W21JF

the voice of the market Winter 2021 | worldfinance.com

One of life’s two certainties

Plus the big four digital currencies recession successes democratising finance

Proposals put forward by the OECD could see corporation tax completely reformed

A modern day gold rush

The recent resurgence of gold in the global economy could mark the start of a new era

The talk of the town

The rise of video conferencing platform, Zoom, began long before the pandemic was here

uk £4.95 can $14.75 france €6.50 italY €6.50 germanY €15.00 benelux €10.95 spain €7.00 usa $8.99

The daWN oF a Global diGiTal reVoluTioN The rise of fintech coupled with a pandemic saw an accelerated shift towards online services and a change in how we handle our finances. at the forefront of this innovation are people like dame Jayne-anne Gadhia, founder of snoop kl aus schwab

kenneth rogoff

sophia k al antz akos

stephen roach

Published by World NeWs Media

david orrell

alex k atsomitros

Contents Winter 2021

Features

42

130

180

86

158

220

42 Building momentum

130 Risk versus reward

With a worsening economic outlook accelerating the mainstream adoption of fintech, Dame Jayne-Anne Gadhia launched Snoop to help users track their spending and saving habits

86 Cashing out

A new wave of investment platforms aimed at a wider audience coupled with a global pandemic has seen an influx of inexperienced traders. This could prove to be a rocky road to democratise finance

158 The golden years

The use of physical cash has been decreasing for many years now – and a global pandemic with enforced shutdowns hastened that trend. Are we now ready to embrace a cashless world?

The price of gold hit an all-time high in 2020 and a look back at history suggests that gold could, once again, become a sought-after and safe asset during uncertain times

DESIGNER:

WEB AND MOBILE DEVELOPMENT:

CONTRIBUTORS:

Sam Millard

Scott Rouse

REPROGRAPHER:

ACCOUNTS:

Robin Sloan

Gemma Willoughby

ILLUSTRATOR:

BUSINESS DEVELOPMENT:

Richard Beacham

Jonathan Bentley Bryan Charles Tom Crosse Michael Harris Terry Johnson James Watson Monika Wojcik

Sophia Kalantzakos Marie Lam-Frendo Ellora MacPherson Patrick McCrae David Orrell Stephen Roach Kenneth Rogoff Klaus Schwab

PRODUCTION MANAGER:

Richard Willcox VIDEO PRODUCER:

Paul Richardson

twitter.com/worldfinance 10

| Winter 2021

EDITORIAL:

Jo Caird Emily Cashen Martyn Cornell

facebook.com/worldfinancemag

Lana Crowe Antonia Di Lorenzo Laura French Sharon Gethings Charlotte Gifford Callum Glennen Courtney Goldsmith Adrian Holliday Emma Holmqvist Deacon Alex Katsomitros Ruth Kibble Rita Lobo Selwyn Parker Richard Willsher

180 Sink or swim With governments the world over providing loans and financial aid packages at levels never previously seen before, we need to ask: what happens next as we sail into a sea of debt?

220 A taxing issue The OECD has put together proposals on corporate tax being reformed after continued concerns over inequality and the need for a post-pandemic economic recovery, but will they be accepted?

The information contained within this publication has been obtained from sources that the proprietors believe to be correct. However, no legal liability can be accepted for any errors. No part of this publication may be reproduced without the prior consent of the Publisher. © World News Media Ltd, 2020–21 Printed in the UK. ISSN 1755-2915 Editorial on pp34–41 © Project Syndicate, 2020–21

linkedin.com/showcase/world-finance-magazine

World News Media Ltd Compton Courtyard 40 Compton Street London EC1V 0BD United Kingdom Tel: +44 (0) 207 253 5100 Web: w ww.WorldFinance.com www.WNmedia.com Email: enquiries@wnmedia.com

youtube.com/worldfinancevideos

Regulars

Banking

Wealth Management

13 The Ledger

48 Digital Banking

92 Insurance

Financial news and analysis of the markets

A selection of leading banks discuss the future of banking, market innovations and the COVID-19 challenges they overcame

26 Global Review A look at which countries will finance innovation to build sustainable futures

72 Corporate Diversity There are several recent female success stories in the finance industry but it is still a male-dominated environment with a culture that needs to evolve?

28 Financial History Tracing the progress of solar power through the ages and the innovations that happened

30 Profile

74 Banking Groups

2020 was a breakthrough year for Eric Yuan and his company, Zoom

34 Comment Klaus Schwab calls for a ‘Great Reset’ of the economy, Sophia Kalantzakos discusses the importance of minerals within geopolitics, Kenneth Rogoff questions the view of global stock markets and Stephen Roach shines a light on how the US lags behind China

226 The Econoclast

Leading voices from within the industry discuss innovation via digitalisation, ground-breaking apps and AI

108 Investment Management The industry is experiencing an increased number of investment opportunities, plus a surge of interest in ESG funds

122 World Economic Forum The 51st instalment of the annual meeting of business leaders will certainly be unprecedented as it takes place four months later and on an entirely different continent

Sustainable growth and a strong digital offering are among the key ingredients to remaining a top financial institution

78 Retail Banking

124 Wealth Management

A global pandemic raised numerous obstacles that needed to be overcome but innovative banking helped keep the customer’s needs the number one priority

Antifragility is the art of reacting and taking profit from stressors, volatility and unpredicability – which was apt for 2020 Turn to page

210

84 Commercial Banking The heart of banking can still be found in personal relationships as resilience prevailed when faced with unprecedented challenges

David Orrell explores the breakthroughs taking place in quantum computing

for this year’s

WORLD FINANCE 100 winners

Markets

Infr astructure

Str ategy

136 Forex

164 Investment

186 Recession Successes

Investors require a certain level of financial infrastructure when trading to facilitate speed and this has never been more evident

142 Cryptocurrencies An in-depth look at the world of digital currency and its acceptance and adoption by central banks and corporate firms

The decline of private investment into infrastructure over the last decade has been the subject of a recent study, but what can be done to reverse this trend?

166 Shipbuilding

Big ships are big business and currently the most lucrative contracts are all going to firms based in Asia as they corner the market

146 Art Corporations across the globe are selling off their art portfolios to raise much-needed capital as the effects of the pandemic set in, but this brings with it exciting opportunities

168 Aviation Flights were grounded and airport terminals were deserted places for much of 2020.

When can we expect a return to business as usual?

150 In Focus: US The days of Twitter outbursts strewn with errors are, hopefully, behind us with a new US president at the helm, but what situation is Joe Biden stepping into?

152 Oil & Gas With oil prices falling by 40 percent last year, the industry as a whole will be required to be responsive and dynamic in its reaction during the year ahead

170 Technology Some of the largest ports in the world are embracing technology to improve the supply chain

176 Financial Services After several years of talks the details and ramifications surrounding Brexit still remain unclear

Profiles of five of the biggest companies in the world – all formed during times of severe economic turmoil during the last 150 years

190 Branding The biggest brand names are not just billiondollar companies but are also building their own in-house technology

192 Sustainability Making the right decisions today to mitigate climate change starts with sustainable infrastructure projects

200 Pharmaceuticals & Medical Success in this heavily regulated industry has been found in Latin America by exceeding expectations

204 Management After 2020, what is the future impact of the fundamental shift in our working habits?

216 Tax & Accountancy The conduct of the Big Four has been called into question, so what needs to change?

Winter 2021 |

11

colu m n ists

|

i nsigh ts

|

a ppoi n t m e n ts

|

merger s & acqu isi t ions

|

markets

|

stat ist ics

|

gl oba l r e v ie w

|

f i na nci a l history

The Ledger B U S INE S S NE W S & F I S C A L D I GE S T

Far from any road Snow falls at Qianjiang National Forest Park in Chongqing, China. The last big winter storm in China cost the economy an estimated $21.94bn. The severe weather impacted the manufacturing pipeline with roads and railways closed, an extensive amount of crops were lost that drove food prices up, entire electricity power grids failed and the damage also led to an increase in insurance claims.

Winter 2021 |

13

The Ledger Winter 2021

c ol u m n i s t s

i n s ig h t s

Myth of the stand-alone CEO The world has its fair share of superstar CEOs. Identified by just a last name, Gates, Jobs, Bezos, Zuckerberg and Musk have achieved celebrity status rivalling that of sporting legends, Patrick Stakenas musical stars and Hollywood actors. Should today’s young CEOs emulate these anomalies, or will the very attempt sabotage their prospects of success in the post-pandemic world? This pandemic has done something many mentors struggle to achieve: it has forced the young CEO, infatuated with stardom, to face the reality of their situation. Life or cruel, unfair, death.

It has exposed the fortified infrastructure the world’s business titans stand on and the teams supporting them; government officials are seen relying heavily on their specialist advisors to make decisions and multinational CEOs are watched as they turn to their boards for strategic discussions and consensus.

To survive the next three years of economic turmoil, CEOs need to show a strong mentality shift in what the path to success looks like. They must emerge from lockdown humbled, wise of their flaws, and willing to change – and how should they do it? Delegate.

According to a recent Gartner CEO survey, the habit of delegating does not appear to improve with experience; similar proportions of first-time CEOs (33 percent) and serial CEOs (35 percent) were wary about deputising key functions. This, of course, needs to change. For every task there’s likely a person more talented than you happy to do it. Executives want to be valuable to their CEO – it’s one of working life’s most fulfilling accomplishments.

A company I founded and was chairman and CEO for, ForceLogix Technologies, made a successful IPO in 2009, during the trough of the recession, and I couldn’t have done it so well without the guidance from my board of advisors, which ultimately became my board of directors. Bite the bullet and appoint an advisory board. Leverage the insight of business veterans to survive this critical phase of your company’s life. None of us are a scalable asset, despite what Silicon Valley’s celebrities might appear to accomplish. After reading this, 24 hours in a day still won’t be enough, but now you’re the chief executive officer instead of the chief everything officer.

TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com

14

| Winter 2021

Bitcoin’s wild ride Bitcoin staged a record-breaking rally throughout 2020, reaching an all-time high of US $19,510 per coin in late November (see Fig 1). The surge has been compared to its 2017 growth, when the premier cryptocurrency reached a high of $20,000 per coin.

According to Reuters, its rally has been due to increased demand for riskier assets among investors, largely due to COVID-19 diminishing local markets. Bitcoin’s perceived resilience to inflation and the growing expectation that cryptocurrencies will become mainstream in a COVID-normal world have also played a part in its growth. Bitcoin’s surge has also had a wider effect on other cryptocurrencies. Both Ethereum and XRP, the second and third biggest cryptocurrencies, surged to multi-year highs alongside Bitcoin, before dropping back in unison.

The sudden fall has been attributed to major traders taking advantage of the near-record high, as well as tweets by Brian Armstrong, CEO of cryptocurrency exchange Coinbase,

In a digital-first, post-COVID world, it’s easy to imagine that cryptocurrencies may MARKET indeed achieve more mainstream popularity.

With more commerce and retail going online, a digitalonly currency makes at least some degree of intuitive sense. However, their use by everyday people to conduct VOICE of the

Fig 1

Bitcoin value in 2020 US DOLLAR

20,000 18,000 16,000 14,000 12,000 10,000 8,000 6,000 4,000

Mar

May

Jul

Sep

Nov

SOURCE: TRADING ECONOMICS

issuing concern that a regulatory crackdown could be on the horizon. The sudden fall has the potential to dampen the interest professional investors and hedge funds have shown in the cryptocurrency since the 2017 crash.

Cryptocurrencies have become a more common component in professional investment portfolios, but such sharp movements have the tendency to spook investors.

transactions is hindered by wild price fluctuations. Who would choose bitcoin to store their wealth, let alone pay for their groceries, when its value could jump or fall by 10 percent overnight? As such, it will remain stuck in the realm of speculators and investors unless it achieves some kind of stability.

a p p oi n t m e n t s

c ol u m n i s t s

The passing of the baton

Sean Doyle ceo

Marie Cheval ceo and chair

Peter Zaffino ceo and director

British Airways

Carmila

AIG

British Airways (BA) revealed it would replace its chief executive Alex Cruz amid “the worst crisis” facing the travel industry. Sean Doyle, the former boss of Irish carrier Aer Lingus, took the reins with immediate effect. The news closely followed Cruz’s decision to cut around 10,000 staff members due to COVID-19. In September 2020, data from Heathrow showed just 1.2 million passengers travelled through the airport, down an incredible 82 percent. Luis Gallego, CEO of BA’s owner IAG, said he was “confident these internal promotions will ensure IAG is well placed to emerge in a strong position.”

Marie Cheval was announced as the new chair and chief executive of Carmila, the owner and operator of more than 200 shopping centres across France, Spain and Italy. Carmila was created by Carrefour alongside large institutional investors to boost the value of shopping centres connected to Carrefour hypermarkets, and the business is now the third-largest listed owner of commercial property in continental Europe. As director of Carrefour France Hypermarkets since 2018, Cheval, who will succeed Alexandre de Palmas, has overseen the transformation plan for the group’s hypermarkets – a key format for Carmila.

The board of American International Group (AIG) has named Peter Zaffino as the company’s new CEO, effective from March 2021. Zaffino will succeed Brian Duperreault at the helm of the global reinsurer, taking on the role alongside his current position as president. He has also been appointed to serve as a director, effective immediately. Zaffino said he was “honoured” to follow in the footsteps of Duperreault and thanked the AIG board of directors for the opportunity. “I look forward to leading AIG’s next phase on our journey,” he said. Meanwhile, Duperreault will move into the role of executive chairman.

VOICE OF THE MARKET

Gallego took over from former IAG chief executive Willie Walsh in September 2020, and his leadership shake-up was one of his first major moves as CEO, showing he’s keen to make his mark during an incredibly difficult time for the industry and prove that he can pull the business out of the COVID-19 downturn in one piece and then make plans for future progression.

VOICE OF THE MARKET

Cheval has been with Carrefour since 2017, when she joined as executive director of customers, services and digital transformation. As a member of Carmila’s board since 2018, she has already helped to shape the progress of the business’ strategy. Thanks to her previous post at Carrefour, Cheval will have vital insights into an important market for Carmila.

VOICE OF THE MARKET

The leadership shakeup at AIG comes as the business reveals it plans to separate from its life and retirement business. Speaking about Zaffino’s tenure, Duperreault said he had been “instrumental in the significant turnaround and transformation at AIG. His vision, determination and pursuit of excellence will help ensure the company’s future success.”

CEO succession is one of the most important, if not the most important, joint responsibility of the board of a company. It has a huge impact on the company’s future and is a critical business Marga Hoek continuity issue. It is also one of the most challenging tasks and processes to get right; succession planning is highly sensitive and comes with significant risks throughout the entire process, from identification of potential successors, to selection, to appointment, to transition.

There have been times when a new CEO ‘had to be external,’ as the grass was often considered to be greener elsewhere. But that trend has now reversed.

Currently, companies increasingly prefer to appoint an internal successor. This actually makes sense. There is mounting evidence that external CEOs have a higher failure rate – up to 40 percent can take six months to achieve full productivity and cost close to 20 percent more. In 2018 nearly 90 percent of CEO successions within S&P 500 companies were internal. Alongside this change, of course, comes the growing need for CEO succession planning and development. An internal ‘CEO bench’ is now essential if you want to appoint an internal successor.

CEO succession processes require planning, and a multi-year approach. A study by the Centre for Executive Succession, University of South Carolina, shows clearly that a planned succession stands a much higher chance of being successful: of 22 successful appointments, 76 percent were part of a planned succession process. Of the failed appointments, only around half, 57 percent, were planned.

Although this study and many others make the relationship between planning and successful appointments clear, many companies are struggling to set up a succession programme or to develop a strong succession bench. Development is key to this.

Personally, I believe external, independent mentoring is the best way for developing potential CEOs. The only way to teach senior executives things they haven’t learned before is by sharing experience that they do not have yet – CEO and board experience. Mentoring from external CEOs and board members can unlock their potential.

Achieving successful internal CEO appointments is hard work but few things have a higher return on investment.

TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com

Winter 2021 |

15

The Ledger Winter 2021

c ol u m n i s t s

Time for a skills revolution

All that glitters

In October, the World Economic Forum (WEF) released The Future of Jobs Report 2020, a deep dive into the jobs and skills of the future. The report couldn’t have come at a better time: the Courtney Goldsmith COVID-19 crisis has radically altered the global workforce, as well as working environments for many around the world.

Despite the uncertainty of these times, the report’s findings are clear: the rise of automation alongside the pandemic-related global recession, “is creating a ‘double disruption’ scenario for workers,” and action must be taken swiftly to reskill and upskill individuals.

By 2025, the WEF predicts that technological adoption by companies will transform tasks, jobs and skills. In just five years, 85 million jobs may be displaced by a shift in the division of labour between humans and machines.

However, 97 million new roles may emerge that are more adapted to the future of work.

But the skills gap between these old and new roles is significant, with employers seeing critical thinking and analysis, as well as problem solving, active learning, resilience, stress tolerance and flexibility among the skills rising in prominence by 2025.

Businesses must act now alongside the public sector on regional, national and global scales to ensure that the transition of workers into more sustainable jobs is smooth.

In some places, this work has already begun. For instance, there has already been a four-fold increase in the numbers of individuals seeking out opportunities for learning online by their own initiative. Meanwhile, the report recorded a five-fold increase in employer provision of online learning opportunities to their workers and a nine-fold enrollment increase for learners accessing online learning through government programmes.

For reskilling and upskilling workers, the window of opportunity has become shorter thanks to COVID-19’s new restrictions on the labour market – and this also applies to employees who will be able to stay in their roles. The share of core skills that will change for employees remaining in their jobs stands at 40 percent.

The window is closing fast, and businesses face a defining moment in their history to ensure they are heading towards a new age of good work, good jobs and improved quality of life.

French luxury goods giant LVMH has agreed to buy the US jeweller Tiffany & Co for around $15.8bn, marking the luxury sector’s biggest ever deal. The agreement called an end to a war of words that erupted between the two companies over Tiffany’s performance since the outbreak of the coronavirus pandemic.

Previously set at $135 a share, the new takeover price was agreed at $131.5 a share.

This means LVMH will receive a discount of about $425m following the dispute, which saw the French brand, which owns the likes of Louis Vuitton and Moët, lash out at Tiffany in September 2020. LVMH cited Tiffany’s “dismal” prospects for the future and its “catastrophic performance during the COVID-19 pandemic.” In fact, the crisis caused sales at Tiffany to plunge by 36 percent, resulting in a net loss of $33m compared to net earnings of $262m the previous year.

LVMH argued that Tiffany was no longer the same business that it had agreed to buy last year, igniting a legal dispute between the two companies. However, Tiffany’s chairman Roger Farah said he was “pleased to have reached an agreement with LVMH at an

attractive price and to now be able to proceed with the merger.” Billionaire LVMH chief executive Bernard Arnault said he was “as convinced as ever” of the “formidable potential” of the Tiffany brand. “We believe that LVMH is the right home for Tiffany and its employees during this exciting next chapter,” he said.

Susannah Streeter, senior investment and markets analyst at Hargreaves Lansdown, told the BBC that any benefit for LVMH looks uncertain, at least for the time being. “The collapse of the international travel market continues to depress sales and with any benefit of the Tiffany acquisition uncertain for now, the group is still in a state of flux,” she said.

M&A

M&A

Global fintech takeover

Stock exchange expansion

US payments company Stripe has bought Paystack, a fintech start-up based in Nigeria, as the company looks to expand into Africa.

The Silicon Valley company, which is valued at $36bn, reportedly paid around $200m for the start-up – proof of sub-Saharan Africa’s fast expanding market. It marks the biggest startup acquisition to come out of Nigeria, as well as Stripe’s biggest takeover to date.

According to Stripe, the African internet economy is growing rapidly, with online commerce in the region soaring 21 percent yearon-year, a whopping 75 percent faster than the global average. Paystack works with more than 60,000 businesses to make it easier for organisations of all sizes to collect payments around the world. Stripe will allow Paystack, which has “ambitious plans to expand across the continent,” to continue operating independently.

SIX Group, the Swiss financial markets infrastructure operator, completed its takeover of the operator of the Spanish stock exchanges, Bolsas y Mercados Españoles (BME), for €2.57bn in June 2020. The deal catapults SIX to one of Europe's major players by making it the third-largest stock exchange operator by revenues on the continent. The deal comes at a turbulent time in the market, with much consolidation among the smaller exchange operators amid lower fees and declining revenues.

Jos Dijsselhof, CEO of SIX, said that while SIX will preserve and strengthen BME’s position in Spain, the combined group will be “more ambitious and innovative, investing in opportunities that would have been unavailable to the separate entities. Together, we will succeed in driving the transformation of financial markets, to our own benefit and that of the ecosystem.”

TO READ MORE FROM WORLD FINANCE COLUMNISTS, VISIT: www.worldfinance.com

16

m e r g e r s & a c qu i s i t io n s

| Winter 2021

n e w s i n p ic t u r e s

Up the junction A field on the outskirts of London, England, is used to store hundreds of unused traditional taxis. It had been forecast that the tourism industry would see a growth in 2020. However, COVID-19 triggered a near-total shutdown in international travel and it is estimated that the pandemic cost the UK tourism industry ÂŁ24.7bn in lost spending with 32.3 million fewer visits than predicted.

Winter 2021 |

17

The Ledger

Winter 2021

markets

v i de o s

Trading crisis presents commodity opportunities

Shanghai Yangshan deepwater port in China

China experiences impressive trade windfall during tough conditions China recorded an unexpected jump in exports in October as global trade struggled to pick up pace amid the COVID-19 pandemic. According to data from the country’s customs agency, exports surged by 11.4 percent in October, compared with the previous year. The figure marks a 19-month high and is well above the 9.2 percent that a poll of analysts at Bloomberg had forecast. Imports, meanwhile, grew by just 4.7 percent, below predictions of an 8.6 percent rise (see Fig 1).

China has benefited from a significant boost in trade due to its production of medical goods, such as masks, that are in high demand around the world, as well as electronic goods

Fig 1

and home working equipment. Although China was the first major economy to recover from the coronavirus crisis, many countries across Europe have continued to struggle, imposing lockdowns into the winter. China’s surge in exports comes amid a difficult time for the global trade industry. In fact, recent figures show that shipping companies are spending less on new vessels. In October, new ship orders as a percentage of the global fleet fell to 7.1 percent, the lowest level since 1989, according to Clarksons Research. Falling orders for tankers, containers and bulk carriers show that confidence among the shipping lines that control the bulk of international trade remains low.

China’s trade growth n EXPORT n IMPORT

US DOLLAR

50% 40% 30% 20% 10% 0 -10% -20% 2016

Apr

Jul

Oct

SOURCE: GENERAL ADMINISTRATION OF CUSTOMS

2017

Apr

Jul

Oct

2018

Apr

Jul

Oct

2019

Apr

Jul

Oct

2020

Apr

Jul

Oct

2020 had a calamitous impact on the world’s stock markets – but forex traders thrive on volatility.

Giles Coghlan, Chief Currency Analyst for HYCM, told World Finance that as global growth Giles Coghlan starts to pick up on the back of vaccine hopes, it could be an excellent time for commodities.

“This could be a very, very good time for gold,” he said. “The Federal Reserve is set to keep interest rates at low levels right through 2023… you would expect that to be very good for gold, which has grown and gained in value in all of the last major financial crises that we’ve had. So gold long still looks good right now – but we need to keep a careful eye on what the Federal Reserve does.”

Copper is also a promising pick in the medium-tolong term, due to the growing popularity of electric vehicles. According to ev-volumes.com, electric vehicle sales grew 57 percent in the first half of 2020, while the vehicle market as a whole declined 37 percent. Electric vehicles “are thought to account for about 9.4 percent of copper demand by 2030, and the current level is 2.4 percent,” Coghlan said. “So you would expect dips in copper to find buyers in the medium term.”

“Another interesting commodity is nickel,” he said. According to a report by Morgan Stanley, electric car sales are seen to boost nickel more than any other commodity used in their production – and they’re expected to represent 26 percent of the total automotive market by 2030, up from just three percent today. “They predict that over the next five to 10 years there’s going to be a heavy investment in nickel mining, and a greater demand for nickel itself,” Coghlan said.

“Over the next five to 10 years, the commodity nickel could be a great investment.”

As for currency trades, those that are pre-cyclical in growth are expected to benefit – especially in those countries that locked down quickly and effectively, like Australia and New Zealand. “If the US dollar weakens, that would further benefit the Antipodean currencies,” Coghlan said. “And perhaps an AUD/JPY long, or a NZD/ JPY long, could be a great trade over the medium to longer term.”

FOR MORE ABOUT TRADING COMMODITIES, VISIT: www.worldfinance.com/videos

Winter 2021 |

19

The Ledger Winter 2021

v i de o s

i n s ig h t s

Going digital first through a worldwide pandemic On March 7, 2019, Baiduri Bank – one of the largest financial services providers in Brunei – announced its new CEO. Twentyyear Baiduri veteran Ti Eng Hui would take the helm from Pierre Ti Eng Hui Imhof, who was retiring after 16 years. On March 7, 2020, the first Bruneian started experiencing symptoms of COVID-19, after returning from a religious gathering in Malaysia. “Working together with my colleagues in the Brunei Association of Banks, together with the regulators MBD and also the Ministry of Finance,” Ti Eng Hui told World Finance, “We rolled out a financial relief package for those businesses and individuals affected by the COVID-19 situation, where their loan repayments can be deferred until next year.”

When World Finance spoke to Ti in 2019, shortly after his appointment, he made it very clear that the bank was adopting a rapid digitisation strategy, investing heavily in technology and staff training.

“COVID-19 has delayed the pace a bit,” he said, “but we are very firm, and we are very clear on what we want to achieve.”

“You know, our online transactions now account for more than 90 percent of overall banking transactions, and we continue to see that number climbing,” he said.

“Really, digitisation is the way to go, online is the way to go. And more and more we see the need to do even more, just to make sure that we are one step ahead.”

The bank launched a new mobile banking service in March 2020 – before the crisis had really taken hold in Brunei – which has helped to divert traffic away from Baiduri’s branch network. But the bank has also gone to stringent efforts to make sure that the staff and customers who still need to interact face-to-face can do so safely. “We need to do all the scanning, the social distancing, just to make sure that they see a space that they are comfortable in. I think given the good infrastructure we have in the country in terms of internet access, it’s something that we can definitely do a lot more with in the future. So strategy-wise, continue in the same way, towards more digitisation, at a faster pace."

FOR MORE ABOUT THE DIGITAL BANKING REVOLUTION, VISIT: www.worldfinance.com/videos

20

| Winter 2021

UN secretary-general Antonio Guterres

Pandemic spend reaches $11trn G20 nations have announced that combined they have spent an unparalleled $11trn on economic recovery measures during the COVID-19 pandemic. The figure was announced ahead of November’s G20 leaders’ virtual summit. “G20 members adopted immediate and exceptional measures to address the pandemic’s impact, including the implementation of unparalleled fiscal, monetary and financial stability actions,” a release said.

The spending is equal to twice that of Japan’s total gross domestic product. The G20 announcement also stated its member nations had spent a combined $21bn to enhance pandemic preparedness and response. At the virtual summit, hosted in Saudi Arabia, the leaders of the world’s 20 biggest economies pledged to provide fair and equitable access to a COVID-19 vaccine.

“We will spare no effort to ensure their affordable and equitable access for all people, consistent with members’ commitments to incentivise innovation,” the leaders said in a

The economic impact of the COVID-19 pandemic is difficult to overstate. An International Monetary MARKET Fund report released in October 2020 found that total lost output caused by the pandemic could add up to as much as $28trn by 2025. International economic output could slump by as much as 4.4 percent when the end of VOICE of the

draft statement seen by Reuters. “We recognise the role of extensive immunisation as a global public good.” However, more investment is still needed. Before the summit, UN secretary-general Antonio Guterres said that another $28bn is still needed for the manufacture, procurement and delivery of any new vaccine, while urging G20 nations to join COVAX, a coalition of countries collaborating on the distribution of vaccines.

“The recent breakthroughs on COVID-19 vaccines offer a ray of hope,” Guterres said. “But that ray of hope needs to reach everyone. That means ensuring that vaccines are treated as a global public good, a people’s vaccine accessible and affordable to everyone, everywhere.”

At the conclusion of the conference, the G20’s final communication read: “We have mobilised resources to address the immediate financing needs in global health to support the research, development, manufacturing and distribution of safe and effective COVID-19 diagnostics, therapeutics and vaccines.”

2020 calculations are finalised, that would make it the worst annual performance on record. While the announcement of a vaccine has been very positive, its rollout is likely to take several months, and it will surely be years before the world can return to any semblance of normality again. Anyone expecting a speedy recovery will be disappointed.

BRITISH VIRGIN

JURISDICTION OF CHOICE

JURISDICTION OF CHOICE

ISLANDS

WHY BVI?

Compliance with international regulatory standards Competitive start-up costs Innovative legislation

Internationally renowned commercial court No currency controls

Quali�ed professional pool of practitioners Strong partnership between public and private sectors

Pioneering, innovative and leading solutions, the way in global business solutions the British Virgin Islands (BVI) is an internationally respected business and �nance centre with a proven commitment to connect markets, empower clients and facilitate investment, trade and capital �ow.

3rd Floor, Cutlass Tower, Road Town, Tortola, BVI VG1110 T: +1 (284) 852-1957 E: info@bvifinance.vg W: www.bvifinance.vg | www.bviglobalimpact.com

The Ledger Winter 2021

n e w s i n p ic t u r e s

Here comes the sun Fishermen lay their nets on the Brahmaputra River in Guwahati, India. While most industries were severely impacted by global lockdowns, the Indian fishing industry managed to maintain a consistent growth of 3.4 percent during 2020. The fisheries sector contributes INR 1.75 trillion (£17.68bn) annually to the gross value added to India’s economy and is a major export earner.

22

| Winter 2021

s t a t i s t ic s

a new

Gold rush

In August 2020, the price of gold soared to an all-time high of more than $2,000 an ounce as investors sought out safe havens amid the global COVID-19 pandemic. Traders also flocked to gold to hedge against a possible rise in inflation, as governments around the world pumped money into their economies to combat the crisis. Here, we look into the yellow metal’s trajectory over 2020 and beyond. See page 158 for a World Finance special report on the topic of gold.

Fig 1: Gold spot price

GOLD PRICE FORECASTS FOR 2021

$/OZ

PER OUNCE

2,200

HSBC:

Citibank:

Goldman Sachs:

Australia & New Zealand Banking Group:

$1,965 $2,275

2,000 1,800

$2,300 $2,300

1,600 1,400 1,200

Fig 2: Value of COVID-19 fiscal stimulus packages in countries

1,000 2016

2017

2018

2019

2020

SOURCE: Bloomberg

$2,067.15

18%

Gold’s record high, per ounce, achieved in 2020. The previous high, from 2011, was $1,896.50

JAPAN

21.1%

CANADA

16.4%

AUSTRALIA

Gold’s total annual price rise in 2019

SOURCE: WORLD GOLD COUNCIL REPORT

Fig 3: Official gold coin buying surges n Q1 n Q2 n Q3

TONNES

AS A SHARE OF GDP

250

14%

UNITED STATES

13.2%

TURKEY

12.8%

BRAZIL

12%

GERMANY

8.9%

CHINA

7%

INDIA

6.9%

FRANCE

6%

ARGENTINA

200

ITALY

150

INDONESIA

6% 4.9% 4.4% EUROPEAN UNION

100

RUSSIA

3.4% SAUDI ARABIA

50

3.4%

2019

2020

2018

2016

2017

2015

2013

2014

2011

2012

2010

2009

2008

2006

SOURCE: Metals Focus, Refinitiv GFMS, World Gold Council

2007

2005

2003

2004

2001

2002

MEXICO 2000

0

4.3%

Note: Y-T-D record

0 SOURCE: Statista

0.7% 5

10

15

20

25 Note: As of October 2020

Winter 2021 |

23

The Ledger

Winter 2021

v i de o s

Wealth management is becoming democratised With the introduction of MiFID I and MiFID II, Europe’s traditional wealth management providers had little choice but to pass the costs of compliance on to their clients. This threatened to make Dimitris Kantzelis the industry inaccessible to all but the world’s HNWIs – clients with less than €1m in their accounts would be locked out of seeing any profit in the long-term.

Of course, this was an opportunity for businesses that could leverage smart technology to keep their costs of providing wealth management services low – businesses like XSpot Wealth, founded in 2014 with the noble ambition of democratising wealth management.

Its co-founder and CEO, Dimitris Kantzelis, spoke to World Finance about bringing that vision to life.

“For us, automation was already there,” he said.

“We were already using algorithms and artificial intelligence when trading; this made us realise that if we could apply some of these rules in wealth management, we could help everyone start their investment pots with great diversification, full transparency, and very low costs.” XSpot Wealth’s services were designed to be relevant for its founders’ friends and families. This was a time when wealthier millennials were starting to think about saving for an early retirement. “We needed to come up with a solution that could relate to everyone – not just the few,” said Kantzelis: “People who wanted to start with very low amounts, less than €10,000… so XSpot Wealth was built exactly for this: to help people of every level of income, taking ownership of their financial future.”

As well as financial accessibility, XSpot was committed to convenience from the outset – which has been a key attractor of new business this year especially. “We saw this during the lockdown,” said Kantzelis: “There were many clients coming to us, asking ‘Can we open an account quickly, online, without the need to go to a branch to sign a bunch of papers?’”

“But for us it’s not only the account opening that is so easy – less than 20 minutes. It’s the fact that we’re very open, showing all the risk and reward metrics for our clients. So for them it’s so easy to understand which investment plan is perfect for them.”

FOR MORE ABOUT WEALTH MANAGEMENT, VISIT: www.worldfinance.com/videos

i n s ig h t s China launched a probe into wine imports from Australia in an row between the trade partners

China and Australia trade war worsens In a further souring of relations between China and Australia, the Chinese Ministry of Commerce has imposed temporary anti-dumping tariffs of as much as 200 percent on Australian wine. The decision is yet another penalty recently placed on Australian primary producers by the Chinese government. In the last 12 months, China has also imposed tariffs on Australian barley, suspended the import of meat and warned of customs delays for several other categories of Australian produce. The Australian Broadcasting Corporation reports that the decisions have left Chinese importers wary of Australian goods. Recent shipments have seen significant delays due to customs, and there have been reports of food spoiling on airport tarmacs. China is a particularly important market for winemakers. According to Wine Australia, China accounted for 39 percent of Australia’s total wine exports for the first nine months of 2020. Immediately following the announcement, Australia’s Treasury Wine

China and Australia have had a contentious relationship for some time. The two are major MARKET trading partners, with Australia selling minerals, resources and food while importing manufactured goods such as telecommunication infrastructure and furniture.

Australia is also a major destination for tourism and educaVOICE of the

Estates, one of the world’s largest winemakers, saw its share price fall by 13 percent. China’s investigation into the anti-dumping allegations is still ongoing, and is due to conclude sometime in 2021. Australia is currently deciding whether to appeal the tariffs with the World Trade Organisation. Australia’s politicians have attributed the decision to worsening diplomatic relations between the two countries.

“The cumulative impact of China’s trade sanctions against a number of Australian industries during the course of 2020 does give rise to the perception these actions are being undertaken as a result or in response to some other factors,” said Australian Trade Minister Simon Birmingham. In the last 12 months the Australian government has made moves towards blocking foreign investment, banning the use of Huawei technology in the rollout of Australia’s 5G network and supporting a push for an international investigation regarding the origin of COVID-19.

tion. However, Australia’s political and ideological ties to the US have often been a source of contention, particularly as US-China relations have degraded. In 2015 Australia and China entered into a free-trade agreement, which was heralded as a major diplomatic milestone at the time. It may take a Biden presidency to restore relations back to this high point.

Winter 2021 |

25

wor l d f i na nce

Global Review

3

Leaders of change

4

Now in its 13th edition, the Global Innovation Index 2020 (GII) reveals which countries will finance innovation to build a sustainable and inclusive future. Published amid the pandemic, the GII discovered that while finance for innovation is drying up, the crisis could spark a new round of creative disruption 1–20 21–40 41–60

61–80 81-100 No data available

Note: Countries ranked (between 1 and 100)

1

Switzerland (Rank 1)

Coming out on top of the GII’s ranking, which takes into account around 80 different indicators.

Sw itzerland has topped the rankings for 10 consecutive years by displaying a “strong and solid” performance, ranking high in government effectiveness, env ironmental performance a nd ma rket c apit a lisat ion.

Not on ly does Sw itzerla nd consistently produce high-quality innovations, but its business sector also excels. Switzerland is home to 122 of the world’s top 5,000 brands – including Nestlé andUBS bank – and it ranked second in a new GII indicator of global brand value, which scales a country’s brand worth by its GDP. 26

| Winter 2021

2

India (Rank 48)

Among the 131 economies featured in the GII 2020, India stood at 48th. The countr y climbed up the ranks from 57th in 2018 thanks to several significant initiatives by the government. In fact, in the central and southern Asia region, India took the top spot. Together with only three other economies, India holds the record for being an “innovation achiever” for 10 years in a row. According to the report, the country “[produces] more valuable brands than could be predicted from its income level”.

Due to its strong universities, India ranks second after China in innovation quality among middle-income groups.

3

United States (Rank 3)

The US was a force for innovation in 2020, ranking third overall, up from six th in 2018. In the global brand value rankings, the US took fourth place, as host to 1,359 of the top 5,000 highest-value brands. Many familiar names are among the list, including A mazon, Google and Apple.

Together, these three brands a r e v a lue d at $521bn . The US was also named a world leader in the development of i n novat ion “clust er s,” w it h S a n Jo se - S a n Fr a nc i sc o, Boston-Cambridge and New York City ranking among the top 10 science and technology clusters in the world.

4

Brazil (Rank 62)

Brazil ranked fourth for its region, though in the overall ranking it came 62nd, up two spots from the previous year. Despite the relatively high ranking in its region, Brazil faces many challenges, including a “diverse and uneven economy”, the report says.

“Historically, islands of efficiency and prosperity have existed side by side with poverty and other social problems, such as access to quality education, health, and several basic public services. In a country with these characteristics, science, technology, and innovation often are considered secondary issues,” explains Robson Braga de Andrade, president of Brazil’s National Industry Confederation.

wor l d f i na nce

Global Review

1

6

8

2

5

7

SOURCE: GLOBAL INNOVATION INDEX 2020

5

Singapore (Rank 8)

While Singapore ranked eighth globally in the GII, among the 17 economies in southeast Asia, east Asia and Oceania it topped the list. Relative to GDP, Singapore performs above expectations for its level of development; however, while the city-state ranks first globally in innovation inputs, it only reached 15th place in terms of its innovation outputs. Relative to its level of innovation investments, Singapore produces fewer innovation outputs than expected, the report revealed. When it comes to its institutions, market sophistication and business sophistication, Singapore excels – but in terms of its creative outputs, there is room for improvement.

6

South Korea (Rank 10)

2020 marked the first year that the Republic of Korea joined the GII’s top 10. In its region, the Republic of Korea places second, just behind Singapore. The most significant gains in 2020 were made in the GII areas that measure the innovation efforts and outcomes related to new knowledge and technologies, but Korea also stands out for its human capital and research systems. “Thanks to the excellence of its innovation ecosystem, the Republic of Korea is the world leader in patents and industrial designs by origin, and ranks in the top 10 in [Patent Cooperation Treaty] patents, utility models and high-technology manufacturing exports.”

7

Mauritius (Rank 52)

Mauritius made a stunning rise in 2020, jumping from 82nd in 2019 to 52nd. This can partially be explained by more complete innovation data, data revisions at source, performance improvements, and model changes. Among the other 25 economies in the sub-Saharan Africa region, Mauritius took the top spot. On average, countries in the region perform best in the institutions pillar, and Mauritius is no different. The country was also helped by its strong business environment and the ease of starting a business. However, it was let down by its below-average score for its income group in business sophistication, often another strong point for sub-Saharan Africa.

8

Israel (Rank 13)

Israel claimed a strong spot on the GII, ranking 13th place overall, and notching a firstplace spot among the 19 economies in northern Africa and western Asia. The country was down three places compared to 2019, but despite this, Israel is still considered a world leader in innovation and entrepreneurship thanks to its start-up numbers – more per capita than any other country. The high number of engineers who live within its borders allow the country to take first place across several GII indicators. However, it still lacks the “industrial maturation” that will be crucial to further development.

Winter 2021 |

27

wor l d f i na nce

Financial History

Let there be light Solar power is poised to become the new king of electricity supply, according to the International Energy Agency’s annual report, the ‘World Energy Outlook.’ Solar photovoltaics have officially become the cheapest source of electricity in history in some parts of the world – but how long has it taken for the technology to reach this point?

212 BC

1767

1839

1954

Although the work of harnessing and directing the sun’s rays may have been undertaken from as early as 700 BC, it is said that in 212 BC, the Greek scientist Archimedes utilised the reflection of sunlight off bronze shields to set fire to Roman ships. The US Department of Energy admits that no records of the event exist, but it says the Greek navy recreated the experiment in 1973. It would be many years later before scientists discovered how to convert the energy from sunlight into electricity.

The development of solar technology really kicked off in the late 1700s. Swiss scientist Horace Bénédict de Saussure gained fame by creating the world’s first solar collector.

Otherwise known as a solar oven, the design consisted of an insulated box with three layers of glass, which would capture thermal radiation to produce heat. The oven was able to reach temperatures of 110°C, and in the 1830s it was used by Sir John Herschel to cook food during his voyage to South Africa.

In a huge breakthrough for solar power, French scientist Edmund Bacquerel discovered the photovoltaic effect, which would lead to today’s solar photovoltaic (PV) panels, whereby electric power is generated by using solar cells to convert energy from the sun into a flow of electrons. In the 1860s, this discovery was followed by French mathematician August Mouchet’s idea for a solar-powered steam engine. He and assistant Abel Pifre made the first solar-powered engines in the next 20 years.

The first solar cell that could convert enough of the sun’s energy into power to run everyday electrical equipment was designed by Daryl Chaplin, Gerald Pearson and Calvin Souther Fuller at Bell Laboratories. The cell was made using silicon, and at the time the New York Times called it “the beginning of a new era.” Despite this, the solar cells were still a commercial failure, as a one-watt cell cost around $300. In comparison, a commercial power plant cost 50 cents per watt to run.

1970

1982

2015

2020

A cheaper solar cell was designed by photochemist Elliot Berman with the help of oil and gas giant Exxon. At the time, solar cells that were being sent into space cost more than $100 per watt, but Berman and Exxon managed to bring the price down to $20 per watt. With the 1973–74 oil embargo throwing the US into an energy crisis, Exxon ran an ad showcasing its work in solar power; however, the company shuttered its solar business in 1984 over fears it would take at least a decade to make a profit.

ARCO Solar, which was owned by oil company Atlantic Richfield, helped to develop the world’s first megawatt-scale power station in Hesperia, California. ARCO worked over the years to boost the efficiency of solar panels and create a more durable product, and it soon became the world’s largest solar manufacturer. By 1985, sales of PV cells had reached $250m, and silicon cells had an efficiency of 20 percent. However, the company was still unprofitable, and at the end of the decade it was sold to Germany’s Siemens.

Thanks to technology advances and a reduction in costs, the global solar PV market was nearing 200 gigawatts (GW) in 2015, or 40 times the installed capacity of 2006. By 2018, this had risen to more than 500 GW, of which 180 GW were utility-scale plants. The rising tide of solar has been helped by a number of national programmes to boost deployment in the US, Japan, Germany and China. By 2050, the IEA expects solar power to be the world’s largest source of electricity.

