Simon Merchant, CEO and founder of Flagstone on the importance of proactive savings management

Welcome to Good Money Guide. Today we’re joined by Simon Merchant. He’s the CEO and founder of Flagstone, which is a savings platform that allows you to save with a variety of different saving accounts, across different providers with the objective of getting better interest rates. We’re going to have a chat with Simon about what Flagstone does, who they do it for. We’ll find out a bit more about him and hopefully he’ll give us some tips on how to be a better saver and generally make more of your money. 

How are things at Flagstone? 

Things are very good at Flagstone. There’s a lot going on. We’re a very ambitious business and we’ve got a very big market to go after. So, lots to do and I’m really enjoying the experience.

Savings are obviously huge at the moment because interest rates are high. For a long time, they were almost completely forgotten, but they’re very in fashion at the moment. We can see from our analytics that people are really interested in putting their money to work in savings accounts. Could you briefly tell us what Flagstone does and who they do it for?

Flagstone is focused on the cash savings market, which is a huge market. Over two trillion pounds of cash savings are held in the UK alone. We started the business back in 2013, because we thought that there was a very big problem with that market. We saw a market where essentially it was still working the same way today that it did 300 or 400 years ago.

Indeed, in many instances, it was less efficient today than it was 300 or 400 years ago, because of all of the necessary regulation and anti-money laundering regulations and so on.

What we observed was a market where the process for monitoring different interest rates, maximizing the value of your savings, moving cash from A to B, opening new accounts, repeating the process when rates changed, it was very painful, very time consuming, very paper based. As a result, nobody did it. That’s why two thirds of the cash in the UK is essentially sitting in lower yielding accounts, usually with high street banks, earning a suboptimal rate of return.

What we’ve done with Flagstone is we’ve put together a combination of a technology platform, and a panel of banks that essentially allows our customers to open one account with us, then access hundreds of different deposit accounts across instant access, notice accounts, fixed term deposits, all at the click of a button. With no more paperwork, no more administration, all electronic execution. essentially a really quick and easy way to make sure that you’re getting a decent rate of interest on your cash. And importantly, that you are protecting that cash as your precious savings through the financial services compensation scheme. That’s essentially what we’ve put together.

In terms of who we do that for. It’s a wide range of customers ranging from UK individual households, that’s our primary market, to SME corporates, finance directors of smaller and medium sized businesses, and charities also. Essentially the core problem is always the same. The core problem is inertia, cash savings, stock, earning suboptimal returns and trying to create a really seamless, frictionless way for customers to change that and take control of their savings and maximize the value.

It’s interesting that you brought up the archaic way that people save with providers. I don’t really think much has changed with some of the underlying providers. As part of our process, we’ve tested some of the underlying savings’ accounts on your platforms and the other ones, and opening an account is quite a feat. I would say the people that win in this world are the people that make it easy to do business. So how do you guys compare to everybody else out there? There are a few other providers, you’ve got a couple of big investment platforms that offer a savings hub or an active savings product. Then there’s a few other savings platforms, one that was started roughly around about the same time. Obviously, I’ve been following your progress and it’s gone sort of fairly stratospheric recently. 

How would you compare to the other players in the market? 

The first thing is we specialise in this market. We’re not a stocks and shares investment platform that has a cash savings proposition tacked onto it. This is our focus. Helping UK savers make the most of their cash savings is our mission. In terms of what differentiates Flagstone, other than that, we’re the largest in the market. We have over 14 billion pounds of assets under administration. We work in partnership with lots of the big wealth managers in the UK market, such as St. James’s Place. We have the largest panel of banks in the market with now, I think, 67 on our panel. When you come onto our platform, you can access accounts from 67 different banks, which is a very broad spread. That’s essentially what makes Flagstone unique, is the breadth of our offering, the focus.

To come back to the previous point you made, you’re absolutely right about friction in the process being the key enabler. If I was to come to you and say you can get a really good rate of interest on your cash and protect it through the FSCS scheme, but I need you to spend five hours a month doing that. You’d probably find there might be better things to do with your life. If I can come to you and say five minutes a month, then it’s a no brainer. That’s really what we’re aiming for at Flagstone. We’re trying to create a business where ultimately, perhaps three or four years from now, anyone who’s got cash savings in the UK, logically holds them with a cash deposit platform.

