Why two investment bankers founded an energy switching startup

In the years before the 2008 financial crash changed everything, Andrew Long was trading derivates at Dresdner Kleinwort Wasserstein, and Rob Porter was maintaining the IT on his desk.

Fast forward 10 years: Dresdner Kleinwort no longer exists, and the two men have held several other jobs at various investment banks and hedge funds, only to rejoin forces to set up a startup in a small office in London's Southwark, aimed at helping to automate the tedious process of switching your energy supplier.

It might read like something from a Michael Lewis book, but Porter, who is now the CTO of that startup, says his old life wasn't as Flashboys as you may think.

"Really you are working for a giant corporate and in the last two years it became less fun and it has become very compliance and risk focused, so it's harder to get things done," he told Techworld. "Ever since the crash they have been working on new regulations, at enormous cost to build and rendering certain business lines unprofitable, so the thrill of joining a startup and building from scratch outside of that difficult environment was appealing."

So, did anyone think he was mad leaving the lucrative world of investment banking to set up a startup in his fifties? "Well, my wife," Porter said. "It's a risk for sure, but you only live once."

What is Switchcraft?

That startup idea was Switchcraft, an online service where customers enter their details once and are automatically moved to the best possible energy deal. Customers get a couple of days to confirm that they want to switch but otherwise it is completely automated.

This is different to other switching services that still rely on a fair amount of manual processes, especially more traditional price comparison services like Compare The Market or uSwitch.

Consumers are switching more than ever already. According to the energy regulator Ofgem, 5.1 million electricity customers and 4.1 million gas customers switched supplier in 2017, the highest rate in the best part of a decade.

Unlike other modern switching services, like Flipper for example, Switchcraft is free, but takes a commission from the energy companies when new customers make the switch. It doesn't work with the handful of suppliers that don't pay these commissions but otherwise is a completely independent system for finding the best deal. "Customers expect this to be free now," as Porter put it.

The early returns on that gamble have been impressive though. With little marketing spend the service already counts more than 10,000 customers switching their energy supplier automatically every year, and saving hundreds of pounds in the process.

For what it's worth Switchcraft couldn't save me any money at the time of writing, so good job Bulb.

How does it work?

When Long approached Porter to be his CTO for the new company he had dreamed up, the two started work on building the underpinning technology.

"We had to build a signup journey for the user that looks like a normal switch," Porter explained, which means filling out a few details about your house and current energy deal, before being presented with some potential savings.

"Once we have that user data we hold that and monitor the switches and have an intelligent schedule to check the market for each customer, taking into account exit fees and market winds," he added, "so over the last few months energy prices have been going up, so we leave people on their current deals as long as possible if they are fixed."

When a better deal comes up Switchcraft will drop you an automated email saying you are being switched to a new tariff, giving the customer a couple of days to decide if they want to or not.

The underlying algorithms were written by Porter and Long themselves, and they are tweaked as the cofounders see what does and doesn't work for customers.

"I wouldn't say it is rocket science," Porter said, nonchalantly, "but every time we hit a hurdle we analyse that and fixed it and automated it."

The last part is key to the business being a commercial success, as the more they can automate the wider its operating margins stay. "We are a pretty lean outfit that can't afford to have hundreds of manual process and as we get more customers that pays dividends," Porter explained.

The first live customer was onboarded in April 2017 and was automatically switched to a new provider in April 2018.

What next?

Despite Porter saying his algorithms are perfectly sufficient for energy switching, he admits they may need to bring a quant in to help them move into more complex areas like mortgages. That being said, until the data in that area improves, which it might as open banking continues its rollout, it's not something Switchcraft is actively investing in yet.

"The main issues with mortgages is that if you want to get a mortgage now it is a 45 minute exam from the bank and that is hard to replicate in an automated way," he said.

"For us the natural next step is insurance."

To help with this expansion the company has just closed its first formal round of funding, raising £1.8 million from an unnamed venture fund.

"The vision for us is to soak up as much data as possible," Porter said. "Our vision is to switch with a single click. That is a vision at this stage, but is where we would like to go."

This story, "Why two investment bankers founded an energy switching startup" was originally published by Techworld.com.

Copyright © 2019 IDG Communications, Inc.

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