.

If only Stan Marsh had known!

The South Park scene – there’s nothing rude don’t worry!

About the author

Euan Ker is a sustainable investment analyst. He is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Euan joined us in 2014 as an investment implementation analyst with responsibility for implementing macro investment decisions across a number of fund-of-fund mandates, totaling some £13 billion under management. Prior to moving to the ESG Research team in 2018 his responsibilities also included asset class, regional and currency hedging overlays through derivatives. Euan has a 1st Class Honours degree in Management with Economics from Robert Gordon University. He has the IMC professional qualification and has 5 years’ industry experience (as at 30 November 2018).

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The affordable housing conundrum

The UK needs more affordable housing

Development of new council housing has fallen off a cliff over the last half century. Last year there were 1,155,285 households on local authorities’ housing waiting lists in England alone. Local authorities no longer have the resources to be significant developers of social housing and the burden now falls to private house builders, and, particularly for social housing, the Housing Association (HA) sector.

New homes built by private and social sectors in England

Source – Ministry of Housing, Communities and Local Government

HA’s have been somewhat reluctant participants in the development game; happy to cautiously grow their housing stock, but not picking up the slack from the dearth of council housing. In addition, government policy has, at times, not exactly been favourable towards the sector. However Theresa May seems to be more predisposed to the social housing sector. Recent proposals indicate rent levels will return to being linked to inflation in the coming years, and there has even been a return of government grants, albeit relatively small, to fund new social housing development. The quid-pro-quo for this friendlier relationship is that housing associations have to get out and build new affordable homes.

Many in the sector, especially the larger associations, have heard the call. They have responded with a spate of mergers designed to pool resources and flex balance sheets to launch ambitious development programmes. Some of this will be funded by government grants, but much of will come from debt raised by HA’s in the corporate bond market. Indeed, they have become some of the most prolific issuers of corporate bonds in the UK market in recent months. It’s rare if a week goes by that my colleagues and I don’t have a meeting with an HA looking to raise fresh bond market finance.

New development programmes often consist of a mix of “tenures”. Some new homes will be for traditional social housing, some will be for shared ownership schemes, and some will be for outright sale on the open market. The latter subsidises the former and is all very sensible and commendable. However, from a creditor’s point of view it introduces more risk. Developing homes for outright sale exposes them to potentially adverse movements in house prices, especially in volatile markets like London. This increase in risk has been reflected in a downward drift in the credit ratings of some of the larger corporate bond issuers in the sector. When I first started analysing the sector over a decade ago, the small number of issuers generally had very strong credit ratings – usually in the broad AA range. Today, there are still a few who can boast an AA rating but they are the exception rather than the rule, as the table below shows.

Part of these moves reflect the downgrade of the UK’s sovereign rating (to which HA ratings are linked) in recent years, but the increase in development risk has taken its toll on the credit rating of many an HA.

We have long been providers of finance to the housing association sector, often through our ethical fund range, where it will continue to be an area of focus. However, now, more than ever, we are being increasingly selective about where we invest in this sector. We see most value in those HA’s with a proven track record of development through different property cycles, and on those whose focus is on developing primarily social housing, without taking outright sale risk.

HA’s have a tricky path to navigate: developing new housing stock to keep policymakers happy whilst simultaneously maintaining good relations with bondholders on whom they rely for finance. The two aren’t mutually exclusive, but will provide a difficult challenge for management teams in the coming years.

About the author

Iain Buckle is an investment manager in the Fixed Income team with responsibility for credit analysis, particularly securitised and structured finance assets. Iain is the co-manager of several funds with a primary focus on sterling credit mandates. His funds include pooled and segregated mandates and included in our ethical bond franchise. As an experienced investment manager Iain is responsible for overseeing the institutional pooled and buy-and-hold portfolios managed across the team. Iain joined us in 2000 from Baillie Gifford where he was a fixed income analyst, and has 21 years’ industry experience*. He studied Economics at Heriot Watt University.