The key things we need to do in order to get to that point is number one, continually chip away at friction and make it very easy for customers to open accounts, understand the platform, execute on the platform, fine tune all of those aspects. Then secondly, we need to build a brand where we build general awareness of what our sector is all about, what a cash deposit platform is and the benefits that it can provide to customers, and who Flagstone is within that. That’s really what we live and breathe every day now.

I’ve seen your adverts on TikTok, so someone’s obviously pushing you in the right direction. Going back to friction and those five minutes a month, do you think you could ever bring that down to zero minutes a month, with a set and forget auto reinvest? Where people are automatically ushered into the provider with the best interest rates. 

I think there’s a balance to be struck there. We’re very conscious of our position in the market as a marketplace. We have our banking partners on one side of our business, and we have our customers and distribution partners on the other side of our business. We’ve been very careful to build a business that achieves balance between the two.

An important point is that we don’t manage our customers cash for them. We provide a technology platform that enables our customers to manage their own cash according to their own preferences, their own liquidity requirements, very much individually. That’s really important from a bank’s point of view, because that means essentially, we are creating a platform where we have distributed decision making amongst tens, hundreds of thousands of retail customers in the UK. It’s that which makes the capital we provide to those banks through the deposits, which are liabilities on their balance sheet, it makes those deposits more sticky and more valuable from their point of view.

There’s a balance to be struck, but certainly, there’s a long way to go as we learn more about our customers, how they look at our platform, what we can do to delight our customers. There’s a lot of things that we can do to make that process of an individual customer being able to find the right accounts, in the right timeframe, execute, have peace of mind, know exactly where their cash is at any one point in time. That’s really the essence of it.

You mentioned earlier that you don’t do stocks and shares ISAs. We have a big investment lean, we’ve always liked investing, but of course it’s not right for people who are slightly shorter term or slightly more risk averse. There’s something else you don’t have as well; you don’t have the option to save into an ISA account. Obviously focus on one thing and do it really well, screams out loud, but is there a particular reason you don’t have ISAs or the ability to invest?

None other than the prioritization and delivery of the best possible platform we can over time. I would be very surprised if you saw us end next year without a cash ISA offering. Coming back to the other point you make about saving versus investing. Obviously as different platforms, different businesses like yours and ours, we have our particular focus, but from the point of view of the customer, I don’t think people think about it in terms of an either or at different points in the life cycle of saving and investing. If there’s one thing that all the research shows, it’s maintaining the right asset allocation balance that actually drives risk adjusted returns over a long period of time.

The really interesting thing about cash is I always describe it as the inevitable asset class. What I mean by that is typically it’s where people start their investing journey because it’s an easy-to-understand product, a savings account that pays an interest rate. Typically, it’s where people start out. Then as they build wealth, they build awareness, they might read and educate themselves, or have access to a financial advisor, then they’ll inevitably broaden out into other products. But throughout that life cycle they’ll be coming in and out of cash as they sell investments, buy houses, sell houses, etc. Then obviously towards the end of the savings journey, what we see in all markets and in the UK no different, is an increasing weighting towards cash as people move towards retirement.

It’s all about balance and having that balance between investing for a higher risk adjusted return. But also, if the two trillion pounds of cash held by individuals in the UK tells you anything, it’s that everybody wants to hold some cash. There’s only one real reason why you ever want to hold cash. It’s that you want to be absolutely certain that £100 at the start of the year is still £100 at the end of the year. If that wasn’t your overriding concern, then you could and should be investing in something different.

But of course, for at least a portion of people’s wealth, that very much is the priority. That’s the piece where our mission is to build trust and confidence with our customers, where they can see our platform as a safe place to hold their cash and get peace of mind that they’re achieving a respectable rate of return on that important asset class.

When you’re younger, you can afford to take a little bit more risk because you’ve got the luxury of time on your side. The last thing you want to do when you need the money on a regular basis is have it in riskier investments. Just on that, what does your client base look like? Is it generally a mature client base because you’ve got £10,000 minimum threshold. Obviously, you have a fairly high net worth client-base, but does it skew older? Or are you seeing more younger people in cash at the moment? 

Generally speaking, we see a mix across the age groups. We also integrate with other FinTechs where we essentially power their savings propositions. That enables us to offer our platform and the benefits of our platform to customers at lower investment values. Generally speaking, the majority of our customer base comes from two sources.

One is our direct customer base, as we’re building awareness of Flagstone and its place in the market. And then secondly, through our partnerships with wealth management firms. Typically, clients of those wealth management firms are in the 45 plus generation.