The IEA’s World Energy Outlook 2020 revealed that in some parts of the world, solar power is the cheapest source of electricity in history. The IEA’s outlook predicts 43 percent more solar output by 2040 than it expected in 2018. In part, this is due to a fresh analysis that discovered solar power is 20–50 percent cheaper today than the IEA estimated in its last outlook. Policies designed to encourage renewable energy growth have made it possible for solar to generate electricity “at or below” $20 per megawatt hour.

28

| Winter 2021

Behind every AI-powered purchase is a delighted customer

What if you could sell significantly more insurance than with conventional models? And with every sale, your customer information system becomes smarter. Revolutionize your sales with MSIG’s first-of-its-kind, AI-powered MS1 Brain to predict and fulfill your customers’ needs. Talk to us.

https://www.ms-ins.com/english/

wor l d f i na nce

Profile

Eric Yuan CEO, ZOOM

The Zoom boom

Few entrepreneurs profited in 2020 quite like Eric Yuan, founder and CEO of Zoom, with a 400 percent increase in net worth. But having poured his life’s work into the video conferencing platform, COVID-19 can’t claim all of the credit for Yuan’s success

Economically speaking, it has been the kind of year that any entrepreneur dreads. After the long recovery from the Great Recession, many economic experts and business moguls allowed themselves to believe that the worst days were behind them, and that they would never again see such a crisis in their lifetime. But then along came COVID-19, plunging the world into the worst economic downturn since the Great Depression. 2020 success stories are certainly few and far between, but amid such chaos, certain individuals have thrived. Eric Yuan, founder and CEO of video conferencing phenomenon Zoom, is undoubtedly one of this year’s biggest winners.

When the world as we know it started to shut down back in early March, the word “Zoom” quickly joined the likes of “social distancing”, “bubbles” and “WFH” as part of our pandemicrelated vocabulary. Everything from daily work meetings to high-intensity workout classes and Friday night drinks suddenly moved from the real world to the virtual one, and Zoom was there to facilitate it all. The company’s user numbers have skyrocketed since the onset of the pandemic, with over 300 million video call participants flocking to its platform every day during the month of April. Meanwhile, Zoom founder Yuan has been enjoying the fruits of his labour, seeing his net worth soar by almost 400 percent in 2020, with

30

| Winter 2021

his personal shares in Zoom now valued at around $17bn. But to credit Zoom’s success to the events of 2020 alone would be doing the company – and indeed, Yuan – a disservice. While many of us might not have heard of Zoom until a few short months ago, Yuan has been steering the company on a pathway to success ever since its inception in 2011. By focusing intently on the user experience and always making customer satisfaction and happiness a priority, Yuan has ensured that Zoom stands out from its competitors, showing that even in a crowded market, the cream always rises to the top.

ERIC YUAN IN NUMBERS

Engineering meets entrepreneurship

Zoom’s valuation on its first day of trading on the public markets

Born the son of mining engineers in Shandong Province in eastern China, Yuan showed an instinctive entrepreneurial spirit from an early age. Clearly a driven child, Yuan was not yet ten years old when he started collecting discarded construction scraps, which he would then hand over to be recycled in return for cash. As a young adult, Yuan showed a burgeoning interest in technology when he chose to study applied mathematics and computer science at Shandong University of Science and Technology. It was during this time at university that Yuan had his first thoughts of what would eventually become Zoom. When visiting his girlfriend at the time

2 trillion 300 million Minutes of meetings recorded on Zoom by the end of April 2020

Daily Zoom video participants at the peak of the pandemic in April 2020

$16bn 396.5%

The percentage by which Yuan’s net worth grew during 2020

wor l d f i na nce

Profile

Yuan had a clear vision of what he wanted to create with his new company – as well as an awareness of the pitfalls to avoid CURRICULUM VITAE BORN: 1970 | EDUCATION: SHANDONG UNIVERSITY OF SCIENCE AND TECHNOLOGY IN JINAN, CHINA

1997

2007

2011

2013

2017

2019

Yuan moves to the US after an incredible total of seven rejected Visa applications.

Upon entry he settles in San Jose, California, and lands himself an engineering job at the video conferencing company, Webex.

Cisco acquires Webex for a total of $3.2bn, showing a huge vote of confidence in the video conferencing software that Yuan himself had played a key role in creating and developing during his time there.

Yuan parts ways with Webex after receiving pushback on his suggestions for improving the firm’s video conferencing software. This same year, Yuan would raise $3m of investment to start his own video conferencing company.

After much meticulous planning, Zoom officially launches in January. The company claims to have reached the impressive milestone of one million video participants just four months later, in May.

Yuan’s fast-growing video conferencing phenomenon officially enters the exclusive unicorn club, and reaches a $1bn valuation shortly after securing $100m in investment from Sequoia Capital in January.

After two more years of solid growth following the Sequoia investment, Zoom goes public in April. On its first day on the public markets, Zoom was valued at $16bn, making it one of the year’s most talked about IPOs.

– who he later married – Yuan would have to undertake a ten-hour train journey, meaning that the couple could only spend time together once or twice a year during the holidays. Speaking on the Evolving for the Next Billion podcast in 2018, Yuan said; “Someday if I can have a smart device and with just one click I can talk with you, can see you, that was my daydream, right? And every day I thought about that...the technology was not ready but the idea was there.”

After completing his masters degree, Yuan spent a fateful few months working in Japan in 1994, where he attended a speech given by then Microsoft CEO Bill Gates, who at that time was gearing up to release the groundbreaking

Internet Explorer web browser. Inspired by what he had heard, Yuan felt the pull of Silicon Valley, determined to play a part in the innovations of the West Coast dotcom boom. However, his US aspirations were almost thwarted at the first hurdle, when his visa application was unceremoniously denied due to a translationrelated misunderstanding. Undeterred, Yuan continued to make application after application – submitting a grand total of seven rejected requests in a year and a half – before finally being accepted on his eighth attempt.

In 1997, at the age of 27, Yuan was able to take the first step in the journey that would lead him to Zoom, settling in San Jose, California,

and landing an engineering job with video conferencing company, Webex. His talents and drive soon established Yuan as a key player within the company, and he quickly rose through the ranks, eventually becoming the VP of engineering.

In the 14 years that Yuan spent at Webex, the company grew significantly, establishing itself as one of the leading options for video calling and conferencing. The appeal of video conferencing really became clear in the mid-2000s, with tech conglomerate Cisco acquiring Webex for a cool $3.2bn.

But Webex’s video hosting software certainly wasn’t perfect – and Yuan was only too aware of this. By taking the time to speak with Webex »

Winter 2021 |

31

wor l d f i na nce

Profile

» users, Yuan took note of a growing list of common customer complaints, which included connectivity issues, video and audio lags and time-consuming installation processes for new users. Thus far, Webex had survived and thrived largely because of a lack of competitors in the video conferencing market, but Yuan recognised that it would only be a matter of time until other, more forward-thinking companies would start snapping at Webex’s heels, potentially offering a better service at a better price.

Yuan voiced his concerns and suggested ways to improve the software, but was met with resistance, ultimately leading him to part ways with the company in 2011. Not one to rest on his laurels, Yuan immediately began planting the seeds for his next venture: the ubiquitous video conferencing platform that we now all know as Zoom.

An instant hit From its very earliest days, the Zoom ethos has been focused squarely on one crucial thing: keeping people happy. In an interview with Forbes magazine, Yuan simply described Zoom’s company culture as “happiness,” explaining that his priority was making sure that everyone involved in Zoom – from its employees to its paying customers to its visiting video participants – were happy in all of their interactions with the platform. Having learned valuable lessons from his time at Webex, Yuan had a clear vision of what he wanted to create with his new company – as well as an awareness of the pitfalls to avoid.

By 2011, when Yuan officially founded Zoom, the video conferencing market was quickly becoming a more crowded scene, meaning that his fledgling company needed to set itself apart from its well-established competitors – the likes of Skype and Google Hangouts among them.

Along with taking a customer-focused approach, Yuan conceived of another key strategy that would enable Zoom to stand out from the crowd.

Instead of pursuing an audio-first approach and then attempting to add video to that function, Zoom was to be built as a video-first platform.

This unique approach and clear vision soon won over investors, with Yuan able to raise $3m in 2011 to bring his idea to life. Working with a small team in California and a number of engineers back in his native China, Yuan was able to create the first Zoom iteration within two years, which performed incredibly well with beta testers, and eventually launched in January 2013. Yuan’s carefully conceived creation was an instant success. By May, Zoom claimed that it

32

| Winter 2021

“Zoom might be the pandemic’s greatest success story, but the company’s recent triumph has been many years in the making” had rocketed to 1 million participants in its video calls, quickly securing another round of funding worth $10m.

From the start, investors and users alike could tell that Zoom was a little different to its competitors. The platform’s low data usage meant that video calls could still work for people with a patchy or slow internet connection, and its cloud-based nature reduced the need for timeconsuming installation processes. The platform could also instantly identify what device its video participants were using and adjust accordingly, meaning that there was no need to create different versions of Zoom for Mac or PC. What’s more, at a cost of just $9.99 per month for its ‘pro’ package, it offered a cheaper alternative to its rivals, with arguably better functionality. As users flocked to the platform, investor interest in Zoom also continued to grow, with venture capital powerhouse Sequoia investing $100m in the company in its Series D round of funding in January 2017. This substantial investment saw Zoom valued at $1bn for the first time, officially making it a rare tech unicorn. But, unlike most members of the lauded unicorn club, Zoom was actually posting profits year after year. Following its $1bn valuation, the company enjoyed two more years of impressive growth, posting $330m in revenue in the year ending January 31, 2019.

With such a healthy track record the next step was clear: it was time for Yuan to take the company public. That day finally came in April 2019, with company stock surging by 72% on its first day of trading. By its third day on the public markets, Zoom had leapfrogged Lyft to become the most valuable tech IPO of the year. Zoom had made it – but nobody could have predicted what was to come next.

Right place, right time While Zoom’s IPO certainly put it on the map in tech and investor circles, Yuan and his company were still a long way off becoming household names. When it went public back in 2019, Zoom was still predominantly a businessfocused communications tool, with most of its users coming from the corporate world. Among the general public, meanwhile, the platform was little known – after all, just how often did your

Zoom founder Eric Yuan at the Nasdaq opening bell ceremony.

average citizen hop onto a video conference, outside of a business setting?

Then came COVID-19, and almost overnight, our entire lives changed. Across the globe, governments issued orders requiring people to stay at home, leaving only for essential journeys such as stocking up on lockdown provisions. Bustling city centres suddenly lay empty, and the lights were turned off in offices across the land as workers opened up their laptops and started clocking in from home. With social distancing measures coming into effect, and people abruptly separated from their friends and loved ones, technology became something of a vital social lifeline for many, with video calls helping to keep people connected while they had to remain apart. Zoom, then, became not just a vital tool to facilitate working from home, but also a way for people to connect with the world outside their homes. In the space of a few short weeks, Zoom hit the mainstream.

wor l d f i na nce

Profile

“Thanks to Yuan’s clarity of vision and, most of all, his commitment to customer happiness, Zoom is more than just a pandemic success story” Soon, Zoom quizzes, Zoom drinks and even Zoom dates were all just another run-of-the-mill part of our new normal. Simply put, Zoom was at the right place at the right time, offering an easy-to-use, reliable service that even the biggest technophobes could navigate with ease. Zoom might be the pandemic’s greatest success story, but the company’s recent triumph has been many years in the making. From his years at Webex, Yuan understood that the customer experience is paramount, and from its earliest days, Zoom has been committed to offering a superior service. This year, when push

came to shove, this customer-focused mindset allowed Zoom to expertly leapfrog its competitors, establishing itself as the clear pandemic champion. But as 2020 draws to a close, we have to ask: is the Zoom boom sustainable?

Changing the world As spring turned to summer and weeks of lockdown turned to months, a new, Zoom-related turn of phrase entered the public lexicon: Zoom fatigue. Even the most enthusiastic early lockdown Zoomers felt their passion wane as lockdown dragged on, with the novelty of virtual yoga classes and video call pub quizzes beginning to wear off.

But fatigued as we might be, with fresh lockdowns being imposed on countries throughout Europe, we are likely to be Zooming for some time to come. Even at the end of these governmentmandated lockdowns, however, many people – Yuan himself included – believe that we will see a

fundamental shift in the way that we work, with regular homeworking becoming the new norm in the years to come. “Coronavirus has completely changed how people think about where or how you should work,” Yuan said in an interview with The Telegraph – conducted via Zoom, of course.

“Millennials grew up realising that they can get the job done without having to go into the office.

Give it maybe 10 years and the millennials become the leaders and then it will become very common.

Coronavirus is just a catalyst.”

Similarly, Coronavirus might have been a catalyst for Zoom’s success, but it certainly wasn’t the cause of it. Those seeds were planted long ago, when Zoom was but an idea in the back of Yuan’s mind. Thanks to Yuan’s clarity of vision and, most of all, his commitment to customer happiness, Zoom is more than just a pandemic success story – it’s proof that a good idea can indeed change the world. n

Winter 2021 |

33

wor l d f i na nce

Comment

Klaus Schwab

FOUNDER AND EXECUTIVE CHAIRMAN OF THE WORLD ECONOMIC FORUM

Rethinking capitalism in the post-pandemic world The challenges that we face due to COVID-19 are daunting, but we are also offered an incredible opportunity to hit the reset button in a way that hasn’t been possible during the last 75 years No event since World War II’s end has had as profound a global impact as COVID-19.

The pandemic has triggered a public health and economic crisis on a scale unseen in generations and has exacerbated systemic problems such as inequality and great-power posturing.

The only acceptable response to such a crisis is to pursue a ‘Great Reset’ of our economies, politics and societies. Indeed, this is a moment to re-evaluate the sacred cows of the pre-pandemic system, but also to defend certain long-held values. The task we face is to preserve the accomplishments of the past 75 years in a more sustainable form.

In the decades after World War II, the world made unprecedented strides towards eradicating poverty, reducing childhood mortality, increasing life expectancy and expanding literacy. Today, international co-operation and trade, which drove the postwar improvement in these and many other measures of human progress, must be maintained and defended against renewed scepticism of their merits.

34

| Winter 2021

At the same time, the world also must remain focused on the defining issue of the pre-pandemic era: the ‘Fourth Industrial Revolution’ and the digitisation of countless economic activities. Recent technological advances have given us the tools that we need to confront the current crisis – including through the rapid development of vaccines, new treatments and personal protective equipment. We will need to continue to invest in research and development, education and innovation, while at the same time building protections against those who would misuse technology.

The few that have the most But other shibboleths of our global economic system will need to be re-evaluated with an open mind. Chief among these is the neoliberal ideology. Free-market fundamentalism has eroded worker rights and economic security, triggered a deregulatory race to the bottom and ruinous tax competition, and enabled the emergence of massive new global monopolies.

Trade, taxation and competition rules that reflect decades of neo-liberal influence will now have to be revised. Otherwise, the ideological pendulum – already in motion – could swing back towards full-scale protectionism and other lose-lose economic strategies.

Specifically, we will need to reconsider our collective commitment to ‘capitalism’ as we have known it. Obviously, we should not do away with the basic engines of growth. We owe most of the social progress of the past to entrepreneurship and to the capacity to create wealth by taking risks and pursuing innovative new business models. We need markets to allocate resources and the production of goods and services efficiently, particularly when it comes to confronting problems like climate change.

For the greater good But we must rethink what we mean by ‘capital’ in its many iterations, whether financial, environmental, social or human. Today’s consumers do not want more and better goods and services for a reasonable price. Rather, they

wor l d f i na nce

Comment

increasingly expect companies to contribute to social welfare and the common good. There is both a fundamental need and an increasingly widespread demand for a new kind of ‘capitalism.’

It’s purely business To reconsider capitalism, we must reconsider the role of corporations. An early exponent of neo-liberalism, the Nobel laureate economist Milton Friedman believed (quoting former US President Calvin Coolidge) that “the business of business is business.” But when Friedman pioneered the doctrine of shareholder primacy, he did not consider that a publicly traded company might be not just a commercial entity but also a social organism.

Moreover, the COVID crisis has demonstrated that companies that invested in strengthening their long-term vitality have been better equipped to weather the storm.

In fact, the pandemic has hastened the shift towards a stakeholder model of corporate capitalism, following the US Business Roundtable’s embrace of this concept in 2019.

But for more socially and environmentally conscious business practices to stick, companies need clearer guidelines. To meet that need, the World Economic Forum’s International Business Council has developed a set of ‘Stakeholder Capitalism Metrics,’ so that businesses can get on the same page when it comes to assessing value and risks.

Building platforms for all If the COVID crisis has shown us anything, it is that governments, businesses or civil-society groups acting alone cannot meet systemic global challenges. We need to break down the silos that keep these domains separate, and

“The Great Reset should seek to lend a voice to those who have been left behind, so that everyone who is willing to ‘co-shape’ the future can do so”

start to build institutional platforms for public-private cooperation. Equally important, younger generations must be involved in this process, because it is inherently about the long-term future.

Finally, we must expand our effort to recognise the diversity of backgrounds, opinions and values among citizens at all levels. We each have our individual identities, but we all belong to local, professional, national and even global communities with shared interests and intertwined destinies.

A sustainable world The Great Reset should seek to lend a voice to those who have been left behind, so that everyone who is willing to ‘co-shape’ the future can do so. The reset that we need is not a revolution or a shift to some new ideology. Rather, it should be seen as a pragmatic step towards a more resilient, cohesive and sustainable world. Some of the pillars of the global system will need to be replaced, and others repaired or strengthened. To achieve shared progress, prosperity and health requires nothing more – or less. n

Winter 2021 |

35

wor l d f i na nce

Comment

Sophia Kalantzakos PROFESSOR OF ENVIRONMENTAL STUDIES AND PUBLIC POLICY AT NEW YORK UNIVERSITY/ NYU ABU DHABI

Critical minerals and the new geopolitics Relationships are important in all walks of life and countries now need to ensure the business supply chains for rare and essential minerals are secured The climate crisis and the Fourth Industrial Revolution – with its breakthrough technologies such as artificial intelligence and 5G networks – are setting the world on a geopolitical collision course. Both the drive to decarbonise and the battle for global technological supremacy depend on critical minerals like rare earths, lithium and cobalt – all of which are highly concentrated in a few locations, including China.

The scramble to control these elements’ supply chains is intensifying. For example, the electric vehicles made by Tesla and other automotive firms run on lithium-ion batteries, but just a handful of countries produce most of the world’s lithium. The tension between the geographic concentration of critical resources and the increasing global competition for supply will further unsettle geopolitics in the 21st century. A long era of stable resource competition is thus rapidly ending.

Historically, empires locked in their economic supply chains and managed competition. And in the long post-1945 cycle of decolonisation, the United States, as the global 36

| Winter 2021

economic hegemon, backstopped the rules and norms of world trade. At the same time, supplies of critical resources – in particular, fossil fuels – became more dispersed as improved geological information and new technologies (like deep-sea drilling and fracking) helped to loosen OPEC’s grip.

A game changer But today, conditions have flipped. Critical minerals for the digital and post-carbon economy are highly concentrated geographically, while the end of US unipolarity and increasing global trade uncertainties have triggered a rush to secure them. China’s global rise underpins the competition-concentration tension. Industrial innovation and production are no longer the exclusive purview of the OECD economies, especially the US, European Union member states and Japan. These major powers previously secured critical inputs through colonial expansion and resource carve-ups, but China’s export ambitions, and its control of key supply chains, have changed the game.

Moreover, China’s Belt and Road Initiative

(BRI) – a transnational infrastructure investment scheme with participating countries across Africa, Eurasia,and South America – openly challenges earlier models of access and cooperation.

Governments in the Global South, where many critical resources are located, are frequently willing to strike exclusive deals.

They have welcomed China’s one-stop-shop financing schemes, increased engagement, and narrative of ‘win-win partnerships’ that offer a reliable alternative to Western funding and norm-setting.

China’s resource domination is reshaping geopolitics. In 2010, China halved its export quotas for rare earths, and also reportedly banned their sale to Japan following a trawler incident near Japan’s Senkaku Islands, which China calls the Diaoyu Islands and claims as its own. The episode awakened other leading economies to the fact that a major competitor and rival controlled 97 percent of the global supply of these vital inputs for magnets, glass, electronics, defence systems, wind turbines, and hybrid and electric vehicles.

wor l d f i na nce

Comment

The US, the EU and Japan reacted in a piecemeal manner at best, and 10 years later still haven’t produced effective strategies to free themselves from China’s resource grip.

Rare earths made headlines again in 2019, when China indicated that it might ‘weaponise’ them in its trade dispute with the US. Meanwhile, breathless media reports of rareearth discoveries in Afghanistan, Greenland’s melting glaciers, the abyssal sea, asteroids and planets demonstrate that magical thinking continues to trump effective policymaking.

Likewise, decarbonisation places a premium on further breakthroughs in battery technology and storage, which is why global lithium production skyrocketed from 32,500 tonnes in 2015 to 95,000 tonnes in 2018. Two of the three politically and economically volatile countries in the so-called ‘lithium triangle’ – Chile and Bolivia – are BRI participants and receive substantial Chinese investment, while the third, Argentina, is considering joining. Because none has the capacity for vertical integration, China controls more than 60 percent of global manufacturing capacity for lithium-ion bat-

teries. Even Australia, which has substantial rare-earth and lithium reserves, has so far failed to become an ‘independent’ alternative supplier. Cobalt, another key battery input, is overwhelmingly mined in the Democratic Republic of the Congo. The DRC has the world’s largest cobalt reserves – three times those of Australia, which ranks second – and produces 60 percent of global mined cobalt. The country remains the most cost-competitive producer, with China the dominant investor, although an outcry over labour practices has raised questions about ethical mining.

Returning to old ways How might rich-country governments best manage the competition-concentration tension regarding critical minerals, especially if traditional global institutions are on the wane? One option is to revive the old colonial model of carving up regions to manage competition. But although China has been able to extend its global economic influence without the baggage of having been a colonial power, the EU, US and Japan can no longer play that game successfully. Smaller developing

countries now have other options and preferences, and will often side with China, Russia, Brazil, India or other such powers.

Alternatively, the traditional powers could begin to build a new framework for cooperation.

But US President Donald Trump’s ‘America First’ posturing and a lack of coordination among former allies currently stand in the way. In addition, business is not wired to put geopolitics above the bottom line. Repeated calls by governments to desinicise supply chains achieve little; ministers fulminate about competition but do not address the needs and interests of countries where key strategic resources are concentrated. Moreover, climate change will aggravate retrenchment, especially among resource-rich but economically, socially and politically vulnerable regions.

China has demonstrated its increasing economic power by systematically forging a global network of partners. The powers of old must now build new avenues of trust and co-operation with developing countries, not only to secure the critical minerals vital to powering the world in the Anthropocene era, but also because a perilous planet is a threat to everyone. n

Winter 2021 |

37

wor l d f i na nce

Comment

Kenneth Rogoff

PROFESSOR OF ECONOMICS AND PUBLIC POLICY AT HARVARD UNIVERSITY

The stock market disconnect With no sign of clear skies ahead, the markets present the illusion of having already weathered the economic storm caused by the global impact of COVID-19. But how accurate is this view?

Why are stock market valuations soaring when the real economy remains so fragile? One factor has become increasingly clear: the crisis has disproportionately affected small businesses and low-income service workers. They are essential for the real economy, but not so much for equity markets. True, there are other explanations for today’s lofty valuations, but each has its limitations.

For example, because stock markets are forward-looking, current stock prices may reflect optimism about the imminent arrival of effective COVID-19 vaccines and radically improved testing and treatment options, which would allow for a more limited and nuanced approach to lockdowns. This outlook may be justified, or it may be that markets are underestimating the likelihood of a severe second wave this winter, and overestimating the efficacy and impact of the first-generation vaccines.

A second, and perhaps more convincing, explanation for today ’s stock market performance is that central banks have pushed interest rates down to near zero. With markets 38

| Winter 2021

convinced that there is little chance that rates will rise in the foreseeable future, prices of long-lived assets such as houses, art, gold, and even Bitcoin have all been driven upward.

And because tech firms’ revenue streams are tilted far into the future, they have benefited disproportionately from low interest rates.

The lingering possibility But, again, it is not clear that markets are correct in anticipating a never-ending continuation of low interest rates. After all, the long-term adverse supply effects, particularly from deglobalisation, may linger long after global demand has recovered.

A third explanation is that in addition to providing ultra-low interest rates, central banks have directly backed private bond markets – representing an unprecedented intervention in the case of the US Federal Reserve. These private bond purchases should not be thought of as monetary policy in a conventional sense.

Rather, they resemble a quasi-fiscal policy, with the central bank acting as an agent for the treasury in an emergency situation.

As such, this particular intervention is likely to be temporary, even though central banks have not yet succeeded in telegraphing that fact to markets. Despite sharply elevated macroeconomic volatility and a rising supply of corporate debt, interest-rate spreads over government debt have actually narrowed in many markets, and the number of major corporate bankruptcies to date remains remarkably low considering the magnitude of the recession.

At some point, markets will be disabused of the notion that taxpayers will cover everything indefinitely. Central banks are ultimately constrained in the amount of risk they are allowed to assume, and the belief that they still have an appetite for taking on more could be challenged in the event of a severe second wave.

The bigger picture While these three explanations offer some insights into why stock prices are rising at a time when the real economy is heading south, they tend to miss a big piece of the puzzle: the economic pain inflicted by COVID-19 is not being

wor l d f i na nce

Comment

BECAUSE TECH FIRMS’ REVENUE STREAMS ARE TILTED FAR INTO THE FUTURE, THEY HAVE BENEFITED DISPROPORTIONATELY FROM LOW INTEREST RATES

borne by publicly traded companies. It is falling on small businesses and individual service proprietors – from dry cleaners to restaurants to entertainment providers – that are not listed on the stock market (which leans more towards manufacturing). These smaller players simply do not have the capital needed to survive a shock of this duration and magnitude. And government programmes that have helped keep them afloat for a while are beginning to

lapse, raising the risk of a snowball effect in the event of a second wave.

Some small-business failures will be seen as part and parcel of the broader economic restructuring that the pandemic has triggered.

But plenty of otherwise viable businesses also will fail, leaving large publicly traded companies with an even stronger market position than they already had. In fact, that is yet another reason for the market euphoria.

True, some large businesses have filed for bankruptcy protection, but most – not least brick-and-mortar retailers – were already in trouble before the pandemic.

The poor are hit hardest Further underscoring the unequal impact of the pandemic, government tax revenues have not fallen by nearly as much as one might expect, given the magnitude of the recession and record postwar unemployment levels (or, in Europe’s case, the massive outlays to pay furloughed workers). The reason, of course, is that the job losses have been concentrated among low-income individuals who pay less in taxes.

A reversal of the trend But today’s elevated stock markets face risks that are not only economic, including (but not limited to) the significant possibility of an unprecedented political crisis following the US presidential election. After the 2008 financial crisis, there was a widespread backlash over policies that seemed to favour Wall Street over Main Street. This time, Wall Street will again be vilified, but populist wrath will also be directed towards Silicon Valley.

One likely outcome, especially if the ongoing process of deglobalisation makes it more difficult for corporations to shift their operations to low-tax countries, will be a reversal of the trend decline in corporate tax rates. That will not be good for stock prices, and it would be a mistake to think the populist response would stop there.

Until lofty stock-market valuations are underpinned by a broad-based recovery in both health and economic outcomes, investors should not get too comfortable with their outsize pandemic profits. What goes up can also come down. n

Winter 2021 |

39

wor l d f i na nce

Comment

Stephen Roach

FACULTY MEMBER AT YALE UNIVERSITY AND AUTHOR

China leads again It’s said that those who cannot learn from history are doomed to repeat it and the US has shown no signs of learning from China on the best way to recover in the most difficult of times Just as China led the world in economic recovery in the aftermath of the global financial crisis of 2008, so it is playing a similar role today. Its post-COVID rebound is gathering momentum amid a developed world that remains on shaky ground. Unfortunately, this is a bitter pill for many to swallow – especially in the United States, where demonisation of China has reached epic proportions.

The two crises are, of course, different. Wall Street was ground zero for the 2008 crisis, while the COVID-19 pandemic was spawned in the wet markets of Wuhan. But in both cases, China’s crisis-response strategy was far more effective than that deployed by the US. In the five years following the onset of the 2008 crisis, annual real GDP growth in China averaged 8.6 percent (on a purchasing power parity basis).

While that was slower than the blistering (and unsustainable) 11.6 percent average pace of the five previous years, it was four times the US economy’s anaemic 2.1 percent average annual growth over the post-crisis 2010–14 period.

China’s pandemic response hints at a comparable outcome in the years ahead. The GDP 40

| Winter 2021

report for the third quarter of 2020 suggests a rapid return to the pre-COVID trend. The 4.9 percent year-on-year figure for real GDP growth does not convey a full sense of the selfsustaining recovery that is now emerging in China. Measuring economic growth on a sequential quarterly basis and converting those comparisons to annual rates – the preferred construct of US statisticians and policymakers – provides a much cleaner sense of realtime shifts in the underlying momentum of any economy. On that basis, China’s real GDP rose at an 11 percent sequential annual rate in the third quarter, following a 55 percent postlockdown surge in the second quarter.

Compare and contrast The comparison with the US is noteworthy.

Both economies experienced comparable contractions during their respective lockdowns, which came one quarter later for the US. China’s 33.8 percent sequential (annualised) plunge in the first quarter was almost identical to the 31.2 percent US contraction in the second quarter. Based on incoming

high-frequency (monthly) data, the so-called GDPNow estimate of the Atlanta Federal Reserve puts third-quarter sequential real GDP growth in the US at around 35 percent. While that is a welcome and marked turnaround from the record decline during the lockdown, it is about 20 percentage points short of China’s post-lockdown rebound and still leaves the US economy about three percent below its peak of late 2019.

Post-lockdown rebounds are not the real story, however. They are akin to the snapback of a stretched rubber band – or in statistical terms, the arithmetical result of restarting an economy that has just been subjected to an unprecedented sudden stop. The true test comes after the snapback, and that’s where China’s strategy has its greatest advantage.

China’s response to COVID-19 borrowed a page from its playbook in 2008, when it ringfenced its financial markets from the toxic fallout of the subprime crisis. The objective back then was crystal clear from the start: address the source of the shock, itself, rather than the collateral damage the shock caused. The

wor l d f i na nce

Comment

$596.4bn fiscal stimulus of 2008–09 worked only because China had taken strong actions to insulate its markets from a virulent financial contagion.

Combining defence with attack China’s approach today is similar: first, insulate its citizens from a virulent pathogenic contagion with draconian public-health measures aimed at containing and mitigating the spread of the disease, and then – and only then – make judicious use of monetary and fiscal policy to reinforce the post-lockdown snapback. This is very different from the approach taken in the US, where the postlockdown debate is more about using monetary and fiscal policies as front-line instruments of economic liberation, rather than relying on disciplined public-health measures aimed at virus containment.

This underscores the sharp contrast between China’s COVID-first strategy and the America-first approach of US President Donald Trump’s administration. In China, unlike the US, there is no political and pub-

lic resistance to masks, social distancing, and aggressive testing as requisite norms of the COVID-19 era. Meanwhile, the US is in the midst of its third serious wave of infection while China continues to exercise prompt and effective control over new outbreaks. In the autumn, for example, some nine million citizens in Qingdao were tested in just five days after a relatively small outbreak affecting fewer than 20 residents. By contrast, Trump wore his own experience with COVID-19 infection as some perverse badge of courage, rather than as a warning of what might lie ahead.

Vulnerable for a setback In this context, China’s impressive GDP results in the third quarter stand in even sharper contrast with the precarious postlockdown state of the US economy. Ongoing distress in the US labour market – unemployment insurance claims remained above 800,000 on a four-week moving average through mid-October, and the 7.9 percent national unemployment rate in September

was still more than double its pre-pandemic 3.5 percent level – leaves America’s consumerled economy highly vulnerable to a setback.

The confluence of a new COVID-19 wave with the on-again, off-again political debate over another fiscal relief package has effectively neutralized the animal spirits that have long powered economic recovery in the US. While China’s 11.2 percent sequential (annualised) growth in the third quarter of this year builds effectively on its post-lockdown snapback, some lingering signs of weakness are evident in several key segments of consumer services – namely travel, leisure, and entertainment. Human nature is the same everywhere, with fear and caution enduring, even in countries where aggressive containment measures are working. For those unwilling to focus on containment, like the US, the long shadow of COVID-19 speaks volumes to the ever-present perils of a double-dip recession. That is exactly what has happened in the aftermath of eight of the last 11 US recessions.

The contrast with China’s self-sustaining recovery couldn’t be more striking. n

Winter 2021 |

41

42

| Winter 2021

SHAKING THE

AS CUSTOMERS LOOK FOR BETTER WAYS TO MANAGE THEIR MONEY AND MAKE SAVINGS IN THE MIDST OF THE COVID-19 RECESSION, THE ANSWER MAY LIE IN INCLUSIVE AND FORWARD-THINKING FINTECHS, WRITES EMILY CASHEN »

Winter 2021 |

43

BUILDING MOMENTUM

o say that 2020 was a transformative year would be putting it mildly. The ongoing pandemic has prompted profound changes in the way we live, work and socialise, with prolonged social distancing measures meaning that many aspects of our lives have moved online in the past 12 months. Kitchen tables now double up as desk space, meetings have been replaced by Zoom calls and Friday night drinks take place over FaceTime, instead of at the pub.

When it comes to how we spend our money, too, the pandemic has pushed us towards the digital realm.

When fears of the virus first began circulating in Europe in February 2020, cash quickly fell out of favour, despite studies indicating that currency doesn’t transmit COVID-19. Shoppers were encouraged to use contactless payments wherever they could, and in the UK alone, ATM usage fell by 71 percent between early March and mid-April. When heading out to the supermarket and other essential shops, we have been ditching the cash and relying on our cards and mobile phones, instead. While in-person spending dropped during 2020, online purchases have surged, with an increased demand for goods leading to supply chain chaos and congested ports the world over.

As for banking and how we manage our money, we have also seen an accelerated shift to online services. According to a study carried out by Mastercard, 62 percent of respondents across 12 European markets said that they would be interested in switching from physical banking to digital platforms, and the company’s recent Global State of Play report also showed that 53 percent of the world’s population are using banking apps more than they were before the pandemic.

So, looking at these trends and evolving behaviours, it could be said that 2020 was the year that fintech really hit the mainstream.

With the financial crunch of the pandemic taking its toll on households across the globe, it’s perhaps unsurprising that customers are looking for new ways to better manage their money in this time of crisis. If we are indeed entering a ‘new normal,’ shouldn’t we take a new approach to our finances, too?

Brave new world The COVID-19 pandemic might have started out as a public health crisis, but it has since snowballed into something much bigger.

The global economy has been plunged into a once-in-a-lifetime recession, the recovery from which seems long, slow and precarious.

44

| Winter 2021

Dame Jayne-Anne Gadhia, founder of Snoop

LOOKING AT THESE TRENDS AND EVOLVING BEHAVIOURS, IT COULD BE SAID THAT 2020 WAS THE YEAR THAT FINTECH REALLY HIT THE MAINSTREAM

agement from our first beta customers, gave us the belief that we could make a difference, and that there was no time like the present to launch.” Launching remotely in the midst of a pandemic was something of a challenge for the Snoop team, but they felt compelled to get the app out to the public as soon as it was ready – to help users make the most out of their money at what they knew to be a crucial time.

Financial reassessments Lockdowns have decimated livelihoods and sent unemployment rates soaring, with those who were already most vulnerable – those from poor, marginalised communities – bearing the brunt of the economic pain. And the bad news is that this is just the beginning. We have been warned that the worst is still yet to come in terms of job losses, squeezed household incomes and depressed wages as the world enters the deepest recession since World War Two. It was this dire economic outlook that prompted Dame Jayne-Anne Gadhia to launch money-saving app Snoop in April 2020 – two months ahead of schedule. Using open banking to connect to users’ bank accounts, the app then analyses customers’ spending and saving habits, identifying where they might be overpaying on their subscription packages or utility bills, for example, and offering helpful tips on where to pinch some pennies when it comes to daily, weekly and monthly spending.

“We launched early quite simply because we thought we could help in light of the economic uncertainty caused by the pandemic,” Gadhia told World Finance. “That, alongside encour-

Families in the UK – where Snoop is based – are on average £515 worse off per month due to the impact of COVID-19, and the British economy is expected to shrink by 11.3 percent in 2020, with recovery off the cards until at least 2022. These precarious and uncertain times have prompted many to reassess their spending and attempt to tighten their purse strings – but it can be hard to know where you could be saving money if you don’t know where to look.

The idea behind Snoop is that it will do the hard work for you, finding the very best deals and personalised money-saving tips and putting them right in your pocket. The launch of Snoop marks something of a new chapter in Gadhia’s impressive career in finance.

First training as an accountant with Ernst & Young, Ghadia was introduced to business magnate Richard Branson in 1994. Just a few short months after this fateful introduction, she helped Branson to launch Virgin Direct – which later became Virgin Money.

She spearheaded this project for over a decade, steering it through seismic events such as the financial crisis of 2008 and all of its ensu-

BUILDING MOMENTUM

F I N T E C H LO C AT I O N S I N E U R O P E Ranking of the Top 10 fintech locations in the EU

1. BERLIN 2. PARIS 3. AMSTERDAM IN NUMBERS

2020

When the app was launched

130,000

Downloads of the app to date

1,700

4. DUBLIN 5. VILNIUS

9

7. MADRID 8. BARCELONA

5 4

9. STOCKHOLM

2

10. ZURICH

Fresh perspective As the world around us changes, we need solutions that reflect the opportunities and demands of our ‘new normal.’ Snoop, like many of the other tech companies and start-ups making a name for themselves, has succeeded

10

8 7

Raised from crowdfunding

ing fallout. While Virgin Money represented a more traditional bank, operating on a traditional platform, it was here that Gadhia first developed an interest in challenger banks and digital alternatives to regular financial services. Indeed, the idea for Snoop had already arisen before Gadhia left Virgin Money in 2018. Drawing on the lessons she had learned in her high-flying career to date, she decided to commit herself to Snoop in January 2019, and a little over a year later, her vision had been brought to life.

Since its launch, the app has already skyrocketed to well over 130,000 downloads, and recently raised £10m from over 1,700 investors in a successful crowdfunding campaign.

Already, it would seem, the app is having the impact that its creators intended, with one particular Snoop suggestion helping residents on an estate in the UK to pursue a £75,000 rebate from their water supplier.

And with more money-saving features in the works, Snoop is just getting started on its mission to put power back in the hands of the consumer. “Our focus and core challenge now is all about momentum,” says Gadhia. “We are accelerating the build of the Snoop platform and all of the money-saving features we’d like to deliver for our customers, and helping to make more and more people better off.”

1

3

Number of investors

£10m

6

6. MOSCOW

Source: Global Fintech Index, 2020

by taking a fresh approach to a traditional industry. The financial world has long been dominated by a handful of traditional banks, offering a rather unimaginative set of products and services. In recent years, however, a number of forward-thinking fintech start-ups and digital-only challenger banks have started to make significant inroads into the industry, giving customers a faster, more convenient and more personalised way of managing their money.

With fintech existing at the intersection of finance and technology – two traditionally male-dominated industries – it is both interesting and encouraging to note that some of the most innovative and exciting companies in the fintech world of today have been founded or co-founded by women. Take Starling Bank, for example, which was founded by Anne Boden in 2014. The company made history in November 2020 by becoming the first digital challenger bank to turn a profit – leapfrogging its rival Monzo on its way to profitability. 2020 also saw Starling scoop the award for ‘Best British Bank’ for the third year in a row, marking a real milestone achievement for female-fronted fintech.

WE LAUNCHED EARLY QUITE SIMPLY BECAUSE WE THOUGHT WE COULD HELP IN LIGHT OF THE ECONOMIC UNCERTAINTY CAUSED BY THE PANDEMIC

Yet the industry still has some way to go when it comes to gender equality. In the UK, femalefounded fintech teams receive just one percent of all venture capital funding, and the situation is not much better in the US, where three percent of VC funding goes to female-led teams.

Then there’s also the widely reported boys’ club culture in tech, and the ongoing issue of wage inequality. While there is certainly plenty of work still to be done, the disruptive nature of fintech also offers an opportunity for progress in this area – after all, when rethinking an industry as traditional as finance, surely there’s scope for these innovative companies to reconsider their approach to diversity and inclusion?

A more inclusive future Snoop co-founder Gadhia has long been a vocal advocate of gender equality in the worlds of business and finance. Speaking on the podcast ‘Can I ask you a personal question?’ in August 2020, she described being labelled a “bloody difficult woman” by “older white men” over the course of her career, telling the show’s hosts that she, at times, felt overly criticised by her peers for taking an untraditional approach, and that this negative response had affected her mental health.

Undeterred by such comments, however, Gadhia continued to push for greater inclusion at every stage of her career. While leading Virgin Money, she strove to increase the number of women in senior management roles, and sought to address the company’s gender pay gap. She was also asked to produce a report for the government, called the Gadhia review, which looked into how financial services »

Winter 2021 |

45

BUILDING MOMENTUM

» companies could achieve a better gender balance, especially when it comes to more senior roles. On the strength of this report – which advocated for a more inclusive culture, better management strategies and ways of encouraging flexible working – the Treasury then launched the Women in Finance Charter, which asks financial services firms to commit to a course of action to ensure a greater gender balance at top-ranking roles. In 2016, the British government awarded Gadhia the title of Women in Finance Champion in recognition of her work, and a year later, she was made a founding member of its Business Diversity and Inclusion Group. Then, in the 2019 New Year Honours list, she was made a dame for services to women in the financial services.

“What women have faced – in banking and beyond – is a slightly different yardstick to be judged by than traditional bankers,” she continued. “We are expected to behave in a certain way to be accepted. But actually, true diversity and gender equality is not about behaving the same, but being different because of the differences. We have to take that leap forward,” Gadhia said.

It’s no secret that greater diversity is better for business. Studies have shown that genderdiverse companies – particularly those with more women in senior roles – are more productive and more stable during times of crisis.

While traditional financial services companies have been slow to prioritise diversity in their recruitment drives, newly established fintechs have an opportunity to shift the narrative and build gender balance into their company culture from the very start.

“I think inclusivity is important for individuals, society and the economy,” Gadhia told World Finance. “And that’s true now more than ever. After all, it’s proven that a balanced workforce, at all levels of an organisation, can drive out performance and lead to enhanced profitability. Diversity of workforce avoids the pitfalls of groupthink, drives creativity and encourages innovation. And we need men and women of all races, beliefs and capabilities to inspire that.”

Shifting the focus Along with focusing on gender balance within their own companies, fintech firms could also stand to benefit from ensuring that their products appeal to a gender-diverse customer base.

According to Oliver Wyman, there is at least $700bn in revenue opportunity available from better serving women as customers.

Often, women are not having their financial needs met by traditional banking firms, and could be better served by fintech alternatives that offer a more personalised approach to money management. Research carried out by the management consultancy firm found 46

| Winter 2021

Jane Boden, founder of Starling Bank

Five reasons why open banking is a secure technology that can be enjoyed by both consumers and business, according to Imran Gulamhuseinwala, trustee of the Open Banking Implementation Entity.

1. Firstly, and perhaps most importantly, it is opt-in only. The default is that no one is automatically enrolled into open banking.

2. Customers are never asked for their log-in details and at no point does a third party see or have access to customers’ bank log-in details.