*As at 30 September 2018.

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Higher education, higher quality accommodation

Recent figures from the Office of National Statistics showed demand for UK goods and services continues to grow, with exports rising to £637bn in the year to August. A rise of 5.5% compared to the same time last year. One industry leading that charge is Higher Education. The UK is the second most popular location, behind the United States, for international students. We have some world class higher education institutions in the UK, which offer highly desirable courses to international students.  Of the more than 1.8 million full time student population in this country, 23% are from abroad. It is a key export sector for the UK economy. That’s not to say there isn’t strong demand from within the UK as well. Overall, demand for applications continues to outstrip available course places. On average over the last 6 years, demand for course places has outstripped available supply by over 35%. We expect demand for places to remain strong over the longer term with demographic trends implying a significant growth in the student age population from 2022 onwards.

Full time student applications continue to outstrip available places

Sources: UCAS, HESA, Unite estimates

Place of study for 4.5 million international students

Source: HESA,UNESCO, QS World University Rankings, NUS, Education at a Glance 2016, OECD

Providing good quality, affordable accommodation to students is vital to the ongoing success of the Higher Education sector. UK universities frequently cite their guarantee of accommodation to first year and international students as a key competitive point of differentiation. Moreover, students are increasingly opting for purpose built accommodation, which offers dedicated facilities like study rooms, high speed Wi-Fi, and 24/7 customer care. This has the benefit of freeing up the existing stock of housing for more general needs. However, financial constraints on many universities mean that they are building very little new accommodation themselves, preferring to spend their money on upgrading campus facilities like lecture halls, libraries, and laboratories.  The gap has been filled by the independent providers of student housing like Unite, who are the biggest in the UK with just under 50,000 beds. They let out accommodation both directly to individual students, but increasingly through “nomination” agreements with various universities. These agreements see the universities guarantee Unite, to a greater or lesser extent, that they will fill the rooms in their properties. For the universities this allows them to continue to attract students, and for Unite it provides a highly visible and recurring income stream, usually linked to the level of inflation.

Unite and Liberty Living, a privately held provider of student accommodation in UK with over 20,000 beds, are prime examples of companies which help provide long-term, sustainable solutions in an important industry, whilst also potentially offering attractive returns for investors.

About the author

Iain Buckle is an investment manager in the Fixed Income team with responsibility for credit analysis, particularly securitised and structured finance assets. Iain is the co-manager of several funds with a primary focus on sterling credit mandates. His funds include pooled and segregated mandates and included in our ethical bond franchise. As an experienced investment manager Iain is responsible for overseeing the institutional pooled and buy-and-hold portfolios managed across the team. Iain joined us in 2000 from Baillie Gifford where he was a fixed income analyst, and has 21 years’ industry experience (as at 30 September 2018). He studied Economics at Heriot Watt University.

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Chocolate’s Dark Secrets

Chocolate is one of our favourite foods but cocoa farming comes with significant challenges. Primarily grown in Asia, Latin America and Africa, cocoa is a delicate crop which thrives in tropical climates. Unlike many other crops, which are benefitting from modern crop management techniques, thus enabling lower costs, higher yields and increased scale, 90% of the world’s cocoa is grown on small family farms, which rarely reap the benefits of the profitable global cocoa trade (cocoa farmers get just ≈6% from the sale of an average chocolate bar, down from 16% in 1980).

And the average age of cocoa farmers is steadily increasing. Younger generations don’t see a future in growing cocoa due to the complex farming process and low returns. Between this, illegal deforestation for growing ‘dirty beans’, and rising temperatures affecting yield, we might actually run out of chocolate. Not that it’s about us….

Sweet Success

(beware, the following statements may cause you to be able to eat chocolate and actually feel good about yourself…!)

Hotel Chocolat has defied high street woes with rapid store expansions and profit increases since its IPO in 2016. But what really sets it apart is the company’s disruptive approach and transparency around its mission to “democratise chocolate”. Hotel Chocolat has created its own sustainable supply chain management system through its ‘Engaged Ethics’ programme.