Onto the crux of it. How do you make money as a business when you’re giving access to all of the accounts? Where do the fees to the consumer come from? 

That’s obviously important for us and for the customer. We have a really huge commitment under consumer duty to be transparent and clear about how we make fees. We’ve worked very hard to come up with a very simple mechanism for how we make money. What we do on the bank side of our business is we save our banking partners significant amounts of money. Because of the strength of our distribution network, and our ability to attract and bring customers onto our platform, we find the customer, so there’s no marketing cost from a bank’s point of view. We conduct the AML & KYC due diligence on the customer. From a compliance point of view, there’s a big cost saving.

We will send a single payment to any one of our 67 banks today, and that might represent thousands of deposits from underlying customers. From an operational and a technical point of view, there’s a big saving on the bank side. We increasingly look to negotiate with our banking partners, on the basis that we’re saving them a considerable amount of money to attract exclusive rates to the platform. Our model is essentially the bank will pay us a gross interest rate, we will deduct a spread, which is on average across our platform about 0.25 % today.

Then the rate on our website and on the platform that the customer sees, and the customer elects for, is essentially the net rate. We disclose all that to our customers through their onboarding journey. Essentially what we’re trying to provide is a simple proposition for the customer, which is what you see is what you get. You come onto a platform, you see a rate of 5% for a particular deposit account, you get 5%.

Out of interest then, do you hold omnibus accounts with your banking partners, and then you lump all the client cash together in one and allocate it on the platform? Or do they have individual numbered accounts at the banking partners? 

The way we hold cash on our platform is through a bare trust structure. What the bare trust structure means is that the client is always the 100% beneficial owner of the cash. The customer’s cash never touches Flagstone’s balance sheet, but it’s held on trust for the beneficial ownership of the client. We have the right pursuant to the terms and conditions to move the cash from A to B following the customer’s instructions. Within that bare trust structure, we will essentially hold omnibus accounts at our different partner banks. We are the database of record for the fact that of the £10 million we sent to Bank X today, Richard might happen to be a customer of a wealth management firm who has £5,000 of that.

It’s really interesting because we can always see through our analytics, what people are searching for when they’re looking up providers. What’s really heavy in the saving space is, is X, Y, and Z safe? How safe is my money? It’s really interesting across the different asset classes, how often that phrase comes up.  Briefly, how safe is everybody’s money? What happens if you go under, if the underlying banks go under, what happens to customer money? 

That is absolutely fundamental to customer concern and fundamental to the way we’ve built our business. Again, customer cash doesn’t touch Flagstone’s balance sheet. We are a technology platform. We are essentially facilitating the ability for a customer to place money with Bank X in the same way as if they walked into Bank X’s branch today, filled in the paperwork, brought their passport, brought their driving license, everything else they need to provide in order to be able to open that account. From the point of view of the credit risk that the customer is taking, it’s bank credit risk. So, it’s is the bank safe? That’s the same essential judgment that the customer is making when they decide to open an account with any bank.

Secondly, from an FSCS protection point of view, to the extent the customer is eligible anyway for FSCS protection with a particular bank, they’re eligible for that protection for a UK bank on our platform. The customer is in the same position as if they walked into Bank X and opened the account themselves. That’s absolutely fundamental to our platform and the way we’ve built it. That’s why we are trusted today with 14 billion pounds of UK customer assets on our platform.

How easy was it to get that 14 billion? You started in 2012, that’s not that far after everybody lost a lot of confidence in the banks. Interest rates weren’t great. How easy was it getting a company that specializes in savings products when everybody was wary of saving, off the ground?

I would say that when we first started the business, there was a certain amount of wariness in the market. Of course, we were in for a long period of time, a period of very sustained low interest rates with the Bank of England base rate at 0.10%. There was a point when the 12-month term rate was at 0.6%.

What happened to your spread when the base rate was so low? 

We did not reduce our spread. We essentially have always had the same revenue model. The important and interesting thing is throughout that period of time, we grew every month. The reason we grew every month is because as is backed up by the research that we do with our customers today, when we ask our customers, what do you like about our platform? Why do you use it? What are the motivators for you? I’m getting a good rate of interest is definitely one of five drivers, but it’s very often not the top one and it’s not alone.

