The Birth of Buffernomics
HyperJar is about building buffers in financial relationships, a vision that came from years of collective experience from HyperJar's leadership team. Our CEO and founder Mat Megens ties the two together in light of the current COVID-19 pandemic and economic uncertainty.
The current novel coronavirus pandemic is ushering in a global healthcare and financial crisis that seems surreal. I feel like I’m in a strange dream, but our reality is dreaming of being able to freely go outside for a walk again.
Beyond taking lives, COVID-19 is also wreaking havoc on an interconnected global economy that has been bursting at the seams for many years.
We were 11 years into an economic expansion with interest rates still close to 0%. It doesn’t make much sense unless you think the party is not going to last and alas, the party has definitely ended. We expected a contraction to happen in 2020 but we didn’t expect it to be triggered by a pandemic (we were expecting a few good old-fashioned defaults and a tapped-out consumer leading to some declining consumer sentiment and spending).
HyperJar was built to address economic imbalances, using technology to change how we manage our money and visualise future spending. The goal is to create a system with a financial buffer built-in for both the consumer and business. In a way, it’s quite an old-fashioned idea, digitised for the modern world.
Our experience of other highs and lows
My co-founders and I have had interesting careers that have been near the epicenter of multiple crises and major shifts. Arthur Sculley held a formative role for JP Morgan in Asia in the 1970s, went on to co-found Intralinks, one of the earliest SaaS and cloud businesses in New York, has written business book best sellers and now holds a Senior Fellowship at the Fletcher School, where he specializes in the digital economy. Paul, our chairman, was at Morgan Stanley exploring SME default rates when Long Term Capital Management almost blew up the entire financial system in 1998 (thanks for the rescue Fed!), and spent his time after the global financial crisis in 2008 cleaning up debris from the explosion of Lehman Brothers.
I was working as a telecoms design engineer in Boston during the dot-com boom, witnessing junior engineers being minted paper millionaires, and seeing everyone and their kid brother become expert stock traders (not so much by 2002). In 2006, I moved to London and became an investment banker, starting my career at Lehman Brothers in subprime mortgage trading.
As a rookie banker, I observed first-hand the herd effect to acquire mortgage assets at all costs regardless of fundamentals. Frustrated with being told to only buy not sell, I made a timely move out of mortgages to Morgan Stanley (where I met Paul), to work in a then nascent and unsexy business called Supply Chain Finance. This business unit looked to optimise payment terms between big buyers and their suppliers - to improve corporate financial ratios, whilst throwing a lifesaver to the smaller guys in the supply chain. It was financial engineering taking over the simplest trade there is: businesses selling goods to other businesses. It’s a reasonable product, but what often happens is reasonable products get pushed to extremes, and the fundamentals are left far behind.
In 2011 post the financial crisis I was doing work for IFC, part of The World Bank to bring supply chain finance solutions to developing countries like Egypt, Tanzania and Bangladesh. This was during the Arab Spring. I witnessed the almost immediate destruction of regimes which had presided for decades. The iron fists were just paper tigers.
Throughout this, I observed attitudes around consumer debt that varied widely across the world. There was definitely a more laissez-faire approach in Western countries and a more cautious approach in developing nations. A lot of this is cultural, related to trust in government institutions and safety nets and a lot is driven by local necessity. But the West has an ability to suck people into the allure of debt, playing to our present bias (‘Buy now, pay later’…).
Just in time - or not
COVID-19 is changing the rules. It’s exposing the risk of just-in-time (JIT) as a philosophy. Just like with Supply Chain Finance, JIT can be great for optimizing cash efficiency, but it can be devastating when circumstances take a sharp turn.
On a macro level, JIT with global supply chains highlights what can happen when borders shut down and citizens start thinking about the necessities like food (and toilet paper!).
On a micro level, when consumers are using unsecured credit to consume depreciating assets, it highlights how vulnerable they are to unemployment and their ability to weather an extended job search.
Equally troublesome, many merchants have built a reliance on these credit-stretched consumers. When the credit tap turns off, so does the low margin revenue and the badly hurt consumer can be lost forever.
Incentives to plan ahead
The original idea for HyperJar was to give consumers an incentive to plan and save, and to do so by allowing them to prepay with places where they already shop. By doing that, they could earn growth rates many multiples greater than what banks would offer.
In a way, it’s allowing the consumer to invest in the simplest asset class possible - their shopping - avoiding the whipsaw of financial markets. We take out the middleman by connecting the consumer and the merchant directly. This simple concept evolved to include a mutualised hub where big and small merchants could coexist, in a way that is useful to consumers, and eliminates the inefficiency of trying to build separate digital apps for every business.
It’s a vision of sustainable consumption where each player in the financial transaction builds a small buffer of data and capital that makes the future more stable. Creating more future visibility for all parties.
So, we believe the world has changed. We believe supply chains will begin building in more of a cash buffer, even if there’s a hit on ROE. We believe the buy-now-pay-later phenomenon has reached its peak, and consumers will look to a more old-fashioned way of planning and saving for consumption. We also believe that the merchants that survive will be those that have built up solid relationships with their customers through great caring service, not just the lowest price. We are witnessing amazing acts of community as people have been forced to slow down and focus on what’s important when things happen beyond their control. This community extends to businesses and employees that are suffering as a result of the sacrifices needed to save lives and we believe this will be remembered when the world emerges from this crisis.
A big difference between now and 2008 is the financial system is much stronger. Regulation was put in place to ensure capital reserves were larger and lousy assets like liar loans and overly leveraged securities weren’t littering the system. However, ring-fencing which was implemented by the Bank of England partly as a result of what happened in 2008 has also helped drive some unintended consequences; it was one of the factors driving a sharp growth in unsecured consumer lending. So we are seeing banks and fintechs pushing overdrafts and other unsecured lending products to a degree never seen before.
Ethical, sustainable, long-term
HyperJar was built for this new world. Sustainable consumption done ethically, using data responsibly, creating financial community and remunerating all parties equally. A personal banking model that doesn’t need to sell debt to function. Helping people to build financial buffers; making sharing money easier; giving everyone the ability to ‘invest in their shopping’. For businesses, we believe in long-term growth that doesn’t depend on unsecured consumer lending, but on a committed, symbiotic relationship with their customers.
Before this crisis happened, we believed that we had the right vision for a future of sustainable consumption. We still do.