3. Open banking works via consent only and to experience the benefits APIs can bring, consumers must give their consent at all stages.

4. Only authorised third parties can enter the ecosystem. All parties that become authorised by the FCA must undergo a series of checks, approx 100, to ensure they are fit and proper.

5. A customer redress system is built into open banking so that complaints are heard by the whole ecosystem.

that while women control two-thirds of global household spending, they are 25 percent less confident in their own financial acumen, compared with men. The firm also discovered that women tend to feel more negatively than men do about managing their finances with traditional banks, suggesting that fintech companies have a real opportunity to tap into a dissatisfied customer base and offer innovative solutions that meet the needs of modern women. And that wouldn’t mean taking a completely gender-neutral approach, either, as evidence has shown that even supposedly unbiased strategies can, in fact, lean more towards men’s preferences and requirements when it comes to financial planning and money management.

Instead, fintechs could stand to benefit from gaining an understanding of the specific financial needs of women, and working these into their offerings – while taking care, of course, not to base their approach on outdated gender stereotypes. Already it seems, the more personal approach to money management offered by fintech apps and challenger banks has proved popular with women. A 2019 survey from the US showed that 58 percent of financial app users were women, suggesting that women are more inclined to turn to fintech solutions in order to manage their spending.

It is often darkest just before dawn What’s more, with women hit hardest by the economic fallout from the COVID-19 pandemic, there has never been a more important time for fintech companies to listen to the financial demands of women. In fact, the International Monetary Fund has warned that 30 years of gains for women’s economic opportunities could be undone by the COVID-19 downturn, with both the short-term and long-term effects of the crisis threatening to exacerbate existing gender inequalities. A report by the University of Exeter found that women in the UK are

BUILDING MOMENTUM

LONG BEFORE COVID-19, DIGITAL BANKING HAD BEEN HERALDED AS THE FUTURE, WITH TRADITIONAL BANKS UNDER PRESSURE TO MODERNISE THEIR SERVICES almost twice as likely as men to have lost their job during the pandemic, while a study by the Women’s Budget Group showed that around 133,000 more women were furloughed than men during Britain’s first pandemic-enforced lockdown. Women’s wages were also dealt a harsher blow than men’s, in part because they are more likely to be working in sectors hit hardest by the crisis – such as hospitality, leisure and retail.

With the economic outlook looking rather bleak in the months to come, it’s understandable that many people – and The concept of open banking has quickly picked up pace and is now at various stages of adoption in countries around the world, disrupting the traditional banking industry and changing how it competes and does business.

UK

Open banking launched in the UK in January 2018 to improve competition in financial services. Adoption was only mandatory for the nine biggest banks and building societies, but smaller newcomers also took up the gauntlet. As of 2020 there are 204 regulated open banking providers in the UK and the nation is regarded as a trailblazer, having set its own framework and API standard.

AUSTRALIA

Wrote open banking into the consumer data rights law with open banking legislation passed in September 2019 by the Australian Parliament.

The country’s ‘Big 4’ banks collectively control around 95 percent of the financial services market but open banking will change that.

perhaps women in particular – may be looking for new ways to make savings and financially plan for the future at this uncertain time.

That’s where money-saving apps such as Snoop come in. From the comfort of their own homes, customers are able to track their spending and see where they could be making savings, with fintech apps offering a more personal and practical approach to money management – all at the touch of a button. Long gone are the days where you would have to attend an inperson meeting with a financial advisor at your bank branch. Today, all you need to manage your spending and set saving goals is an AIpowered app in your pocket. In these times of crisis, fintech could offer a valuable lifeline to those in real financial need.

The post-pandemic future With our world undergoing so many significant transformations during the last year, there has been much conversation about whether these changes will be a permanent part of our postpandemic future. The long-awaited COVID-19

US

Open banking has been slower to start in the US where it is more of an industry-led initiative in contrast to the UK where it has been driven by the Competitive Markets Authority. Some believe that it needs support from regulatory bodies in order to unlock its full potential and to encourage widespread adoption.

SINGAPORE

The Monetary Authority of Singapore (MAS) and the Association of Banks in Singapore (ABS) have jointly produced the finance-asa-service API playbook to provide guidance to financial institutions, fintech players and other interested entities in developing and adopting open API architecture.

JAPAN

The country’s banking act was amended in June 2018 to promote open banking and although implementation was voluntary, around 130 chartered banks in Japan were expected to open their APIs by the end of 2020 with more scheduled for 2021.

CHINA

While open banking is recognised as an integral part of fintech it is still considered to be in its infant stages in China with the problem of lacking universal industry standards and data security measures remaining unsolved.

MEXICO & LATIN AMERICA

Since 2018 Mexico has had an ambitious agenda to be at the forefront of leading open banking in the Latin America region. It is making good progress, having passed a fintech law in 2018 to set out open banking standards and requiring banks to adopt them.

EUROPE

In comparison to the UK, initial progress in the rest of Europe has been slow, but many countries and banks across Europe are now adopting the initiative including Germany, Luxembourg and Italy as well as panEuropean payments initiative the Berlin Group, consisting of more than 40 individual banks.

vaccine could well provide a roadmap out of the pandemic, and while its rollout may be slow and gradual, it has provided some much-needed light at the end of the tunnel.

But, if ‘normal life’ begins to resume, as we can now hope, just how ‘normal’ will it be?

Will we be entering a new era, moulded and transformed by the experiences of 2020? Or will we gradually slip back into the routines and behaviours of the past? As the last year has shown, any predictions about the future are largely futile, but it is hard to imagine that the pandemic will not leave deep-rooted social, cultural and economic scars.

For years now, the world has been undergoing a digital revolution, and COVID-19 has accelerated this shift to online-first. This is particularly true when it comes to money management. Long before COVID-19, digital banking had been heralded as the future, with traditional banks under pressure to modernise their services and offer practical, personalised options for a digital age and its increasingly tech-savvy consumers.

It was clear that customers wanted quick, convenient, hyper-personalised products at the touch of a button, and if they couldn’t get that from their traditional banks, then they were happy to look elsewhere. If this was where banking was heading in the pre-pandemic world, COVID-19 has only served to hasten this digital transformation.

Technology will lead the way According to a survey recently commissioned

by Plaid, 67 percent of respondents plan to continue managing most of their finances digitally once the pandemic is over, marking a real shift in how consumers approach banking and money management. People have been seeking new solutions, with fintech adoption skyrocketing across all age groups.

“Almost 50 million UK consumers have a current account, and over 25 million people use their mobile to manage their money – a figure that’s growing quickly as a by-product of COVID-19,” says Gadhia. “Apps like Snoop can deliver consumers a better experience and save them lots of money – we’ve calculated that our app can save users an average of £1,500 per household per year. As such, I think businesses like Snoop are going to play a very big part in the way people manage their money in the future – all driven by the latest technology, hyper-personalised experiences and independence.” While many of us long for a return to the ‘old normal’ in our personal lives, at least, it seems that when it comes to our finances, these digital trends are here to stay. As the world finds its way out of a deep, dark recession in the years to come, fintech may well be fuelling its recovery – and all at the touch of a smartphone screen. n

Winter 2021 |

47

ba n k i ng

Digital Banking

Coding a fintech future While the pandemic is not totally responsible for a physical shift to digital assets, contagion anxiety from large swathes of consumers is supercharging the change The banking industry grappled with unheardof disruption in 2020: from responding to COVID-19 to the stampede for ESG investment, there was a voracious appetite for new answers to financial risk. But the journey – particularly for some – has been especially tough. As is, in some cases, the pressure bearing down from regulators and government: get the service offer right first time or risk punishing fines and media humiliation. Equally, the opportunities and reward for a relevant product that captures the consumer’s confidence are still there. Innovate or die is a tired axiom but behind the fatigue of the words lie huge prizes.

Fintech scrutiny is rising Where does the present adversity leave us as we look back upon what has been, for some, an anxious year? Millions are on furlough and the survival of many businesses hangs in the balance. Despite out-of-this-world technology, the pitfalls of the banking market still expose the inexperienced to bleak realities. New entrants want growth and customer trust.

They also need to put capital to good use.

This double pressure is new ground for some banking fintechs. Out-of-this-world tech may not be enough for all. Then there is the issue of the economy, wherever your banking clients are in the world. A report from McKinsey & Company recently documented the changing face of opportunity and how switched on organisations are in managing it. “Citizens everywhere are demanding more of companies and reminding them, with due respect to Milton Friedman, that the business of business is now more than just business.”

48

| Winter 2021

Importance of Gen Z In terms of banking, this will put more consumers in control of their financial journey and financial wellbeing. But which banking businesses, specifically, stand to gain? For example, both digital and non-digital banking players are desperate to build long-term relationships with Generation Z. How many of these banks know how to talk to Gen Z, let alone employ and keep them?

Gen Z grew up in an era of soaring asset prices where families struggled to keep up.

A savings culture is deeply instilled for many Gen Z’ers. A lack of work and all-round options due to the pandemic is hitting this generation hard. But it’s also a generation that’s digitally native, adept at creating value out of little. Barring the essentials, an internet connection is all many need to flourish. Stock options and fancy add-ons are not so interesting, but oldstyle stability is.

In the background lies the remainder of a dark winter and a global health crisis still gathering pace. Many banks and financial players have come through multiple lockdowns and massive financial uncertainty with better earnings than expected. But the true economic fallout of COVID-19 is still incalculable. One thing is certain: there are more global jolts to come.

The World Finance Digital Banking Awards 2020 arrive at an alarming time, for just about everyone. But bringing what is ‘good’ – things such as sustainability – to the fore will help. In fact, PricewaterhouseCoopers (PwC) predicts it may be the opportunity of the century, declaring that more than 50 percent of European fund assets will be ESGdenominated by 2025.

Environmental, social and governance funds (ESG) have moved well away from their narrow ‘do-good’ straitjacket. But financial players who underestimate the meaning of ‘good’ or ‘bad’ investment do so at their peril because these values now travel well beyond, for example, decarbonisation or arms sales.

‘Good’ might address racism, both covert and overt. The massive take-up of Black Lives Matter proves this. Or transgender and LGBT issues. Even what you eat – meat or vegan burgers, for example. And be aware, this list is lengthening. Just how these issues are measured is fraught with risk and complexity.

Ratings systems are in their infancy (and set to spawn their own sub-industry). But the central tenet is fairness.

Old order upended In other words, the deployment of capital, digital or otherwise, is being shaped by agendas that stretch well beyond the narrow confines of price-to-earnings values, cash f low and liquidity-solvency metrics. Even traditional asset allocation models. While those values still matter, credibility, empathy and transparency are now also part of the mix – and a growing one. The new social-financial contract is also being driven by regulation.

PwC says the emergence of a new sustainable finance policy in Europe will see “a significant impact not only on products but on financial agents – MiFID firms, insurance brokers – and fiduciary investors – insurance companies, pension funds – at the same time.”

So a massive wall of ESG money is on the march – and digital banking players will want to attract as much of it as they can.

The opportunities are staggering, as is the potential for out performance. While the new landscape enlarges and consolidates, unsustainable industries may rapidly wither as non-compliant sectors of the economy are

ba n k i ng

Digital Banking

rammed by legislation, fines and taxation.

Institutional investors, you can be sure, will not want to risk being caught in the wrong place at the wrong time.

Digitally redefined

WORLD FINANCE DIGITAL BANKING AWARDS 2020 COUNTRY

BEST CONSUMER DIGITAL BANKS

Andorra MoraBanc Armenia Ameriabank Botswana Standard Chartered Brazil Caixa Tem Bulgaria Postbank Chile BBVA Chile China Ping An Bank Costa Rica BAC Credomatic Dominican Republic Banreservas El Salvador BAC Credomatic Germany Deutsche Kreditbank Ghana Standard Chartered Greece National Bank of Greece Guatemala BAC Credomatic Honduras BAC Credomatic Hong Kong DBS Bank Indonesia PT Bank CIMB Niaga Ivory Coast Standard Chartered Kenya Family Bank Mexico BBVA Mexico Myanmar KBZ Nicaragua BAC Credomatic Nigeria Sterling Bank Pakistan HBL Panama BAC Credomatic Portugal ActivoBank Qatar Qatar Islamic Bank Spain EVO Banco Sri Lanka People’s Bank Switzerland UBS Tanzania Standard Chartered Turkey Garanti BBVA UAE Mashreq Bank Uganda Standard Chartered UK Lloyds Banking Group USA Bank of America Zambia Atlas Mara Zimbabwe Standard Chartered

BEST MOBILE BANKING APPS

MoraBanc App Ameria Mobile Banking SC Mobile CAIXA Tem app m-Postbank BBVA Chile Ping An Pocket Bank app Banca Movil BAC Credomatic Banreservas Banca Movil BAC Credomatic DKB-Banking SC Mobile NBG Mobile Banking Banca Movil BAC Credomatic Banca Movil BAC Credomatic DBS digibank app OCTO Mobile SC Mobile PesaPap BBVA Mexico KBZPay Banca Movil BAC Credomatic OneBank HBL Mobile Banca Movil BAC Credomatic ActivoBank QIB Mobile EVO Banco Movil People’s Wave UBS Welcome SC Mobile Garanti BBVA Mobile Mashreq Neo SC Mobile Lloyds Bank: by your side Bank of America Mobile Banking Atlas Mara Zambia Mobile Banking SC Mobile

WHEREVER WE LIVE, INNOVATION AND COMPETITION IS REPURPOSING ALMOST EVERY BANKING SERVICE THERE IS

The digital banking concerns of 2019 were increasingly focused on biometric and AIbased issues, not to mention big data – trends that World Finance has trenchantly covered for some time. But all of these issues have now been supercharged by COVID-19.

For financial digital players, this has meant an opportunity to use AI to evaluate a business’ ability to withstand a pandemic – or even supply relief to other businesses. Some of this new thinking has been powered by social distancing. But much of the creativity has simply been down to the need for capital redistribution and compliance in an easy-toaccess digital format. In Africa this has been going on for years in the form of micro and mobile payments; M-Pesa is a good example.

Where things have become more advanced is in the possibility of fintech in healthcare or in lending for larger sums, like mortgages.

“Examples of these innovative partnerships already exist, like the ones Walmart has with PayPal and Green Dot [world’s largest pre-paid debit card company],” said a recent Deloitte report, Beyond COVID-19, New Opportunities for Fintech Companies. “There are myriad opportunities,” the report added, “for fintech to collaborate with partners in other areas – for example with the big technology firms – especially on a global scale.”

Stability 2.0 But no amount of financial innovation thrives without a stable domestic environment. If economic governance is robust then business, even in the grip of a worldwide pandemic, has more opportunity to succeed and grow.

Smartphone technology, meanwhile, is helping many people take charge of their lives, widening opportunity with access to capital at reasonable cost, throwing off tiresome legacy limits that once held so many back. Wherever we live, innovation and competition is repurposing almost every banking service there is.

The World Finance Digital Banking Awards 2020 celebrates this progress in all its diversity, those at the epicentre of this digital banking turmoil. Their response to unprecedented challenges is impressive and innovative and deserves to be celebrated. n

Winter 2021 |

49

ba n k i ng

Digital Banking

Open banking: a success story waiting to happen Over two million people and small businesses are using open banking enabled services in the UK, after an industry shake-up changed the way banking services are provided globally. But what can be done to reach more customers?

words by

Rita Lobo BANKING CORRESPONDENT

It might not be the most glamorous tale of innovation, but regulatory changes in England in 2018 opened the gate to the promised land of banking data. The open banking revolution, which regulated thirdparty service providers such as budgeting and investment apps that accessed bank account data, has been a cornucopia of opportunity with developers, investors and customers alike reaping the benefits. Open banking is the catch-all term for a series of reforms passed in 2018 that provide a regulatory framework for how banks deal with customers’ personal financial information. England’s Competition and Markets Authority (CMA) had been calling for it for some time, as a way to decentralise large banks’ power and influence.

A long w i t h t he S e c on d Pay me nt Ser vices Directive, passed at the same time, it determined that UK-regulated banks are obligated to share customers’ financial data with authorised providers such as apps and other banks. The only caveat is that the user must give the third party permission. When the CMA started campaigning for these regulatory changes in 2016, the idea was to inject competition 50

| Winter 2021

into the stale UK banking industry, and in turn drive innovation. In the CMA’s 2016 report on the UK’s retail banking market, they rechecked the scathing conclusion that the large, legacy banking institutions across the UK did not have to compete hard enough for customers’ business, which in turn was crippling the success of smaller challenger banks and financial service providers to access the market.

Progression and development Their proposed solution was a slew of regulatory changes that would provide reg u lat or y ba ck i ng , a nd t here fore a measure of security, to small and mediumsized businesses sharing their current account information w ith other thirdparty providers. “Open banking in the UK was a world fi rst,” says David Beardmore, Ecosystem Development Director, at Open Banking Implementation Entity (OBIE).

“We designed and built the framework like a playing field, and it has been very encouraging to see so many firms come and play on this pitch that we built using that framework.” But perhaps more promising is the breadth and scope of the open banking ecosystem today, he continues: “there are firms creating all sorts of use cases, including some that we never even conceived of.

This really is innovation in action.” Since the measures were passed in 2018, over two

million users – both indiv idua ls and THE BREADTH AND small businesses – SCOPE OF THE OPEN use open-banking BANKING ECOSYSTEM enabled applications TODAY IS EXTREMELY across the UK , according to OBIE. PROMISING These applications range from apps to round up the change after a purchase and invest that cash, to credit building apps, to online mortgage brokers. There are significant benefits for small businesses too, not just consumers.

“There’s some really exciting propositions out there that can help small businesses using open banking to manage their cash better, and it can also help them seek funding,” says Imran Gulamhuseinwala, Implementation Trustie at OBIE. “In these difficult times for small businesses, we think that this is invaluable.”

Competitive arena Significantly, open banking has allowed challenger banks like Monzo and Starling, which have a combined four million customers, to leverage partnerships with third-par t y ser v ice prov iders to of fer investment, savings, and money transfer without the development cost and regulatory burden. This development represents a significant opportunity for app and service developers who occupy the B2B space, or are weary of launching direct to consumer products.

Though the industry has come a long way in the three years since the CMA ordered banks to share their data, there is still significant work to be done. According to research by Which? seven in 10 people “were unlikely to consider sharing their financial data, even if it meant that financial products and services were more tailored to their needs.” The main reason for this rejection cited by respondents was: ‘I am happy with my current banking arrangements so don’t see a need for an open banking product’ followed by ‘I am concerned about the security of my personal/financial details when shared with a third party.’

These responses suggest that the public at large is still largely unaware of the regulatory framework that would protect their data and their money, as well as of the myriad potential gains many of the apps provide.

Jenny Ross, editor of Which? Money says that “If open banking is to ever be a success, regulators and industry must do more to promote the benefits and demonstrate that customers are properly protected from data breaches and scams in order to boost trust in these services.” n

ba n k i ng

Digital Banking

In pole position for the digital future While there will be lasting consequences from the pandemic to the way we live and work it has also accelerated the process of the digitisation of society with some banks well prepared to be at the forefront

words by

Ricardo Campos

employees, the banks are keeping the economy as healthy as possible, so that companies stay operational, jobs are retained and the financial system keeps flowing.

ActivoBank in numbers

More than just a digital bank

€2bn

2010

Year launched

CEO, ACTIVOBANK

The COVID-19 pandemic arrived at a time when the Portuguese economy was still recovering from the last economic crisis, creating considerable instability in some of the most sensitive sectors of the economy. Travel, transportation, restaurants, hotels, and wholesale and retail commerce were all badly hit, affecting around 20 percent of the work force and contracting GDP by 4 percent.

The full economic impact of the pandemic will only be felt in the coming years, most likely exacerbating existing socio-economic inequalities. Young people and those with less secure jobs will probably bear the brunt demographically while, in business terms, smaller companies will be more severely impacted than their larger peers. There will be significant regional variations too. But there will be positives that come from this crisis. The pandemic has accelerated the digitisation of workplaces, forcing companies such as ours to move most of its employees to remote working.

Companies across the economy are having to reinvent their business models, and e-commerce and remote services are growing faster than ever before. The Portuguese banking sector is in a stronger position than it was in previous crises. Higher capital requirements and greater liquidity than in 2010–13 mean that the sector is more resilient than it was then.

Also relevant is the fact that the current crisis is not directly related to the financial sector. As a result, banks today have been able to move quickly to support the community with special measures such as loan moratoriums for individuals and businesses. ActivoBank also waived credit card interest for three months.

By helping to mitigate the negative effects of the pandemic for customers and their 52

| Winter 2021

ActivoBank is a digital bank for individuals, but unlike most digital banks, it has a very wide offering. In addition to basic banking facilities such as current accounts and credit cards, ActivoBank offers personal and home loans, insurance policies, savings accounts, investment products, stock trading, investment funds and ETFs. Furthermore, it has 16 branches located in major shopping malls, giving it a footprint and a visibility not available to digital-only banks.

ActivoBank is committed to maintaining its physical branches as we believe they continue to play an important role in our relationship with our customers. Branch staff are great at helping even our most technologically conservative customers get more comfortable with our digital tools and learn to appreciate their benefits. Launched in 2010, Activobank is owned by Millennium bcp, the biggest private Portuguese banking group. At the end of 2019 it had over 300,000 customers (almost 100,000 of whom were acquired in 2019), over €2bn in assets and a positive net result of approximately €10m.

Carving a unique position ActivoBank recognises the competition from fintech on one side and incumbent banks on the other and carves its unique position by differentiating itself from both. Fintechs started as mono-product attackers but they are moving to become more like banks as they add products and services to their portfolios.

Incumbent banks, meanwhile, have increased the pace of their digital transformation to respond better to the fintechs. ActivoBank has the best of both worlds, able to offer products and services to cater for most of our customers’ financial needs.

Worth of assets

300,000

Number of customers

65%

Proportion of customers using digital banking We are a fintech by nature, an attacker in price and offer. But we also boast the width of offer, security and trust of an incumbent bank because we belong to the largest private financial group in Portugal.

Its ‘phygital’ model provides the visibility and reassurance of a physical presence with the benefit of digital experience and innovation.

Digital banks and fintechs don’t always have to compete. By working together and sharing knowledge we can create even better services and products for our customers. Our partnership with TransferWise is a case in point.

In s t e a d of t r y i ng t o m i m ic wh at TransferWise has done so well – developing the capability to make seamless transfers around the globe in almost any currency – we partnered with them and incorporated their capabilities into our app and site. In the process we helped improve their service, making it even easier for customers to transfer funds abroad by enabling them to do so instantly from their ActivoBank accounts.

I strongly believe this is the way in which smaller digital banks and fintechs can get together and work on great solutions that will make them stronger and more competitive.

ba n k i ng

Digital Banking

A growing market Almost 65 percent of our clients use mobile banking already and trends indicate that this number will increase. People are logging into the app more frequently too, every day compared to a handful of times per month.

A big draw for these daily users are the stock trading services and investment products that ActivoBank offers, tools that reward frequent engagement. Growing our customer base is fundamental so that we reach a significant share of the market. Ever important, however, is increasing the number of customers that use us as their main bank. Fortunately, this figure is rising fast. We are also projecting a strong increase in our share of wallet, as our customers use more of our products. Our growth is projected to move from a mostly transactional customer, one who makes payments and transfers, to a first bank customer who relies on us for their mortgage, personal loan, investments and insurance products. We are growing in the order of 30– 50 percent in most areas, and we expect to continue on that trajectory for the next couple of years.

The future

Adapting to succeed During the pandemic, many branch and call centre staff continued travelling to their place of work while over half our employees shifted to remote working. To accommodate the needs of our staff, as well as to respond to an increase in demand for the call centre, we split our call centre team into six, with each group working in different locations. It was important for ActivoBank to show its customers that they can trust it to be always available, online and offline. It wasn’t just call centre usage that went up. We saw a rise in the number of accounts opened via digital channels too, unsurprising given that we were the first bank to allow customers to open an account remotely.

ActivoBank has always relied on a strategy of constant digital transformation. It started as Banco7, the first phone bank in Portugal, back in the 1990s. Then it was the first bank with a transactional website in 2000, and in 2010 it launched the first transactional mobile bank-

“By working together and sharing knowledge we can create even better services and products for our customers”

ing app in Portugal. In 2019, we went back to the drawing board, redesigning the app and launching a new version better suited to the needs of our clients. Not only do we challenge ourselves, but we are also challenged by our customers, who want to interact with us in the quickest and most convenient way possible. As such, our IT teams are constantly improving our architecture and infrastructure so that we can respond to those challenges.

Most of the digital developments start with a suggestion or a complaint from a customer and are tested by our customers themselves.

One of the weapons in our armoury is a stateof-the-art lab where we invite customers and non-customers to test our concepts and ideas. With the aid of a gaze-tracking system, we are able to analyse how users interact with prototypes of our mobile app and web platform, giving us valuable insights into the user experience. As we develop these digital interfaces, we understand that providing help and support is crucial for the experience. Not only do we invest in expanding our contact centre capabilities through chat and cobrowsing, blending the digital interface with human support, but we also provide digital support through state-of-the-art bots.

The pandemic will have lasting consequences for the way we live and work. Most banks have speeded up the process of enabling remote working, and the digitisation of society has gone into a higher gear. E-commerce has grown incrementally, as have most other digital and remote services. Digital banks such as ActivoBank are in pole position to take advantage of this shift in society, helping customers to access their banking wherever and whenever they need it.

Issues of trust and security are more important than ever, as more and more businesses move online. Banks such as ActivoBank that have invested heavily in this area, in terms of both systems and staff training, will be best placed to capitalise on this movement. We have several teams that control and monitor our digital platforms, such as IT, legal and compliance, all ensuring that safety and privacy procedures are implemented according to the recommendations and obligation of the European and national regulatory bodies.

The way we responded during the pandemic will have helped bolster trust too – customers knew that they could rely on us through this difficult period. Going forward, clients can expect the same commitment as they have since day one: simplicity, transparency, innovation and trust. n

Winter 2021 |

53

ba n k i ng

Digital Banking

Digital switch picks up speed The pandemic has accelerated the digital transformation in the Spanish banking and financial services sectors. Online banks drive this digital evolution through investments and alliances with new entities in response to customers’ demands

interview with

Enrique Tellado CEO, EVO BANCO

By embracing digitisation, the banking sector is facing new opportunities and challenges both for the institutions themselves and for consumers. With users increasingly demanding digital products and services, companies are experiencing a revolution in the way they interact with their customers.

This is improving companies’ efficacy and productivity as well as users’ satisfaction. The new ways customers interact with services and finance as well as the current change in their consumption habits boost digital banking in the marketplace, which has finally achieved the value and space that users have been demanding for years. In this scenario, the COVID-19 pandemic has accelerated the digital shift in the banking sector over recent months. Banking and financial services sectors, not only in Spain but all over the world, are currently driving this change by challenging the traditional banking industry through new alliances with other entities as well as significant investments in technological innovation. Enrique Tellado, CEO of digital bank EVO Banco, spoke to World Finance about the opportunities for disruptive innovation in Spain’s evolving banking sector.

What makes EVO Banco different in the Spanish banking sector?

The banking sector is going through a great process of transformation towards digitisation, not only in Spain but all around the world. This is a process that had already begun before the pandemic. However, the COVID-19 crisis has accelerated all these transformations and digital banking is no longer a trend but a reality. In this sense, in EVO we believe we are prepared for these changes because we have 54

| Winter 2021

been working in this direction since 2012, when we planned to lead the change in the Spanish financial industry with a 100 percent digital banking model. To achieve this goal, EVO has launched numerous technological projects based on our values of simplicity, transparency and innovation to offer a unique, agile and surprising experience to our customers. We are in a scenario where users are increasingly demanding digital products, services or even experiences. Satisfying these demands will continue to strengthen our offer as a 100 percent digital bank. But our strategy does not settle for only implementing disruptive technologies; we consider ourselves to be a disruptive technological firm in the banking sector. Digitisation and enhancement of customer experience is in our DNA. What are the benefits EVO Banco experienced during the digital transformation of all contracting and financial management processes?

As a 100 percent digital bank, we know that the digital transformation is giving many companies the opportunity to achieve greater efficiency and productivity. In the case of EVO, the digital transformation means becoming an active part of all the processes of change in our society, listening more and better to our clients, understanding their needs, and acting accordingly. For this reason, EVO has created a digital ecosystem of financial services focused on better serving clients. Customers can find everything they need in our mobile banking app, one of the most advanced in the sector not only in terms of services, but also in usability and user experience. In addition, we consider the new players in the sector as potential allies who help us build a powerful digital ecosystem that adds value to the customer and makes us different. We seek to innovate with solutions and disruptive products that allow us to move swiftly in the market and be in the customer’s moment of truth.

Leaning towers in Madrid, Spain

Could you tell us more about EVO Banco’s fintech alliances?

We are convinced that societies of the future need to collaborate with each other as a fundamental part of their activity. Financial alliances with other entities are part of our strategy in the pursuit of value. We cannot think that in the current context companies can survive without strengthening ties with each other.

An example of this is our financial alliance with Finizens, which made us the first bank to integrate robo-advisor technology with what we call the Intelligent Investment Plan, an opportunity to invest automatically into five different investment profiles. Or Travel Cash, which allows clients to request currency through their mobile app and have it sent to their home.

We also have agreements with the Spanish Post Office and Caja Rural cash dispensers, to offer solutions for cash deposits and withdrawals throughout Spain. And the most recent one, the agreement with Coinscrap, which allows us to have an Intelligent Money Box that helps the customer save money while spending, by rounding up purchases and receipts, and with clear short, medium and long term goals.

ba n k i ng

Digital Banking

“As a 100 percent digital bank, we know that the digital transformation is giving many companies the opportunity to achieve greater efficiency and productivity”

How is the new revolution in banking changing the interaction between banks and customers?

The way customers and organisations interact and relate to each other is continuously changing. We work to offer our clients disruptive and sustainable services and experiences. That is why EVO became the first bank in the world to create a comprehensive bank assistant in Spanish with voice interface and the usage of natural language. Through EVO Assistant, our new artificial intelligence engine, the bank is transforming the way in which we relate to our customers, who will be able to solve queries, perform transactions and receive value-added information from the bank to improve their financials.

Furthermore, we have integrated EVO Assistant into our call centre service and, last July, we extended EVO Assistant to telephone banking, in order to improve self-service and responsiveness in the main customer service channel. After that, in September 2020, along with NUANCE, a leading company in voice biometrics and artificial intelligence technology, we announced a partnership that will provide EVO’s customers with a voice biometric fingerprint. We believe that voice biometrics is currently the most secure

system for verifying our users’ identity and preventing unauthorised access to services and operations. We strongly support the idea that voice, as the new revolution in banking, is changing how banks and customers interact, and voice technologies and their exponential growth, in the form of assistants, speakers or other IOT devices, will become the main channels of interaction with the customer.

What further strategies are you putting in place for next generation digital banking?

It is important to listen to what customers are telling us, and they want their bank to give them the same experience they have with big tech companies. One of the main pillars of the activity of EVO is its firstin-class user experience, which, from a technological perspective, we aim to enhance by boosting stability, scalability and security in our architecture. Agility is also essential for quickly providing new services to clients and that is why we use short development software cycles. We also consider ourselves to be a datadriven bank, incorporating machine learning technology and managing data in real time.

We are also pioneering in mobile first and voice banking, with the integration of natural

language services in the different channels we have, and we will also keep working on offering more transparency and widening our open-banking ecosystem, so we will continue to expand our fintech alliances.

What are your expectations in terms of growth over the next five years?

Our main focus in the next five years is to consolidate ourselves as one of the most innovative and digital financial institutions in the Spanish market. To achieve this, the bank will consolidate the digital acceleration strategy that has allowed us to offer highvalue financial and non-financial services to the client to date. Internally, our main goal will be to extract the value of data. Data is becoming the most valuable asset in our dayto-day relationship with clients. Based on that, we will completely adapt the offer and the way we interact with clients. In addition, voice will remain highly relevant, as the easiest interface to interact with clients. Since being the first bank to launch its own Voice Assistant in March 2018, now, EVO Assistant has integrated several new services. It is going to be one of the main pillars to enhance user experience. We will also advance in the use of biometric technology and our customers’ biometric data to validate and authenticate the decisions they make about what to do with their money. EVO Banco will bet on biometrics and voice to deliver a seamless, agile and secure experience to our customers in authenticating their operations.

What are EVO Banco’s key areas of focus for the next 12 months?

Our main goal is to become a reference in digital banking and voice in Europe through the use of data and AI. Digital banking has changed the paradigm of the relationship between customers and financial organisations. Technology, innovation, and customer experience will have a relevant space in the future. In fact, the current change in customers’ consumption habits and the new ways of interrelating with services and finance allow digital banking to acquire the value and space that customers have been demanding for years. The current economic crisis as well as the digitisation motivated by COVID-19 have allowed the natural evolution towards this new generation of financial entities with very talented teams, a new culture and leadership style of young people with different skills and wide expertise. n

Winter 2021 |

55

ba n k i ng

Digital Banking

Andorra: a microstate on the rise MoraBanc has been at the forefront of the economic transformation that has taken place in Andorra, finding that success mirrors success when applying the same principles that have propelled the country into the limelight as a desirable investment destination

words by

LluĂ­s Alsina GENERAL MANAGER, MORABANC

Andorra is a European microstate located in the Pyrenees. For a good part of its history, it has been a country that, except for tourism, has lived discreetly, hidden from the spotlight and unnoticed by most. Today, things have changed and the principality looks more and more like a place full of opportunities and open to the world. How and why has Andorra gone from being a great unknown to a fashionable business and tax destination?

Change management has become a key factor in our time, for people, companies and countries. Society is going through an intense 56

| Winter 2021

and constant transformation process, and for those not paying attention or unwilling to change, they risk being left behind.

In this context, a key word for maintaining competitiveness and success is adaptation. A concept that generates success stories such as that of Andorra, whose government was able to take agile steps to efficiently modify its positioning when they saw that the country and economic model needed to take a different route. Less than a decade ago, the Pyrenean country made the decision to leave opacity behind and integrate itself by adopting international standards of transparency and taxation. At that time, voices were heard predicting a collapse of the banking system and serious problems for the economic viability of the country. Today, we can say that those predictions were very much mistaken, that

the financial sector is in excellent health and Andorra is growing. All of this is thanks to a process that we know well at MoraBanc, since we follow a very similar one and have been a significant success story in our own right. Within a few months, we were able to rethink and carry out a transformation plan for the bank in record time. The result? Far from the times of opaque banking, we have generated other business lines and redesigned our range of products and services to achieve four years of growth in a row on a consolidated basis. Our subsidiaries in Switzerland, Miami and Barcelona (opened in 2020) are also contributing to this success. We maintain solvency levels well above the average for European banking. In short, as the country itself has done, we have repositioned ourselves by adapting to the needs of our society today, leveraging our competitive advantages.

Strategic positioning Andorra has been able to adapt and has developed a fascinating appeal for individuals and companies to come and live here, all without losing its attraction as a tourist

ba n k i ng

Digital Banking

35%

The increase in passive residences in Andorra in the last decade

500%

Growth of foreign investment in Andorra in less than a decade

Andorra la Vella and Escaldes Engordany, Andorra

destination. Every year, eight million people visit this country of only 80,000 inhabitants.

If we want to list the attractions of Andorra for the investor, we must start with the country’s fiscal ecosystem. Andorra currently has a competitive tax framework that is standardised with the surrounding countries.

It applies a balanced tax regime that on one hand is within the standards of international taxation, but on the other hand is sufficiently attractive.

The tax rates applicable to both natural and legal persons are a maximum of 10 percent. Andorra also has an indirect tax on consumption, through the taxation of the supply of goods and services by entrepreneurs or professionals, as well as the importation of goods, with a general rate of 4.5 percent.

During 2010 and 2011, Andorra signed Tax Information Exchange Agreements (TIEAs), and no longer features on the list of tax havens in certain countries such as Spain. The ‘tax quarantine’ provision no longer applies when there is a change of tax residence to our territory. Andorra has a worldwide income tax system in which all income earned must

be declared. This is very important for the purposes of signing double taxation treaties and being a fully comparable jurisdiction.

Andorra has a fiscal framework that is completely standardised with neighbouring and surrounding countries. This makes it attractive for new investors, with a network of agreements to avoid double taxation growing year by year. The principality is also a signatory to the common reporting standard, and has been exchanging information automatically with more than 70 countries each year, since 2017. In addition, it should be noted that the principality of Andorra is a member of the inclusive framework of the Base Erosion Profit Shifting (BEPS), having fully committed itself internationally to adapting its internal regulations to the provisions laid down in the action plans of the OECD project.

Virtually all investments or financial returns are exempt for non-residents. We have had a personal income tax since 2015 and it is a very competitive 10 percent. The first €24,000 is exempt on a general basis and the first €3,000 in savings is exempt, operating as reductions from the base. It is also a very powerful regime in relation to capital gains, which are generally exempt from taxation, as long as you do not hold more than 25 percent of the share capital.

since a change of residence, or setting up a business in a place is also a life project. In matters such as education, health or security, the country is also at the forefront.

Geographically, Andorra is well connected with Barcelona and Toulouse, and meets basic needs with an excellent level of quality. It has free education with three educational models and international schools, a public health service recognised for its efficiency and good service, and a level of public safety that is among the highest in the world. It is a modern and digital country with 94 percent of homes connected to the internet via fibre optics.

In the last decade, the number of expats living in Andorra has grown by 35 percent and many top international artists and athletes have established themselves in the country. This is a figure that grows every year, as the level of recommendation among them is very high. Andorra’s positioning goes beyond attracting new residents and companies.

The country is making its voice increasingly heard in international forums. Just recently the country’s entry into the International Monetary Fund became effective, and this now opens up new paths and opportunities for the country’s economy. Andorra is also currently negotiating an association agreement with the European Union.

Enhanced appeal

The bank of the new Andorra

Andorra does not have inheritance and gift tax, nor does it have wealth tax – like many European countries that have eradicated this tax from their internal regulations. The absence of this type of tax further enhances the appeal to investors and large estates.

The Andorran Sicavs and investment funds continue to be taxed at a reduced rate of zero percent in corporation tax and are generally recognised via double taxation agreements.

In short, Andorra is a very attractive country fiscally that has been adapting and successfully passing all international and peer reviews.

According to data from Actua.ad, foreign investment in Andorra has grown by 500 percent in less than a decade. With these favourable conditions as its calling card since the beginning of the economic opening process, Bradley Hackford recently ranked the principality as the second most attractive country in the world to invest in.

Andorra’s popularity in this respect would not be possible solely on economic grounds

Andorra is a success story. It is the story of how a country has reinvented itself to seek an attractive international positioning that generates opportunities. As a bank and as a company, we see ourselves reflected in the new image of the country, and we believe in promoting openness, transparency, innovation and outstanding personal client service.

Digital banking has played a key role in the transformation process of the bank, when it made a significant investment of resources and talented professionals to lead the digital banking sector in Andorra. As a result, this year’s World Finance awards have recognised us as the best online bank and best app in the country, for the fourth consecutive year.

We are closely connected with new companies coming to Andorra and with new passive residents. We know that the service offered by the financial sector is very important to the country’s standing, and to add value we work with the objective of making permanent improvements.

Just as the country has closed agreements with institutions such as the IMF, as a bank we also add partners, and have alliances with Goldman Sachs Asset Management, the Cuatrecasas law firm and with Pyrénées, the largest retailer in Andorra. n

“Andorra currently has a competitive tax framework that is standardised with the surrounding countries”

Winter 2021 |

57

ba n k i ng

Digital Banking

The vision to venture into a digital future Many businesses have been scrambling to adapt as aspects of our lives have been moved into an online space. But for CIMB Niaga Bank, laying a digital foundation has meant this transition has been far simpler for its customers

words by

Lani Darmawan CONSUMER BANKING DIRECTOR, CIMB NIAGA BANK – INDONESIA

The banking sector has often demonstrated resilience in the wake of devastating crises.

However, in 2020, a year characterised by the COVID-19 pandemic, it is about survival. With profits on the decline, non-performing loans on the rise and return on equity plunging, banks are focusing on weathering the crisis in the immediate future. In the medium and long term, strategy is being anchored on adaptation with digital transformation at the core. This is based on the fact that COVID-19 has defined a ‘new normal’.

For CIMB Niaga Bank, Indonesia’s second largest privately owned bank by assets, the situation is no different. The need to withstand the impacts of the pandemic is paramount.

But the bank has not shifted focus from its Forward 23+ strategy centred on customer journey, digitalisation, enhancing productivity and finding new opportunities. The strategy, which is part of the larger CIMB Group plan, is designed to ensure CIMB Niaga joins the rank of top banks in the ASEAN region.

Due to this ambition, CIMB Niaga Bank, which is majority owned by the Malaysiabased CIMB Group, is strategically positioned to support clients and businesses suffering from the disruptions that have been forced on the banking sector by COVID-19. The bank has a strong footing. It has been in operation for over 65 years. It boasts a wide-range of banking products and services, both conventional and Sharia. With a network of 390 branches, 34 digital lounges and 27 mobile branches, the bank has over 12,000 employees.

CIMB Niaga intends to weather the challenges brought upon us by the pandemic from this firm foundation, but also aims to anchor future growth. This is critical, and for good reason. Indonesia, Southeast Asia’s largest economy, is among the countries that have been badly affected by the pandemic, both directly 58

| Winter 2021

and indirectly. At the end of November 2020, the country had 522,581 COVID-19 confirmed cases with 16,521 deaths. Economically, the impacts have been severe, forcing the country into a recession. The last time this happened was during the 1998 Asian financial crisis.

Since 2014, Indonesia’s gross domestic growth has averaged five percent per year, ranking it among the fastest expanding nations. This year, however, most sectors of the economy including transportation and warehousing, f inancia l ser v ices, manufacturing, tourism, construction, mining and construction are on a downward spiral.

The wider effect is that Indonesia is headed for negative growth this year. Worse still, the World Bank is projecting an “uneven and volatile” recovery in the coming years.

As the heartbeat of businesses, the banking sector is feeling the devastating effects of the pandemic. In the period ending September 30, 2020, the seven top banks in Indonesia posted an average decline in profitability of 29.7 percent. This is in line with the country’s Financial Services Authority (FSA) revised forecast, indicating that profits would decline by around 30 to 40 percent on average in 2020.

Robust fiscal planning Amid the tough operating environment, CIMB Niaga continues to demonstrate a spirit of community and strength. For the bank, most indicators remain strong with liquidity, asset quality and cost management being central in the bank’s ability to withstand the current crisis. This is reflected in the financial results for the nine-month period leading up to September 30th. During this period, CIMB Niaga’s capital adequacy ratio remained strong at 20.8 percent while total assets stood at IDR 281.7tr ($15.4bn). This ensured the bank maintained its position as Indonesia’s second largest privately owned bank by assets.

While the performance of the conventional bank remains solid, CIMB Niaga Sharia maintained its position as the largest Islamic business unit in Indonesia. The unit’s total financing was valued at IDR 32.6tr ($2.3bn) with deposits increasing to IDR 35.1tr ($2.4bn).

CIMB Niaga head office building in Jakarta, Indonesia

Notably, CIMB Niaga is one of the Sharia banks that has embraced digitisation. This enables the bank to support the burgeoning needs for quality Sharia-based products in a country that is predominantly Islamic.