“You work too hard for bad chocolate. They work too hard for cheap cocoa. We’re reconnecting our love of chocolate with its roots – with the people who grow it and the natural world it comes from” 

Hotel Chocolat

Most of Hotel Chocolat’s cocoa comes from Ghana, where the company pay a premium of approximately 50% above the open market cost per tonne in order to source cocoa that meets its Engaged Ethics standards for sustainability. But let’s talk about the small (but impressive) percentage which comes from St. Lucia, used specifically for its premium Rare and Vintage range. The only company in the UK to actually grow its own cocoa, Hotel Chocolat owns a 250-year-old estate in St. Lucia where it works with over 180 farmers directly. The farmers benefit from advice and technical assistance, are provided with high quality St. Lucian Trinitario cocoa seedlings and, crucially, have a guaranteed market for their entire crop at prices above those available in the world market. St. Lucian farmers can now work with confidence, invest in their land knowing that they will see the benefits.

Hotel Chocolat thinks of chocolate much like wine, with the flavour reflecting where the beans were grown and how they were processed. They aren’t Fair Trade, and that’s ok. Whilst Fair Trade has been monumental in raising awareness of the problems farmers face in developing countries, it doesn’t work with this direct approach Hotel Chocolat has adopted in St. Lucia. Only smallholdings are eligible for Fair Trade accreditation, not company-owned plantations. It also doesn’t lend itself to the close management Hotel Chocolat want in terms of the specific beans used and the resulting flavours. Hotel Chocolat’s level of investment actually goes beyond many fair-trade agreements, but as with everything related to ESG: One size doesn’t fit all!

Oh and 95% of Hotel Chocolat’s products already meet the Public Health England targets to reduce sugar in products by 2018. The company’s “more cocoa, less sugar” philosophy, coupled with no artificial colours or flavourings, means its chocolate is as guilt-free as chocolate can be…

About the author

Georgina Laird is a sustainable investment analyst. She is responsible for analysing and monitoring environmental, social and governance factors within the Global Sustainable Equity Strategy. Georgina joined us in 2015 from Russell Investments where she was an index analyst. She joined Kames as a performance analyst before moving to the ESG Research team in 2016. Georgina has a BSc in Mathematics from Heriot-Watt University in Edinburgh. She has the IMC professional qualification and has 5 years’ industry experience*.

*As at 28 February 2018.

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Making money in a cashless society

Investing sustainably means more than financing windmills, solar panels and electric vehicles. The growth in electronic payments and its broader impact on society provides a good example of a sustainability theme that many investors may not be familiar with.

The increase in digital transactions is driven by technology, consumer expectations regarding convenience and policy action. Electronic payments offers a number of advantages to businesses, including lower cash handling costs, streamlined operational costs and the opportunity to better understand customers via data analytics.

Governments also like electronic transactions. They provide greater transparency, which in turn leads to greater formalisation of the economy and higher tax revenues. In general the less cash-based a society the less corrupt it is – a fundamentally sustainable outcome.

Greater transparency was at the centre of India’s recent demonetisation efforts, when the government removed approximately 85% of the currency in circulation to reduce unaccounted and counterfeit money in circulation.

As well as reducing corruption, electronic transactions also enable financial inclusion. In India, there are now approximately a billion people who can transact via their smartphone, or if they don’t own a phone they can transact through biometric devices located in small stores across the country.

Similarly, in Sub-Saharan Africa, mobile money account ownership is driving a huge expansion of financial inclusion. As the World Bank Group states:


“When people can participate in the financial system, they are better able to start and expand businesses, invest in their children’s education and absorb financial shocks.”


Companies operating in this space include Vantiv, a US integrated payment processor that operates between merchants, customers and their respective banks. We also like Tencent, which operates China’s second largest online payment network. And although a relatively small part of its overall revenues, Google offers a peer-to-peer payments service through its Google Wallet product.