So, peace of mind, having one place where I know all my cash savings are, not having to manage multiple spreadsheets and different statements, and getting a single consolidated tax statement. Doing your tax return is an exercise you sometimes feel like you might need a PhD for. Having a single consolidated tax statement that says here’s all your cash holdings, and here’s the interest that you’ve generated is very much appreciated by clients. We still grew throughout that period.

But building a business, as you will know, is a very difficult thing to do. I always think that the number one quality that any entrepreneur needs to have is resilience above all. The ability to persist, roll with the punches and believe ultimately, in the opportunity and the business model. We had to be very resilient for a long period of time. We had to be very careful with investment and capital. Then as interest rates started to rise from those historic lows, what happened at that point was coming back to my earlier point, the cost of inertia. The cost of doing nothing with your savings started to rise.

Once the Bank of England base rate went through, I think it was 1.75%, of course, it’s at 5 % today, even once it started to go through that level, then we really saw a significant change in the volume of applications. Because at that level cash becomes an asset class that can just not be ignored anymore. For many customers, back in 2018 with a very low base rate, the opportunity to earn between half a percentage point and one percentage point on cash wasn’t particularly motivating. Once that becomes three, four, five percent, then as part of a balanced investment portfolio, it’s not really something which either the customer or the wealth advisor can ignore anymore. We saw that translate very dramatically into application volumes and assets onto the platform.

Throughout that time, as the business has grown, has there been a standout moment where you thought we’ve nailed this? What’s been the best moment so far? 

I would say no, there’s no standout moment because as a leadership team we definitely suffer from that classic entrepreneur disease, which is we’ve achieved that, what’s next? In terms of what I really enjoy about this and I’ve loved about this experience, and continue to love about it is, as a business reaches a level of maturity and success then my ability to attract really talented people to work with us in this business just grows exponentially.

That’s what makes this a great experience, the opportunity to work with great people and really pursue a vision of, today, Flagstone is very much the best kept secret in financial services. Although we’re a market leader in our market, and the largest player in our market, and have 14 billion pounds in assets, we’re a tiny pinprick on the opportunity that we believe exists in this market. We’re very ambitious to change that.

What’s been the worst moment or the biggest challenge so far? 

I’ve built several businesses from concept and PowerPoint presentation to the point when they’re sustainable. There’s no question that the most difficult point is, once you’ve got over the initial proof of concept and you’re into that phase where you’re really trying to invest to grow, and create something that has scale and the potential to scale up, then you tend to be at that point, always 12 to 18 months away from running out of money. Because you’re always seeking to reach the next milestone, prove the next phase of the business, and then raise more capital.

There’s no question Flagstone’s been profitable now for seven consecutive quarters, and on that basis, there’s still lots of problems and challenges in trying to build any business. But all your problems become very nice problems to have once you move away from the constant struggle to balance how much to invest versus, what milestone can we reach in order to raise more capital from our investors.

Let’s finish on two top tips for people who may use your platform. What’s your top tip for people to make more of their money when saving? Or the mistakes you think they make that they should avoid? 

I think my top tip is very simple, which is we’re now in a market where the returns on cash savings significantly exceed inflation. For a portion of your overall financial position, which is probably for most people quite significant relative to the rest, take action. Make sure that you’re not one of those savers, I think the stats are £1.1 trillion earning below 2% today, with a base rate of 5%. £250 billion are earning zero today. So, make sure that you’re not one of those savers. Take action and consider cash deposit platforms as a way to make that process less painful, and less time consuming than it might have been 10 years ago.

Let’s end on some homework. Do you have a book recommendation for us, something that’s either appealed to you personally over the years, or you think can help people manage their money better?

I was warned you might ask me this, and it made me reflect that I don’t really read books about investing. I think that’s because I spend most of my time working in this world. Also, a lot of what we’re trying to do here is demystify the world of investing and saving, and really just promote the concept of being responsible and looking after your hard-earned cash savings. It’s actually a very simple thing to do.

I do spend a lot of my time reading books which help me figure out how to create a great leadership team in a business like this. How to create great culture in a business like this. I’d have two recommendations there. One is a whole series of books by Patrick Lencioni around how to create great culture in teams. Then secondly, the outstanding book about culture at Netflix, which is called No Rules Rules, and a collaboration between Reed Hoffman and a journalist on describing Netflix’s culture and how they’ve built it over time.

Thank you very much for your time. Anyone out there, if you have used Flagstone, do come onto the Good Money Guide and tell us what you think of them.