Exercise: Write a Business Case for an Instant Payments Product

The market for this product is small and medium businesses in the United Kingdom that need to pay suppliers and staff quickly. There are 5.5 million small businesses in the United Kingdom, and research shows that 1.2 million of them pay more than 200 invoices a month and wait an average of three days for a standard bank transfer to clear. Faster Payments already allows instant payments, but many small businesses do not use it because their accounting software does not connect to the bank. Your product will offer an instant payment service inside the accounting software, with a simple price and a confirmation in seconds. Your target is to win 25,000 customers in three years, which is two percent of the addressable market of 1.2 million businesses. Revenue is forecast from a simple price and a realistic usage assumption. You will charge 40 pence per instant payment, with a monthly subscription of 15 pounds that includes the first 50 payments. A typical customer will make 180 payments a month, so the customer will pay 15 pounds plus 130 payments at 40 pence, which is 52 pounds, giving a total of 67 pounds a month. With 5,000 customers in year one, 15,000 customers in year two and 25,000 customers in year three, the annual revenue is 4.0 million pounds in year one, 12.1 million pounds in year two and 20.1 million pounds in year three. Total revenue over three years is 36.2 million pounds, before any churn or price change. You should state the churn assumption clearly, which is 8 percent of customers leaving each year. Cost is forecast in three parts, build cost, running cost and risk cost. The build cost is 3.8 million pounds over nine months, covering technology, testing, security review and the integration with two accounting software partners. The running cost is 18 pence per payment for processing, operations and support, plus 1.2 million pounds a year for the product team, marketing and the platform. At 10.8 million payments in year one, the running cost is 1.9 million pounds for processing plus 1.2 million pounds fixed, giving 3.1 million pounds. At 54 million payments in year three, the running cost is 9.7 million pounds plus 1.2 million pounds, giving 10.9 million pounds. The risk cost is 500,000 pounds a year for fraud losses and reimbursement under the authorised push payment fraud rules, based on an expected fraud rate of 0.05 percent. Risk is the section that most business cases understate, so you must be honest about five risks. The first risk is fraud, because instant payments cannot be recalled once sent, and a fraud rate above 0.1 percent would cost more than one million pounds a year. The second risk is competition, because a rival bank or a fintech such as Wise could launch a cheaper product at 25 pence per payment. The third risk is a change in scheme fees, because Faster Payments could raise its fee and reduce your margin. The fourth risk is low adoption, because small businesses may not change their habits even if the product is better. The fifth risk is a technology failure, because a four hour outage could cause 200,000 payments to fail and damage trust. For each risk, state the likelihood, the impact and the mitigation. The roadmap for the product has four phases over eighteen months. Phase one, months one to three, covers discovery and design, with twenty interviews and a prototype tested with five businesses. Phase two, months four to nine, covers build and testing, with a pilot of fifty customers in month nine. Phase three, months ten to twelve, covers launch to 5,000 customers, with a marketing campaign and a dedicated support team. Phase four, months thirteen to eighteen, covers growth, with bulk payments, recurring payments and a second integration. Success will be measured by five metrics, 25,000 customers by year three, 90 percent making a second payment within seven days, straight through processing above 99 percent, complaints below five per 10,000 payments, and a positive margin by year two. On these numbers the product earns 0.4 million pounds in year two and 8.7 million pounds in year three, so approve the investment.