In Indonesia, the FSA has predicted a muted growth in loans and advances. But this has not stopped CIMB Niaga amassing a strong loan book that stands at IDR 180.9tr ($12.8bn), contributed to by a 4.1 percent yearon-year growth in the consumer-banking segment. Total deposits, on the other hand, stood at IDR 211.9tr ($15bn). During the period, the bank posted a net profit of IDR 1.9tr ($134.5m). Although the net profits were 31 percent lower compared to the IRD 2.6tr ($184m) realised in 2019, they represented the bank’s determination to navigate the crisis. This is evident on many fronts. Despite

ba n k i ng

Digital Banking

significant resources to roll out an ambitious strategy that is redefining service delivery in the midst of the pandemic. For most banks, the digital transformation has been a necessary evil brought about by COVID-19.

For CIMB Niaga, however, it is a well-thoughtout business strategy. As the bank delivers the enhancement on digital channels, it has always remained passionate and curious about new and powerful methods. This includes the ‘design first’ thinking process that challenges the status quo and invents new ways of doing things, as well as agile methodologies that speed up project and features delivery.

O t her me t ho d s i nc lude c on s t a nt benchmarking and learning from competitors, cutting across local, regional and international boundaries, conducting surveys to discover more about the customer and being true to the Kaizen concept of constant and never-ending improvements. The results of the conscious approach to digitisation have been significant in avoiding service disruption especially considering Indonesia has witnessed major lockdowns to contain the spread of the disease.

CIMB Niaga Bank in numbers

1955

Year the bank was formed

390

Total number of branches

12,000

Number of employees at the bank

$15.4bn

Total assets currently held

Fig 1

Internet users in Indonesia 2015–25 (includes projections) MILLIONS

300 250 200 150 100 50 0

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

SOURCE: STATISTA

the pandemic having widespread disruptive effects, particularly on service delivery, CIMB Niaga has actively responded with digital transformation being central to ensuring business continuity. In fact, COVID-19 did not bring about the need for digitisation for CIMB Niaga. The bank, which was established in 1955 under the name Bank Niaga, was founded on innovation and a forwardthinking philosophy.

Years in the making CIMB Niaga was the first bank in Indonesia to install an automated teller machine (ATM) and to launch a mobile-phone eWallet. In 2017, the bank correctly predicted that the banking sector in the country was ripe for accelerated digital revolution. To be a leader on the digital frontier, the bank deployed

To start with, CIMB Niaga has been able to leverage the COVID-19 pandemic as an opportunity to seamlessly redirect customers to digital channels like OCTO mobile and OCTO Clicks online banking. It has also encouraged customers to utilise its payment capabilities and cashless transactions. These include QR transactions that allow customers to transact without cards, and also our OCTO vending machines distributed to key locations across Indonesia. With adoption of online platforms to interact with customers, the bank has been able to reach more customers.

In fact, the platforms have been ideal considering the geographical perspective of Indonesia, a country that consists of many islands. More importantly though is the fact that CIMB Niaga is at the forefront of the country, in terms of playing a central

role in the projected e-commerce explosion.

Numerous surveys show the online economy and e-commerce could reach $35bn this year, up from $23bn in 2019, and is on track to cross the $130bn mark by 2025.

Internally, adoption of digital channels by CIMB Niaga customers has been swift. The bank is recording higher penetration rates on mobile banking, something that is reflected by a significant increase in digital transactions that are in excess of 96 percent of the total yearly transactions processed by the bank.

Financial transactions have also increased by almost 50 percent while active users have also grown significantly (see Fig 1).

Pushing things forward The bank has more ambitious 2021 targets due to the robust growth seen. Over the next 12 to 24 months, CIMB Niaga will be focusing on perfecting its digital bank capabilities and strengthening its foothold expansion to be a truly digital bank. Already, it has implemented several exciting initiatives. These include a digital OCTO savings account and credit card set for launch next year. Concurrently, a team is working on building the initial frameworks to continue the expansion to a more robust app for its mobile banking. This year alone, the team will have delivered over 74 features on mobile, providing more conveniences and solutions to users. Of importance though, is that CIMB Niaga is putting security at the core of its digital networks. On this, the bank is not only compliant to industry standards but has systems to monitor, detect and prevent fraud. Its OCTO mobile policy implemented in 2017 has, for instance, reduced cases of fraud to record low levels. For CIMB Niaga, the vision to venture into the digital space was a masterstroke. This is because as COVID-19 forces other banks to accelerate the digital transformation, CIMB Niaga has already responded to customer needs. But even as it continues to roll out innovations and solutions that conveniently bridge f inancial and everyday life for users, the bank is cognizant of the fact that it cannot afford to lock out conservative customers who still believe in bricks and mortar.

Notably, branches will still be available for this type of customer. However, the fact that the numbers are on a decline has seen CIMB Niaga proactively continue educating customers on its digital capabilities and conveniences. The result has been faster transition into the digital space. For customers who are perhaps more apprehensive, the bank’s relationship managers are well versed in digital onboarding. This makes them ready to assist clients when they feel comfortable and ready to turn to digital. n

Winter 2021 |

59

ba n k i ng

Digital Banking

A catalyst for economic transformation Mobile banking has enabled banks to optimise their services for every type of retail customer, so Atlas Mara Zambia has positioned itself to serve people from every financial background

words by

Teza Ngulube HEAD OF RETAIL AND DIGITAL BANKING, ATLAS MARA ZAMBIA

Digital technology has been a great financial democratiser worldwide. Mobile phones and app-based banking have put previously inaccessible financial transactions into the hands of millions. While especially true for certain populations in the global south, you would be mistaken to think that businesses such as Atlas Mara Zambia are only tackling the challenge of having people join the formal economy in the first place. Rather, the bank has mobilised its offering for the emerging middle class and established banking customers alike, positioning itself as the top digital bank in Zambia and embracing the needs of every user.

Three lifestyles Atlas Mara Zambia has identified that their ‘typical’ customer in fact has three distinct lifestyles, and the bank has optimised its offering to cater for each one. It has customers who have typically been excluded from accessing financial services or are early entrants into formal banking. These 60

| Winter 2021

customers require basic banking services such as money transfers and merchant payments, and they value convenience and ease. There are customers who are ambitious and always aspire for more, living their life on the go; access to credit and savings solutions is paramount for them. And there are also customers who value status and recognition and enjoy rewards and lifestyle benefits, for whom protection of wealth is key. In meeting all the needs of these varied customer profiles, technology must take centre stage. Convenience is a common thread, and Atlas Mara Zambia has had to build all its customers’ needs into its digital capabilities to provide this for them.

Fintech at the centre Following the birth of Atlas Mara Bank Zambia at the coming together of two banks, Banc ABC and Finance Bank, it was imperative that the organisation cemented its delivery of products and services around its customers.

Quite deliberately, it realigned itself around customer needs, reviewing its whole digital infrastructure, covering ATMs, cards, mobile banking, point of sale as well as its call centre and agent banking network. While its stock of digital assets underwent review, mobile banking capabilities took centre stage. The reality that mobile technology has become an integral

part of life across generations in our current lifetime has seen banking customers’ lives revolve around the mobile phone. Today it has become more than a communication tool and commands a large part of all our lives. Building a provision of financial services around the mobile phone has allowed Atlas Mara to seamlessly integrate into its customers’ lifestyles.

First and foremost was a refresh of the mobile banking platform for customers, making it easy to access through self-registration on both mobile app and, crucially, ussd (more on this shortly). Once registered, the customer is then able to open savings accounts, make merchant payments, money transfers (local and international), and access credit through micro loans and salary advances. Atlas Mara customers also enjoy supplementary services such as access to statements for the account as well as any linked prepaid cards, forex rates, blocking cards, setting up standing orders as well as being able to make cardless cash withdrawals at ATMs or agent outlets. All of this while earning rewards for all their transactions. For all these services, it is not only the customerfacing front-end that is digitalised, but also the back-office processes, making the experience seamless for the customer.

Collaboration, not just innovation Being digital means successfully harnessing technology to provide paperless, real-time, convenient, relevant, and secure financial services to customers through various distribution assets, including mobile and

ba n k i ng

Digital Banking

“More and more banks and service providers are alive to the fact that customers’ needs revolve beyond what they are able to offer as a single entity”

internet banking, ATMs, agent outlets and call centres. By allowing an intricate interplay of these distribution assets that aligns with customers’ specific lifestyles, the bank can leverage technology to further its aim of delivering the ultimate in world-class financial products and services.

Atlas Mara clearly recognises the need to invest in its digital assets to ensure it remains relevant for its customers and to deliver highlevel security protocols. But what is also critical in this digital age is to recognise that partnerships are the signature of the future. More and more banks and service providers are alive to the fact that customers’ needs revolve beyond what they are able to offer as a single entity, and Atlas Mara has a portfolio of partners growing in both breadth and scale, driving a common goal of using technology to meet the ever-changing needs of customers.

Financial accessibility for the unbanked Digital technology has allowed financial institutions to reach large numbers of people at low cost, whether they were previously part of the formal economy or not. Despite some 1.7 billion people worldwide still having no bank account at all, uptake of financial services through mobile phones, apps and other digital technologies has furthered retail banking more in a handful of years than it previously had in decades.

While it provides mobile banking through smartphone apps, a large part of the Zambian population is heavy reliant on ussd, and the bulk

of the bank’s customer activity still happens on its mobile banking ussd platform, and not the app. In offering mobile banking through ussd, therefore, Atlas Mara Zambia does not simply cater to those with smartphones, and there is an important reason for this.

There has been other outreach and marketing in this direction, too; there are certain challenges for a highly digitalised bank that still needs to reach those who may not have access to smartphones, or are part of a rural population. Primarily, contact is key.

All of Atlas Mara’s mobile banking services are available in seven local languages in addition to English. This helps customers interact with the platform more comfortably in their language of choice. Social media is heavily used to engage and interact with its clients on how to use its services and also provide security tips, and SMS messaging continues to be used, especially for the ussd audience.

Geographical setting is also important, as the rural populations require a more localised engagement approach. So while the mobile banking platform is already available in local languages, the engagement messaging also has to be in local languages and be channelled through local radio stations as well as local influencers.

The phenomena of Chilimba The bank has developed a mobile banking solution called Tenga Mobile Money wallet for its non-customers, particularly to serve the unbanked population. This tool is available for any Zambian with a national ID and registered local mobile number. With these two things, one can access Tenga Mobile Money through a self-registration process via either an app or, crucially, through ussd (dialling *360# through the phone’s keypad).

Once registered, customers can fund a mobile money wallet through any Atlas Mara agent outlet countrywide, or through its partner agent networks.

Additionally, Tenga Mobile Money wallets can receive funds from any local bank account, allowing customers with existing bank accounts elsewhere to transfer funds

into their Tenga Mobile Money wallets. Once funded, customers can access all the usual financial services available on its mobile banking platform. Furthermore, Tenga Mobile Money customers can also enjoy access to Atlas Mara’s Group Saving feature, which allows one of Zambia’s oldest traditional banking phenomena (locally called Chilimba) to be carried out digitally. The benefit to the business of such an offering is obvious, as it becomes known for providing ease, convenience, and trust for those who may not previously have had a bank account or used formal financial services.

Financial catalyst for growth By allowing every citizen access to financial services, supported by a robust financial education programme, as an institution Atlas Mara becomes not only a leading fintech business, but a catalyst for economic transformation. By allowing people to experience f inancial emancipation by providing them an opportunity to define their financial signature, the foundation is laid for individuals’ future interactions with banking services that support their lifestyles.

Successful retail banking is all about adapting around the customer, and Atlas Mara’s offerings placed for every level of Zambian society are inclusive, adaptable, and support traditional values with forward-thinking technology. Customer needs are always evolving, and the bank has a structured way to continuously meet those needs. The company’s mobile banking technology has been a key lever in delivering basic banking needs of savings and extending credit, and has also now intertwined with its customers’ lifestyles, providing various enhancements such as money transfers, merchant payments and even insurance services.

With open banking APIs, the bank has even forged partnerships with other entities, enabling it to meet its customers’ needs without having to leave its platforms.

In every financial industry, social and economic boundaries are less clear cut as social mobility increases, and fintech such as that offered by Atlas Mara will continue to boost this trend. Because of the way mobile phones intertwine with everyday life, mobile banking has become the most important channel for most people to access banking services. By building a financial ecosystem intertwined with mobile technology, Atlas Mara has delivered world-class banking services for both customers and non-customers, creating the ultimate digital bank in its market. n

Winter 2021 |

61

ba n k i ng

Digital Banking

Change in demand pushes reform Business success is measured by the ability of companies to adapt to changes and accept new challenges. COVID-19 opened new growth opportunities for banks to reform their portfolio of products and services to suit customer needs

interview with

Petia Dimitrova CEO & CHAIRPERSON OF THE MANAGEMENT BOARD, POSTBANK

The pandemic has affected the whole financial sector in recent months and forced companies to respond quickly and adequately with plans and strategies aimed to facilitate both clients and employees. This scenario allowed the banking sector to accelerate a digital switch that had already begun before the global lockdown, through investments in highquality technological innovations reflecting the changed needs of customers.

One of those banks with a driving force for innovation is the Bulgarian institution Postbank, which has been a decisive factor in innovation and in shaping Bulgaria’s banking trends in recent years and has been awarded many times for its innovations. With a nearly 30-year presence among the leaders in Bulgaria’s banking sector, Postbank manages a broad branch network across the country and a considerable client base of consumers, companies and institutions. Further, it has built one of the most well-developed branch networks and modern alternative banking channels. World Finance spoke to the CEO and chairperson of the management board of Postbank, Petia Dimitrova, about the bank’s recent activity and its plans for the future.

The COVID-19 crisis has changed the business environment everywhere around the world. How have you handled it and how has it affected the Bulgarian banking sector?

The COVID-19 crisis has affected many business sectors, including the banking one. We had to respond fast and adequately by adapting our plans and strategies to the situation. I believe Postbank did pretty well – we were prepared for the challenges and provided 62

| Winter 2021

our clients with personalised solutions when they needed them. In the first days after the lockdown, we were ready with a series of measures aimed mainly at helping our clients and giving them the comfort and security they needed. It may sound like a cliché but I believe every crisis opens new opportunities and helps us test our progress. The business sector, not just the banking one, had to respond with the speed at which consumer behaviour changed – literally in one day – and show it is resilient. Well-operating companies are used to tackling challenges but only the successful ones are prepared for them. If I have to point to one positive effect of the crisis, it is that it taught us to be bold in the introduction of innovations, which are aimed at our clients’ convenience and can be used remotely. We had to meet their main expectation at that moment – fully remote access to their personal finances via our efficient digital channels. Of course, our offices remained open but complied with all required protective measures because we knew some clients prefer this means of communication.

Meeting our employees’ expectations to protect them and facilitate their work was another of our priorities.

The crisis showed us we can be faster and more efficient by shifting our focus to modern technological solutions. We had one main goal – to be more flexible and find the useful solutions consumers and companies need now because they will be important for them tomorrow. As a leading bank on the market, I am glad we managed to fully meet this need of our clients, which is also at the foundations of Postbank’s motto, ‘Solutions for Your Tomorrow.’

You mentioned digitalisation. What solutions have you introduced in Postbank to facilitate your clients and employees in the current situation?

The pandemic undoubtedly changed the banking sector towards the desired direction of service digitalisation we all have been

The city of Sofia, Bulgaria

talking about for a long time. It clearly showed that now is the time for swift but high-quality innovations, express financial solutions and products, which mirror the changed needs of our clients. They should be easy to use and accessible via clients’ preferred channels.

Postbank was fully prepared to meet the new reality because the digitalisation processes in the bank started a couple of years ago and the COVID-19 crisis focused our efforts even more and made us speed up our plans. With the Bank@Home campaign, we encouraged our clients to stay home, thus protecting them and our staff. We launched a fully remote process of applying for and receiving debit and credit cards, which our clients can have delivered to an address of their choice. We provided them with an option for online consultations for mortgage loans via EVA Postbank mobile app and a real-time conversation with the bank’s employees via the live chat functionality.

Postbank has been a market leader and a trendsetter for 30 years now. The introduction of various digital solutions is the main focus of our strategy in order to provide excellent consumer experience to every client and an opportunity to reduce the daily workload of our employees. This is why it was quite a natural step to be Bulgaria’s first bank institution that has implemented a largescale and considerable optimisation for just six months via robotic process automation technologies. We incorporated six robots, which were ‘trained’ to execute 20 of the processes typical of the back-office, including

ba n k i ng

Digital Banking

Reduction in processing times due to implementation of robots

internal processes even more easily, which is a great convenience because we have many offices and employees across the country.

Being a company that prioritises both the innovations of the products and services we offer to our clients and the care for our team, we see the app as an opportunity with which we can further take care of them by making their everyday life easier and improving the communication between them. The app is a continuation of our strategy to be a preferred employer and of our vision about the people we want to attract as employees and develop their skills in the company by meeting their needs and expectations.

self-serving devices to deposit or withdraw cash from their Postbank cards and accounts, make transactions in BGN from all of their accounts in the bank, order bank statements for their accounts or credit card balances, as well as receive monetary transfers via Western Union and many other convenient services.

Speaking of our clients’ response, they are satisfied because they receive one more option to conduct their transactions fast and save precious time, which is an advantage in our dynamic everyday life. Our employees are also satisfied because they will not have to do standard banking operations and will be able to spend more time consulting our clients thanks to the unique service.

We launched a unique mobile wallet that provides more bank services to our clients via their phones – adding all bank cards to their user account, making contactless POS payments via their phones, managing the cards in their mobile wallet through setting limits for the different payment channels (POS terminals, ATMs, online payments), an option for adding loyalty cards, discount vouchers for shopping with our partners, making direct transactions between the users of the new mobile app to accounts in Postbank or other banks in Bulgaria, as well as other bank cards in the EU. There are numerous conveniences and I am sure our clients will appreciate them.

We have quite recently launched another innovation for internal communication with the bank’s team. The special mobile app, Digital Office, enables us to manage our

What are Postbank’s plans for 2021?

2021 will surely be a special year for us because we will celebrate our 30th anniversary. In all those years, we have not stopped moving forward, but what is most important is that we remained a bank of first choice for our clients. We achieved it thanks to our work and united team. We have recently won the Bank of the Year in Bulgaria award and are really proud of this recognition. The accolade certainly motivates us to set even more ambitious goals that we are not just striving to achieve, but overachieve. One cannot move forward without a good team. This is why I am glad I am working with real professionals and Postbank is among the top employers in Bulgaria. As I mentioned, we are planning to further expand the functionalities of our Express banking digital zones, as well as their coverage in Bulgaria as part of our strategy to provide excellent consumer experience to every customer. Our efforts in this direction have won several prestigious international accolades. We are happy we have been named for the third consecutive year Best Retail Bank in Bulgaria by World Finance and won an award for consumer experience in banking in one of the most prestigious contests in the banking sector, Retail Banking: Europe 2019 awards. We will continue our CSR projects, including a strategic partnership with Bulgaria’s most modern software university, SoftUni, with which we support young people in their development and create a working, bidirectional connection between the business sector and education.

We are partners of the entrepreneurs in Bulgaria in our effort to help them achieve higher business growth. We have been successfully working in this direction with the team of Endeavor Bulgaria on its Dare to Scale programme for the second consecutive year. We also support projects of the United Nations Global Compact Network Bulgaria.n

6

Number of robots introduced at the bank

20

Number of typical processes they were programmed to do

80%

using templates to create documents, updating user profiles, entering invoice data, payment processing, etc. This way we reduced the time for processing and implementation of those processes by about 80 percent on average.

We also achieved something important – we improved the general consumer experience because innovation optimises activities, which are directly related to an effective and full customer service. We are planning to develop and incorporate new robots in the future to further optimise the bank’s processes.

You launched a thorough transformation of the Postbank branch network and introduced express banking digital zones.

At what stage are you in this process and how did consumers respond to them?

The bank branch of the future is equipped with high technologies and is a reflection of modern clients’ needs. This is why we are overhauling the design of our broad branch network. We started the process in end-2019 with the opening of our first digital offices, which are part of our comprehensive policy of introducing innovations for the convenience of our clients.

Following the best global practices, we have been opening since mid-2020 express banking digital zones in our branches to offer faster and more convenient services to our clients. They are currently available in 32 Postbank offices in 15 Bulgarian cities, and enable our clients to identify themselves with their bank cards and carry out about 90 percent of cash desk operations by themselves. They can use the

Winter 2021 |

63

ba n k i ng

Digital Banking

Putting customers at the heart of digital change Mashreq Bank may be the oldest privately owned bank in the UAE, but it has always been a leader in the pioneering use of technology to improve the customer experience

words by

Subroto Som EXECUTIVE VICE PRESIDENT – GROUP HEAD OF RETAIL BANKING, MASHREQ BANK

Digital transformation has long been a strategic goal for Mashreq Bank, and the current situation has only accelerated the momentum.

Rapidly changing customer behaviour and expectations are a major factor for us, and we believe this, coupled with changing regulations, is putting pressure on banks to increasingly turn to technology to offer solutions; not only to cut costs but also to increase efficiency and tap new streams of revenue.

The provision of digital services is part of the bank’s entire corporate strategy. Mashreq has always been an early adopter of technologies that disrupt the way we bank. A while ago, we invested in our digital innovation initiative and the investment has borne fruit. We strongly believe that this was the right strategy and will benefit our customers immensely going forward. The way in which the fourth industrial revolution has changed our world means that digital is ubiquitous: we live our lives through the digital sphere and it is only natural that every aspect of our financial lives exists digitally as well. We continue to invest in solutions that are innovative, but more importantly add value to our customers. Over the past year, customers have provided exceedingly positive feedback to our revamped distribution network.

Our entire retail and SME offerings have evolved in response to the changing needs of our customers, who embrace self-service technologies and digital banking with ease, while demanding more personalised and tailored solutions in terms of advisory and nontransactional services. The recent launch of our blockchain data-sharing platform, called Know Your Customer (KYC), which is the region’s first, is a milestone for us. The new platform will ensure a faster, reliable, and more 64

| Winter 2021

secure onboarding and digital data exchange process, thereby removing existing cumbersome paper-based KYC processes. In addition, the platform will help oversee banks’ collection and management of KYC data. We were the first bank to launch a digital-only SME bank account and the first in the region to enable customers to complete the Know Your Customer (KYC) updates digitally.

What the customer wants It is clear to us that customers – individuals and small and medium businesses as well as corporates – have wanted digital banking products and solutions for some time. We continue to invest heavily in data analytics and AI, and use robotics to automate a lot of operating procedures, manual entries and manual activities that are repetitive in nature. We also work with a large number of FinTechs in the retail space in the areas of payments, wealth management, credit underwriting, and customer identity authentication.

Mashreq was the first bank in the region to launch a digital banking proposition for SME, NEOBiz, a great example of innovation. Prior to the launch of NEOBiz, start-ups and SMEs reported difficulty in opening a bank account in the UAE and accessing financial services.

In some cases, they avoided opening a local bank account and instead conducted their transactions via non-UAE-based foreign banks that subjected them to high international fees. NEOBiz has been able to address this with a 20-minute digital account opening application, email-based queries, and tablet fulfilment. This is a drastic simplification of a process that previously took up to three months in extreme cases. NEOBiz has now been operational for a year, and it continues to receive extremely positive feedback from our clients. In the current situation, customers expect support from their bank. In addition, they expect a full-scale digital service with a reduction in fees and charges, and access to value-added products and services. NEOBiz

ticks all these boxes: perhaps that is the reason why it is winning the trust of so many customers. Additionally, the bank’s quick remit offering, which is a digital remittance proposition, is widely popular with both SMEs and individual customers.

Being a digital-only proposition, NEOBiz is also a lot more economical and gives the customer choices with complete transparency and flat fees. It offers 24/7 access through online and mobile banking in addition to call centres, interactive teller machines and even a virtual relationship manager.

The best part about this offering is that it brings third-party products such as accounting software, mobile point of sale and payment gateways as optional add-ons, at special preferential prices for our customers.

For the SMEs, it acts as a one-stop shop and again delivers a superior value proposition.

The bank is looking to introduce more offerings in the immediate future.

In addition, through the adoption of technology such as blockchain, artificial intelli-

ba n k i ng

Digital Banking

THE OPPORTUNITY FOR DIGITAL-ONLY BANKING SERVICES AND PRODUCTS IS THE ABILITY TO BUILD UPON THE COMMUNITY OF USERS

City skyline in Dubai, United Arab Emirates

gence, data analytics and machine learning, Mashreq has been able to streamline lengthy documentation practices and cumbersome paper-based KYC procedures, ensuring a faster, reliable and more secure onboarding and digital data exchange process. Our long-term vision for NEOBiz is that it enables customers to focus on and expand their business. We have major enhancements in the pipeline to expand these services to achieve our ambitions.

The UAE has an exceptionally high smartphone penetration, at 96 percent of the adult population according to 2019 data from the Media Lab. Digital inclusion is a great equaliser, and this strong access to digital services through either a PC or a smartphone is enabling people to enjoy high-quality services and is an opportunity for many businesses and banks, like us, to cater to their lifestyle needs, like in areas such as e-commerce. In 2019 the UAE was named as one of the fastest-growing hubs for e-commerce in the region, according to a joint study by Dubai Economy and the global payments technology company provider

Visa. Furthermore, the UAE is well renowned for world-class infrastructure, services and initiatives that are geared towards enabling smart cities, and therefore enabling digital services and financial inclusion.

Meeting the pandemic challenge The COVID-19 outbreak has propelled the shift towards digital banking at an exponential speed and we see the opportunity to continue this transformation. Internally, at the onset of the pandemic, we gave our teams access to special technology kits for virtual desktops, and remote conferencing facilities, as well as controls and guidelines that are specific to each business unit. We have also created a microsite with a full suite of banking services, so that both our retail and corporate customers can meet their requirements easily and without hassle during this difficult time.

I can proudly say that in the past couple of months, when nearly 97 percent of Mashreq was working from home, we offered our customers uninterrupted services and seamlessly

transitioned them towards digital banking. Today, 92 percent of our customer base has online and mobile banking credentials. This in itself is an indicator of the strength of our digital offerings and our clear position as a digital leader.

In 2019 alone, the number of transactions processed through the bank’s gateway increased by 126 percent year-on-year, allowing for hundreds of millions of secure digital purchases to take place. This percentage is significantly higher in 2020.

We recently collaborated on the launch of klip, the digital cash platform launched by Emirates Digital Wallet. This initiative, the first of its kind, will provide customers with a seamless, secure payments platform that is geared towards improving financial inclusion and driving contactless and cashless transactions.

We also launched two major platforms for our customers: WhatsApp Banking, to offer more convenience, as well as NEOBiz, the UAE’s first digital banking proposition catered exclusively to SMEs. The response from our retail and SME customers to these initiatives has been extremely positive, with consumers embracing the convenience and f lexibility they offer. Our branch network has transformed significantly since 2019 and now boasts digital-only kiosks as well as personalised flagship branches for segments such as Mashreq Gold and Business Banking and SMEs. On the corporate banking side, the bank has also on-boarded most of its clients on Mashreq Matrix, our digital GTB global transaction banking, trade and cash management platform, which offers solutions for trade transactions, cash management, liquidity pooling and trade tracker capabilities.

Transformation is an ongoing process The ability to collect customer data is often integrated into the operations and processes of digital banks right from the beginning. This data is used to engage with the customer postacquisition, and also help them as they transact, thereby making the customer experience seamless and personalised. This offers unique insights into customers’ behaviour and empowers digital banks to provide valuable and relevant offers in real time.

The opportunity for digital-only banking services and products is the ability to build upon the community of users. In a connected world, co-operation and partnerships are key, as they foster a symbiotic ecosystem. This is of immense value to young businesses and SMEs, as we have seen through the enormous success of NEOBiz. Transformation in the digital space is an on-going process for us. The bank has invested in a technology organisational platform that will allow us to continue with our transformation drive efficiently and effectively. n

Winter 2021 |

65

ba n k i ng

Digital Banking

Building a digital Pakistan for all The road has been long, almost 75 years in the making, and so much progress has already been made – but the next great challenge on the horizon is a digital banking revolution for Pakistan

words by

Sagheer Mufti CHIEF OPERATING OFFICER, HBL

Habib Bank Limited (HBL) boasts more customers than the combined populations of Belg ium, the Maldives, Oman and S w it zerla nd. In a l l t he se c ou nt r ie s, incidentally, Pakistan’s longest established commercial bank has overseas operations. A story that began in 1947, with the request of Muhammad Ali Jinnah, founder of Pakistan, that HBL move its base to this f ledgling nation, has become an epic tale of growth and globalisation. Currently the largest domestic 66

| Winter 2021

multi-national bank in Pakistan, HBL has a global presence with over 1,700 branches and 2,100 ATMs across three continents.

The latest chapter in this story is one of digitisation. HBL has a vast portfolio of products and services, highly developed infrastructure, and advanced technological capabilities. As it looks to the future, the bank is making concerted efforts and investments into fulf illing its vision of becoming a ‘technology company with a banking licence.’

Key to this strategy are digital transformation and financial inclusion. We aim to become the leading supra-regional financial institution in South Asia and the Co-operation Council for the Arab States of the Gulf, serving nearly 50 million customers by 2024.

HBL HAS CEMENTED ITS POSITION AS THE LEADING DIGITAL BANK IN PAKISTAN

ba n k i ng

Digital Banking

HBL in numbers

1,700

Number of branches across the world

1947

Year the bank was formed

20 million Customers, currently served

50 million Customers, the target for 2024

250

Payment companies available on its mobile app

HBL plaza in Karachi, Pakistan

Digital solutions for all HBL’s pivot to digitisation has transformed the bank’s response to technological advances, new business models and almost insatiable customer demand for faster, cheaper and better banking services. HBL aims to stay nimble, agile, alert and smart, a pioneer when it comes to providing innovative, digitally enabled banking solutions to all.

The digital strategy of the bank is governed by a broad framework that has four elements as its basic building blocks: integrated customer experience, digitally enabled operations, evolving business models, and data enablement across HBL. The end goal remains to be a mobile-first, data-enabled, customer-centric, inclusive and agile organisation that is quick to pivot as opportunities present themselves.

The bank aims to be an organisation that empowers its customers and employees alike and that has the ability to form ecosystem partnerships and deliver scalable solutions to customers in a secure and compliant manner.

The bank has developed a comprehensive range of digital payment services under the umbrella of HBL Pay. Under HBL Pay all cash management needs, supply chain payments, cross border individual and trade payments, government payments, and social transfers are enabled digitally. This has transformed banking norms in Pakistan, making it easier to do business and improving the customer experience.

Milestone moments With a sizeable domestic share, HBL was nationalised in 1974. In 2004, the bank was privatised and management control of the bank was handed to the Aga Khan Fund for Economic Development (AKFED). Since then, HBL has cemented its position as the leading digital bank in Pakistan. The bank’s customer base has risen to 20 million customers, driven primarily by an increase in its digital platforms usage across mobile, internet banking and Konnect by HBL, the bank’s branchless banking channel. The bank’s digital payment solutions enable its customers to enjoy a convenient cashless lifestyle. Konnect by HBL alone has more than eight million customers, of which 60 percent are women. This platform has served as a vehicle to drive increased digital financial inclusion and grow and acquire new clients despite challenges posed by coronavirus lockdowns.

HBL Mobile and internet banking have continued to see major growth. HBL’s mobile app has over 1.3 million users and has seen triple digit growth in transaction count and value. This number is expected to have gone up to 1.7 million by the start of 2021. This is expected to continue, especially in the current environment where digital is rapidly becoming the new norm.

Through Konnect by HBL, the bank partnered with the government of Pakistan on key programmes such as the anti-poverty initiative Ehsaas to deliver the Ehsaas Emergency Cash Program, the largest social safety net initiative in Pakistan’s history. HBL is leading this effort across Sindh, Balochistan, Punjab and Islamabad and to date has disbursed over PKR 175 billion to more than 12 million households. This initiative allowed HBL to distribute a large amount of money in a transparent and efficient manner at an extremely low cost to the government, ensuring the targeted delivery of subsidy to the rightful recipients.

“The bank’s digital payment solutions enable its customers to enjoy a convenient cashless lifestyle” Digital payment experience HBL Mobile also offers personal loans with instant decision making and 24-hour fulfilment, as well as a four-click credit card application process. HBL has launched QR Payments to provide customers with a secure and instant digital payment experience and aims to onboard over 100,000 retailers by the start of 2021. Other key features introduced during 2020 include enhanced debit and credit card management services, applications for car loans, an in-app complaints portal, updating expired National Identity Cards, opening Roshan Digital Accounts for non-resident Pakistanis, and foreign currency transactions.

Seamless integration HBL has more than 250 payment companies available on its mobile app with various categories. With utility bill payments, taxation, online shopping, educational fees, Zakat/donations, mobile bills and top-ups, and corporate payments all available via the app, we facilitate hassle-free payments to the largest number of payment companies available on any digital channel in Pakistan.

As part of the Open Bank Project, an API gateway has also enabled HBL to integrate seamlessly w ith the global pay ments ecosystem, both for provision of its own services and access to services offered by other entities.

Even as HBL makes strides on its path to large-scale digitisation and accelerated growth, there are three significant areas where digitisation is still lagging behind. Some government payments and receipts are now available digitally, but not all, and this needs to change. Similarly, we want to see digitisation of small ticket retail purchases and supply chains and their payments.

HBL has the opportunity to accelerate the digitisation of Pakistan’s economy and help shape its future. The bank is committed to doing so by leveraging technology and data to empower its customers. We want to speed up and facilitate business transactions, increase transparency and customer engagement, and broaden access to banking. It’s our contribution to building a digital Pakistan. n

Winter 2021 |

67

ba n k i ng

Digital Banking

Dominican Republic’s digital banking arena receives boost With a wealth of experience from 80 years in the banking industry Banreservas knew that a digital revolution was taking place so they were already prepared and well positioned to serve its clients when the world closed down in 2020

words by

Samuel Pereyra CEO, BANRESERVAS

Roll back to 1998 and only two percent of the world’s population had an internet connection.

That figure has since surged to 40 percent and continues to accelerate. More than 20 billion new devices were connected in 2017 alone. By 2030 it is anticipated this will sail past the 500 billion mark. Most will be fully mobile.

By any standard these are extraordinary figures. For Banco de Reservas de la República Dominicana (Banreservas), the COVID-19 pandemic highlights the investment the financial institution has made in mobile technology, allowing it to respond meaningfully to those in need. Fortunately, this preparation had already been underway for some years, enabling it to react to the pandemic with confidence while supporting the broader Dominican Republic economy.

Tech and Latin American finance sector With internet users now comprising 50 percent of the global population, the global tech transformation is not just powered by developed nations. Even in the poorest 20 percent of global households in developing nations, seven out of 10 rely on a mobile device to manage their finances.

The explosion of virtual media and face-toface digital services is reflected strongly across the Latin America and Caribbean banking sector. The latest State of Cybersecurity in 68

| Winter 2021

the Banking Sector in Latin America and the Caribbean report (released January 2018) saw 53 percent of respondents rely on smartphones to check bank balances and make basic transactions. This compares with 29 percent of those still using branches. Even fewer were relying on telephone banking – just 23 percent.

The numbers – the specific data originates from the Washington-based Organisation of American States (OAS) – emphasise a profound tech shift: even for mundane, dayto-day tasks such as transferring funds, 43 percent of consumers relied on mobile banking rather than visiting a bank in person. These same consumers do not mind whether their transactions are made via laptop, tablet or smartphone. In other words, trust in mobile banking technology continues to surge, whatever device is used.

Swipe right for Dominican digital The bald mobile tech insights don’t end there.

As recently as September 2020 Banreservas’ own data registered more than 71 percent of all financial transactions carried out via ‘alternate’ – read digital – channels, representing an 8.7 percent hike compared to the year before.

While 80 percent of Dominicans have a mobile phone – around 50 p er c ent of t he s e being smartphones TRUST IN MOBILE BANKING TECHNOLOGY – home computers CONTINUES TO SURGE, are proportionally lower per-household, WHATEVER DEVICE IS despite high levels USED of internet banking.

Mobile tech is

Banreservas headquarters in Santo Domingo, Dominican Republic

becoming crucial while also fast overtaking legacy tech.

Yet there was little strategic vision for Banreservas’ digital channels, even as recently as 2014. Bricks-and-mortar branches still remained the company’s client touchstone. But since 2015 the strategy has switched sharply to migrating transactions via digital channels, lifting this share from 42.7 percent in 2014 to 71.7 percent in 2020.

Mobile tech speed increased Since 2016, more than 50 percent of financial transactions are now made through high-tech devices. In 2019 Banreservas went further in defining their digital strategy, fostering a culture of continuous improvement but anchored to two vital key pillars: better security and better transparency.

Banreservas is committed to being at the forefront of modern digital instruments, increasing controls and reducing threats, key factors in the banking sector. The financial institution is currently working on improving its processes and strengthening its collaboration with clients, opening

ba n k i ng

Digital Banking

THE SIX PILLARS OF DIGITAL WISDOM Determined to make Banreservas relevant for the next generation and beyond, the financial institution has designed a fresh-from-the-ground-up digital proposition leveraged by six pillars.

1. Transactions – this means all self-service digital channels support transactions across different business segments and can be done independently of any branch.

2. Requests and services – similarly all service needs, whatever the business sector, can be handled outside the branch network.

3. Commercial management – developing digital capacities for a timely, value-added customer management experience that accepts pre-approved payments for basic products and services.

4. Digitisation of end-to-end processes – developing end-to-end integrations with the Bank’s BPM, CRM and ERP applications.

opp or t u n it ie s t o incorporate other BANRESERVAS IS segments, such as COMMITTED TO BEING SMEs, the private AT THE FOREFRONT sector and especially OF MODERN DIGITAL younger client s, INSTRUMENTS already immersed in the digital and virtual culture. This is completely common to their environment.

considerable. Banreservas is working on reducing paper use in other areas such as teller vouchers and account statements.

So while the public health situation remains unwelcome and worrying, accelerating the trend towards digital payments, Banreservas technology is in place to manage public anxiety about viral transmission from cash, as well as addressing – and reducing – outmoded legacy system bureaucracy.

Digital productivity boost

Legacy support solid

Banreservas’ digital strategy is also backed by high-tech biometric voice authentication, allowing clients to access their own mobile account. Banreservas is the only domestic bank offering voice recognition tech through its selfservice voice channel, VOICE ID. More than 20.6 million biometric calls were authenticated in 2019 alone.

The digital tech is underpinned by more back office robotisation. Practically speaking, this means less paper and error potential – far more agility. Many highly repetitive and high-volume tasks are now digitally handled.

The impact on internal productivity has been

Acutely aware of the transformative need of mobile technology across Dominican society, improving this tech experience remains a priority for Banreservas. Yet the existing legacy branch network – more than 290 branches plus 700 ATMs and a 1,250-strong network of banking agents – still have their part to play, supporting its internet banking and mobile app technologies. No customer is excluded. Since February 2018, Banreservas has affiliated to UNARED, the largest network of ATMs, thereby doubling its ATM network reach to 1,500, allowing even more Dominicans to access their accounts. In line with its respected

5. Digitised operational management model – robotisation of repetitive back office processes with potential high margins of error are now outsourced to digital storage with all the client’s information safely recorded. This is vastly more efficient, safe and productive.

6. Internal digital culture – the promotion of an internal digital culture with collaboration and teleworking tools, transforming inter-departmental dynamics.

financial inclusion policy, the institution continues to strengthen its USSD tech channel, allowing vulnerable customers to carry out free transactions from their mobile phone, without eating deep into data quotas. During 2019, this service supported more than 27.7 million queries and 1.6 million transactions.

Money when needed Proximity and access to banks are two reasons why some Dominicans don’t have a bank account. But via Cerca Banreservas banking agents – a network of sub-agents –are able to offer a network of around 1,250 banking »

Winter 2021 |

69

ba n k i ng

Digital Banking

“As far as Banreservas is concerned, broad compatibility and strong risk management is fundamental to the user experience” » outlets. Since 2014, Banreservas has developed this sub-agent penetration, strengthening its competitive position and expanding access points, enabling non-traditional service providers like convenience stores, gas stations and other businesses to function as financial service proxies. Customers can make regular banking transactions such as deposits, withdrawals, paying off loans and credit cards, as well as paying government taxes in a safe way without additional charges.

This f lexibility was an advantage for those managing the insecurity of the current health situation – Banreservas’ technology was instrumental in supporting substantial gover nment a id prog ra mmes for the Dominican population. Practically, these sub-agent opportunities make it easy for Banreservas clients to have equal access to their finances, wherever they live – which is crucial in a health crisis.

Focus on the user wherever they are The best IT and app experiences are frictionless and simple. As far as Banreservas is concerned, broad compatibility and strong risk management is fundamental to the user experience. To resolve these needs a main goal here was to design an elegant and modern visual experience. All of Banreservas’ apps are designed to meet visual requirements and guidelines of Banreservas’ corporate brand, enabling its clients to experience a harmonious journey, whatever device is used.

And for functionality Banreservas’ clients can get, for example, a quick view very easily.

This is just one of the functions of the app and it means an immediate balance summary without having to go through a more formal login process. That means many clients feel permanently logged into the app without compromising their account’s security – much like many social and instant messaging apps, in fact.

The retail sector is also strongly supported.

Their apps have a native transaction allowing peer-to-peer transactions without having to exchange banking product info. It’s an arrangement based on proximity. If the clients are not within the required distance, they can 70

| Winter 2021

BANRESERVAS: BREAKING DOWN THE BARRIERS • Banreservas has reduced the average distance between lower income neighbourhoods and its network from 16 km to 3km – an improvement of more than 80 percent – vastly increasing access to the financial system.

• By 2020 the Banreservas apps registered more than 2.3 million downloads through different versions, facilitating more than 30 million transactions.

• In September 2019 the Enterprise Banreservas app was integrated across the bank’s channels, allowing SMEs and corporate customers to make use of the bank’s services in a more agile way, from any location.

use a token to complete the operation, without providing any financial account information whatsoever.

Innovate frequently and fairly All Banreservas apps take advantage of native fingerprint and facial recognition device capability – from smartphones to tablets and smart watches, including iOS8 and Android.

All apps have the same user interface principles and guidelines of the Banreservas corporate brand. Serrucho is a good example of a Banreservas retail app functionality, helping split a shared bill, though this tech goes well beyond dividing restaurant bills between friends, for example.

There is support for multiple business authorisations: Banreservas’ Enterprise app can perform multiple company approvals, providing a full execution and payment history for easy oversight. Once a client installs an app the initial enrolment process is carried out by

ba n k i ng

Digital Banking

Banreservas in numbers

1941

The year Banreservas was incorporated

20.6 million Biometric calls were authenticated in 2019

290

Total number of branches

700

Number of ATMs in the country

1,250

Network of banking agents

2.3 million Downloads of the Banreservas app by 2020

30 million

Transactions that have been registered on the app

a one-time password that the client receives

by SMS or email, validating their contact information. After login, all transactions – like credit card and loan payments plus taxes and utility bills – can be executed without extra verification. Frictionless risk management is crucial for mobile tech. It must be secure and trustworthy, managing the balance between a user’s experience and crucial risk mitigation.

Fast and flexible response to COVID-19 Banreser vas has been a strong ally to Dominicans during the COVID-19 pandemic.

Its robust digital technology allowed it to support government programmes, reaching out to the population quickly and effectively.

At a time of few precedents, f lexible measures were rapidly implemented for the benefit of any Dominican needing them.

Working alongside the government’s aid programme, Banreservas helped design a new digital financial tool based on the customer’s

bank ID details plus a unique number to be used as a PIN. The results of this initiative were impressive and practical: more than 700,000 Banreservas consumers could use almost 4,400 grocery outlets, warehouses, supermarkets and department stores without exacerbating the spread of the virus or risking their own health.

