The rise and fall of Greensill, the fintech that wasn’t

The financial service industry tends to have its fair share of dramas and scandals. That what makes it entertaining somehow. Some are really out of a Hollywood film. Like the Credit Suisse spying scandal. Was Greensill ever a fintech? Only to ask yourself this is quite surprising given the hype surrounding the startup. What is even more amazing, is how little due diligence investors have done. Even though they poured serious money into it. You know, not a friends and family round for a cupcake business with little oversight. Not far from $2 billion raised in total since inception. Realising now that there is no real secret sauce behind the company is truly shocking. No-one actually bothered to check. And it also shows the extent of the cosy lobbying world.

Grab your popcorn 🍿, let’s dig a bit into it: the rise and fall of Greensill, the fintech that wasn’t.

What is Greensill’s business and why the hype?

The promise is quite simple, as in everything in fintech. Take an antiquated process in financial services and make it more efficient with smart technology. That’s how you can call yourself a pure-play fintech company. Greensill was not an exception.

At a very simple level, Greensill was financing receivables and payables. Invoice finance of some sorts. For example, a business has sold something to a customer and is waiting to get paid. Greensill gives you the cash, and will ultimately get the money from the customer. In exchange for the service, they take a cut. As a business, it is a great way to manage your cashflow. That seems fairly straightforward, and it is not particularly new. Probably one of the oldest forms of finance. Obviously, Greensill said that there was some fancy technology behind it that made it all very efficient. Machine learning and artificial intelligence were mentioned several times. Because these types of businesses, namely factoring, supply chain finance, or else, tend to rely on manual processes.

What happened?

For a time, everybody seemed to think that Greensill was the next big thing in fintech. They supposedly had an incredible technology platform that was revolutionising invoice finance. They even landed former UK Prime Minister David Cameron as an advisor. Pretty solid. Everything was going extremely well for Lex Greensill and his company. Until recently, when Credit Suisse, which had been financing some of Greensill’s loans, froze $10 billion in funds. Because obviously, Greensill was getting the funds to finance their activities from big old banks. The Swiss investment bank woke up from a long nap and said insurance policies covering defaults had expired. And, that it was reportedly worried about Greensill’s exposure to some clients. It was about time…

It then unravelled at the speed of light. Because Greensill was in the end taking huge risks. Without actually the same kind of scrutiny most lenders would get. It might have been to inflate numbers in order to raise huge funding rounds. Greensill is also all over the place, so everybody is taking the hit. The (not) fintech is based in London, registered in Australia, and has a banking business in Germany. A global mess.

If the business is so straightforward, how come it collapsed? Well, see the problem is that Greensill went a step further. Instead of financing invoices, it started to lend money against potential contracts and possible sales. Even lending against non-customers of their own customers. So instead of being invoice finance, it is some sort of normal business loan. You can see how that can become very problematic very quickly if the business you lend to is in the midst of a pandemic. And you are not assessing credit risk like you should. Cherry on the fintech cake, when potential buyers thought that they would buy this awesome technology platform, they realised there was none.

What lessons can we learn from the whole Greensill is not a fintech fiasco?

Greensill’s rise and fall is an interesting case study. On several counts, from the fake innovation sometimes surrounding fintech to the cosy word of lobbying. Also, it shows that regulators can be slow to catch up. Really slow. The problem is worse when said company has received hundreds of millions from investors and has excellent connections with some powerful people that allow to bypass some rules.

Sometimes barbarians do not care about economic moats

What is quite fascinating from a strategy perspective, is that the moats were not that deep. Economic moats is a term popularized by legendary investor Warren Buffet to describe the competitive edge of a company that allows it to push back adversaries. It is quite visual, you are in your castle and people cannot really attack your business because they fall in the moats. Investors were pouring money into Greensill thinking that its technology was effectively a very deep moat. But there were not. No particular secret sauce. Instead, it relied heavily on other companies’ platforms. Without it, the competitive advantage of the company vanished like an ice cream in the sun. As it was collapsing, other players managed to snatch clients in a matter of months as if it was nothing. Barbarians just needed a stool, not even a ladder…

When it came to it, the business was worth a few millions dollars. And then nothing…

Beware of marketing BS

It was not long ago that people saw it as a true innovator. Greensill was the poster boy for UK fintech. It was included in all the top European startup rankings. David Cameron, more on his role in this fiasco below, once even called it “one of Britain’s many great fintech success stories“. It could have been. Its founder, the namesake Lex Greensill, was honoured as a Commander of the Order of the British Empire for his contribution to the economy. You hardly get praised more than that.