Internally, Banreservas adapted quickly to working remotely because of previous tech platform preparation and the recent renewal of its main client support applications: it was primed to respond effectively. In March 2020 around 23 percent of employees had access to remote working tools. But this number swelled to 51 percent by April 2020 and almost 70 percent by the end of September. In addition, productivity increased among employees meaning faster response times to both internal and external demands.

Future resilience is built in Ba n re ser va s’ mobi le t ech nolog y ha s proved reliable and cost-effective for many Dominicans at a time of profound economic stress. Many people’s lives have been upturned.

Some lives have been changed forever. But there is also much to be proud of. Despite the global economic hardship caused by the pandemic, the 2021 forecasted GDP growth for the Dominican Republic by the IMF is just four percent. It is one of the least exposed economies of the region. The Dominican Republic’s financial inclusion programmes have supported many, from consumers to local businesses and corporates. National debt levels remain modest and employment prospects are still promising across tourism and export markets such as coffee, sugar and gold.

Historic landmark The price of gold, for example, climbed more than 25 percent in the last 12 months, offsetting the economic downturn the country experienced as a result of the pandemic.

Remittances also rose strongly, around 11 percent, during 2020.

A profusion of medical instruments and pharmaceutical products – such as electro medical devices, drapes and masks, to name a few – exported to the US to help fight COVID-19 is just one example of the country’s economic innovation and dynamism. High value and high tech trade is supported by the Dominican Republic’s network of 74 unique free zones, right across the island.

Each is designed FINANCIAL INCLUSION to support specific AND EDUCATION industry sectors HAS NEVER BEEN and needs, diversif y ing the MORE IMPORTANT OR economy. In 2021 NECESSARY Banreservas celebrates its 80th bir thday and this landmark will highlight the many achievements it has made to support the country’s economic durability. The current COVID-19 pandemic is testament to this investment in a very tangible and real way.

In contrast, other countries in the same region will be fighting hard not to lose hardwon progress against inequality and poverty.

Financial inclusion and education has never been more important or necessary and Banreservas’ mobile technology underpins this commitment to all Dominicans, now and well into the future. n

Winter 2021 |

71

ba n k i ng

Corporate Diversity

Shattering the glass ceiling The recent success of Suni Harford, Alison Rose and Jane Fraser is promising news for an industry dominated by male leaders, but barriers to progression remain – and that starts with the culture The maths gap words by

Laura French FEATURES WRITER

When Jane Fraser steps into her role as Citigroup’s CEO this February, she’s set to make history as the first woman at the helm of a major Wall Street bank. That’s big news for the industry, and it’s not the only example of recent female success stories in finance; in November 2019, Alison Rose made a UK first by becoming head of NatWest Group.

The same year, Suni Harford became the first female president of UBS Asset Management.

In January 2020, Stephanie Cohen stepped up to co-lead a new consumer banking and wealth management division at Goldman Sachs, putting her in line to compete for the CEO crown in the future.

These announcements mark promising progress – but they also highlight the reality that they’re still glaring exceptions to the rule.

The figures speak for themselves; women represent less than one in five positions in the financial services C-suite, according to 2019 data from McKinsey, despite the fact they make up nearly 50 percent of entry-level roles.

In the investment sector the image is bleaker still, with women holding just 10 percent of senior roles in venture capital and private equity firms, according to a 2019 study by data firm Preqin. Add that to the fact the gender pay gap continues to reign supreme – with men earning 23.1 percent more than women in financial services on average, according to recent analysis by the BBC – and it’s clear there’s still a way to go. Institutions are under mounting pressure to improve the situation.

In 2018, the UK Treasury select committee published a women in f inance repor t examining how the industry could improve its diversity credentials. More recently, David Swensen – head of Yale’s $31.2bn endowment and one of the US’s most eminent investors – threatened to pull money from businesses not increasing women and minority group representation in the coming years.

72

| Winter 2021

It’s clear the issue is at the forefront of the agenda – but what more should the industry be doing, and why are women still being held back from the industry’s top spots? The problem starts with the pipeline, according to Brad Barber, professor of finance at UC Davis’ Graduate School of Management and author of the study ‘Family, Values and Women in Finance.’ His research found that only 30 percent of recent finance majors were women, with fewer girls than boys pursuing maths, leading to a “math gender gap.”

“Across countries there is a correlation between the math gender gap and the representation of women in finance,” he told World Finance. “This suggests cultural attitudes, which vary across countries, may discourage women from pursuing mathoriented careers like finance. It’s also possible (even likely) that the general culture of finance, particularly the stereotype of Wall Street as a male-dominated culture, is not appealing to women.” The UK Treasury’s women in finance report indeed found that “alphamale culture” continued to be an issue in the industry – especially around bonuses, where the style of negotiation was seen to “result in higher rewards for men and act as a deterrent for women.” Changing that image, then, is crucial in attracting more women into the field.

And that starts with education, according to Amanda Pullinger, chief executive of 100 Women in Finance, a global network working to empower women in the industry. “It’s about saying, how can we change perceptions around finance and inspire young teenage girls to pursue it as a career?” she said. “We know there are negative perceptions, but it’s an industry that can have enormous impact on the world.

There are lots of roles out there, and it’s about getting young women inspired to consider them as a career.”

Barriers to progression Yet even among women who do enter the field, the majority don’t progress to the highest ranks, according to Alexis Krivkovich, senior partner at McKinsey and author of

1 in 5

Positions held by women in the financial services C-suite

1 in 10

Senior roles for women in venture capital and private equity firms

23.1%

The wage gap, on average, between men and women in financial services

several studies, including ‘Closing the Gap: Leadership Perspectives on Promoting Women in Financial Services.’

“Our 2019 data showed that companies in the finance sector start off with even representation between men and women,” she told World Finance. “But this drops by more than half by the time we get to the C-suite.”

The research found several reasons for this – but perhaps the most glaring barrier was the fact that many entry-level women simply didn’t aspire to the top spots, leading to a divisive “ambition gap.” According to the study, only 26 percent of entry-level women surveyed envisioned themselves in a top executive position, compared to 40 percent of entry-level men. This could be due to several reasons, with issues balancing family and working life the number one hurdle, according to the research.

Yet perhaps the biggest issue is the fact there are still relatively few female role models in the finance industry to aspire to. In a women in banking survey by the Institute of Leadership and Management (ILM), 70 percent of women cited the greater proportion of men in senior financial roles as a barrier to progression, and 41 percent said a lack of female role models was part of the issue. This creates a selfperpetuating circle. “As women go through the ranks, particularly on the investing side, they tend to be the only one in that group or the

ba n k i ng

Corporate Diversity Suni Harford, first female president of UBS Asset Management

THERE ARE LOTS OF ROLES OUT THERE, AND IT’S ABOUT GETTING YOUNG WOMEN INSPIRED TO CONSIDER THEM AS A CAREER

A 2019 report by Stanford Graduate School found that companies with more women performed better on the stock market, with investors considering these firms more ethical and more likely to think outside of the box.

That’s likely to become even more important in the coming years, as Gen Y and Z come to dominate the market; in a survey by public relations firm Weber Shandwick, 67 percent of millennials said they were more likely to work at a company that had a formal, stated goal of improving gender equality in the C-Suite.

There are other arguments in favour of hiring more women in financial leadership.

A study by economists Peter Kuhn and Marie Claire Villeval found that women tended to take a more collaborative, team-oriented approach – which could have several benefits when it comes to leading the future workforce.

As Pullinger puts it, “I think the world of work is going more and more to a structure where collaborative leadership is needed. And I think it’s understood that it’s no longer about command and control – that’s not how you create better results.”

Turning point only one in the room,” said Pullinger. “And that sense of being the only one, particularly if you don’t have other women to look up to – that’s where a lot of women become discouraged, I think, and find it really hard.”

She believes increasing the visibility of women in senior positions, for example by encouraging public speaking and creating peer networks, is an important step in changing cultural stereotypes and encouraging more women to take the leap.

Sponsoring success Having role models, of course, depends on women getting to these positions in the first place. And for that, the industry needs a bigger emphasis on sponsorship, according to K rivkov ich. “Companies should be instituting formal mentorship and sponsorship programmes for younger tenure women,” she said. “They should also be coaching managers and senior leaders on how to encourage women to progress.” McKinsey’s research found that women who received advice on career advancement from managers and senior leaders were more likely to be promoted – but only 34 percent of senior-level women said they had received advice, compared with 44 percent of men. And it’s not just about women supporting women; given men continue to dominate financial leadership positions, they’re

critical in helping bring about change. The ILM report found that a “lack of understanding between men and women within the industry” was one of the key obstacles to creating a more inclusive culture, concluding that “while it may seem sensible for women to be mentored or coached by other women, this is not necessarily the best solution.”

Pullinger likewise believes getting male peers involved is crucial in the march towards gender parity – especially when it comes to blasting entrenched stereotypes and encouraging women to take up less traditional roles. “In investment, I know so many women who have been pushed or encouraged to go into certain female-dominated areas, like the investor relations side,” she said. “What I want to see is a generation of young women, inspired by other female portfolio managers and analysts, coming into the industry and not being put off by the fact there aren’t many women on that side.”

Good for business In any case, getting men involved in the fight for parity might well be in their interests.

Several studies have shown businesses with greater diversity produce better results; McKinsey found companies in the top quartile for gender diversity on executive teams were 21 percent more likely to have higher profitability.

Institutions are waking up to this, with several recent senior promotions among women – not least Jean Hynes, set to become CEO of Wellington Management in June 2021, Deborah Zurkow, named Global Head of Investors at Allianz Global Investors in January 2020, and Bea Martin, who became Global Treasurer of UBS in December 2020.

“I have seen a lot more conversation between women and their partners around the distribution of what happens in the home as a result of COVID-19 and more people working remotely,” said Pullinger. “For those willing to have that conversation, I’m hearing that this could actually be a blessing in the long term.”

Krivkovich agrees this could be a gamechanging era. “This time is a unique moment in our history where the future of representation hangs in the balance,” she said. “We are at a crossroads – if companies are thoughtful about their approach to diversity, equality, and inclusion, they have a lot to gain. But if they don’t address the unique challenges surfaced

by COVID-19 – which in many cases has exacerbated the ‘double’ shift mothers usually take on – they could lose a significant portion of women from the workforce.”

Time will tell how institutions respond, but it’s clear that pressure is mounting – and those burying their head in the sand might have some very big questions to answer in the coming years.n

Winter 2021 |

73

ba n k i ng

Banking Groups

Leading Brunei’s banking industry With a strong digital offering and continued sustainable growth Baiduri Bank is currently well positioned to capture future opportunities as the leading financial partner of Bruneian businesses and consumers

words by

Ti Eng Hui CEO, BAIDURI BANK

From a humble shop lot office in 1994 to becoming the largest conventional bank in Brunei and a leader in Brunei’s banking industry, Baiduri Bank has grown in strides over its 25 years of operation in Brunei Darussalam and its achievements have been recognised by numerous international publications.

“Our successes and position in the economy can be attributed to our commitment to local projects, interests and clients, our responsiveness to react to changes and the foresight to anticipate changes in the global and regional economy, as well as our global outlook,” Ti Eng Hui, CEO of Baiduri Bank, told World Finance.

Baiduri Bank’s core businesses comprise retail banking, corporate and institutional banking, while its wholly owned subsidiaries Baiduri Finance and Baiduri Capital specialise in consumer financing and investment solutions respectively. Today, technology plays a pivotal role in the successes of economies and businesses, and in improving financial accessibility for the general public, banks need to adopt more technological solutions to cater to customers’ evolving needs and requirements.

Technological advancements With technology now playing a more pronounced role in how businesses and individuals conduct their banking, Baiduri Bank has developed several user-friendly mobile applications in keeping with the digital banking movement. The bank’s latest tech offering, Baiduri b.Digital Personal, is a digital banking and lifestyle platform. With a plethora of new features that put emphasis on enhanced customer experience and engagement, the Baiduri b.Digital Personal mobile app sets out to be the go-to solution targeting the young, tech-savvy gen74

| Winter 2021

eration who demand mobile services as their default way of banking. Additionally, Baiduri Bank also has a dedicated internet banking platform for businesses, known as Business iBanking, which provides a modern, convenient and secure channel for businesses to manage their banking needs efficiently.

Meanwhile the Bank’s subsidiary, Baiduri Finance, also offers a standalone mobile app, the Baiduri Finance Mobile App, a tool catering primarily to hire purchase payments, among others. Understanding and being able to cater to the unique needs of the Bruneian customers is crucial to the success of any new offerings, and with automobile financing being a necessity for many, the Baiduri Finance Mobile App provides an easier and faster alternative to meeting their hire purchase needs.

Among their other digital innovations is the introduction of Brunei’s first online securities trading platform. “Through our subsidiary, Baiduri Capital, we provide the opportunity for our customers to invest in major stock markets including Singapore, Hong Kong (including the Shanghai-Hong Kong Stock Connect), Malaysia and the US,” Ti explained. “Our secure online trading portal allows customers to obtain quotes, place orders and review their account status and balance at their convenience.”

Baiduri Bank is still the first and only bank in Brunei to offer an e-payment solution through MerchantSuite, an online platform facilitating the issuance of invoices and card payments without requiring a dedicated, and often costly, e-commerce website. MerchantSuite enables local small and medium enterprises to extend their market reach by allowing shoppers to pay online with any Visa, Mastercard or American Express cards. Baiduri Bank is also partnering with DST, one of Brunei’s largest telecommunications providers, to launch an e-wallet. This partnership allows Baiduri Bank, the country’s largest card issuer with the largest merchant base, and DST to share resources and create the largest

digital payment ecosystem in Brunei with connectivity to regional and international payment platforms. While technology has been the driving force behind practically all modern-day innovations within the banking sector and beyond, a crucial aspect that must never be taken lightly is data security.

Baiduri Bank is the first and only bank in Brunei to be PCI-DSS certified, reflecting the bank’s steadfast commitment to uphold the global data security standard for processing, transmitting and storing cardholder data.

Baiduri Bank is certified to the latest industry standard, PCI-DSS Version 3.2.1.

Building for the future In line with the nation’s agenda to build a highly skilled workforce, Baiduri Bank has invested heavily in human capital development. “We have an agreement with world renowned Moody’s Analytics for the provision of a structured e-learning s o lu t i o n f o r o u r employe e s u nder various divisions of the bank. This is a The year targeted by Brunei to reach its long-term development first of its kind for a Brunei bank,” Ti told plan for an economy that is both World Finance. dynamic and sustainable “This solution, as well as others, is part of our plan to create a futureready, dynamic and highly skilled workforce in line with one of the goals of Wawasan 2035, the nation’s long-term development

2035

ba n k i ng

Banking Groups

financing, instalment loans, property loans as well as trade financing options such as indent financing and accounts receivable financing.

Through these financing solutions, local SMEs have access to short and medium-term capital to fund their operations or grow their business.

Other products designed to serve SMEs include business credit cards, payroll processing and other day-to-day banking services such as fund transfers and bill payments.

Active support measures

The 30km-long Sultan Haji Omar Ali Saifuddien bridge, Brunei

plan for an economy that is dynamic and sustainable,” Ti continued. Other initiatives include the implementation of SAP Success Factors, a world-leading provider of human capital management systems covering core human resource processes and talent management, as well as the launch of the Baiduri Management Associate Programme, a year-long development programme aiming to provide successful candidates with a solid foundation in banking through job rotations under the guidance of experienced managers.

In support of the nation’s economic agenda to diversify beyond the oil and gas sector, Baiduri Bank continues to play an active role in various local business development programmes. The bank has introduced the Baiduri SME Empowerment Series in partnership with Darussalam Enterprise (DARe), a statutory body with the aim to nurture and support local enterprises in the early and middle stages of the business life cycle. Ti said, “This initiative is aimed at implementing a series of skills training workshops designed to complement existing training programmes offered by DARe, thereby providing a more comprehensive, well-rounded training curriculum to local entrepreneurs, empowering them to achieve greater success in their business ventures.”

Baiduri Bank also offers a wide range of solutions for local SMEs to optimise their cash flow and finance their growth. Some of the financing solutions include working capital

Speaking on the bank’s response to the COVID-19 pandemic, “We activated our Business Continuity Plan (BCP) for a pandemic on March 12, 2020 after the World Health Organisation declared COVID-19 a global pandemic. But THIS SOLUTION, AS prior to the activation WELL AS OTHERS, IS of BCP, Baiduri Bank had already begun PART OF OUR PLAN taking precautionary TO CREATE A FUTUREst eps a s ea rly a s READY, DYNAMIC Ja nua r y 2020, AND HIGHLY SKILLED when Singapore WORKFORCE announced its first c on f i r me d c a se ,” Ti said. The bank activated split operations with alternate teams working in separate physical locations away from the primary site. The bank also performed professional sanitisation of all branches including its subsidiaries. Mandatory temperature screening, social distancing measures, as well as fabricating acrylic shields at teller counters to form a protective barrier, were swiftly implemented across all branches.

The bank also provided personal care kits for all employees as part of its efforts to ensure their health, safety and well-being. In support of efforts led by the Ministry of Finance and Economy and the Autoriti Monetari Brunei Darussalam (AMBD) to assist financially impacted individuals and businesses during the COVID-19 outbreak, Baiduri Bank has introduced several support measures to help mitigate the impact. For eligible individuals who are financially affected by the pandemic, the bank introduced a deferment of principal payment for personal and mortgage/property loans, an option to convert credit card balances to term loans and deferment of hire purchase principal payments through Baiduri Finance.

The ba n k ’s supp or t me a su r e s for corporate clients include a deferment of loan principal repayments for companies in a ll business sec tors. Additiona lly, busi ne sse s u nder el ig ible c at egor ie s including tourism, hospitality, air transport

and food and beverages were also given waivers of fees and charges for trade and payment transactions. These measures were primarily intended to help alleviate the short-term cash flow problems for local businesses that were adversely impacted by the COVID-19 outbreak. In addition, the bank also implemented a fee waiver for online fund transfers between local banks to encourage its customers to utilise digital channels such as online or mobile banking or via the ATMs, in line with safe distancing measures.

Brand refresh Baiduri Bank launched its refreshed brand in September 2020, following an intensive yearlong process of planning, research and assessment in partnership with an international team of brand consultants. It is a culmination of a journey to find out how the Baiduri brand was seen by its business partners and employees and definition of a truer representation of who the bank is and what it stands for.

Ti continued to explain to World Finance: “Our community, and the world around us, is changing and we too must change with it.

As we prepare ourselves for the next phase of growth, we want to take the opportunity to have a closer look at our core capabilities in the context of the changing world, and ask ourselves how we can redefine our vision to stay relevant, and to better communicate the strengths and values that make Baiduri unique. We also want to rally our people behind a shared purpose, so they are inspired to do their best to create meaningful impact in the communities we serve.”

Well positioned for opportunities Baiduri Bank’s global outlook coupled with deep local insights, strong commitment to the domestic market and quick adoption of new technologies have contributed to its success as the leading conventional bank in Brunei. On the digital payment front, the bank fully supports the primary objective of A MBD’s Digital Payment Roadmap to create a digital payment ecosystem by 2025. With plans to continue development and enhancement of its electronic payment capabilities and e-banking services, the bank is on course to be a leading player in the digital banking realm in Brunei.

With a strong credit rating of BBB+/A-2 from Standard and Poor’s, coupled with high liquidity, Baiduri Bank is well positioned to capture opportunities in the market and drive sustainable growth as the leading and preferred financial partner of Bruneian businesses and consumers. n

Winter 2021 |

75

ba n k i ng

Banking Groups

Mobilising the disenfranchised Excellent customer service and financial inclusion remains the key focus for Zenith Bank Ghana, even in the midst of the pandemic

words by

Anthony Akindele Ogunranti MANAGING DIRECTOR & CHIEF EXECUTIVE OFFICER, ZENITH BANK GHANA

The COVID-19 pandemic has indisputably changed the way we do business at Zenith Bank and our interactions with stakeholders – not the least in the digitisation of our banking services. With the rollout of a digital retail strategy aimed at driving financial inclusion, we embarked on an aggressive retail marketing and digital banking drive. As a result, Zenith Bank – which is well known for its prowess in developing innovative digital banking products and services – ensured that its customers enjoyed convenient, easy and accessible banking services tailor-made to their needs, since the outbreak of the pandemic.

When Ghana recorded its first case of COVID-19, we were well ahead of our peers in ensuring easy access to banking. Products that drive financial inclusion – such as our USSD Code product (*966#) – were enhanced to enable more customers who hitherto did not have bank accounts carry out banking transactions seamlessly.

76

| Winter 2021

‘Instant Account Opening’: with *966#, account holders and non-account holders can open instant bank accounts with minimum documentation and without physically visiting any of our branches.

‘Zenith Cash Out’: this service allows for the transfer of cash from any Zenith account holder to any cash recipient. The requirement for this service is a token that can be used to withdraw cash either at the ATM or any of Zenith Bank’s branches nationwide.

‘Merchant Pay’: this service is a collection solution for SMEs and corporate entities to receive real-time payments directly into their bank accounts. Payments are made via USSD or scan to pay – Zenith Bank’s QR code payment platform.

We also ensured that other products such as GlobalPay, ZMobile (our mobile banking app), Zenith corporate internet banking, point of sale terminals and our wide array of cards (Mastercard and Visa, Cruz-Card, Eazypay GH Dual Card, GlobalTravelWallet) were also enhanced to provide consumers with a better experience. Following the COVID-19 health and safety protocols outlined by the World Health Organisation (WHO), and in our quest to maintain our core line of business (an essential service required to run the economy of Ghana), we instituted a staff

rotation policy with the aim of achieving social distancing to curb the spread of the virus. With the rotation policy, 50 percent of staff worked from home while the rest worked from the premises of the bank nationwide and vice versa on a weekly basis. With this in place, we also enhanced our teleconferencing tools, which we barely used prior to the onset of the disease. Teleconferencing tools such as Zoom and Teams have become our go-to apps for organising meetings, trainings, staff engagements as well as customer interactions.

A proud contribution To further adhere to health and safety protocols, we provided all our branches nationwide with thermometer guns to check the temperature of staff and customers before entry to the bank’s premises. Handwashing units fully equipped with soap, alcohol-based sanitisers and paper towels were also provided at all branches of the bank for both customers and staff. Furthermore, per instructions by the government of Ghana, a ‘no mask no entry’ directive was strictly followed by every member of staff who was on duty at the bank’s premises as well as any customer who visited.

To this end, the bank has since the COVID-19 outbreak provided disposable masks for its entire staff daily.

In line with our mission “to continue to invest in the best people, technology, and environment to underscore our commitment to achieving customer enthusiasm,” we provided

ba n k i ng

Banking Groups

our retail loans. Customers whose businesses had been impacted by COVID-19 directly and indirectly were also granted moratorium on both principal and interest for tenors ranging between three to six months. To encourage the use of the digital channels and also lighten the burden of our customers, the bank waived all fees for transactions via the following channels for a period of three months; 1) Automated Clearing House (ACH) – bulk upload via internet banking; 2) Ghana Interbank Payment and Settlement Systems (GhIPSS) Instant Pay (GIP); and 3) Mobile money interoperability.

In partnership with Prudential Life Insurance, we also provided free COVID-19 cover to our customers who were adversely affected by or had to be hospitalised because of the virus.

Innovative digital products

substantial financial support towards the nation’s fight against the virus. In April 2020, after the first case of the disease had been recorded in March 2020, we donated GHS 1m ($171,500) to the COVID-19 trust fund established by the government of Ghana as our contribution towards the fight against the spread of the virus, as well as to assist with the welfare of the needy and vulnerable in society.

Additionally, the bank made a contributory donation to the Ghana Association of Bankers (GAB). Proceeds from this, together with funds from other banks, were channelled towards donation to the Ghana Private Sector COVID-19 fund to build the Ghana Infectious Diseases Centre, donation of PPEs, masks and other hygiene products to major hospitals in Ghana and feeding of the less privileged during the peak of the pandemic. During the bank’s 15th anniversary in September 2020, the staff of the bank embarked on a CSR project themed ‘United against COVID-19’ where they donated COVID-19 hygiene products to hospitals and orphanages across the nation.

Increase in lending activities In line with the central bank’s directive to lighten the economic burden on bank customers dur ing the pandemic, the following measures were undertaken. The bank rolled out credit packages to ease the impact on businesses and our valued retail customers. We implemented a two percent flat downward review of interest rates for all

Financial inclusion continues to form a major part of Zenith Bank’s strategy year-on-year.

Since its inception, the bank has ensured the continuous rollout of a wide array of innovative digital products and services that are user-friendly and provide total convenience to customers. Digital channels afford the ‘unbanked’ an opportunity to leapfrog barriers to brick-and-mortar banking – such as cost and infrastructure – that historically have excluded them from the financial system to be able to perform simple banking transactions anytime, anywhere. Zenith Bank was among the first banks in Ghana to launch an appbased mobile banking service. Z-Mobile, which is available on both Android and iOS devices, enables customers to make instant interbank transfers, set up beneficiaries, top up investments, pay utility bills and much more right from their mobile phones.

According to a 2019 report by the World Bank, Ghana is one of the fastest-growing mobile money markets on the African continent. It is estimated that about half of the 20 percent of Ghanaian adults who have mobile money accounts do not have a bank account. This proves that mobile money is not just an enabler of cheaper and more convenient financial services for those who already have access but is also spreading the net to reach those who were previously financially excluded. According to GhIPSS, mobile money interoperability increased by 358 percent in the first quarter of 2020. Our strategic partnerships with major telecommunications and fintech companies have also leveraged mobile banking to reach the population’s

“Customers are now more inclined, first, to live a healthy lifestyle and, second, to want to bank in an easy and safe way”

unbanked citizens. For example, ‘Zenith’s Bank2Wallet’ service enables customers to link their mobile money wallets to their bank in order to make immediate transfers and payments remotely at any time of day.

We have always sought to be the pacesetter in the delivery of superior customer service.

To this end, we have put in place strategies that ensure continued enrichment of the customer experience across all touchpoints.

Our core service strategy hinges on four key elements: 1) entrenching customer-centricity; 2) consolidating retail and digital banking; 3) empowering staff to live our service tenets; and 4) customer segmentation for enhanced service delivery.

To provide customers with the best experience, we use several analytical tools to measure our performance with regards to how satisfied our customers are with the services rendered. These include the Net Promoter Score (NPS), which measures customer loyalty through the categorisation of customers into three major groups (promoters, passives and detractors), and Customer Satisfaction (CSAT), which defines how happy customers are with the bank’s products and services.

We have also continued to enhance our presence on social media platforms like Facebook, Instagram and, recently, Twitter.

With the help of daily, weekly, monthly and yearly analytics, this helps us gather useful demographic information about our customers, and most importantly, maintain a solid relationship with clients via the digital space.

Future plans The pandemic has ushered in a new, digitally oriented way of life for many people here in Ghana and across the world. Customers are now more inclined, first, to live a healthy lifestyle and, second, to want to bank in an easy and safe way. Always committed to developing cutting-edge technologically driven products and services aimed at making banking easy and on-the-go for its customers, we will continue to invest heavily in products and services that ensure that our banking services remain consistent and easily accessible. We will continue to adapt to the new normal by keeping abreast of current trends and educating our vast clientele on the need to go digital. Zenith Bank in the next year and beyond will remain steadfast in its quest to becoming the banker of first choice to all our customers. Our focus areas thus remain exceptional customer service, strong financial performance, robust digital banking platforms and retail banking structure. In pursuit of these, we will continue to take advantage of the numerous opportunities in the marketplace. n

Winter 2021 |

77

ba n k i ng

Retail Banking

Core Europe: how to prevail in retail banking Despite COVID-19, a severe economic downturn and record-low interest rates, Core Europe remains a solid market for retail banking. A focus on simplification, technology and efficiency will serve as key levers to help consolidate the banking landscape

We are living in one of the most dynamic and transformative periods of banking. These developments have been at work for some time and are not merely a result of the COVID-19 health crisis. On the contrary, the pandemic serves as an accelerator and catalyst for this transformational change. The traditional banking model is defined by persistently low profitability, structural cost challenges, a legacy approach to technology, and everchanging customer behaviour.

good deal of the below-average profitability of banks in the region can be attributed to cost challenges, a legacy approach to technology, overly complex business models, and, to a certain degree, a fragmented banking market. We see this as an opportunity, in terms of applying an industrialised approach to banking, as well as presenting further opportunities for consolidation.

More importantly, our focus is on the strong macroeconomic backdrop of the region, which helps to inform our view. The DACH region is a market with over 100 million people, roughly one-third the size of the US, with solid underlying macroeconomic fundamentals and ample fiscal capabilities, more true today than at any other point in time.

Banking in the DACH region

Robust government crisis responses

Almost no nation has been spared the economic consequences stemming from the COVID-19 health crisis, which was characterised as a global pandemic by the World Health Organisation (WHO) in early March last year.

Early on, the crisis triggered unprecedented market volatility and uncertainty not seen since the financial crisis. The COVID-19 outbreak has led to varying responses, and at varying speeds, from governments across the globe.

The developments this year will undoubtedly require a rethink of how businesses operate and engage with customers.

If we turn our attention to focus on Core Europe, the situation for banks in the DACH region (made up of Germany, Austria, and Switzerland) looks particularly interesting.

Pre-COVID-19, the average return on equity for German banks was below three percent; while Austria consistently ranks as one of the most densely banked countries in Europe.

The region is at times mischaracterised as being structurally unprofitable for banking. A

In the DACH region, governments quickly implemented effective policies to contain the spread of COVID-19 to avoid putting their healthcare infrastructure at risk. Austria, which is the core and foundation of our business, implemented a lockdown affecting all businesses with the exception of critical infrastructure earlier than most countries in mid-March, and a second lockdown, in early November. DACH countries have gone to great lengths to support their economies and have put in place extensive stimulus packages. In Austria this amounted to over €50bn, or approximately 13 percent of GDP, while in Germany the fiscal stimulus package amounted to over €1trn, or approximately 30 percent of GDP. This was possible as a result of the DACH countries’ strong fiscal positions, with a relatively low debt-to-GDP ratio and low levels of both consumer debt and homeownership when compared with AngloSaxon countries. These are all good macro

words by

Anas Abuzaakouk CEO, BAWAG GROUP

78

| Winter 2021

factors from a retail banking standpoint and should translate to a lower cost of equity, given the stability and low volatility of the region.

With a strong macroeconomic backdrop, a stable legal system, a stable regulatory environment and low levels of consumer indebtedness augmented with strong risk management, conservative underwriting and an industrialised approach to banking, we believe this to be a formula for success in retail banking across the region.

Our role as a bank in times of crisis It goes without saying that BAWAG Group’s business will forever be changed by the events of 2020. Despite the aforementioned all-too-familiar challenges, we see many opportunities across the European banking landscape. Defining core competencies, focusing on core markets, being laser-focused on a handful of core products and services, maintaining a conservative risk appetite, and simplification are keys to driving consistent

“We are convinced that simplification and efficiency are key differentiators across the European banking landscape”

ba n k i ng

Retail Banking

Despite the challenges stemming from the COVID-19 crisis, we continued The number of people to tra nsfor m our in the DACH region business and focus on the things that we control, accelerating initiatives to Size of Austria’s fiscal f u r t h e r s i mp l i f y stimulus package our operations.

S p e c i f i c a l l y, w e have taken the next strategic step Size of Germany’s i n c on s ol id a t i ng stimulus package our domestic and international retail and SME businesses, focusing on providing standard products and services across the DACH region. We are combining our strengths across the company to centralise and enhance operations; this will ultimately result in greater simplification and most importantly, an enhanced customer experience.

100 million €50bn €1trn

The strategy of being simple and efficient

Danube river running through Vienna, Austria

and profitable growth. BAWAG Group entered the crisis from a position of strength, having transformed the business and having kept its strategy consistent over the years. More than ever, we see a commitment to simplification and efficiency as key, as well as greater caution and prudence in order to address the challenges ahead. As a bank, we have played a critical role in keeping companies afloat and guaranteeing the financial security of our customers. We refocused our efforts on the well-being and full service of our customer base during these difficult and challenging times. Our digitalisation and simplification efforts in recent years are paying off, as we are able to ensure smooth and consistent operations, stay focused on execution, and most importantly, deliver for our customers and local communities.

During the lockdowns, all branches in Austria and Germany remained open with strict safety measures and distancing rules in order to protect our front-line employees.

We quickly launched a simplified online application process for payment holidays for our customers and provided immediate access to government guarantee programs for SME clients. The past few months have also triggered a significant shift in how we

engage with customers as well as how our team members work together. The post-COVID-19 workplace and operating infrastructure will look very different to what it was before 2020.

Since the onset of the pandemic, over 75 percent of our employees have been working from home. We have decided that a flexible working environment will be permanently incorporated into our operating framework. This will provide for a more flexible and dynamic work environment, improved work-life balance, and a continuous reassessment of our overall operating infrastructure.

Focusing on what can be controlled For BAWAG Group, 2019 was a record year, delivering net profit of €459m, a return on tangible common equity of 16.1 percent and a cost-income ratio of 42.7 percent.

For the first nine months of 2020, BAWAG Group reported a net profit of €201m, a return on tangible common equity of 9.6 percent and a cost-income ratio of 43 percent.

The underlying operating performance of our business remained solid with preprovision profits of €495m; allowing us to take a conservative and prudent approach to provisioning given the uncertainties in both the scope and length of the pandemic.

We are now looking into the future as the changes we have experienced over the course of the last year due to the crisis will serve as a catalyst for accelerated long-term changes across the Group. We are going to do our best in continuing to navigate these uncertain times, ensuring that we protect our employees, support our customers and local communities, and protect and grow our franchise. Our goal is to always maintain a strong capital position, stable retail deposits, and a low risk profile. We do this by focusing our strategy on mature, developed and sustainable markets while always applying conservative and disciplined underwriting standards across all of our products.

We are more conv inced than ever that simplification and efficiency are key competitive differentiators across the European banking landscape. Defining core competencies, being laser-focused on a handful of core products and services and continuously simplifying our business over the years has allowed us to establish a highly efficient business with a cost-income ratio in the low 40s. This generated mid-teen returns preCOVID-19 and healthy pre-provision profits.

This gives us the flexibility to proactively and prudently address potential risks arising from a severe economic downturn. We will continue to play our part in supporting our customers and our local communities while protecting and growing our franchise in the times ahead.

We will focus on the things that we control, continuing to drive operational excellence and disciplined and profitable growth. n

Winter 2021 |

79

ba n k i ng

Retail Banking

A seamless transition to new ways of working Banks around the world are adapting to the possibility of an irrevocably changed post-pandemic world. What has fundamentally changed in banking, and what is the best way to address these changes?

words by

Iakovos Giannaklis GENERAL MANAGER RETAIL BANKING, EUROBANK

our service model, transforming digitally, adopting new smart ways of working, alongside with strengthening our risk management, and bringing environmental, social and governance (ESG) corporate purpose to the forefront.

Transforming customer experience The pandemic is mounting a historic challenge for the global economy and the business community as a whole is dealing with the largest economic disruption we have faced on a global scale since World War Two. Greece, similarly to most European economies, has been experiencing a deep downturn in economic activity, estimated to reach a 10 percent economic detraction for 2020. Projections point to a modest recovery of around 4.8 percent during 2021, as positive developments on the vaccination front allow for cautious optimism for the year ahead and the prospects of an economic rebound.

This new crisis occurred when Greece was accelerating its pace to recover fully from the global financial crisis that had a huge impact on the Greek economy. Eurobank, one of the four Greek systemic banks, had completed its economic transformation and dealt effectively, ahead of local peers, with the non-performing loans inheritance of the Greek debt crisis. In 2020, Eurobank materialised, despite the objective difficulties imposed by the pandemic, its complex balance sheet strengthening plan, that had begun in 2018 and that will eventually allow the bank to increase its competitiveness in the post-COVID-19 recovery phase.

Leaving the economic downturn aside, the pandemic has also brought along fundamental changes in customer behaviour that have reshaped retail banking, forging us to rethink our organisation, redefine our service and operating models and our value proposition to our clients and reframe our economics.

As a result, I see five main imperatives for banks, to position ourselves for the strategic long-term changes already underway in the post-pandemic era, encompassing: redesigning 80

| Winter 2021

COVID-19 has accelerated the migration of retail banking customers, throughout the world, towards digital channels: more users of e-banking, fewer customers visiting our branches. In light of that change, retail banks need to reassess their distribution strategies and the physical-to-digital channels’ mix. A key concern is how much physical space is really needed and how to make the most use out of it. In my view, as it is also supported by recent research, customers will never cease to value banking branches, especially for those interactions that entail advice or help, where customers appreciate human contact.

Eurobank has already been making investments to accommodate customers’ moves from traditional to alternative channels, whether that is advancing our call centres’ infrastructure and functionalities, upgrading our automated payment systems, redesigning our e-banking and m-banking or adding new features on our award winning v-banking service, which allows for individual or business banking customers to consult and transact with their relationship manager by video. At the same time, we are also reinventing our customers’ experience in our new era designed branches that will be available this year. Our goal is to provide seamless, omni-channel customer experience, as defined in our bank’s new motto: ‘Eurobank is your bank, wherever you are: in your house, in your office, on the street!’

Technologically accelerated changes The experience of the pandemic has highlighted the importance of deploying banks’ wealth of data in the service of a more personalised customer experience, redefining the industry’s

ba n k i ng

Retail Banking

former ‘customer centric’ approach to the new, individualised, customer segment of ‘one.’ Following the paradigm of other industries, which have framed our customers’ expectations, banks adopt micro-segmented customer engagement strategies that, based on customers’ behavioural data and past product purchases, customise product recommendations and personalise service and communications.

In the post-COVID-19 era, banks will focus even more on enhancing the customer journeys, expanding their data sources and analytics capabilities so that customers may receive timely credit extensions and personalised financial transaction reminders throughout the day, in a similar way they receive movie recommendations from Netflix. In parallel, it is imperative that we build, as we already do, our analytical capabilities, incorporating machine

GOING FORWARD, BANKS ARE CALLED UPON TO PLAY A CONTINUED ROLE IN THE PANDEMIC RECOVERY, ADDRESSING ESG IMPERATIVES AND HAVING A SUSTAINABLE IMPACT ON SOCIETY learning algorithms to rate our customers’ experience and explore their insights on a regular basis and at every touchpoint and embed it in our decision-making to foresee customer expectations and rapidly address customer needs in a personalised and relevant way.

Cost efficiencies and innovation Eurobank has already signed up on the digital transformation journey, aiming for paperless branches, digitised internal process, and automated infrastructures to maximise productivity of central office functions.

In the face of the tech challengers that also frame our customers’ expectations, we have set as a strategic priority the creation of in-house innovation boosters for quick time-to-market ideas from the lab prototype to small-scale population testing. A few examples of firstto-Greek-market products include: Eurobank wallet, e-commerce solutions (bundling banking and non-banking services), payment link (an easy to use and minimum infrastructure payment service offered to merchants during the pandemic), bio-card, and tourism electronic platform.

In parallel, creating sector-based ecosystems, and becoming a one-stop shop providing our customers with value-adding banking and non-banking services, has been a value creation source for our customers.

During the pandemic, we transitioned rapidly to having at times over 50 percent of our staff working from home. Moving forward, we plan to adopt hybrid remote-onsite working models that will help us to benefit from the related flexibility, cost efficiencies, and higher employee satisfaction rates. In the meantime, investing in digital collaboration tools and in our people’s digital upskilling and reskilling is a necessity.

Risk management and ESG The need to mitigate the risk of an increase in non-performing loans, due to COVID-19, calls for investments in automated credit decisionmaking that combined with the deployment of transactional behavioural data will allow for enhanced risk management and lead to improved credit decisions. Advanced early warning systems and sophisticated credit portfolio reviews with advanced analytics are expected to be widely deployed in the coming years to address various risk considerations including sectoral concentrations.

Finally, the role banks assumed addressing the pandemic crisis, ensuring employees’ and customers’ safety and supporting economic recovery, brings corporate responsibility to the forefront. Going forward, banks are called upon to play a continued role in the pandemic recovery, addressing ESG imperatives and having a sustainable impact on society.

At Eurobank, responsible banking is at the core of our strategic priorities, with the design and implementation of green funding, socially supportive programmes and corporate social responsibility initiatives. During 2020 we launched biodegradable cards and electric car financing, we eliminated paper statements, and endorsed paperless branches and paperless internal procedures, while ensuring environmental certification of our buildings.

Finally, lessons learned and strategic directions driven from the pandemic, can definitely have a positive effect on our bottom line. Challenges triggered by COVID-19 have been putting an undeniable stress on the banks’ profit and loss. Nonetheless, improved productivity and cost efficiencies can be achieved as a result of our digital transformation; and targeted, personalised and relevant customer value propositions in conjunction with advanced risk management systems can drive our top line.

In the post-pandemic era, banks will play a pivotal role as the backbone of the financial system’s stability and as the driving force to a socially and environmentally considerate world, fuelled by advanced data analytics to allow our customers a personalised experience with flexibility, ease of usage and relevance to their lives. n

Winter 2021 |

81

ba n k i ng

Retail Banking

Putting the customer first with innovative banking As the fight against the COVID-19 pandemic continues, Garanti BBVA has doubled down in its efforts to adapt to the new normal by maintaining its innovative approach to banking

interview with

Mahmut Akten EXECUTIVE VICE PRESIDENT OF RETAILBANKING,GARANTI BBVA

Established in 1946, Garanti BBVA has steadily grown to become Turkey’s second largest private bank, with consolidated assets of close to TRY 526bn ($68.5bn) as of September 2020. Its investments in technology, innovation, products and services – offered with strict adherence to quality and customer satisfaction – have carried it to this prized position in the Turkish banking sector.

Garanti BBVA is an integrated financial services group operating in every segment of the banking sector, including corporate, commercial, SME, payment systems, retail, private and investment banking. It also has local subsidiaries in pension and life insurance, leasing, factoring, brokerage and asset management, and international subsidiaries in Cyprus, Malta, Netherlands, Germany, Switzerland and Romania.

Its business model is driven by strategic priorities focused on responsible and sustainable development, customer experience, employee happiness, digitalisation, optimal capital utilisation and efficiency.

Custom-tailored solutions and a wide variety of products have played a key role in its reaching TRY 400bn ($52.2bn) loans and non-cash loans.

Garanti BBVA stands out in the sector with their 5,213 ATMs (the second largest ATM network among private peers), an award-winning call center, internet, mobile and social banking platforms - all built on a cutting-edge technological infrastructure.

In the midst of the second wave of the pandemic tightening its grip on the global economy, World Finance spoke with Mahmut Akten, Executive Vice President of Retail Banking at Garanti BBVA, about its continuing response to COVID-19.

82

| Winter 2021

Has the continuing pandemic changed your approach to business or clients?

For Garanti BBVA, the safety of our employees and the satisfaction of our clients are and always will be our priority. At the start of the outbreak, we moved all eligible employees to remote working to preserve the workforce and launched multiple initiatives to help people adapt to the ‘new normal.’

We made our customers’ life easier by introducing measures like adding new services on digital channels, increasing digital and contactless transaction limits, limiting the number of customers waiting in branch lobbies and postponing debts.

Additionally, as a result of the rapid increase in e-commerce transactions during the pandemic, Garanti BBVA customers are now able to make their payments at the checkout by applying for a general purpose loan which takes around 5 minutes to complete the process and place the order. In other words, providing both our employees and customers with uninterrupted and innovative banking services in the healthiest conditions is crucial.

What has made you most proud of Garanti BBVA’s response to the pandemic?

Garanti BBVA was one of the fi rst Turkish companies to organise efforts to fight this epidemic. The most important action was, as a part of our global campaign, to deliver 200 ventilators to be used in the treatment of COVID-19 patients in the worst days of pandemic. Additionally, we made donations to university hospitals for the purchase of medical devices and materials which brings our total contribution to $5.3m.

We are also one of the most successful banks to comply with the rapidly changing pandemic situations without any interruption or lack of quality in our services. For example, in the first days of pandemic, we implemented a one-click debt postponement function on our digital channels in a short period of time. Thus, our customers were able to postpone their debts without visiting branches or calling the call-centre.

Have you made any digital changes recently to facilitate remote working or any other ‘new normal’ activities?

The COVID-19 pandemic showed us the undeniable importance of digital services, even though we have been investing in digital channels and technological systems for over 25 years. In the future, we will continue to focus even more on digital transformation and remote services, and will evaluate the most suitable and healthy conditions both for employees and customers.

During a pandemic, providing customers with all critical banking services in a remote and safe way becomes crucial. At Garanti BBVA, we have been offering most of our services, from major products such as personal loan application and disbursement, overdraft account new limit and limit increase, credit card applications, deposit account openings, investment products, pension transfer to numerous transactions and payment ser vices through our digital and remote channels.

Ther e for e , G a r a nt i BBVA reg a rd s customer experience as the most impor tant element for dif ferentiating itself and standing out from the competition.

“Customer experience is even more important in today’s dynamic environment with countless changes accelerated by technology”

ba n k i ng

Retail Banking

Have you added to the f inancing of renewable energy projects?

For retail banking, we brought out our Green Mortgage product to support environmentally friendly buildings, which has TRY 379m ($50m) total financing provided. As an important step, in 2019, we focused on increasing our impact on climate change and started working on our scope 1 and scope 2 emission targets for submitting to the Science Based Targets Initiative. In light of these developments, at the beginning of 2020 we signed a contract with utilities across Turkey to purchase 100 percent renewable energy for our buildings and branches that have a compatible infrastructure. We will keep supporting our stakeholders for climate change transition and opportunities in this journey. We will also focus on encouraging our customers to become aware of their own individual impact and guide them on adapation mechanisms on sustainability such as using public transportation, green products, electric and hybrid vehicles. We will continue to advise our customers on how to facilitate and accelerate their efforts in sustainable trends such as circular economy, sustainable investment funds and sustainable innovation.

Do you ant ic ipate changes in ho w you do business in the post-pandemic environment?

At Garanti BBVA, digitalisation has always been one of our most important priorities. As a result of investing in our digital channels and technological infrastructure for many years, we have reaped the rewards of fast adaptation during the pandemic. When it comes to the post-pandemic environment, the increase in using digital channels that accelerated during

the pandemic will continue at an even faster pace. As well as digital channels, innovative hybrid service models will stand out for more sophisticated products and services in the future. For example, in the mortgage loan process, to recognise customers, ensure security and to give advice, seamless videocall functions on digital channels will be provided so that customers will be 100% remotely served without visiting branches. Therefore it can be said that, with the increase of hybrid models, the role of remote service employees will be more important and much stronger.

Can the traditional bank branch survive?

G a r a n t i B B VA prov ides a w ide range of f inancial services to its more Total contribution to support t ha n 18 m i l lion causes fighting COVID-19 customers. We have 18,162 employees working throughout an extensive Customers for the bank distribution network o f 89 4 dome s t ic branches, seven foreig n bra nche s Total number of employees in Cy prus, one in Malta, Netherlands, G e r m a n y , S w it z e rl a nd a nd Domestic branches Romania. Traditional branch bank ing services have been reshaped with the Foreign branches help of digitalisation to increase operational excellence, customer experience and efficiency. Most of the pillar products are being served with a fully

$5.3m

18 million 18,162 894 7

omnichannel experience to our customers. For example, when a customer applies for a general purpose loan at a branch, the same application can be completed on digital channels and loan documents can be approved via a call centre with an end-to-end seamless experience.

Moreover, when a customer process is left unfinished on digital channels, a notification is sent instantly to the customer representative and immediate action is taken to finish the process. These developments are seamlessly combined with the power of human touch and have resulted in great success. It is an undeniable fact that human touch is still a very powerful communication tool that directly affects customer experience, especially at critical points of customer processes. Since customer experience has always been one of the main pillars of our strategy, we strongly believe that companies delivering a facilitating experience are, and will be, the most successful ones in their industries. Therefore it can be said that even though the usage of self-service channels has been increasing, human touch will continue to be a key aspect of banking interactions.

Looking further ahead, what do you think will be the most exciting applications of AI and virtual reality within banking?

Automatic learning is a prerequisite for intelligent systems. It enables data-driven predictions and creates new business opportunities. The most important areas that will be affected by new technologies are automation, personalisation, human-machine interactions and security. Exciting examples of where the banking sector can benefit from new technologies include the automation of recurring processes for efficiency, providing customers with the service they need at the right time with a personalised experience, a healthier credit-scoring algorithm and more ‘human-like’ digital interactions. At Garanti BBVA, data-driven interactions are one of the important strengths that differentiate us in the sector. To maintain this strength, we have been investing more and more in new technologies.

As to the future, our capital-generative, disciplined and sustainable growth strategy that strictly adheres to solid asset quality enables us to move for ward strongly.

Sustainable grow th not only increases production and sales but also generates innovative technologies and products. Besides this, our effective risk management through an integrated review of financial and nonfinancial risks, as well as our organisational agility in capturing new opportunities, will continue to result in sustainable value creation for all our stakeholders. n

Winter 2021 |

83

ba n k i ng

Commercial Banking

“Forward-thinking commercial banks are placing renewed value in customer relationships built on trust, good faith, and strategic relationships”

The heart of banking Like so many industries during 2020, commercial banks faced unprecedented challenges and are learning how best to adapt in the recovery process

Rebalancing the platforms words by

Jean-Marc Torre GROUP HEAD AND SENIOR EXECUTIVE VICE PRESIDENT, CORPORATE AND COMMERCIAL BANKING, BANK OF THE WEST

In 2020, businesses had to adapt swiftly through a precarious situation. We are now in a phase with a new set of requirements centred on resilience and a sustainable recovery.

The lessons of this unprecedented period will help banks meet customers’ needs, navigate this turbulent time, and avoid online risks, guiding them through 2021 and beyond.

The heart of banking is still relationships Even before the pandemic, an off-the-shelf, product-first approach was inadvisable. Now it’s irrelevant. COVID-19 underlined something we already knew: we are all interconnected.

Amid the pandemic and economic slowdown, Bank of the West’s relationship management bankers redoubled customer outreach. We needed to know how our customers were, what challenges they faced, and about their shortterm liquidity needs. Human relationships in commercial banking aren’t solely for crisis management; they also enable us to be present in an always-evolving business environment.

While corporate treasurers and finance managers are increasingly focused on strategic issues with distant horizons, there are meaningful conversations to be had with companies about longer-term ways they can adapt to opportunities now. Forward-thinking commercial banks are placing renewed value in customer relationships built on trust, good faith, and strategic relationships.

84

| Winter 2021

As the pandemic’s impact progresses, digital transformation is clearly critical to recovery and business resilience. Banks should support corporate customers with digital channels that are open, flexible, and help companies adapt. However, effective commercial banks carefully balance digital solutions and human connection. Customers shouldn’t face a haphazard mix of traditional and digital platforms – or assume digital-only is sufficient. Banks have increasingly leveraged AI to deepen customer relations, improve anti-money laundering and fraud-prevention processes, and offer customers greater value.

AI solutions work best with predictable transactions; the uncertainties of this recent crisis called for human connectivity. Banks that balance digital and human channels will prove essential to business continuity.

An integrated human-and-digital experience can support customers’ digital transformations while helping them navigate an uncertain future and endure. Nevertheless, it’s clear more business activity will become digital. Lockdowns and social distancing accelerated digital transformations. Companies that shifted to remote work swiftly and securely were at a great advantage with cybercrime spiking early in the pandemic crisis. This has been a jarring reminder of how critical cybersecurity and fraud prevention are to a company’s recovery, growth and resilience. Relegating cybersecurity decisions to IT is too risky: cybersecurity is operational security. Savvy commercial banks continue to strengthen fraud prevention while enabling businesses to engage in digital transformations that balance efficiency with resilience. Corporations

need commercial banks that understand end-to-end security is central to operational resilience, and it is therefore non-negotiable.

Rethinking credit risk When the future looks wholly different than the past, relying on backward-looking data models, even when (artificially) intelligent for measuring credit risk, becomes problematic. Financial ratios show a point in time and tell part of the story, but amid extreme uncertainty, commercial bankers must understand their clients’ overall financial wellness. Commercial banks that entered 2020 with a more granular understanding of their clients’ businesses will serve their customers well today and in the future.

Whether their industry is experiencing a boom or drought, CFOs and treasurers will be asking themselves if their bankers understand their needs and business objectives. A more holistic approach to measuring their financial wellness will enable commercial banks to give them a reassuring answer and make informed decisions. Businesses are also facing an evolving global compliance landscape. The regulatory consequences of the pandemic are far-reaching and will affect commercial banks and corporations.

When global lockdowns crippled predictable market dynamics, governments and regulators intervened with guarantees in the supply of services, human protections, and reactions to new barriers. The effects of these new measures will be felt differently across sectors and geographical lines.

Commercial banks are wise to re-engage with the principles of trust and humanity as we navigate this global pandemic and its aftermath. We are not over it yet, but there are silver linings. The majority of finance leaders believe they will be more resilient and agile in the long run. Banks need to ask themselves if they have changed enough to serve their customers now and in better times ahead. If commercial banks rise to the occasion now, the trust and value built during this crisis will pay dividends for years. n

86

| Winter 2021

A money EVOLUTION CASH USAGE IS FALLING AT UNPRECEDENTED RATES IN ECONOMIES ACROSS THE WORLD, AND MANY BELIEVE THE PANDEMIC MAY HAVE HASTENED THE TREND. BUT ARE WE PREPARED TO DO AWAY WITH PAPER MONEY ALTOGETHER? LAURA FRENCH INVESTIGATES »

Winter 2021 |

87

cashing out

In March 2020, reports claimed the World Health Organisation (WHO) had warned against using cash amid fears it could be spreading coronavirus. The WHO later pushed back on the claim, declaring it had never issued any official warnings – but it wasn’t the only whisperings of ‘dirty cash.’ China had already begun sterilising money in February out of hygiene concerns, and in March the US Federal Reserve started quarantining dollars from Asia, begging an important question: how clean was cash?

In response, retailers across the world began putting more emphasis on cashless transactions, with contactless payments growing by more than 40 percent globally in the first quarter of 2020, according to a survey by Mastercard. A study by data firm Dynata found the preference for cash dropped by 31 percent in the early months of the pandemic across the countries surveyed, and YouGov research found that ATM withdrawals in the UK had fallen by around 60 percent over lockdown.

The explosion of online shopping further contributed to the trend, with consumers turning to online systems such as PayPal to make their transactions; Amazon’s revenue increased 37 percent to a record $96bn in Q3, as shoppers across the world flocked to the e-commerce giants to get their goods.

A gradual decline This shift hasn’t come out of the blue, of course; the idea of a ‘cashless society’ has been touted for years, dating back as early as the 1960s with the advent of credit cards, and spurred on by the rise of electronic banking, digital wallets and mobile payment systems, made possible by the explosion of fintech firms such as Venmo, iZettle, Swish and PayPal. Sweden had already gone almost entirely cashless – at the start of 2018, only one percent of the country’s GDP was circulating as cash – and Finland was edging ever closer too, with the central bank having forecast a cashfree society by 2029.

In the UK, cash payments were predicted to represent just nine percent of all transactions by 2028, according to a 2019 report by UK Finance. And in China, more than 90 percent of city-dwellers said they used WeChat Pay and Alipay as their primary payment method, a study by the Brookings Institution found.

But while the move towards a ‘cashless’ future might not be anything new, many experts believe the pandemic is likely to have sped up the trend.

Among them is Natalie Ceeney, Chair of Innovate Finance and leader of the 2019 Access to Cash Review study, which looked at consumer cash needs in the UK. “The pandemic is likely to have dramatically accelerated the decline in cash,” she told World Finance. “Those who can use digital have made a significant shift in their behaviours.”

Luc Gueriane, Chief Commercial Officer at financial services provider Moorwand, agrees. “The pandemic has accelerated the move away from cash usage and the 88

| Winter 2021

adoption of contactless payments instead,” he said. “A lot of people are now realising the convenience of not using cash and are beginning to have more trust in digital banking products that have helped them throughout the pandemic with money management features.”

That’s good news for the fintech sector, and it brings benefits to the finance industry at large – but how close are we to really going ‘cashless’, what barriers are there, and how would economies ultimately cope with the transition?

How convenient The potential advantages of a cash-free society are many – not least the convenience that digital and contactless payments bring to consumers. This in turn could encourage increased spending; a study by MIT professors Drazen Prelec and Duncan Simester in 2001 found that shoppers spent up to twice as much when using a credit card versus physically handing over cash, for example.

That could have positive knock-on effects for both businesses and the wider economy.

Going cash-free could also save merchants money, according to Gueriane. “Physically managing cash is an expensive part of any business,” he said. “There are costs associated with handling, storing, and depositing paper money, such as security for keeping the cash safe, or transporting and depositing cash into bank accounts.”

That’s likely to become an even bigger factor if cash usage continues to decline; a study of 750 retailers in Sweden found that if cash transactions fell below seven percent of the total, the cost of handling the physical money became higher than profit made on cash sales.

“Smaller merchants have resisted for years on taking card payments because they don’t buy into the argument that the cost of cash is there,” said Gueriane.

THE PANDEMIC HAS ACCELERATED THE MOVE AWAY FROM CASH USAGE AND THE ADOPTION OF CONTACTLESS PAYMENTS INSTEAD

cashing out

tate illicit activities.” When the move was announced, €500 bills accounted for nearly a third of the €1trn cash floating around at the time, much of it believed to be linked to money laundering, terror financing and the shadow economy.

It’s not just the largescale criminal activity that cash can cover up, though.

Counterfeit notes, robberies and employee theft are all issues associated with paper money, with the latter alone costing American businesses $50bn a year, according to a report by the Statistic Brain Research Institute in 2017.

It was indeed the attempt to quash this kind of crime that accelerated Sweden’s move towards going cashless, according to Jonas Hedman, associate professor at the department of digitalisation at the Copenhagen Business School. “Something unique to Sweden was a spate of robberies, which resulted in the unions of various organisations like bank employees, bus drivers, cab drivers and others pushing for a cash-free society in order to protect their members,” he said in an interview with the Wharton School.

MONEY LAUNDERING AND TAX EVASION ARE REDUCED BECAUSE THERE IS ALWAYS A PAPER TRAIL

“But COVID-19 has pushed retailers to acknowledge the economic benefits of investing in contactless terminals when so few people are actively taking cash out anymore.”

Those costs aren’t only limited to businesses, of course; cash is a costly business for banks, with large sums spent on protecting physical money and monitoring criminal activity – and extra costs associated with actually producing the physical paper and coins.

Cursed cash?

But perhaps the most commonly cited motivation for going cashless is the ability to monitor payments and so eradicate cash-related tax evasion and criminal activity.

“Tax revenue is lost from cash-in-hand payments,” said Gueriane. “Every transaction is recorded on a bank statement, which makes it easier to see if and when money’s gone missing. Money laundering and tax evasion are reduced because there is always a paper trail.”

In his 2016 book, The Curse of Cash, economist Kenneth Rogoff argues that tax avoidance, money laundering, violent crime, the drugs trade, corruption, human trafficking and terrorism are all facilitated by cash.

According to his findings, the value of cash circulating in the US in 2015 was $1.34trn (which, divided evenly, would mean every person in the country having a cash pile of $4,200). With around 80 percent of this money made up of $100 bills, he suggests a significant chunk of this is being used to facilitate illicit activities – which could arguably be wiped out if the country went cash-free.

It’s not only in the US that this is happening, of course; in 2016, the European Central Bank (ECB) announced it would stop printing and issuing €500 notes, “taking into account concerns that this banknote could facili-

Cybercrime

40%

GLOBAL INCREASE OF CONTACTLESS PAYMENTS

$96bn THE INCREASE OF AMAZON’S REVENUE

2029

THE YEAR FINLAND FORECAST HAVING A CASH-FREE SOCIETY

Eradicating cash, however, doesn’t necessarily equate to eradicating crime. That’s at least the opinion of Innovate Finance’s Ceeney. “Reducing cash is often cited as having huge benefits in terms of tackling crime, but this is extremely misleading,” she said.

“The sad reality is that criminals usually find a way, and as cash use reduces, crime simply shifts to other targets, or is laundered in different ways. In Sweden, as cash reduced, bank branch and cash transit robberies declined to almost nothing. At the same time, the theft and hijacking of other valuables rose. In the same way, many criminals now target the vulnerable online in ‘push payment’ scams, rather than turning up at their door trying to solicit cash.”

Friedrich Schneider, Professor of Economics at the Johannes Kepler University in Austria, carried out research to find out what impact eliminating cash would actually have on tax evasion and crime. His results concluded that if cash was abolished, the shadow economy would be reduced by 20 percent, corruption by 18 percent and crime by five to 10 percent – that’s significant, but it clearly doesn’t just get rid of it altogether.

Criminals could switch from cash to cryptocurrencies, with the likes of Bitcoin having already garnered a reputation for illicit transactions on the dark web.

There’s also the added threat of cybercrime. The UK’s Financial Conducts Authority (FCA) reported that data breaches at financial services companies rose by more than 1,000 percent between 2017 and 2018, with cybercriminals stealing £503m from the country’s financial »

Winter 2021 |

89

cashing out

» institutions in the first half of 2018, according to UK Finance. The more we rely on digital, the bigger the risk might become. It’s not just targeted bank hacks that pose a threat, of course; many have argued about the dangers of relying solely on digital infrastructure when flaws in the system or power outages can cause mass meltdowns.

Visa’s IT collapse in 2018, when a broken switch led to more than five million failed transactions across Europe, is a case in point.“Cash works even when the power goes down, whereas digital payments don’t,” said Ceeney.

“This has raised concerns within central banks and governments as to the resilience of a digital infrastructure were cash to become obsolete.”

A survey by Paysafe found that half of consumers globally believed cash to be the most reliable form of payment during a crisis. “When a hurricane is approaching the US, Federal Reserve officials have told me they see an increase in the demand for cash by up to 500 percent,” Brett Scott, author of The Heretic’s Guide to Global Finance: Hacking the Future of Money, told World Finance.

“Because people recognise that an offline form of money is what you need when there’s a natural disaster.

Ultimately if you want your economy to survive, you need these resilience elements in your monetary system. If you want a multi-modal, resilient payment system, you’d better keep cash – which is why the central banks should be promoting it.”

Sweden’s setbacks In recognition of these issues, Sweden has started to backtrack on its cashless plans. In 2018, the Swedish Civil Contingencies Agency advised consumers to keep a cash pile for use in the event of a war or cyber-attack, later suggesting that it should be made obligatory for supermarkets, pharmacies, petrol stations and health services to accept cash. In November 2019, the country voted on a law making it mandatory for banks holding over £5.8bn in deposits to offer an adequate level of cash services. Following suit, the UK announced in its March 2020 budget that it would legislate to protect the nation’s cash infrastructure.

“We heard a very consistent message from policy makers, regulators and business leaders in Sweden that their digital revolution had gone too fast,” said Ceeney.

“The Swedish parliament has even debated ‘what do we do when we are hacked by the Russians?’”

It wasn’t just the prospect of cyber-attacks and digital failures that drove the decision, though. The biggest problem was the fact a significant portion of the population was cut out. Many believe going cashless risks excluding vulnerable groups and exacerbating inequality.

“Sweden’s population demographics are similar to those of the UK, and like us, they had people in their population who were unable to use digital payments, and yet were struggling to get cash or use cash,” said Ceeney.

“They were in danger of leaving people behind.”

This clearly isn’t a situation unique to Sweden.

According to estimates from the Federal Deposit Insurance Corporation (FDIC), 5.4 percent of US households are unbanked, meaning they wouldn’t be able to function in a cashless society.

90

| Winter 2021

That figure is closer to two percent in the UK, according to the Financial Inclusion Commission, but the Access to Cash Review found that around 17 percent of the population would struggle to cope if the country went cash-free. And it’s not just the elderly who would be excluded, according to the research, with poverty the biggest indicator of cash dependency, and other vulnerable groups also frequently reliant on cash.

Gueriane believes this element of exclusivity is one of the biggest barriers to societies going completely cashless. “The crisis has made it clear that a lot more action is needed around making digital banking solutions available to all individuals,” he said. “Many programmes (digital banking solutions as well as crypto) are working to help make banking more financially inclusive.

However, if there isn’t buy-in from all involved, then there is a risk of a cashless economy becoming financially exclusive to certain demographics.”

The cash rebellion It’s not just vulnerable groups and low earners who are on the side of cash, though. In the US, a survey by Genesis Mining, ‘Perceptions and Understanding of Money 2020’, found that 60 percent of respondents were opposed to the idea of paper money being replaced with digital-only money.

Diary studies by the Federal Reserve found that cash is still the preferred payment method for many in the US. “These studies have shown that cash use is still dominant in low-value transactions, below $20,” said David Stearns, software engineer at Stripe and author of Electronic Value Exchange. “That’s especially true for the very young, who don’t yet have access to a card, and the older

COUNTERFEIT NOTES, ROBBERIES AND EMPLOYEE THEFT ARE ALL ISSUES ASSOCIATED WITH PAPER MONEY

cashing out

A POOL OF CASH

$1.34trn CASH CIRCULATING IN THE US

$4,200 THE NATIONAL AVERAGE PER PERSON IF DIVIDED EQUALLY

$100

BILL DENOMINATION ACCOUNTING FOR 80 PERCENT OF THIS POOL

demographic (45+).” Stearns points to the importance of cash in cultural traditions, such as tipping and giftgiving. But for some the biggest issue is having freedom of choice – and the desire for a diverse monetary system that includes centralised, state money.

Partly for this reason, Brett Scott believes there’s mounting resistance against the idea of a cashless society.

“I’m seeing a lot of pushback,” he said. “I’m on a Facebook group with 25,000 members, which is ordinary people who are suddenly worried about this issue. The state should be protecting the diversity of the monetary system.”

Concerns over privacy Central bank digital currencies could be one solution to maintaining this diversity as we move towards a potentially cashless future. China’s central bank is trialling a digital yuan as an alternative to cash, while Sweden’s Riskbank is piloting the e-krona – a digital wallet that allows users to make payments, deposits and withdrawals on a mobile app. The latter has evolved out of concerns that consolidation of payment services “could restrain competitiveness in the market and make society vulnerable,” in the words of a 2017 report on the project.

The report states: “The development towards an almost cashless society entails households having little opportunity to save and pay with risk-free central bank money and this can ultimately lead to a decline in the re-

CASH IS THE ONLY ANONYMOUS PAYMENT METHOD, SO CONSUMERS WHO CARE ABOUT PRIVACY WILL RESIST ITS ELIMINATION

silience of the payments system. A possible e-krona could function as a complement to the payment forms that are currently offered in the private sector.”

But this wouldn’t overcome susceptibility to cybercrime and the vulnerabilities of digital infrastructure, and nor would it overcome another potential barrier to going cashless – concerns over privacy. Unlike with cash, transactions would still be traceable – which is exactly what some fear, according to Scott.

He believes getting rid of cash could be dangerous in countries where states already have widespread control.

“The prospect of monitoring political subversion and opposition looms large in certain countries,” he wrote in an essay on the topic. “The end of cash will probably mean the beginning of an all-encompassing panopticon that can be used for widespread surveillance, tracking and manipulation of individuals.” Stearns agrees that privacy may be a concern for some – and a potential barrier in the future. “Cash is the only anonymous payment method, so consumers who care about privacy will resist its elimination,” he said.

Cryptocurrencies could offer a way around these issues, since transactions are invisible – but they aren’t without their issues, not least, once again, digital vulnerabilities and the shadow economy.

The road ahead Ultimately, many believe it’s unlikely cash is going to just die out tomorrow. “Just like there is no total paperless office, you will see cash living alongside other forms of payments for some time,” Bernardo Batiz-Lazo, Professor of FinTech History and Global Trade at Northumbria University, told World Finance. “Innovation in payments is incremental, however the emergence of central bank digital currencies – and possibly social-media related digital payments such as WeChat and AliPay – may mean more diversity.”

Yet it’s clear younger generations are adopting digital payment systems faster than their predecessors; 47 percent of Gen Y and Z respondents use mobile payments more than any other payment method, according to an international Paysafe study (compared to 28 percent of Generation X and 10 percent of Baby Boomers). As that generation comes to dominate the economy, that’s likely to have an impact on cash usage in the future.

But with ongoing concerns around financial exclusion, security and resilience, how we deal with this shift is likely to become one of the biggest financial questions in the coming years. If economies are to harness the benefits of a cash-free society, governments, central banks and private institutions will need to rally together to extend digital reach to the financially excluded, find solutions to potential privacy concerns, and establish ways to maintain resilience and diversity in the monetary system, all without compromising on security.

Even then, the road to a global, fully cashless economy – where money flows smoothly between borders, and cash-related criminal activity is nothing more than a spectre of the past – is likely to be long and winding.

Economies will need to prepare themselves for a bumpy ride ahead – and for some, the transition may come at a price. n

Winter 2021 |

91

w e a lth m a nagemen t

Insurance

A lifeline when it is needed most The insurance industry has been well on the way to a digital-first model for years, but the COVID-19 pandemic has accelerated these efforts and brought online services into focus If there is one industry in the world that could be described as being uniquely equipped to cope with a disaster, it is the insurance sector. The core purpose of insurers is to prepare for the worst and be ready to take charge of a recovery. This is why the development of the COVID-19 pandemic, at least broadly for insurers, has not been the catastrophic blow that other industries have experienced.

But this does not mean that the sector should be complacent. In fact, the pandemic is increasing scrutiny of insurers to even greater levels. As more people are faced with unexpected lifestyle changes, businesses required to cancel events and governments driven to make incredibly tough decisions, insurers face a looming crisis of reputation.

How insurance companies respond to the growing volume and complexity of claims has the potential to alter how the world sees the industry. Will insurance companies be the sturdy foundation behind the world’s return to COVID-normal, or the penny-pinching misers hindering our reconstruction?

This may sound like an exaggeration, but this is the lens that individuals, companies and governments are likely to view the sector through. Facing this reality, ambitious innovation and high professional standards are the most important values an insurer can hold on to.

This year the World Finance Insurance Awards showcases the businesses that are best equipped to handle the environment and expectations that are accompanying our new COVID-normal world. This means much more than just financial discipline. All businesses need to be leaders, but insurance companies need to be moral touchstones given the critical role they will play in the months and years ahead.

Prolonged pressure of interest rates The COVID-19 pandemic has provided a number of challenges that are applicable to any business. Increased frequency of working from home, economic malaise and the prolonged pressure of minimal interest rates means companies have had to rapidly change how they work.

92

| Winter 2021

This has been true for insurers as much as any business, though COVID-19 has presented several more specific quandaries for the insurance industry. The first is the surge in claims, most commonly within the health, travel and business sectors. Additionally, falling sales of these products due to travel restrictions has contributed an additional layer of pressure.

Less interest in holding conferences means less business in event insurance, for example.

This is likely to be a temporary problem. As the world reopens, insurance will be the first thought on any event organiser’s mind.

Despite this, there are more persistent issues. The broad economic strain from COVID-19 has all but guaranteed stubbornly low interest rates for the foreseeable future. For insurers’ broad investment portfolios, this means limited returns to fund their operations as well as a greater risk of their customers defaulting or going bankrupt. A sudden shock to the economy, such as another global financial crisis, could send a significant portion of the economy beyond the brink, driving a swell of claims and bad debts. Combined, the potential of these forces is expected to have an impact on government regulations, particularly in terms of solvency. Solvency tests could increase, placing an extreme burden of compliance for many insurers. Ultimately, only the best run insurers will be able to guarantee a future for themselves and their clients.

Insurers are in the customer service business just as much as the financial business.

When a person or organisation suffers some kind of catastrophe and requires help, financial or otherwise, the personal service they receive will be the only thing they remember from their insurance policy, no matter how many years they paid for it. Insurers have been looking for ways to improve their customer service for years, particularly in the digital space, but COVID-19 has made it an imperative.

A recent report from KPMG, COVID-19: customer and digitization in insurance, predicts that the pandemic will change both the products and services on offer throughout the insurance sector. On the product side, people enduring greater financial stress are

taking this moment to reassess their ongoing expenses and reflect on what is really valuable to them. In many cases people are discovering unexpected benefits in their products, as well as unnecessary expenses. A COVID-normal lifestyle is also likely to result in a number of new products in the market, as people change how they live, work and travel.

People are also changing the way they shop for insurance, with digital channels now an absolute necessity. Online services have always been important, although they are now the only way many people feel comfortable interacting with companies. In the corporate space, new business proposals that would usually occur in an office have been moved online, if they are occurring at all. Old habits may be tough to return to, so success in the future will depend on how effective insurers’ new channels are.

Successful services for consumers Alongside new channels, COVID-19 is contributing to a change in product preference among insurance customers. According to Deloitte’s A demanding future: The four trends that define insurance in 2020 report, developed from a survey of over 200 C-suite executives located throughout Europe, the Middle East and Africa, insurers now believe that 62 percent of consumers now regard non-insurance products as the most important factor when choosing an insurer.

These kind of non-insurance services have been most successful in the health sector, particularly in terms of internet-connected devices. Smartwatches and wristbands are a common gift with new policies, providing potential health benefits to the customer. Other insurance sectors are catching up as well. Car insur-

w e a lth m a nagemen t

Insurance

WORLD FINANCE GLOBAL INSURANCE AWARDS 2020

ers can now install driver-monitoring software to help people correct poor driving habits that left unchecked would increase their chances of having an accident. Cyber insurers provide dedicated training and guidance to companies to help them avoid a cyberattack, as well as providing support if an attack actually happens.

These kinds of products hit right at the core of why people buy insurance: to be safe and protected in times of crisis. It’s often said that prevention is better than a cure, and in this sense, there is no better example than the role that the insurance sector can play in preventing disasters before they happen.

Alongside this comes an added layer of responsibility. Insurers are now doing far more than just financially supporting someone in the event of a disaster or emergency. Having access to the data that these kinds of add-on services provide, and the power that accompanies it, puts insurers under a tremendous amount of scrutiny. As 2020 has led to the world living most of its life online, the types of data people are willing to part with have increased, making many of these new policies more palatable to the public. However, it would only take a few negative incidents to turn public opinion around. Based on this, ongoing success in the insurance field is based just as much in ethics as it is in good business sense.

The COVID-19 pandemic has illustrated to companies and individuals the immense, unpredictable risks that our modern world faces. Insurance has a role to play in alleviating their fears and helping the world recover.

The winners of this year’s World Finance Insurance Awards are the organisations most able to adapt to the new environment and help forge the future of the industry. n

ARGENTINA

HONG KONG

PERU

General – MetLife Life – MetLife

General – China Taiping Insurance Life – AIA

General – RIMAC Seguros Life – MAPFRE

AUSTRALIA

HUNGARY

PHILIPPINES

General – QBE Life – Tal Life

General – Allianz Hungária Life – Magyar Posta Életbiztosítás

General – Standard Insurance Life – BPI-Philam Life Assurance

AUSTRIA

INDIA

POLAND

General – UNIQA Group Life – Vienna Insurance Group

General – ICICI Lombard Life – Max Life Insurance

General – Warta Life – Warta

BAHRAIN

INDONESIA

PORTUGAL

General – Gulf Union Insurance Life – Bahrain National Life Assurance

General – Sinarmas Life – Great Eastern Life

General – Allianz Seguros Life – Grupo Ageas Portugal

BANGLADESH

ISRAEL

QATAR

General – Nitol Insurance Life – Popular Life Insurance Company

General – Phoenix Life – Clal Insurance

General – Qatar General Insurance Life – Q Life and Medical Insurance

BELGIUM

ITALY

ROMANIA

General – Belfius Insurance Life – Belfius Insurance

General – UnipolSai Life – Poste Vita

General – ERGO Group Life – Allianz-Tiriac

BRAZIL

JAPAN

RUSSIA

General – Bradesco Saude Life – Sulamerica Cia Saude

General - Mitsui Sumitomo Insurance Life - Nippon Life Insurance Company

General – AlfaStrakhovanie Life – Renaissance Zhizn Insurance

BULGARIA

JORDAN

SAUDI ARABIA

General – Armeec Insurance Life – UNIQA Life Insurance

General – Middle East Insurance Company Life – Arab Orient Insurance Company

General – Al Rajhi Takaful Life – MEDGULF

CANADA

KAZAKHSTAN

SERBIA

General – RBC Insurance Life – Sun Life Financial

General – Nomad Insurance Life – Kazkommerts-Life

General – Generali Osiguranje Life – Generali Osiguranje

CARIBBEAN

KENYA

SINGAPORE

General – Guardian Group Life – ScotiaLife Financial

General – CIC Insurance Group Life – Britam

General – AIA Singapore Life – AIA Singapore

CHILE

KUWAIT

SOUTH KOREA

General – ACE Seguros de Vida Life – SURA

General – Warba Insurance Life – Al Ahleia Insurance

General – Hanwha General Insurance Life – BNP Paribas Cardif

CHINA

LEBANON

SPAIN

General – Ping An P&C Life – New China Life

General – AXA Middle East Life – Bancassurance

General – Grupo Mutua Madrilena Life – Zurich

COLOMBIA

LUXEMBOURG

SRI LANKA

General – Liberty Seguros Life – Seguros Bolívar

General – AXA Luxembourg Life – Swiss Life

General – Sri Lanka Insurance Company Life – Ceylinco Life Insurance

COSTA RICA

MALAYSIA

SWEDEN

General – ASSA Compañía de Seguros Life – ADISA

General – Etiqa Life – Hong Leong Assurance Berhad

General – If.Skadeforsakring Life – Folksam

CYPRUS

MALTA

SWITZERLAND

General – CNP Asfalistiki Life – Eurolife

General – GasanMamo Insurance Life – HSBC Life Assurance Malta

General – Helvetia Life – Swiss Life

CZECH REPUBLIC

MEXICO

TAIWAN

General – Komercˇní banka Life – Allianz pojišt’ovna

General – GNP Life – Seguros Monterrey New York Life

General – ShinKong Insurance Company Life – Fubon Life Insurance

DENMARK

NETHERLANDS

THAILAND

General – Topdanmark Life – Topdanmark

General – ABN AMRO Life – ING Netherlands

General – Bangkok Insurance Life – Thai Life Insurance

EGYPT

NEW ZEALAND

TURKEY

General – Allianz Egypt Life – Allianz Egypt

General – Tower Insurance Life – Asteron Life

General – Zurich Sigorta Life – Anadolu Hayat Emeklilik

FINLAND

NIGERIA

UAE

General – Fennia Mutual Insurance Life – Fennia Life

General – Zenith Insurance Life – FBNInsurance

General – ADNIC Life – ADNIC

FRANCE

NORWAY

UK

General – Covéa Insurance Life – CNP Assurances

General – Fremtind Forsikring Life – Nordea Liv

General – AXA UK Life – Legal & General

GEORGIA

OMAN

US

General – Aldagi Life – Aldagi

General – Oman United Insurance Life – Dhofar Insurance

General – Progressive Life – Lincoln Financial Group

GREECE

PAKISTAN

UZBEKISTAN

General – EuroLife FFH Life – NN Hellas

General – Adamjee Insurance Life – EFU Life

General – Uzagrosugurta Life – New Life Insurance

HONDURAS

PANAMA

VIETNAM

General – Ficohsa Seguros Life – Pan-American Life

General – ASSA Compañía de Seguros Life – Pan-American Life Insurance Group

General – Bao Viet Life – Boa Viet

Winter 2021 |

93

w e a lth m a nagemen t

Insurance

Just a click away The insurance industry is being completely revolutionised by an app that enables one-click accident claims to be generated in unbelievably fast times, writes Ping An Property & Casualty Insurance Company As one of the world’s largest and most populated countries, it should come as no surprise that China’s digital economy is of a scale to be reckoned with. With some one billion ‘netizens,’ businesses in China need to serve huge numbers of people and be reliable, accessible and, vitally, fast. Using the example of revolutionising car insurance claims with AI, imagebased assessment, and reliable data processing, Ping An Property & Casualty Insurance Company (hereafter Ping An P&C), a wholly-owned subsidiary of the Ping An Group, explains how the insurance firm has achieved the seemingly impossible.

There are an estimated 340 million cars in China, all of which need insurance and multiple other services. As one of the world’s largest insurers, Ping An P&C has created an enviable digital offering for car owners: an app that settles accident claims in as little as two minutes.

This app provides users with a one-stop experience, not only for accidents but for an everexpanding range of auto services from roadside recovery to valeting, and, new for 2020, COVID-secure sterilisation. This is even more impressive when you look at the stats: there are 83 million bound vehicle users on this app, registered to over 123 million users, so the scale of the operation is mind-boggling, as is the market share covered by Ping An P&C’s unique ‘ecosystem’ approach.

A digital ecosystem With the vigorous development of a new round of information technologies, especially digital technologies including big data and AI, it is imperative for the insurance industry to accelerate its digital transformation in order to keep pace. Since its establishment in 1988, Ping An P&C has adhered to a strategy of stable and healthy development, and in recent years has hired technology talent from home and abroad, and reshaped its organisational structure and corporate culture as a technology-driven company. The company developed such capabilities as cloud computing, big data and mobile applications, and advanced the digitalisation of its 94

| Winter 2021

various businesses. The Ping An Auto Owner app is a product of this ecosystem transformation, and crucially provides an infrastructure for the company to reconstruct the auto service industry chain as a whole.

Super swift settlement So how does it work? Take the platform’s distinctive service ‘vehicle loss calculation’ as an example. In the past, car owners had to be familiar with repair shop rules, the structure of vehicle parts, and be able to haggle over the price. The Ping An Auto Owner’s smart car loss calculation function has completely solved this issue. In the event of a traffic accident, the car owner only needs to take a picture of the scene, especially the damage caused by a collision, and upload it to the app. The loss report can be generated within seconds, and Number of cars that are in the premium for the China and need insurance coming year can be estimated immediately to help customers decide whether Ping An P&C turnaround time commercial insurfrom quotation to policy issue ance needs to be used or not. In addition, a reasonable repair price will be accuOnline customer claims settled rately generated, and during 2020 by Ping An P&C a reliable repair shop recommended. This saves time comparing different repair shops and enables customers to obtain the best maintenance package.

The company has also taken quality and accuracy into account, laying a solid foundation for a data-driven system and ensuring the veracity of claims. In 2019, the precision of Ping An’s digital reporting and processing defeated over 100 international and local participants to take the top ranking in the Robust Reading Challenge for Scanned Receipts Optical Character Recognition and Information Extraction (SROIE). This in turn engenders consumer confidence, knowing that the app’s eye-

340 million

20 seconds 9 million

watering processing speeds are underpinned by reliable technology and an award-winning level of precision.

Claims during COVID-19 Since the coronavirus outbreak began, Ping An P&C has added a new aspect to its services: that of epidemic containment. It strengthened its online services and fast-track claim settlement with these technologies, ensuring not only an efficient, convenient customer experience but critically, a minimal number of contacts. For example, its ‘one-click claims service’ enables 36 functions for car owners, including reporting, uploading car accident photos and documents, signing agreements, input of payment information, claims progress enquiries, and auto repair service booking.

It is not an automated service to the exclusion of any human interaction, of course. The company ensures its back office procedures are as smoothly digitalised as the customer-facing element, allowing claims settlement experts to be on hand to answer questions, help customers with the claims process, and ensure access to contactless, super-fast, easy services for car owners during the COVID-19 pandemic.

In 2020 the online claims settlement service has been delivered to nine million customers

w e a lth m a nagemen t

Insurance

total of more than 190,000 outlets, including over 59,000 maintenance outlets, over 78,000 repair shops, and over 30,000 4S car dealers.

This is another smart move on Ping An P&C’s part: with such an enormous market share and the convenience of staying with them year after year, it is in the interest of auto business owners to be affiliated with the name of Ping An P&C. This enables them to secure incoming business as well as providing the extra level of customer confidence brought about by association with such a huge insurance provider.

Looking to the future

Ping An International Finance Centre in Shenzhen, China

and counting, 95 percent of whom have used the ‘one-click claims service’ function, and the app has achieved a 95.7 percent positive rating. During the epidemic, the fastest auto insurance claim took only two minutes to close.

Car owners’ various service demands obviously changed during the COVID-19 pandemic, and contactless online service including emergency electricity connection, car disinfection, automatic refuelling, pandemic prevention, annual car inspection agency and subsidies for green transportation were all launched on the app immediately so that Ping An P&C could provide car owners with more considered services while contributing to pandemic prevention and control. The app is even able to help car owners develop safe driving habits. The optional ‘safe trip’ feature can record driving behaviours – with the consent of car owners – and significantly reduces driving risks by providing risk assessments and prompts for bad driving behaviours and generating improvement plans.

An integrated service But the convenience doesn’t end there. When it comes to insurance application and renewal, Ping An Auto Owner can generate personalised auto insurance plans in just seven sec-

onds and accurately recommend product portfolios for customers based on AI i m a ge aut om at ic classification, OCR recognition, smart marketing and other technologies. The potential for expanding customer offerings and keeping people coming back again and again through convenience alone is obvious. If it only takes customers a few minutes to purchase insurance products thanks to AI-driven automatic enquiry, why would they leave the service and go elsewhere?

By building an ecosystem, Ping An P&C links users with service providers, helps partners improve their operating efficiency, provides users with considerate services, and effectively balances the needs of users and those of partners. Through this ecosystem, Ping An P&C ultimately provides users with 80 types of one-stop services including parking payment, fuel card recharge, vehicle loss calculation and refuelling discounts. Up to now, Ping An Auto Owner has integrated a

IT IS HUMAN NATURE THAT WE SEEK EASE, CONVENIENCE AND SIMPLICITY WHEN MAKING DECISIONS, AND BUSINESSES THE WORLD OVER HAVE TAKEN ADVANTAGE OF THIS KNOWLEDGE

With the rapid development of information technology such as big data and AI, the acceleration of digital transformation in the insurance sector is a must. Amid the wave of digitalisation and a persistently complex and volatile landscape worldwide, Ping An P&C’s new vision to be a world-leading technological property and casualty insurer has driven its increasing investment in scientific research. Moving forward, the company aims to become a property and casualty insurer that is powered by technology, data, and an ecosystem approach.

In its retail auto insurance business, over 90 percent of Ping An P&C’s quotes are made automatically, and the first quote is accepted. As no manual data entry is required, the turnaround time from quotation to policy issue is as short as 20 seconds. This is clearly an attractive option; if customers do not even need to fill out a form or go online to compare the insurance market, it is much less tempting to stray to a competitor.

It is human nature that we seek ease, convenience and simplicity when making decisions, and businesses the world over have taken advantage of this knowledge: consider Amazon’s one-click offering that makes online purchasing effortless. Ping An P&C is utilising similar factors when offering their 20-second turnarounds and in-app purchasing. Ping An P&C clearly knows that making things easy for their customers will lead to repeat business and allow customers to feel like they are on top of things, which in 2020 is no small feat.