To set the record straight, Greensill is not the only company lying about its technology. There are many businesses out there that are not completely truthful. There are a lot of supposedly AI-powered systems around. It is a well-known lie. Literally, it is estimated that 40% of startups in Europe that claim to use AI actually do not. Fair enough, as a customer you are not going to investigate if it is indeed true. If it is a rules-based or not even an automated system, sometimes you just cannot know as the end-user. So long as it works. You do not have to believe it as Gospel truth but as a customer at the end of the day it does not matter so much. And most market commentators or analysts cannot check either. The company is not going to open its door to let you check its technology.

However, as an investor, you should carry out some due diligence. If you invest $1,000 in your friend’s cupcake business, fair enough, you are not going to grill him for hours and check everything. Which is admissible. If you write several hundred million dollars worth of cheques, maybe you should. Simply hire a few auditors and verify that the technology is there. As stated, that’s the moat, the competitive edge. Without that you are just overpaying for a good old bank with some marketing glitter.

It’s not only banks that are ‘systemic’

The regulatory burden on banks is much heavier than fintechs. Non-banks enjoy less oversight. Which is fine if you consider that the potential impact of their failure on customers and the wider economy is not the same. But the consequences are showing just now. Because it’s not only maverick investor Softbank and a few other funds that are going to get burned on this one. It owes a big chunk of cash to various creditors. Softbank already kind of knows that it made a mistake, by writing down its investment by a whooping $1.5 billion. Credit Suisse is on a roll. The Swiss investment bank is going to lose a lot on the whole Archegos debacle and could lose as much as $2 billion with the Greensill fiasco.

You would not be far off in stating that Credit Suisse are not the best at risk management as we touched on in our latest weekly update.

However, it’s not just creditors that have been hit. The nature of Greensill’s business means that some companies were relying a lot on its financing. For instance, Liberty Steel is on the brink of shutting down, reportedly putting 5,000 jobs at risk. And other businesses are similarly struggling following the collapse of Greensill.

The cosy world of lobbying

That’s probably the best part. Grab your popcorn for real.

You know why there is barely any corruption in developed countries? Because it is legal and it is called lobbying.

Jokes (or not) aside, it does show that having enough cash to get good lobbyists can help you open some doors. And bypass some rules. Former British Prime Minister David Cameron is under investigation on whether he breached lobbying laws while working for Greensill. He was an advisor to the company and lobbied the Chancellor, Rishi Sunak, for government-backed funding. Well, sorry David if you cannot get paid lavishly to whisper at the Chancellor’s ears without consequences. Life is pretty tough. And now the Chancellor is also under pressure to explain how Greensill came to be the only non-bank approved to administer the scheme in June last year. As we mentioned in our latest member-only weekly update, the former PM does not want secret messages between him and the Chancellor to get out. That’s unfortunate…

Wait, there is more. Bill Crothers, a former top civil servant who went on to serve as a director of Greensill is facing questions over several meetings he held with the head of the Cabinet Office after leaving Whitehall. Better, he joined the fintech as an advisor while still working for the government. Bill Crothers’s part-time position had been agreed by the Cabinet Office. Awesome!

Asleep at the wheel

And then there are the regulators. The UK’s Financial Conduct Authority, Germany’s Federal Financial Supervisory Authority, and the Australian Prudential Regulation Authority all failed to recognize the risks Greensill was apparently taking. That’s a lot of regulators turning a blind eye. Is it lack of resources, lobbying or plain incompetence? Time – and investigations – hopefully will tell. Germany’s regulators are also on a roll after failing to see anything regarding Wirecard…

Time for a bit more scrutiny from everybody?