Up to now, Ping An P&C has developed and offered more than 1,000 types of master insurances, and its business scope covers all the lawful property and casualty insurance you would expect, such as auto, corporate property, engineering, liability, cargo transportation, agricultural and more. In developing a way to turn the potentially stressful experience of auto claims into a secure, reliable, and almost instant process, you can’t help but wonder what other areas of insurance this comprehensive technology could be applied to in the future. n

Winter 2021 |

95

w e a lth m a nagemen t

Insurance

Evolving with the times The swift, sudden arrival of the COVID-19 pandemic has affected every aspect of our working lives. As we look ahead to an uncertain future, innovation will surely be the key to success for businesses of all sizes

words by

Andreas Tesch CMO, ATRADIUS

Despite a rocky end to 2019, the tentative trade agreement between the US and China gave us optimism for global economic growth in 2020. However, all hope was dashed by the catastrophic arrival of COVID-19.

Spreading around the world in a matter of weeks, the virus has infected millions, and for many, the lockdown measures to contain it have effectively brought economic activity to a standstill. The crisis has plunged the global economy into its deepest recession since the Second World War, with the World Bank anticipating a GDP contraction of 5.2 percent for 2020. Despite the best efforts of governments to soften the economic blow with emergency fiscal measures, the outlook is decidedly gloomy.

96

| Winter 2021

Though some countries have fared better than others, the forecast is rather bleak across the board. In general, countries with longer and harsher lockdowns have experienced the most severe economic contractions – the likes of Italy, Spain and France among them. The virus has been particularly cruel to Europe, both in terms of the human and economic impact, with the EU expected to see a GDP decline of 8.3 percent in 2020, amid a renewed surge in COVID-19 cases and newly reinstated lockdown measures.

These are turbulent and testing times for us all. While there is a long road ahead of us in both the fight against the virus and the recovery from its economic effects, the crisis has also shown us where changes can be made in our working lives, and has stimulated plenty of ideas about how we can create a stronger and more innovative post-pandemic world.

If we take this time to implement some positive changes, we can emerge from the COVID-19 crisis in a better place, both as businesses and as individuals.

Surviving and thriving The alarming speed with which the pandemic spread across the globe meant that businesses were forced to react rapidly, making significant adjustments to how they operate in order to comply with the new COVID-19-related rules and restrictions. Almost overnight, the world began a previously unprecedented experiment in home working, with offices left empty as workers began to log on from their kitchen tables. For many businesses, this turned out to be a surprising success, with employees adapting to this new way of working with ease. Many were all too happy to say goodbye to the daily commute, and enjoyed the extra time they got to spend with their families in the evenings, too.

Productivity doesn’t appear to have suffered either, with a report by Equiem showing that 82 percent of British workers claim to be more or equally as productive at home as in the office.

Home working was just one of the ways that we adapted to the pandemic at Atradius.

Our priority has always been the health and safety of our staff and customers, and we have successfully enabled remote working while also maintaining 24/7 support for our clients at this difficult and uncertain time. We have been proactive in our communication with our customers throughout the pandemic, helping to provide them with the cover that they need

w e a lth m a nagemen t

Insurance

AS WELL AS OFFERING PROTECTION FOR THE PRESENT, WE ARE ALSO COMMITTED TO HELPING OUR CUSTOMERS PREPARE FOR THE FUTURE

survive and thrive in challenging circumstances, businesses need to embrace change – with a healthy dose of wariness. At Atradius, we firmly believe that the key to success now lies in caution, innovation and evolution. It might sound like something of a contradiction to pair caution with innovation, but both concepts are vital to two distinct aspects of business. It is important to be cautious when it comes to your approach to credit management, because this is likely to be where an otherwise healthy business can find itself in bankruptcy.

Make sure that your buyers can pay you, limit credit given to riskier buyers, follow up on outstanding invoices early and regularly, and outsource credit management through credit insurance or collections companies. On the other hand, innovation and evolution will help you to find new ways to grow your business. The world is continuously evolving, and businesses need to evolve with it. Whether that means boosting your online services or reviewing your business model or product offerings, now is the time to consider how you can adapt your business to the ever-changing set of circumstances we find ourselves in.

An uncertain outlook and keeping them abreast of how the situation is evolving and what it might mean for their business.

We understand that every business and every customer is unique, and each will have been impacted in different ways by the unfolding events of 2020. Early on in the crisis, we changed some claims notification procedures to allow our customers more time to collect outstanding invoices before having to file claims. This was essential as many businesses were trying to find their way under lockdowns and were not trying to avoid paying invoices.

While we have given our customers more time to collect invoices, we continued to pay claims at the same rapid speed we did prior to the crisis. At the same time, we also worked collaboratively with governments in many countries to implement plans that would allow more businesses to stay afloat during the pandemic. Now, with 2020 behind us, we are working to extend these plans in order to provide continued support as the financial crisis drags on.

While we are there to offer protection and support to our customers, there are other ways in which businesses can help themselves at this time. This year has shown us that innovation is indeed the mother of success, and in order to

If 2020 has taught us anything, it’s that it is impossible to anticipate just what might be around the corner. Life can throw us for a loop, meaning that we all need to be ready to adapt to whatever the next challenge may be. And there are certainly challenges abound as we look to 2021 and beyond. In the early autumn, there was cautious optimism about the possibility of global recovery in 2021, as lockdown measures were gradually unwound across Europe. However, a pre-winter surge in COVID-19 cases and a tightening of restrictive regulations means that the long-awaited return to relative ‘normality’ now seems a long way off.

With a number of major European economies placed back into stringent lockdowns, businesses are understandably concerned – the stop-start nature of repeat lockdowns can pose a challenge to even the most adaptable and innovative of companies. What’s more, as people become less risk averse with their health and perhaps show less compliance with COVID-19 containment measures, businesses may well have to brace themselves for a longer run of partial lockdowns.

That being said, while repeated lockdowns are far from ideal, most countries now appear to be better prepared to deal with these measures than when they were first introduced earlier in the year. Improved healthcare infrastructure is now in place, and remote working and home offices have already been set up.

Businesses have made adjustments to survive under these conditions, and many governments have already announced extensions of emergency fiscal measures well into 2021.

These developments may soften the blow of repeated lockdowns, but it is undeniable that a tightening of COVID-19-related regulations will prove incredibly taxing to businesses in the months to come. Unfortunately, the cost of this crisis in terms of bankruptcies and unemployment are largely still ahead of us, especially as fiscal packages are inevitably scaled down.

Protection in turbulent times As it stands, global economic recovery in 2021 largely depends on the development and deployment of an effective vaccine, or a relaxation of the social distancing measures that have thus far hampered economic activities.

As neither scenario is assured, the outlook for the next year is an uncertain one.

Amid such an unpredictable and everchanging set of circumstances, businesses are in need of a sense of reassurance and stability. At Atradius, this is precisely what we aim to offer our clients, even in the most testing economic conditions. The commercial and political risks that are inherent in domestic and global trade have been amplified by the COVID-19 crisis, making it vital that we are there to provide protection to our customers when they need it most.

Now more than ever, businesses need reassurance that they will be paid for the goods and services they supply, and we are proud to be able to help our customers to enjoy more stable cash flow during this uncertain time. We have continued to improve our online systems over the course of the past year, to boost the efficiency with which we can deliver our services to our customers. After all, our success depends on our customers’ success, so we have continued to focus on helping our customers succeed.

As well as offering protection for the present, we are also committed to helping our customers prepare for the future. This means inspiring them to innovate and evolve, and keeping them up to date with all of the most recent developments that might affect their business – whether that be disruptions to supply chains, Brexit-related requirements or changes to COVID-19 regulations both domestically and overseas. The coming months will be challenging for us all, but at Atradius, we are confident that through innovation and adaptability, the most forward-thinking businesses will successfully emerge on the other side of the crisis, ready to weather any other storms that might come their way. n

Winter 2021 |

97

w e a lth m a nagemen t

Insurance

Two brains are better than one

The Japanese insurance firm MSI is using its artificial intelligence system, MS1 Brain, to enable its agents to offer clients the best possible choice of products

words by

Shinichiro Funabiki DIRECTOR, VICE PRESIDENT EXECUTIVE OFFICER, MITSUI SUMITOMO INSURANCE AND CHIEF DIGITALISATION OFFICER, MS&AD INSURANCE GROUP HOLDINGS

Mitsui Sumitomo Insurance boasts a history of more than 100 years, dating back to the establishment of Osaka Insurance Company in Osaka in 1893 and Taisho Marine & Fire Insurance Company in Tokyo in 1918. Both companies grew in tandem with the post-war economic recovery, with Osaka Insurance merging into Sumitomo Marine and Fire Insurance Company in 1954; and Taisho Marine and Fire Insurance also went through a number of mergers and was renamed as Mitsui Marine and Fire Insurance in 1991.

Later, in 2001, the two companies merged to form the present Mitsui Sumitomo Insurance.

Mitsui Sumitomo has roots in both the Sumitomo Group, which has a history of more than 400 years, and in the Mitsui Group, which has a history of over 340 years. Today, Mitsui Sumitomo Insurance is one of the largest nonlife insurance companies in Japan, a Fortune 500 company with a global reach, and a core part of MS&AD Insurance Group Holdings, itself formed in 2010. MSI is number one in the Japanese non-life insurance market, with profits of almost 143 billion yen ($1.35bn) a year with the most recent final results, and number one in terms of gross premiums written in the 10-nation ASEAN region. They operate in a total of 49 countries and regions based on the knowledge and credibility cultivated from more than 90 years of overseas expansion.

However, despite reporting a rise of 2.3 percent in net premiums written, to 1.5479 trillion yen in its last financial results, the company, led by Noriyuki Hara, president and chief executive, is not standing still, as it seeks to improve the service it offers to both its customers and its agents.

A perfect fusion MSI believes it ha s transfor med the conventional insurance company sales model for its 40,000 agents in Japan by developing what it claims is the first artificial intelligencepowered agent sales supporting system in 98

| Winter 2021

the industry, MS1 Brain, a fusion of humans and artificial intelligence (AI), combining customer relationship management (CRM) with sales force automation (SFA). The agent is able to uncover the customer’s potential needs through analysis of massive amounts of data, with MS1 Brain then suggesting what insurance products to propose and in what way. In addition, by collecting customer information and accumulating it in the AI system, agents create a sustainable system in which AI and people grow together.

Since MS1 Brain was launched in February 2020, it has provided agents with 860,000 individual sales leads per month and 80,000 corporate sales leads per month, with sales agent productivity increasing between 20 and 130 percent compared to the conventional sales model. We take pride in the ease with which we interact with our customers. We build strong relationships and we strive to build client trust. The experience we have gained will be integrated with AI to provide customers with an improved level of experience. Using digital technology we will revolutionise communications with our customers. MS1 Brain will be our tool for change.

It will mean a revolution in proposals, with the use of AI to analyse big data. Predictive needs analysis will inform us of customers’ potential needs, resulting in a ‘Brain Video’ proposal presentation, with recommendations personalised for each customer. This will create opportunities never seen before. We are building a process for insurance proposals where each step of the way is guided by ‘Next Best Action,’ which accumulates the knowhow practised by experienced agents, with objectives and effects made clear.

Strategic sales plan For its agents, by adding a data-based approach to accumulated experience, MS1 Brain will enhance sales activities, bringing a revolution in management support: data to maximise profits and grow the business, the ability to view sales activity and improve performance through graphic visualisations, develop a strategic sales plan, and become a ‘management compass.’ Proposals backed by carefully parsed data, actions modified to higher degrees of accuracy, and better

Impact of MS1 Brain

860,000

Individual sales leads per month

80,000

Corporate sales leads per month

20% & 130% Increase in sales agent productivity

management, will be realised through a combination of human knowledge and AI. The MS1 Brain is very intuitive and userfriendly, even for those who do not have a lot of experience as an insurance agent.

Recommendation analysis predicts customers’ needs via AI and automatically tells agents the recommended products every month.

Customer needs are indicated by a star-rating system. For corporate customers, it reviews a variety of products, such as casualty insurance, while for individual customers it looks at products such as well-compensated automobile insurance and life insurance, and gives reasons for the recommendations. For corporate customers, MS1 Brain can also analyse partner companies’ needs with the corporate information of a credit research company. It displays analysis recommendations for sales customers and suppliers; in addition, top tips and scripts for approaching customers and role-playing videos for practice are also provided.

It also has a management menu that shows the activity of the agents’ representatives, including what kind of customers they are approaching, and allows managers to optimise the skill of the agents and the level of the next best actions they want them to use on the settings screen. The management function

w e a lth m a nagemen t

Insurance

a digital insurance platform utilising API (application programming interfaces) to enable someone to buy an appropriate insurance product at the same time as they make a purchase, by embedding the related insurance proposal in the digital platform used by the sellers of goods and services. Someone buying, for example, goods such as home appliances and smartphones on Yahoo Auction (Yahoo’s eBay-style service, which is very popular in Japan) can now buy purchase product repair insurance at the same time, with the system integrating the online completion of accident notifications and claims, while still maintaining a smooth user experience.

Improving customer experience

Mitsui Sumitomo Insurance building in Tokyo, Japan

allows managers to check the status of the agency, compare its performance against other agencies and plan sales initiatives based on this information.

Customers are analysed based on transaction periods and insurance premium size to enable managers to make proposals to customers in a systematic manner. The MS1 Brain helps managers develop management strategies effectively. The management menu ensures that all agents use the system properly.

Innovative digital approach The development of MS1 Brain is part of an attempt by MSI to transform the conventional non-life insurance business operation and sales model, both within the company and across the insurance industry as a whole, with an innovative digital approach that has three main pillars: digital transformation, digital innovation and digital globalisation. To support this approach the company is also digitalising human resources, digitalising system infrastructure and digitalising governance.

On the digital innovation front, MSI launched a new service called RisTech (Risk × Technology) in May 2019, combining data held by MSI and its clients to offer risk analyses and reports, to provide new opportunities in risk management that go beyond conventional

insurance. The initiative, led by MSI’s Digital Strategy department, alongside its Corporate Sales and Product Planning departments, has seen more than 150 companies in different industries approached by September 2020, and more than 20 billion yen of insurance premium sales achieved. We are aiming to visualise and minimise risks that could not be done through conventional approaches, thereby protecting companies, communities and the earth from accidents and natural disasters in order to create a hazard-free world.

Another initiative saw the development of

As well as MS1 Brain, the innovations include: » Responding to customer inquiries and procedures through chatbots » Advanced detection of fraudulent claims using AI » Installing a sales performance dashboard system using Business Intelligence tools, a procedural and technical infrastructure that collects, stores and analyses the data produced by a company’s activities » Setting up a workflow system for application and reporting work between employee and within the company and agents » Organising a web-based deficiency management system that will enable agents to solve issues by themselves » Bringing in the automation of routine work by using RPA (robotic process automation) software designed to reduce the burden of repetitive, simple tasks on employees.

MSI’s Digital Globalisation project involves global digital hubs both in Tokyo and in Singapore, opened in April 2020, to promote digitalisation and solve the issues involved in connecting digital assets worldwide, improving the customer experience and business process productivity, especially in Asia. At the same time, MSI is promoting a data analytics initiative with its subsidiary, the City of London-based MS Amlin, which provides insurance cover to commercial enterprises and reinsurance protection to other insurance companies around the world, and which was acquired by MSI in 2016 for £3.5bn.

To support these initiatives, and in order to realise the creation of new digitalised business models, as part of its digital strategy, Mitsui Sumitomo Insurance is working to improve the basic digital literacy of all its employees and develop ‘digital human resources’ as well. The company has assigned a ‘digital ambassador’ to act as a change agent in each department and drive operational efficiency and process innovation. It is training data scientists who will contribute to building a safer and more sustainable society by analysing data. It is also implementing original educational programmes in cooperation with universities to nurture personnel who can create ideas and develop advanced analytical skills for business issues and, ultimately, plan and realise ideas of unprecedented social value.

To enable its digital initiatives to take root as part of the company’s internal culture, a comprehensive system will be constructed and operated, including the creation of what is being called the Digital Human Talent Certification System, to provide an open innovation space that will offer places for MSI’s employees to use their new digital knowledge and specialised data analysis skills and apply them to the company’s business. n

Winter 2021 |

99

w e a lth m a nagemen t

Insurance

Calm out of chaos BPI-Philam was digitalising its bancassurance offerings long before COVID-19, so how did the firm, which champions its customers’ wellbeing as well as their financial security, balance these priorities with growing its customer base during a global pandemic?

words by

Surendra Menon CHIEF EXECUTIVE OFFICER, BPI-PHILAM

Deep into lockdown 2020, it became clear that businesses of all sizes would survive COVID-19 by the quality and accessibility of their digital offerings. In a country like the Philippines, which is the global capital for social media, traditional enterprises had to sink or swim in line with the global scramble to transfer business previously carried out face-to-face into the online arena. At BPI-Philam, a bancassurance firm, we were ahead of the game on this, having already used technology to increase market share and reach out to customers who may only recently have joined the country’s formal economy.

COVID-19 cost many Filipinos their livelihood, especially those in the informal sector.

The latest statistics show a 10 percent unemployment rate, equivalent to around 4.6 million people out of work, as of July 2020. But it’s not all bad news. There are those who have been able to open online businesses to generate income, leading to a 4,000 percent increase in business registrations during the lockdown, as consumers also shifted to digital for some semblance of normality in their lives. Aside from getting essentials like groceries and hygiene products, people flocked online to purchase electronics, foreseeing a greater need for connectivity amid the implementation of quarantine.

100

| Winter 2021

As the community quarantine wore on, food businesses also made their presence felt, catering to those who wished to get a literal taste of food they would only normally get outside of their home. The boom of these various home-based businesses allowed the consequent growth of delivery and courier services, which in turn provided a source of income for those who lost their jobs early into the quarantine, while likewise providing additional income for the business owners.

Spending priorities In the context of a global pandemic when purse strings were tightened and jobs lost the world over, one would be forgiven for thinking that the young Filipino workforce would reject the long-term idea of spending on insurance. So many suffered financially during 2020, and news headlines have warned about families and individuals sacrificing long-term savings and insurance as they reprioritise their spending in the here-and-now. But there have been some surprising findings to come out of this grim scenario in the Philippine market.

As uncertainty surrounding the pandemic loomed, Filipinos began to be more conscious of personal finance matters. In the first quarter of 2020, consumption of personal finance topics online grew by 800 percent. From loans to effect on oil prices to stock market performance, interest in money matters spurred conversations all over the place.

Instead, people became more conscious about saving and securing income to provide for the whole family when jobs are on the line.

It seems that rather than sacrificing longterm security for immediate financial relief, COVID-19 has in fact led to a real motivation to save more and spend less in order to prepare for further impact in the future. In fact, BPI-Philam’s affiliate company, Bank of the Philippine Islands (BPI), reported an increase in total deposits to 1.68 trillion pesos, up by four percent year-on-year as CASA deposits grew by 14.7 percent. This is particularly pertinent given that some 10 percent of this country’s economy is generated by the overseas Filipino workforce (OFW). The impact of COVID-19 has certainly been felt by members of this group who are locked down and unable to work, and others such as seafarers and healthcare workers abroad who cannot get home at all, even months after the pandemic first struck.

Indeed, some industries like seafaring, which are inherently vulnerable due to their communal setup and differing policies among the states and territories they do business in, bear the brunt of the pandemic even more.

As of October 2020, there were still reports of stranded Filipino seafarers onboard vessels on foreign seas, waiting to be repatriated. Others had their contracts extended far beyond normal extension limits because they are necessary to keep the world’s supply chain going. All these things have adversely affected OFWs’ personal earnings at this time, for better or worse.

Some of the more tenured OFWs have been able to establish another source of income over the years in the form of small side businesses, but many are worried that even that is at risk with the pandemic still raging worldwide.

w e a lth m a nagemen t

Insurance

ment is to provide affordable and accessible insurance in its race against risk, to close the protection gap in the Philippines. BPI-Philam maximises the available technology to make the process of acquiring an insurance policy more convenient, even for busy people. For instance, its customers’ policies are automatically enrolled in its ePlan portal so they can manage it themselves anywhere there is an internet connection.

Wellness out of chaos

Future impact Like other industries that had to quickly adjust their operations when the lockdowns began in March 2020, most Philippine insurance companies’ sales also went down during that period, and BPI-Philam was no exception.

That was to be expected as cash flow became an issue in the short term, but the uncertainty surrounding COVID-19 brought heightened anxiety to consumers, pushing them to react in certain ways. When they truly understood the gravity of the situation, people sought information and had greater awareness of the benefits of insurance, so the demand for such products shot up.

To support the industry during this extraordinary time, the Philippines Insurance Commission eased cer tain regulator y requirements and eventually allowed insurance companies to sell products online.

Many new private players also entered the market at this time, while others upgraded their offerings, devising ways to reach customers who are stuck at home.

It’s worth asking what implications all of this will have on the way products like insurance are marketed to a young workforce, and look at how the insurance gap can be plugged.

As a bancassurance firm, BPI-Philam’s customer base is the same pool of clients serviced by its partner bank BPI. This means that they are already part of the formal economy, being account holders to begin with. Nevertheless, BPI-Philam’s insurance products are designed to cater to various income brackets, not just the affluent ones. Part of the company’s commit-

PEOPLE BECAME MORE CONSCIOUS ABOUT SAVING AND SECURING INCOME TO PROVIDE FOR THE WHOLE FAMILY WHEN JOBS ARE ON THE LINE

BPI-Philam has an advocacy for Filipinos to live healthier, longer, and better lives. This paved the way for it to offer a wellness series, a suite of protection solutions powered by Philam Vitality that reward customers’ healthy choices. Philam Vitality is a science-backed health and wellness programme for customers that extends perks and benefits like premium discounts, additional insurance coverage and add-ons, incentives, and lifestyle rewards from partner establishments. The wellness series is aimed at taking customers on a personal pathway to a healthy and active lifestyle, and it is not just limited to young people. The company partners with health and wellness providers like gyms, health clinics, and sports equipment stores or related brands to make the journey more fun and convenient for all customers. Those subscribed to select BPIPhilam insurance products that are integrated with Philam Vitality are entitled to earn points they can redeem for exciting rewards that will further uplift their lifestyle. One encouraging observation is that despite the lockdown throughout much of the country, overall engagement of the Philam Vitality program amongst BPI-Philam’s customers decreased by only around four percent. This shows that people were still taking good care of themselves by staying active even while at home.

Looking ahead When it comes to balancing priorities going forward, it seems the natural progression right now is one of changed attitudes: although people are spending less money overall on insurance, there are more people willing to spend their money on insurance in the first place. There is no doubt that COVID-19 hit the burgeoning bancassurance market as much as any other, but BPI-Philam’s experience reflecting on 2020 is that many Filipinos are more protective of their long-term future than perhaps they were before. This could lead to a brighter future for the company as well as its customers as it seeks to expand its client base even further while championing the healthy and balanced lifestyle that 2020 brought into such sharp focus the world over. n

Winter 2021 |

101

w e a lth m a nagemen t

Insurance

Embracing the new normal Where some see challenges others will see opportunities and that is exactly what happened within the Philippine non-life insurance industry during 2020

words by

Leticia C. Tendero DIRECTOR OF INVESTOR RELATIONS, STANDARD INSURANCE

The year 2020 was expected to be a catalyst to economic growth, with even the World Bank citing the Philippines as having one of the most dynamic economies in the East Asia Pacific region, rooted in strong consumer demand, supported by a dynamic labour market and strong remittances. “Business activities are buoyant with notable performance in the services sector including the business process outsourcing, real estate, and finance and insurance industries,” reported the World Bank. These opinions were grounded on sound economic fundamentals and a globally renowned competitive workforce.

However, with the negative effects of the global pandemic on the economy, said projected growth has significantly slowed down in 2020. In fact, the Philippine economy fell into recession as GDP spiraled down by 16.5 percent in the second quarter of 2020 from the previous year, according to the Philippine Statistics Authority. Nonetheless, economic growth is projected to slowly rebound in the latter part of 2020, with an expected 7.3 percent contraction, and then further improving in 2021 and 2022 on the back of expected global improvements as well as the election-related spending boost in 2022.

The non-life insurance landscape In 2019, total gross premiums written from the local non-life insurance sector grew by 13 percent to P92.479 billion from P81.469 billion in the previous year. However, as a result of the pandemic, the insurance industry, specifically non-life, is expected to be adversely affected by the decline in economy as well as its key industry drivers. With over half the net premiums generated from motorcar premiums, the non-life insurance sector is expected to take a huge hit on its premiums portfolio, especially with new motorcar sales taking a huge 39.5 percent drop as of August 2020, year-on-year.

Similarly, other key industry drivers such as the property, stock market, tourism and travel sec102

| Winter 2021

tors, among others, all suffered huge setbacks.

Nonetheless, with lower claims incidences during the lockdown period and with continued work-from-home (WFH) arrangements until the end of 2020 for most companies, vis-à-vis, lower operating expenses, these may still balance off the expected drag in premiums, thereby resulting in continued profitable operations for the year. Further, with the mandated increase in capitalisation implementation in recent years, the remaining industry players are financially strong and are expected to survive.

Interestingly, the pandemic has forced insurance companies to embrace the changes of the new normal – digitalisation of operations was among its top priorities. As indicated in the past by the insurance commissioner, innovations in technology are changing the industry almost imperceptibly. At present, the industry has been thrown into a ‘black swan’ situation whereby most industries, excepting some establishments belonging to what we broadly now call the essential goods and services sectors, have been immobilised.

The insurance industry was considered non-essential and was thus not operational for severa l months, which propelled insurance companies to embark on more aggressive initiatives towards digitalisation of operations. The insurance commissioner has been pro-actively supporting the industry by extending submissions of regulatory reports and encouraging assistance programmes to employees and sales forces that are dependent on commissions for their livelihood. Equally impor tant, the commissioner allowed insurance companies to implement sales initiatives through digitalisation, information and communication technology, or any similar technological platforms, subject to regulatory requirements.

Turning challenges into opportunities While every industry and company is subject to shifts in political, economic, social and environmental conditions both globally and locally, it is the goal of Standard Insurance to continuously improve such that opportunities continue to open for us not just locally but globally, and not only in non-life insurance but in adjacent business as well.

S t a n d a r d Insurance has always been prepared for cata strophic event s, so when Growth in non-life insurance this pandemic premiums during 2019 happened, we were able to smoothly shift to remote working arrangements. Our in-house developed systems are all digital and integrated online.

More importantly, all our systems are already in the cloud, which allows us to access systems from anywhere and makes the whole cycle of insurance operations possible.

We have assigned our management to one of two teams, each of which could run the entire company on its own, if it had to. As early as February 2020, the full cycle of operations was tested by these two separate management teams, with success, ready for implementation.

Hence, Standard Insurance has been online and connected and has been one of only a few that were able to continue to work, immediately after the lockdown, and without a single day of missed operations throughout the pandemic. Continued interactions with brokers and intermediaries as well as internal communications coordination were done via video conferencing and other social media platforms.

To date, our digital analytics show that we are number one in terms of engagement in

13%

w e a lth m a nagemen t

Insurance

Financial hub of Metro Manila, Philippines

company websites and social media platforms compared to our competitors.

However, being a non-essential industry during the quarantine period, motorcar sales and insurance premiums generation have been a challenge. Collections likewise slowed down by approximately 20 percent of normal levels initially, but eventually picked up after implementation of the following measures the company mandated to mitigate the negative effects of COVID-19: We defended and increased our renewal ratios, we increased market share and we also maintained proactive collections.

In line with this, the company initiated several critical initiatives that will further improve its renewal business and get more switchers (business from competition) as well as other sales-related initiatives. Aggressive collection initiatives were likewise stepped up and cost-cutting measures have been put in place. In worst case scenarios, the TTC complex in Naic, Cavite, with housing facilities, telecommunications and wireless fidelity facilities, serves as a key business continuity planning (BCP) site outside Metro Manila.

Further, all our affiliated companies’ business process outsourcing (BPO) offices can be used as BCP sites and we have in fact tested this possibility, with ease. These are offices of the Insurance Support Services International Corporation (ISSI) and Petsure, whose offices

are located in Taguig, BGC and Quezon City, a total of four separate offices within Metro Manila, all well equipped with connectivity and space.

To maximise our online reach, our systems design and development team made our company website an e-commerce site, over and above the usual company information, products and services, among others. Our front office is able to sell e-policies to our clients and file claims online. All filed claims are automatically uploaded to our claims module and our claims front liners are notified immediately via our online platforms.

MyStandardOnLine (MSO) is a platform where all existing clients from the front office, or any intermediary platforms, can register, monitor, renew and pay policies. We have also launched Standard Prime, a loyalty membership programme that provides our clients exclusive offers, freebies and discounts.

As a game changer for our sales intermediaries, agents and sales associates, Standard Insurance launched ISSIoffice, an internally developed insurance office application linked to our major systems. It is an application software, using a smartphone or any telecomputing device, where the whole insurance cycle can be done, from negotiations between an intermediary and the client, to consummation of transaction and payment of premiums, as well as filing of claims and servicing of claims filed.

ISSIoffice has an iteration capability where updates can be made online. Ultimately, we hope to gain market share with this tool’s prevalence and ease of use.

Cybersecurity in a pandemic With WFH the new normal, the use of different technological platforms have increased the risks of cyber-attacks and data security issues.

Hence, the cybersecurity team was elevated to play more important and visible roles to keep the business online without disruptions, to combat and protect the company from possible operational risks.

The team extended the use of our CATO mobile VPN software to both companyissued and personal computers and laptops to ensure safe usage. An alternative VPN portal from the Amazon Web Services (AWS) cloud is likewise provided for our business partners to use. Company-issued laptops come with our standard security configurations and endpoint security software, capable of detecting and stopping malware, as well as preventing the resurgence of dangerous ransomware that had victimised businesses even prior to this pandemic. Furthermore, since online meetings are also part of the new normal, there is a surge in the use of video conferencing

platforms in conducting collaboration meetings and training sessions, as well as internal and external communications.

Email communication now requires bigger storage, as all transactions, documents and files go through this medium. As such, the infrastructure team regularly reviews usage and upgrades user accounts as and when needed. Even with security measures in place, hackers are still finding ways through cyberspace to destroy, steal or cause harm.

To combat this, the WE CONTINUE TO team regularly sends GRANT FULL SALARIES its security advisories AND BENEFITS TO ALL, to all company users, FROM THE START OF reminding them to be vigilant and strictly THIS PANDEMIC UP TO follow recommended THE PRESENT DAY protocols. By regulating the behav iour of our associates with reference to the use of devices, network and the internet, the cyber security team steadfastly endeavours to protect our company assets, our systems and our data.

Crucial role of human resources Similar to our cyber security and systems group, our human resources department was also in full gear from day one of the pandemic.

They were tasked to oversee the initiatives relating to the health and well-being of its more than 1,400 associates nationwide, thereby avoiding any operational breakdowns. These included extension of monetary assistance well within the first month of lockdown. During this time, some of their family members were on ‘no pay, no work’ arrangements so that aggregate family finances were drained and insufficient to meet their respective family needs.

Teleconsulting services and other related services, co-ordinated with our health insurance provider, were given. There was close monitoring of any suspected COVID-19 cases, and support for this, including contact tracing and assistance during quarantine, was immediately implemented. Shuttle services for associates working from the office as well as protective equipment were provided. To date, WFH arrangements are still highly recommended. More importantly, we continue to maintain a full complement of associates, without the need for retrenchment.

We continue to grant full salaries and benefits to all, from the start of this pandemic up to the present day. On the whole, Standard Insurance has been able to continue business operations, maintain the team’s productivity, protect the well-being of its people and provide financial assistance to them when needed. n

Winter 2021 |

103

w e a lth m a nagemen t

Insurance

Fulfilling the responsibility of being the people’s brand To successfully maintain focus on the people and environment in Taiwan requires driving both social and environmental sustainability at the same time, writes Fubon Life Insurance Despite the turbulent global environment and continuing uncertainty, Fubon Life has maintained outstanding performance with the advantages of financial stability, comprehensive distribution channels, and a diversified product portfolio in 2020. The cumulative net profit after tax for the first eight months last year reached NT$43.058 billion, equalling a year-on-year growth of 68 percent. In addition to the brilliant investment performance, the company’s premium income also performed well last year. The accumulated first-year premium income (FYP) from January to August 2020 reached NT$84.6 billion, and the total premium income was NT$374.4 billion. Fubon Life’s professional operation has also been recognised by the prestigious international financial media.

World Finance has ranked Fubon Life as the ‘Best Life Insurance Company in Taiwan’ on nine occasions.

High-quality service experience Fubon Life offers a comprehensive product portfolio and adjusts product strategies in response to the current economic situation.

For example, in response to the COVID-19 pandemic, Fubon Life introduced the country’s first ‘Statutory Infectious Disease Periodic Health Insurance’ policy, which provides people with advanced insurance protection and all-round medical coverage. In addition, Fubon Life continues to leverage insurance 104

| Winter 2021

technology to provide policyholders with a rapid and high-quality service experience, such as optimising and upgrading the ‘Policy Health Check System,’ and using system analysis results to help policyholders identify the protection gaps in five major areas: life insurance protection, accident protection, medical protection, long-term care protection and pension protection. Fubon’s professionally trained agents will then be able to recommend suitable insurance products to mend the gap as early as possible and improve the risk tolerance of the Taiwanese people.

Fubon L ife’s goa l is t o bec ome a people’s brand. In addition to fulfilling its responsibilities in assisting clients with strengthening their risk protection, Fubon Life also continues to deepen sustainable management such as ESG. It looks forward to leading the development of the industry through sustainable actions in governance, environment, and society. Benson Chen, President of Fubon Life, said: “Enterprises co-exist and prosper with society and the environment. The greater the inf luence of the company, the heavier the responsibility it shoulders. The award not only recognises our achievements, but also extends our responsibilities. Fubon Life will continue to take into account the company’s operation, social responsibility, and environmental friendliness, and follow the United Nations ‘Sustainable Development Goals (SDGs)’ as

a development strategy for insurance and community services, with a view to solving social change issues in many ways and serving the common good of the society in Taiwan.”

Fubon Life has long practised dementia care activities from the perspectives of prevention, assistance, support, and knowledge transfer. For five consecutive years, it has cooperated with the Federation for the Welfare of the Elderly, Taiwan’s main public welfare organisation for elderly welfare, to give away dementia patient bracelets in 100 hospitals across Taiwan. It is recommended patients wear the bracelet immediately after being diagnosed by physicians. After this model was introduced, the bracelet-wearing rate has increased by 42 percent, and the recovery rate for lost dementia patients is now very high, effectively reducing the psychological pressure of caregivers. This year, the scope of this service has been expanded, and more county and city government resources across Taiwan have been integrated to provide better support for families with dementia patients.

Knowledge and understanding are the starting point for improving dementia care, and the general public’s understanding of dementia is generally insufficient. Considering the many opportunities for interaction between children and elders at home, Fubon Life is actively committed to educating children on the issue of dementia. This year, Fubon Life joined hands with the Taiwan Dementia Association

w e a lth m a nagemen t

Insurance

THE APP ACTS AS AN ONLINE INSURANCE EDUCATION AND HEALTH PROMOTION TOOL to expand the promotion of the ‘Dementia Education Seed Project,’ producing Hospitals across Taiwan where c a r t o o n s o n dementia patient bracelets will dementia education be given out targeted at children and adolescents to be broadcast in all primary schools in Taiwan. It is hoped Amount by which the braceletthat through these wearing rate has increased informative yet entertaining teaching materials, close to one million school children nationwide can develop the right knowledge and practice on dementia care, which will not only promote an atmosphere of happiness within the family, but also help patients with dementia at home to seek medical treatment in time. These efforts have laid a positive foundation for a dementiafriendly society.

At the same time, Fubon Life has also leveraged its core competency in launching spillover policies that promote health and strengthen medical protection for the disadvantaged population. These products encourage policyholders to walk more and quit smoking to enjoy premium discounts and in so doing, achieve the objectives of advanced disease prevention and morbidity reduction. Fubon Life has also developed a health promotion app called ‘Fun

100 42

%

group’ that combines community activities with insurance education and health promotion. The app acts as an online insurance education and health promotion tool, as well as a social platform to promote the concepts of insurance and health management in people’s daily lives.

Development of green finance Fubon Life promotes the sustainable de velopment of g r e en f i n a nc e i n a comprehensive manner. Through four low-carbon strategies including green procurement , an env ironmenta lly conscious workplace, paperless services and environmental protection, Fubon Life has launched its environmentally friendly practices and implemented green finance and responsible investment externally, to echo the government’s support for renewable energy development. In order to expand the company’s inf luence throughout society, Fubon Life not only integrates the concept of environmental protection into product design and policyholder services, but also provides diversified and paperless financial services for policyholders. It is estimated that green service processes reduced carbon emissions by more than 495 metric tons in 2019, equivalent to 15.2 months of carbon absorption capacity of Daan Forest Park. Fubon Life also organised nationwide river cleaning and plastic cleanup sessions. The company introduced the

concept of the ‘recycling ecological chain’ by turning recycled plastic waste into mobile phone holders. Through continuous internal and external communication, Fubon Life is able to raise the public’s environmental awareness, and the company’s practice in promoting environmental sustainability was even recognised with the first ‘National Enterprise Environmental Protection Award’, organised by the Environmental Protection Administration of the Executive Yuan. Fubon Life has long been concerned about the sustainability of Taiwan’s water resources. It has not only led employees in activities such as river cleaning and beach cleaning to protect the environment, but has also cooperated with the Wilderness Conservation Association in 2020 to raise the awareness of river waste disposal issues, becoming the first company in Taiwan to respond. It will join forces with the Wilderness Conservation Association in launching the ‘River Waste Quick Screening Survey Project’ for three years to investigate public hazards in a low-carbon, paperless manner, integrating the idea of citizen science to protect the ecological system. The project is aimed at finding more concentrated sections of river waste to facilitate efficient cleanup, and expand the company’s green influence for the sustainable development of the river basins in Taiwan.

In order to demonstrate the commitment of serving the Taiwan market as a people’s brand, Fubon Life has actively invested resources and deepened its corporate influence in terms of product development, service innovation, talent cultivation, social welfare, and environmental sustainability.

The results of the company’s actions have also been recognised at home and abroad, including being named in Brand Finance’s Top 100 Insurance Brands in the World – number one in Taiwan, and winning the ‘Health Promotion Award’ and ‘Green Leadership Award’ in the Asia Responsible Enterprise Awards. Fubon Life also won the ‘Insurance Quality Award’ for three consecutive years in four separate categories. It has also won the RMIM Award for 10 consecutive years and has been voted as the most preferred employer by college graduates. In the future, Fubon Life will continue to focus on the core insurance business and leverage digital technology to create a better user experience for its customers. With the mission of being a good neighbour in the community, it will continue to pay attention to important issues such as dementia and aging, strive to shorten the gap between urban and rural resource allocation, and expand its influence to benefit individuals and families throughout society. n

Winter 2021 |

105

w e a lth m a nagemen t

Insurance

Aiming for continued sustainable development The key to establishing itself as both a sustainable and socially responsible company has been putting people and education first. Thai Life Insurance discuss prioritising community participation and the health of its customers For more than 78 years, Thai Life Insurance has run with the vision of aiming to be a leading brand that inspires every life, by operating as a business that focuses on people from all sectors, because the company believes that people are the key to the success of any organisation. Therefore, it aims to focus on its customers, personnel, shareholders, business partners and people in society on the basis of caring, trust and sharing.

To ensure this, Thai Life Insurance has chosen a sustainable path, optimising profits and reinvesting a portion of those back into society because they believe that if the surrounding community is strong, the company will continue to grow and feed back into the sustainability cycle. Thai Life Insurance is therefore the first life insurance company to develop a sustainable development goals (SDGs) master plan in collaboration with the Thaipat Institute, in order to create shared value between companies and the community. The master plan achieves this by grouping goals into three main strategies according to the sustainability standards of the international insurance business.

Promise strategy Thai Life Insurance has, from its infancy, been determined to develop into a leading international life insurance company with an aim to help create financial stability for all, and to operate as a trusted partner who supports its customers. It is only with professional organisational management, good corporate governance and human resources management that this can be achieved.

In 2019, the company announced that it would be reinventing its business model and following a ‘life solutions’ approach, considering the well-being of the customer through the development of the organisation in all aspects, including products, services, distribution channels, human resources development, administration, and branding.

106

| Winter 2021

This came out of a desire to cultivate a sense of help and support within the company, developing the potential of its employees so that they are knowledgeable, considerate and well-rounded. The sharing of these common goals has been key to a strong company culture.

In particular, the company has helped to develop the role of its life insurance agents to become ‘life solutions agents.’ Tasked with taking care of customers in every phase of life, they promote healthier, wealthier lives for customers through three features.

Firstly, ‘life provider,’ which is to be a trusted adviser, ready to give advice and take care of every stage of life with more than 200 life insurance plans.

Secondly, ‘health provider,’ which is to take into account the health of customers, and give advice and recommendations for hospital visits to all customers at any time.

Thirdly, ‘wealth provider,’ which is to advise on financial stability, and help customers to make progress with savings and investment.

The company aims to enhance the capabilities of its employees in all aspects, whether it is the development of skills, knowledge, international standards of work, the spirit of caring, known as ‘Omotenashi,’ and also professional ethics, with specific training courses available at all levels.

The courses are held on a regular basis each month and adhere to the requirements of the Office of Insurance Commission. We provide courses for obtaining an insurance agent licence, for insurance agent licence renewal, and for a code of knowledge for life insurance policy application to name but three.

Our courses also cover the fundamentals, including a basic understanding of the life insurance business and the codes of conduct and good practice, which is vital when striving to maintain the highest levels of professionalism for life insurance agents.

At the same time, the company is also seeking ways to develop knowledge and work

Thai Life headquarters in Bangkok, Thailand

potential by adopting technology to help in the effective development of personnel. It has taken steps to achieve this by initiating and applying new technology to support the learning process of all personnel thoroughly.

Protection strategy Technology has been instrumental in helping Thai Life Insurance strive to meet the needs of its customers by creating products and services that are quickly and easily accessible.

The continuing evolution of these products means that the systems and processes behind the user-friendly services are continuously reviewed and improved to ensure maximum efficiency. We hope to be able to provide the very best support to our customers during the transition to this new digital era.

We have considered new aspects such as a fresh look at the Thai Life Insurance app, a service that facilitates access to any policy information and where users can log in and do business in one place. Customers are able to check their personal information online, including policies, change their address, phone number and email, download insurance payment certificates, display a list of premiums to be paid, pay for their insurance via mobile banking and credit card, and search for network hospitals.

Along with those benefits, we have also

w e a lth m a nagemen t

Insurance

Prosper strategy

TECHNOLOGY HAS BEEN INSTRUMENTAL IN HELPING THAI LIFE STRIVE TO MEET THE NEEDS OF ITS CUSTOMERS BY CREATING PRODUCTS AND SERVICES THAT ARE QUICKLY AND EASILY ACCESSIBLE

provided customers with access to ’Thai Life Insurance Life Life insurance plans being offered Fit’ and ’Thai Life Insurance Privilege’ projec t s in order to promote better health and a better Year when the project ‘Thai Life Insurance, opportunity for better life.

A l s o r e v ie we d life,’ was initiated w a s t he me d ic a l second opinion (MSO), which is a consulting service, a special supplementary service which the company runs in collaboration with MediGuide, a medical consultant expert with over 20 years of experience, and there is a service network from more than 100 leading medical institutions around the world, including the US, UK and China, which customers receive free access to.

The Thai Life Insurance virtual hospital was created in order to encourage customers to have good health through preventative healthcare. Thai Life Insurance partnered with Samitivej hospital to create an ecohealth system to help connect customers with healthcare and also to promote good health.

Customers will be able to access medical services conveniently anytime through ‘Samitivej Plus,’ an app that was created to guide customers through each step of their

200

2019

experience; before they come to the hospital, during their stay, and after they return home.

Customers are also able to consult a doctor 24 hours a day at their convenience, for a reasonable fee. In 2019, in order to prepare for its digital transformation, Thai Life Insurance laid the foundation for IT and digital works in line with changes such as the data driven customer experience (DDCX) programme, which drives advancement to the customers’ experience by analysing customer data to find suitable products and services. This has been invaluable for helping our representatives find and present the right products at the right time.

The sales agent qualifications are set at four levels according to skills, qualifications and production of work referring to the following criteria: 1. Life Partner Qualification (LP) – must hold a life insurance agent licence and be enrolled in the training according to the specified curriculum.

2. Life Partner Prime Qualification (LPP) – a unit manager level or higher who has passed the life partner courses.

3. Financial Partner Qualification (FP) – a unit manager level and higher who has completed LP training and registered as a universal life seller.

4. Financial Partner Prime Qualification (FPP) – a unit management level or higher with an IC licence to sell unit linked products and who has passed the training courses set by the company.

We are committed to being a life insurance company with a volunteering spirit, we encourage our people to play an active role in the community and in doing so, to help enhance the quality of life of others. The company has raised its corporate social responsibility operation towards creating shared value (CSV), by developing a business model for creating economic values that are shared between society and the company. It is with this that the company hopes to fulfill the needs of stakeholders in all sectors.

The company also initiated a project called ‘Thai Life Insurance, opportunity for better life,’ during 2019. This is a shared initiative between the company and community that mobilises our people at the sub-district and village levels to use their own local raw materials, resources, capital and labour to provide knowledge in the form of ‘teach to do, and to make it practical,’ to community enterprises throughout the country. The objective is to provide people in the community with a better quality of life, more money, better health and a long and prosperous life. By bringing knowledge, skills and expertise from experts and representatives of the company and passing it into the community, we can also help improve the overall development of sales, communications and financial management skills among our customers, including knowledge of life and health insurance. The company’s sale agents in the area can act as coaches as well as an intermediary, helping to build a good relationship between the company and the community as well as creating a good image for the life insurance business.

Increasing knowledge Moreover, the company has also opened product distribution channels to community enterprises across the country, and farmers who produce healthy products now have access to an online marketplace through a Facebook group called ‘sustainable marketplace’ that serves as an online community for presenting products, including a comprehensive hub to increase knowledge from project speakers, and from which community members are able to learn and study at anytime. Thai Life Insurance is therefore the first insurance company aiming to develop business operations with a sustainable goal in mind in Thailand. To do this successfully, it must continue to nurture education within the company and caring in the wider community.

By striving to improve the well-being of its customers, Thai Life Insurance will continue to be an organisation that grows sustainably alongside the Thai people. n

Winter 2021 |

107

w e a lth m a nagemen t

Investment Management

Investing in the bigger picture The year 2020 was a chance for many people, investors included, to reflect on what really matters to them and – like an expert chess player – use the time to consider their upcoming moves In many ways the last 12 months have been an inspirational experience. The world has collectively banded together to fight an invisible, destructive force. Vaccine development has exceeded even the best predictions, and while collective lockdowns have not been popular, they have been immensely effective at slowing the virus.

The world has experienced a mobilisation of resources towards a common enemy in an effort that has only ever been seen during wartime. Frankly, the scale of work can only be matched by the scope of the tragedy COVID-19 has inflicted on so many families.

It is not controversial to say that the year 2020 is one that will never be forgotten. We have reshaped how we live our lives, in some ways permanently, and been provided a moment of reflection. What is truly important?

What world do I want for my children? What can I do to create a better future? These are the questions that investors are asking both themselves and the people in charge of their portfolios. Technological development and innovation are inevitable, and have only accelerated due to COVID-19, but what will be more impactful are the changes to the fundamental motivations of investors.

This year the World Finance Investment Management Awards are spotlighting the firms that are answering these questions and exceeding clients’ new expectations. These firms are not only keeping their customers informed and safe by using digital channels of communication, but they are taking into consideration that the core reason many of their customers come to them is changing.

These businesses know that their clients care about their future, both financially and existentially, and are rising to meet the challenge.

Bounce back Back in 2014, the future of the wealth management sector looked very promising.

According to PricewaterhouseCooper’s Asset 108

| Winter 2021

Management 2020: A Brave New World report, the sector was set for a record-breaking year. Global investable assets were expected to increase to reach more than $100trn by 2020, with a compound annual interest rate of six percent. Sophisticated new tools and analytics were expected to revolutionise how the industry operates, and companies in the asset management space would transform into a proactive force for good.

It’s surprising how much of the prediction holds true. In August 2020, Boston-based research firm Cerulli Associates placed the total value of assets under management as $102.7trn in 2020, admittedly almost $1.7trn down from the previous year. PwC’s 2014 report also accurately predicted the value of technology in the modern asset management environment.

Thanks to the use of technologies such as data mining and customer engagement systems, service delivery has become almost an entirely online process.

For firms that heeded this warning, the COVID-19 pandemic may not have been the catastrophic blow many expected. As the world locked down, people with assets under management were suddenly not only unsure of what investments made sense, but they were also prevented from going into a branch or office to receive some personal guidance. Digital systems obviously avoid this problem, but the firms who were not already fully digitally attuned were suddenly caught out.

Asia first The COVID-19 pandemic is unprecedented, making historic comparisons difficult, but Asia paints a clear picture for the rest of the world when it comes to navigating into a COVID-normal environment. As the first continent in and first continent out, what happens in the region will be of significant interest to managers in the US and Europe.

A recent McKinsey & Company report titled: Asia wealth management post-COVID-19: Adapting and thriving in an uncertain

THIS CHANGED ENVIRONMENT WILL ALTER THE RISKS THAT PEOPLE, INVESTORS AND THE BROADER MARKET ARE WILLING TO TOLERATE

w e a lth m a nagemen t

Investment Management

world, reveals how quickly markets can recover from the devastating COVID blow.

According to McKinsey & Company, investor wealth in Asian equity markets declined by approximately 10 to 15 percent between Februar y and April 2020. China was, unsurprisingly, the biggest contributor to this fall both in terms of investors’ portfolios and economic activity. However, by June 2020, investments began to return to an upwards direction, indicating a positive sign for the sector at large.

The report flags several areas of concern.

The first is retaining investors’ trust in financial institutions. Many will have memories of the 2008 global financial crisis and the doubts that were cast on the solvency of so many organisations. With COVID-19 acting as a catalyst for immense disruption, even greater than what was seen in 2008, wealth managers will need to do a lot to reassure their clients and keep them from panicking.

In a medium-term scenario, identifying new growth opportunities will be the next priority

WORLD FINANCE INVESTMENT MANAGEMENT AWARDS 2020 BEST INVESTMENT MANAGEMENT COMPANIES COUNTRY COMPANY Antigua & Barbuda Global Bank of Commerce Argentina Puente Bahrain GFH Financial Group Belgium Ing Brazil Itau Asset Management Bulgaria Compass-Invest Chile BCI Asset Management Colombia SURA Investment Management Croatia ZB invest Denmark Danske Capital Egypt EFG Hermes El Salvador AFP Confia Finland LocalTapiola Greece Eurobank Asset Management Ireland Setanta investment Management Japan Nomura Asset Management Kuwait NBK Asset Management Malaysia AmInvest Mexico SURA Netherlands APG Asset Management Nigeria Investment One Philippines BDO Unibank Saudi Arabia Alistithmar Capital Singapore UOB Asset Management Sweden AXA Investment Management Thailand UOB Asset Management UAE AIX Investment Group Uruguay Puente Vietnam MB Securities

as investors look to make sense of a new reality. Finally, after the industry has found its feet, competition will resume. The lingering question is what a COVID-normal world will look like. From a business sense, the shift to a digital-first model seems to be permanent.

The industry was already heading towards digital communication and analytics as the primary form of interaction, but the current environment has all but guaranteed this will be the main form of engagement from now on.

Additionally, the COVID-19 pandemic has changed the way we look at risks. It’s clear that the world faces a number of existential threats to our safety, both physical and financial, that have the potential to shut down business overnight. This changed environment will alter the risks that people, investors and the broader market are willing to tolerate. It’s easy to see investors shifting to a more conservative portfolio, or one driven by their values.

Trusted partners Looking forward to 2021, asset managers are now identifying what new initiatives they can undertake to reassure their clients. A study undertaken by the Australian Securities Exchange shows that Australian investors have reacted to the disaster with some degree of sophistication. People around the retirement age have adjusted their expectations, while younger investors have accepted a willingness for short-term risk in exchange for potential long-term gains. In the first three months of the pandemic, more than half of investors made changes to their portfolio, and almost one out of 10 changed their entire portfolio.

Importantly, the value of an investment manager is still considered very high. The Australian Securities Exchange reports that the vast majority of investors were contacted by their adviser in the first three months of the pandemic, and the vast majority also found their adviser either ‘somewhat helpful,’ ‘very helpful’ or ‘extremely helpful.’ These results show that investors still place a high priority on the expertise of a trusted and reliable advisor. This will be important for advisors to keep in mind as they gradually continue towards a COVID-normal portfolio for their clients.

The skills that asset managers need to succeed in the future has dramatically changed. Not only do they need to be digitally literate while still providing personalised service, they need to look to the bigger picture and understand the shifting trends of the modern investor. The winners of the World Finance Investment Management Awards for 2020 are the companies most able to shift their thinking and embrace the new reality we find ourselves in. n

Winter 2021 |

109

w e a lth m a nagemen t

Investment Management

Customer risk aversion presents an opportunity After seeing a surge of account openings and investment transactions during the pandemic, Philippine bank BDO Unibank rethought its strategy and found ways to provide investment opportunities to clients to help them secure their future Makati City skyline, the Philippines

words by

Rafael G. Ayuste, Jr. SENIOR VICE PRESIDENT, HEAD OF TRUST AND INVESTMENTS GROUP, BDO UNIBANK

In 2020 the COVID-19 crisis dragged the world’s financial markets to significant volatility and forced investors to massive redemptions. However, it is during these periods of uncertainty that companies need to embrace new opportunities and guarantee to their customers clear and open communication as well as solid client servicing. This has accelerated the pace of business both in the Philippines and around the globe, with companies speeding up a digital transformation that has changed the way customers interact with financial professionals. BDO Unibank has embarked on improving its digital footprint for years already, and over these months, its asset managers have worked hard to increase visibility and show that they can keep service level expectations. Despite working on a reduced capacity in compliance with newly established quarantine rules, we had to find ways to deliver consistent returns and reliable customer service. As a result, we introduced a webinar series called Market Sense, because we understood the importance of providing guidance to help our clients better understand the current situation in the markets and where it is headed, so they 110

| Winter 2021

can make better investment decisions. Also, we ramped up our electronic direct mailers, sending investment recommendations to clients to help them grab investment opportunities. As a result of this, BDO Trust has surpassed the PHP one trillion (€20.8bn) mark in assets under management (AUM) this year, amidst the crisis. This further bolsters our leadership in the Philippine trust and investment industry.

BDO Trust’s ability to navigate through tough times was tested during this crisis and we believe that we rose to that occasion. As the government slowly eased up on the quarantine measures, the economy started to recover.

Despite the on-going pandemic, we know it is our duty to serve the Filipinos during these unprecedented times.

Digital transformation Filipinos from all walks of life, young and not-so-young, started doing their investment transactions online. We saw a surge of account opening and investment transactions done during the community quarantine. This sudden change in customer behaviour gave us a glimpse of what can be the new reality for investments in the future. Clients are now expecting investment products and services to be available 24/7. On-demand and reliable online investing will become a new standard for local banks, which for years have heavily relied on the branch network. We still believe that the branch network will continue to be the pri-

mary touch point, but the online channels will now be an integral part of the whole banking and investment distribution system.

As technology can easily be replicated, what will differentiate the best banks from the good banks is how the digital aspects of the business enhance the important human interactions. We recognise the need to differentiate from being a product and service provider to an investment partner, able to guide our clients and help them achieve their investment goals through both personal and digital means.

Future plans Introducing new clients to the trust business will be an important driver moving through 2021. Improving our retail investor base will start with increasing our penetration from our own bank’s client base. We shall be targeting clients with a high propensity to invest through data-driven marketing initiatives. This will be done in co-ordination with our branch banking partners to ensure that these clients are given proper guidance at the onset. The goal is to evolve them from being savers to becoming investors. Enhancing client touch points will be an important factor as well. This year we shall continue to harness technology and enhance processes to better serve digitally savvy investors and to provide more value and experience to customers. We have embarked on a comprehensive front-to-backend system enhancement to prepare us to further scale our business. We

w e a lth m a nagemen t

Investment Management

“On-demand and reliable online investing will become a new standard for local banks, which for years heavily relied on the branch network”

have also made significant investments in improving our distribution channels to allow for a more robust digital platform, both online and mobile, to expand our customer reach more efficiently and to greatly enhance customer experience and meet their expectations. The ongoing enhancements will provide full mobile access to BDO UITF and PERA clients, with BDO Easy Investment Plan (EIP) capabilities for all UITF products, and a full-service invest online functionality delivering a smooth customer journey. We want the experience of the client to be the same whether they transact through the branch or online. Initiatives that will allow clients to have electronic certificates of participation and partial redemption of their investments, as well as the experience to create portfolios for specific financial goals, are in progress. The branch will also be provided with ready information on investments so they can service clients efficiently.

Affordable investment products Our continuing efforts to increase BDO UITF usage through financial literacy is just as important. We have a dedicated team that provides financial literacy programmes directly to our clients. We teach proper budgeting, smart investing habits and retirement planning to different audiences - clients, employees, teachers, and factory workers to name a few. We also promote affordable investment products that start with investment amounts as low as PHP 1,000

($20) for peso-denominated funds and $200 for US Dollar-denominated funds via the EIP. We also offer the Personal Equity and Retirement Account (PERA) to our retail clients to help them augment their retirement pay and plan for a comfortable retirement. The PERA is a voluntary retirement account that is meant to supplement a Filipino’s government service insurance system (GSIS), social security system (SSS), and/or corporate pension benefits. It is designed to promote greater financial security for Filipinos here and abroad. We believe that planning for your retirement is one of the key tenets of financial wellness and that PERA will greatly help improve Filipino lives after their retirement.

Under PERA, Filipinos of legal age can contribute up to a maximum of PHP 100,000 ($2,075) for local residents or PHP 200,000 ($4,150) for overseas Filipinos within a calendar year. Contributions to employees’ retirement accounts can also come from employers.

The contributions under PERA are entitled to exclusive tax benefits such as a five percent tax credit on the contributed amount, investment income is exempt from taxes and account investments are exempt from estate taxes. We offer retirement accounts to clients through the PERA online application. This has allowed us to promote PERA efficiently, giving equal opportunity to Filipinos nationwide as well as greatly enhancing the customer on-boarding experience. We also offer three PERA UITFs

which are designed to serve PERA contributors in all stages of retirement preparation.

The BDO PERA Equity Index Fund is ideal for those who are starting to build their retirement fund while the BDO PERA Short Term Fund is more applicable for those about to retire or who have already retired. The BDO PERA Bond Index Fund is appropriate for those who are nearing their retirement. We strongly believe that PERA gives us Filipinos the opportunity to augment our retirement fund so that we can enjoy life after our working years.

Impact of pension reforms We have become aware of the need to invest for our eventual retirement, adding to the benefits that we will receive from social pension and corporate retirement packages. However, the Philippine Retirement Pay Law does not require companies to fund pension plans to cover their retirement liabilities. This leads to employers paying pension benefits only upon the retirement of their employees and often based on the minimum requirements set by the law. The pension received from corporate and state pension plans may not be enough to cover expenses during the retirement years.

This problem has led the government to consider making it mandatory for private companies to partially or fully fund retirement plans for their employees. This development will not only help Filipinos cope with their lives after retirement, it will also help grow the Philippine capital market through the increase in demand for investments to fund retirement accounts.

The government believes that improving the pension system in the country will be a winwin scenario for the country and its citizens.

If the pension reforms come to effect, companies will start to look for trust and investment entities that will be able to provide sound investment advice and reliable service when addressing their retirement fund needs. This will be beneficial to banks that have greater experience in sourcing investments and managing retirement funds.

We have years of experience in handling the retirement funds of several local and multinational companies in the country. We also take things a step further, as not only do we provide our corporate clients with good quality securities to fund their retirement funds, but we also help their employees prepare for their eventual retirement through constant financial literacy campaigns and the availability of a wide array of retail products such as PERA and BDO UITFs that are both accessible and affordable. We also have the EIP that allows employees to invest automatically and regularly for their different investment goals, including their retirement. n

Winter 2021 |

111

w e a lth m a nagemen t

Investment Management

The sustainable investment boom With the rising popularity of ESG funds, investors have to be careful not to fall foul of greenwashing and proposed EU regulations may help them to do just that

words by

Lana Crowe INVESTMENT CORRESPONDENT

2020 was a watershed year for ESG funds.

Investment strategies that take environmental, social and corporate governance factors into account enjoyed record inflows; over the last year, a third of inflows into global funds was invested using ESG strategies, rising to more than half in June and July. As of September, global inf lows into sustainable funds are up again, reaching $80.5bn, and assets in sustainable funds are at an all-time high.

Numbers suggest that this was money well invested: 40 percent of ESG and sustainable funds made top-quartile returns in the first half of this year, with the average ESG outperforming its traditional peer, according to Trustnet. The idea that sustainable investment sacrifices returns for morals has been well and truly put to rest. The COVID-19 pandemic is partially responsible for the spike in inflow, as investors seek sustainable investments that can withstand an unpredictable market.

Hortense Bioy, Director of Sustainability Research at Morningstar, told World Finance: “The disruption caused by the pandemic has highlighted the importance of building sustainable and resilient business models based on multi-stakeholder considerations.”

The global health crisis has had an impact on all categories of the ESG model: beyond health and safety, the pandemic has resulted in increased interest in employee benefits and “renewed focus on management compensation”, says 112

| Winter 2021

Bioy, as well as intensifying already increasing concern over the climate crisis. Similarly, the success of ESG funds this year has been widely attributed to favourable sector exposure driven by the pandemic. Sustainable investment tends to avoid oil and gas, the value of which plummeted earlier this year; despite oil prices stabilising after dipping to sub-zero in the US for the first time in history, energy stocks continue to underperform. On the other end of the market, tech stock is heavily prevalent in ESG strategies: in October, Apple, Amazon, Facebook and Google-owning Alphabet were up 18 percent year on year. There is a sense that the success of ESG is attributable to special circumstances. But as of July, the ubiquity of tech stock – eight of the 10 best performing large-cap funds using ESG metrics have either Apple, Amazon or Microsoft as their biggest holding – has led to lasting success: almost 60 percent of sustainable funds delivered higher returns than their conventional counterparts over the past decade. Research conducted by the World Resources Institute suggests that differences in sector exposure accounts for just 0.77 percentage points of current ESG over-performance; a significant 0.65 percentage points were gained by picking better-performing stock within each sector, suggesting that ESG is an effective measure of financially successful investment.

The numbers are impressive. But the vogue for ESG is plagued by accusations of greenwashing, calling the strength of ESG’s claim to sustainability into question. While ESG fund integration considers a company’s ESG profile, financial performance remains the top priority when purchasing stock.

This is where ESG differentiates from socially responsible investing (SRI) and impact investing, which respectively screen investments according to specific ethical guidelines and prioritise quantifiable social impact. What’s more, ESG valuation is conducted independently or using an agency score, the latter of which was recently deemed unable to “facilitate meaningful investment analysis that was not significantly overinclusive and imprecise” by the chair of the SEC. Varying definitions and methodologies mean one company can attract scores across the spectrum, making it increasingly difficult for investors to identify truly sustainable companies. ESG continues to be dominated by the European market, and, according to PwC, European sustainable investment products could increase threefold by 2025, outnumbering traditional funds.

Proposed regulations developed by the EU, set to commence over the coming years, outline a number of environmental objectives driven by the EU’s pledge to become climate neutral by 2050, including pollution prevention ESG fund assets in Europe and the transition to a circular economy. Regulating non-financial PwC’s best-case prediction sustainabilityfor assets in sustainable related disclosures investment products by 2025 aims to enhance the c ompa r a bi l it y of financial products; the catch-all nature Percentage of ESG and of the d isclosure sustainable funds that made g uidelines means top-quartile returns in the first they will cover the half of 2020 vast majority of funds that currently claim to use ESG strategies, and the appeal of retaining its marketing advantage will outweigh the administrative burden. Philipp Woelk, EU policy officer at responsible investment charity ShareAction, told World Finance that the regulation could have more inf luence on which funds ESG inflows will be directed towards rather than impact its booming growth. “Ideally, the regulation will shift funds to the ‘better’ ESG funds and ultimately push the laggards, who, until now, have benefited from the ESG or sustainable label, to do more ESG integration.”

The initiative does not strictly aim to make ESG an exclusive status but rather to direct capital towards more sustainable growth and make broader, non-financial considerations a vital element of mainstream sustainable investing. n

$1 trn

$7.5 trn 40%

At Standard Insurance, we ensure that our At Standard we ensure that our customers have Insurance, world-class insurance protection. customers have world-class insurance protection.

All of our risks are reinsured by the world’s largest and most stable reinsurers, all of which are highly rated and led by one ofbythe largest reinsurers withmost a rating of A+

by Standard Poor's.

All of our risks are reinsured the world’s largest and stable reinsurers, all ofand which are program probably with the best in the highly rated andOur ledreinsurance by one of the largest isreinsurers a rating of Philippines.

A+ by Standard and Poor's.

Our reinsurance program is probably the best in the Philippines.

If you are serious about protecting your high-quality buildings, vehicles and other valuable assets, you may want to give us a call.vehicles and other If you are serious about protecting your high-quality buildings, valuable assets, you may want to give us a call.

w e a lth m a nagemen t

Investment Management

The stewards of social responsibility Leading Asian asset manager UOB Asset Management (Thailand) has enjoyed two years of robust growth thanks to its tailor-made investment solutions and products

words by

Khetkhan Neesanant DIRECTOR, HEAD OF INSTITUTIONAL & HNWIS BUSINESS DEPARTMENT, BUSINESS DEVELOPMENT DIVISION, UOB ASSET MANAGEMENT (THAILAND)

Thailand’s asset management industry, particularly private funds or segregated mandates, has grown by as much as 15.03 percent (CAGR) due to interest from insurers over the past 10 years, compared to 10.37 percent for the asset management industry as a whole, as of the end of December 2019, according to AIMC. As a result of persistent low interest rates and volatility in equity markets, there is a growing demand from clients – both institutional and HNWIs – for more customised solutions across different levels of risk and return. Additionally, investors may change their mandate as market sentiment shifts, in order to dynamically rebalance their portfolios in a fluid and evolving environment.

Robust and significant growth Serving both institutional and HNWI investors, I’m proud to say our private fund business in Thailand has enjoyed significant growth of 37 percent (CAGR) over the past two years, according to AIMC. Within the institutional segment, our clients include private and publicly listed companies across a broad range of industries, endowments and foundations, as well as insurers and family offices. We have also been entrusted with one of our largest local equity mandates from a pension fund client. With specific investment guidelines of a Saving and Credit Co-operative, our PM team has developed the skills and expertise to help our clients achieve their long-term objectives. These efforts have seen us become the savings co-op fund manager of choice for many investors.

The increasing interest in foreign assets is a trend we have identified. With this in mind, we have been actively recommending that our clients diversify their investments abroad.

The benefits of expanding investments into global markets are many – lower volatility, greater diversification and the lower risk 114

| Winter 2021

concentration in a basket of asset classes are just a few examples. We are lucky to have attracted a diverse, and constantly growing, client-list. To meet the unique requirements of each client’s investment needs, our team takes pride in crafting tailor-made solutions. The cookie cutter or ‘one-size-fits-all’ approach has never been part of our vocabulary. UOB Asset Management (UOBAM) has a long history of partnering and working closely with our clients to help them ride out market cycles.

Starting from the lower end of the risk spectrum, fixed-income instruments have the potential to generate income, mitigate downside risk and diversify a portfolio.

For multi-assets, we offer a broad range of investment options, including income and life cycle. For longer time horizons, we focus on equity, expecting higher returns for those able to tolerate the possibility of capital loss. Then there are alternatives that provide exposure to both inflation-sensitive assets and private investments. Being receptive to changes in the market and the shifting needs of our clients, we encourage a constant dialogue. Client feedback is invaluable to us. Having taken on board feedback from our corporate clients – relating to controls and operational risk prevention in performing online transactions – we have developed a dual-approval process with OTP notification for all our solutions.

Sustainability and investing responsibly At UOBAM, we recognise that the investment community can play a pivotal role in the stewardship of social responsibility, thereby driving sustainability globally. In early 2020, we became an official signatory of the UN Supported Principles for Responsible Investment (PRI). Our twin pillars of sustainability are responsible investments (i nve s t ment r el at e d) a nd c or p or at e sustainability stewardship (non-investment related). When investing for profit and purpose, we believe that responsible investment can contribute significantly to the development of a more sustainable financial system – which in turn benefits the wider community.

Integ rating ESG eva luation into our investment process across asset classes has

enabled us to identify high-quality companies.

We implement a stewardship policy: active ownership means actively engaging with a company, including through proxy voting related activities. These activities form a key component of our responsible investment approach that fulfils UOBAM’s fiduciary duty as an investment manager, to act in the best long-term interests of our clients.

We have also put in place a series of internal staff education plans, involving webinars and staff-led sustainability education workshops.

These have been developed to improve awareness and knowledge of key sustainability issues pertinent to UOBAM (Thailand), which is one of the first asset management companies in Thailand to follow the PRI’s guidelines with the integration of ESG factors into our investment processes, after UOBAM became a signatory to the UN-supported PRI in January 2020. We capitalised on this fact by offering UTHAI-CG for Thai equity and UESG with Robeco as a sub-manager for global equity investment solutions.

Shaping a bet ter world for f uture generations, we are championing a culture of sustainability internally. UOBAM will primarily support the following United Nations Sustainable Development Goals: zero hunger, good health and wellbeing, industry, innovation and infrastructure, sustainable cit ies a nd com munit ies, responsible consumption and production, and climate action.

w e a lth m a nagemen t

Investment Management

“Our targeted marketing strategy means that we are able to create personalised messages for individual investors based on their requirements”

Bangkok business district, Thailand

Exceptional services offline and online UOBAM’s strategic pillars are built on solid foundations. We always keep customers front and centre, while staying digitally engaged and enabled. Not only do we strive to provide best-in-class investment solutions and performances, we also provide a level of customer service and experience that often far surpasses our clients’ expectations.

UOBAM (Thailand) partners closely with UOBAM and the regional network to drive forward the adoption of new technologies, innovation and best practices, allowing us to leverage scale and efficiency. Keenly embracing technology, and harnessing digital innovation across our organisation, we have developed an award-winning wealth management platform known as UOBAM Invest. This state-of-theart invention provides a robo-advisory service via a mobile application, allowing investors to monitor and manage their portfolio 24/7. The innovation is being improved continuously, enabling investors to plan and achieve their investment outcomes in the most user-friendly way possible. We have also been hard at work enhancing our digital services elsewhere. For instance, we have added QR codes for easier transaction payments and enabled online opening of accounts on both our website and UOBAM Invest platforms – allowing investors to open accounts with us easily and with greater speed and efficiency. Agility is our forte, and we are constantly developing our offer to provide personalised services.

To better understand investors’ behaviour, we have conducted research on customer journeys. Analysing these findings helps us refine marketing tools and materials, including advertising campaigns. Our targeted marketing strategy means that we are able to create personalised messages for individual investors based on their requirements – all put in place with the objective of building seamless customer experience and increasing long-term customer loyalty; and naturally, conversions in their investment journeys.

Targeted COVID-19 support During challenging times, safeguarding our clients’ investments is a top priority that forms part of our fiduciary duty. At UOBAM (Thailand), we are committed to providing investment management services essential to maintaining confidence in the financial system, reducing risk for our clients. Thanks to our technological capabilities, we have been able to continue delivering products and services without interruption during the COVID-19 pandemic.

The crisis has spurred us on, not only to be more disciplined, but also to exercise greater creativity and clarity in our communications, both internally and externally. Just like elsewhere in the market, the economic slowdown has impacted our clients’ liquidity and working capital needs, with some investors needing to increase their levels of cash onhand. We have been able to provide this via our

money market funds that focus on preserving capital and providing liquidity by investing in short-dated, high-quality corporate bonds, government securities and bank deposits.

This liquidity solution is popular as it provides enhanced returns over that of short-term deposit rates. In essence, it serves as a shortterm investment vehicle while waiting for the next investment opportunity.

Tackling unforeseen challenges The coronavirus has thrown a wrench into the works for many financial institutions, requiring them to transition rapidly to new modes of operation in order to fulfil their fiduciary duties, while keeping customers and employees safe. Backed by almost three decades of experience and the many lessons learnt, we have been able to respond swiftly to evolving situations and continue to serve our valued clients. Our mantra during this challenging period has centred on ‘staying safe, staying effective, and staying committed.’

These three measures underpin everything we do to continue providing timely and ongoing support to our investors. To give a tangible example of how we have ensured business continuity while adhering to safe distancing g uidelines and stringent disinfectant procedures, we have implemented workfrom-home arrangements for over 80 percent of our staff. This transition has run smoothly thanks to our technological capabilities, which ensure that we are able to continue to offer products and uninterrupted services. Of equal importance, we have maintained our service levels by increasing the use of digital channels to deliver timely market updates, investment insights and ensured that our relationship managers are available to assist with client queries.

And naturally, we are keeping a close eye on clients’ investments, ensuring that there has been no disruption to the daily investment meetings, as well as the ability of the risk and performance measurement team to monitor clients’ investment exposures and portfolio movements, raising alarms when required.

Another key part of our repertoire is to help clients navigate this challenging financial environment. To this end, we will continue to harness our nearly 30 years of experience as an investment management company, tapping into the expertise of our teams of investment counterparts and partners across the region, and guided by our established investment philosophy. n

Winter 2021 |

115

w e a lth m a nagemen t

Investment Management

A paradigm shift in sustainable investment Implementing the changes that are required for sustainable investment means overcoming several challenges, but Latin America is taking part in this transition, recognising a collective effort is needed to secure our future, writes María Ruiz Sierra, Sustainable Investment Associate at SURA Investment Management More than ever, the major environmental, social and economic challenges facing humanity today underscore the need to make structural changes to our economic system, both in the way we produce and the way we consume.

Governments and corporate sectors are called upon to increasingly make decisions by placing sustainability criteria at the heart of everything they do, seeking to balance the creation of economic value with protection of the very environmental and social systems that support and make their existence possible.

The financial sector and capital markets play a fundamental role. The consideration of non-financial issues when making financing and investment decisions is gaining greater relevance as the risks and opportunities detected by applying ESG analysis become clearer.

In spite of the fact that sustainable investing is nothing new and has been steadily evolving for a long time now, from value-based investing to socially responsible investing (SRI), COVID-19 has served as a major catalyst for the future of ESG practices. It has underlined the need for joint action to be taken if we are to tackle the challenges we all face. There is a growing body of evidence that shows that optimum working conditions, transparency, mitigating negative effects on ecosystems and, generally speaking, having a positive impact on company stakeholder groups, constitute an advantage when it comes to creating added value and standing the test of time.

Adapting and evolving Ultimately, sustainability is a company’s institutional capacity for building trust and adapting to new expectations, in terms of both the market and in relation to the relevant regulatory authorities. Addressing this fact, Christiana Figueres, Executive Secretary of the United Nations Framework Convention on Climate Change, has stated that 50 percent 116

| Winter 2021

of the world’s corporations are now adapting to sustainable frameworks and recognising that doing so has a significant impact on their profitability.

The pandemic has exposed and exacerbated the challenges that we have faced for years, especially in the social arena. It is crucial to understand that many of its impacts are here to stay. The overall disruption seen so far has required a certain amount of intervention from both the public and private sectors to ensure the recovery of their economies, but this in turn has given us the opportunity to look ahead in terms of sustainability principles.

The role of investors is no less important in this respect, since through their capital allocation decisions they are effectively injecting liquidity into the different economies, while encouraging activities that help enhance sustainability. Under the UK’s Green Finance Strategy, sustainable investing can be understood from three standpoints. Firstly, we have ‘Greening Finance,’ which consists of systematically integrating ESG criteria into mainstream investment analysis to help make more informed decisions. In this way, investors are provided with a more complete picture of a company’s strategy, risks and opportunities, and to potentially influence its practices to improve corporate sustainability standards.

Secondly and thirdly, we have the ‘Financing Green’ and ‘Capturing the Opportunity’ components, which are about mobilising capital to sectors and technologies that pave the way towards cleaner technologies, enhanced levels of decarbonisation and greater sustainable development, and that are increasingly becoming good investment opportunities.

Continuous increase in numbers Latin America has not lagged behind in this global transition; indeed, 2020 was a year in which sustainable investment has

Paseo de la Reforma in Mexico City

greatly expanded throughout the region. An example of this is the increase in the number of PRI signatories, which went from 28 in 2019 to, at the time of going to press, 69 in 2020. This shows a much greater interest and commitment on the part of institutional investors and investment managers in incorporating ESG criteria in their processes.

Financial regulators and oversight authorities are moving ahead with new regulations and technical guidelines to promote the disclosure of ESG information by market players. We have also seen initiatives being taken by publicprivate associations such as the Green Finance Advisory Council in Mexico (CCFV), which recently launched an initiative signed by more than 70 institutional investors representing assets under management that account for 25 percent of the country’s GDP, requesting more disclosure from listed companies around their ESG practices and climate mitigation targets.

In addition to this, the Responsible Investing Program (PIR) in Peru, the Responsible Investment Taskforce in Colombia and the Green Finance Roundtable in Chile have gained greater importance in furthering knowledge, defining common standards and cementing collaborative relationships with issuers around the topic of sustainable investment.

w e a lth m a nagemen t

Investment Management

28

Number of PRI signatories in 2019

69

Number of PRI signatories in 2020

WITHIN THIS ESG UNIVERSE, WE HAVE DEFINED CLIMATE CHANGE AS A MAJOR FACTOR, UNDERSTANDING IT AS PERHAPS THE GREATEST CHALLENGE FACED BY HUMANITY Building momentum At SURA Investment Management we are committed to strengthening our sustainable investment capabilities. As PRI signatories, we are making decisive progress with incorporating ESG criteria in our investment processes, doing so in a cross-cutting fashion with all types of assets. We have the firm conviction that this not only strengthens our investment criteria, but allows us to help create wellbeing and enhance sustainable development throughout Latin America. We understand sustainable investment as an investment philosophy, being aware that it is a process that we must build upon.

We are making good progress, having taken significant steps to factor ESG into our processes. Currently, our bottom-up analysis of potential investee companies includes a review of their ESG performance and their relationship with their stakeholders. To this end, we have developed a proprietary ESG assessment methodology that prioritises and weighs up environmental, social and governance factors within the context of the relevant sector. This provides an initial score based on input information that we obtain directly from these potential companies through ESG questionnaires, which we then proceed to supplement with analysis

and Social Performance Standards of the International Finance Corporation (IFC) as well as its Equator Principles. This requires that, in addition to complying with all applicable regulations, they must provide a comprehensive view of their impact and take compensatory or mitigation action when necessary.

When it comes to our real estate investments, we ensure that all our property development projects carry green building certifications. We are currently drawing up a plan for integrating standards that will ensure the efficient use of resources as well as promoting the wellbeing of the people who inhabit them. An example of this ambitious process is the construction of the soon-to-be completed Nueva Córdova building. The first building in Chile to have a photovoltaic façade integrated into its structure right from the initial drawing-board stage, it will prevent the emission of 190 tons of CO2 per year. Furthermore, this project is currently in the process of obtaining its LEED Gold Certification, by incorporating technology designed to enhance the quality of its indoor environment and offering chargers for electric vehicles and bicycles.

Push things forward from an external data provider. Analysing a large dataset in this way ensures that our process is all the more robust when it comes to identifying investment risks or strengths.

Within this ESG universe, we have defined climate change as a major factor, understanding it as perhaps the greatest challenge faced by humanity; its increasingly tangible effects are having an impact on all sectors and geographies. Coordinating the efforts of different social actors is essential if we are to achieve the goal of not exceeding a 2°C increase in global warming. To this end, we recently formed an alliance with 2° Investing Initiative, a thinktank that works to align financial markets and regulations with the Paris Agreement goals. We will be carrying out a joint investigation on the potential for building a Latin American Market Portfolio that is aligned with this objective.

We are also incorporating ESG criteria in our decisions to invest in alternative assets. We carry out rigorous due diligence that includes an assessment of the environmental and social practices deployed by the projects in which we invest. Furthermore, we are striving to adhere to international standards. In terms of our infrastructure debt strategy, for example, we ensure that the projects that we finance are carried out according to the Environmental

Clearly there are challenges ahead when it comes to implementing sustainable investment practices: comparable ESG information must be frequently and readily available; markets must move towards more homologous assessment standards that allow for ESG criteria to be incorporated into the pricing process, as well as for more significant movements of capital. Another task ahead is adapting international methodologies to the reality of our own region, as well as establishing mechanisms to avoid ‘greenwashing’, since this would prevent the required structural changes from taking place. However, for us it is a very good sign that Latin America is joining forces with this global push for action and that more and more actors throughout the region are furthering their knowledge from the standpoint of being able to connect sustainability with financial returns.

At SURA Investment Management we are taking on an active regional role through our commitment to sustainable development, as a cross-cutting element of our investment philosophy as well as part of our core asset management strategy. We hope to set ourselves apart by drawing up ESG solutions and placing them at the service of our institutional investors. By doing so, we aim to contribute to the construction of a more sustainable region and planet, creating long-term value along the way. n

Winter 2021 |

117

w e a lth m a nagemen t

Investment Management

IFCs at the heart of growth and innovation A close examination of how international finance centres can support the ‘great reset’ in the post-COVID-19 era

words by

Elise Donovan CEO, BVI FINANCE

The COV ID -19 pandemic has caused unprecedented disruption to the global economy, pausing trade and business, and plunging major economies into crisis. However, as we reflect on what has been one of the most tumultuous periods in recent history, we recognise that there is now an urgent need to help global business get back on track. With an added layer of complexity for businesses around the globe, this is the moment when International Financial Centres (IFCs), like the British Virgin Islands (BVI), can come to the fore as conduits to global growth, investment and trade. IFCs are able to help businesses navigate the uncertainties of an ever-evolving regulatory landscape and help businesses to thrive in more innovative and diverse ways. As the global economy starts to build back from the COVID-19 crisis, there are four key areas where IFCs can help support the ‘great reset’.

Supporting emerging entrepreneurs It is expected that by 2030 the global middle class will reach 5.3 billion people, and the key to this growth will be the ability to cultivate start-up and entrepreneurial cultures and allow them to flourish around the world. The World Bank estimates that 600 million jobs will be needed by 2030 to absorb the growing global workforce. In emerging markets, most formal jobs are generated by small businesses, which create seven out of 10 jobs. IFCs are already helping young businesses – vital to a burgeoning middle class – thrive in developing economies. With many start-ups operating under conditions of greater uncertainty, as well as facing more unique pressures around capital and access to funding, ensuring business-friendly environments with stable and clearly stated rules and regulations is key. While current times have only enhanced these immense pressures for businesses, with alignment to international standards and 118

| Winter 2021

increasing use of technology giving rise to greater synergy in international business, IFCs have been able to provide fertile ground to help start-ups grow and upscale. For many years, IFCs have allowed small businesses to set up secure and robust business structures offshore, so entrepreneurs can run their business with greater agility and without fear of tripping over arduous rules or prohibitively expensive administrative costs in their home jurisdiction. The tried-and-tested structures of IFCs have given those setting up a new business in these jurisdictions, as well as investors, more confidence to help a company grow. IFCs are therefore increasingly becoming an essential conduit for emerging entrepreneurs, making it easier for them to succeed.

Enabling sophisticated businesses Alongside providing entrepreneurs with access to these tried-and-tested structures, IFCs have developed increasingly sophisticated mechanisms that have also enabled institutional investors and businesses to benefit from the ability to custom-build entities and transactions to meet their needs. In an industry report recently published by Vistra, which looked at global trends in international finance, the findings showed that “offshore centres have been some of the fastest to cater to the needs of increasingly sophisticated clients.” IFCs have developed complex business infrastructure and are specialised in providing financial services, particularly those that are vital for capital flows and facilitating inbound and outbound investment. For example, it is well noted that IFCs like the BVI are an important hub for overseas investment and have played a major role in the growth of a number of Asian economies, especially China. Additionally, in an era of unprecedented economic uncertainty, mitigating risk and keeping assets protected from greater loss will play a hugely important part for many established businesses and their post-COVID recovery plans. IFCs provide a reliable and legitimate platform to facilitate cross-border trade and investment, especially with countries like China as we have seen with jurisdictions like the BVI. As China continues its

remarkable recovery from the pandemic – which is forecast to be the only economy Number of jobs needed by 2030 in the world to show to absorb the growing global positive growth in workforce 2020, according to the IMF – IFCs will continue to play a vital role in this period of post-pandemic recovery for established businesses.

600 million

Championing the digital economy One striking effect of the pandemic is that technological adoption and digital innovation have rapidly accelerated in all major economies. Despite initial hurdles, we have seen the continuation of deals, transactions, and other financial activities that have been made possible through adapting to digital methods and by using digital platforms.

However, for those economies that are lagging in innovation, there is now a greater urgency to innovate digitally – not only to overcome the barriers presented by COVID-19 but also to keep up with the irreversible technological transformation that we’ve seen throughout the pandemic. For example, China has recently carried out trials of its digital currency and is actively pushing towards a cashless society.

We have already seen that cryptocurrency has fast become a symbol of ‘stateless’ digital economies.

w e a lth m a nagemen t

Investment Management

By 2030, it is likely that currency managed on distributed ledger technology will be commonplace and could be instrumental in driving global business. The pioneers of stateless, digital assets are seeking jurisdictions that support and encourage these new asset classes. And IFCs are leading the way in developing and facilitating this new global technology.

A recent report found that the BVI, Cayman Islands and Singapore were the top three jurisdictions of choice for Initial Coin Offerings in the world in 2018. Moreover, another recent study found that 80 percent of all crypto hedge funds operating in 2019 were domiciled in IFCs. The potential for digital assets and a new digital economy is huge for the unbanked population in Africa, Latin America, Asia and the Middle East. We’re already seeing how mobile financial technology is revolutionising the movement of money around Africa, for example. As innovative incubators for these technologies, IFCs can have a hand in making financial services available to billions. Furthermore, IFCs provide agile, sophisticated yet costefficient financial products within a supportive regulatory and business environment. For example, the BVI’s “incubator” funds, which target small start-up funds, allow clients to attract and pool a small amount of investment and manage it through their own fund while avoiding high administrative costs. These are

also well suited to the digital fund space. These incubator funds enable a new manager to get established without having to appoint local directors, therefore speeding up the entire process significantly.

Adaptive regulatory environment IFCs have a proven resilience and ability to respond to new regulation. As uncertainty and complexity define the growth environment in 2020, the importance of IFCs in exercising this resilience and adaptive regulatory regime to facilitate the formation of cross-border entities and guarantee strong shareholder protections cannot be overstated. Those within the industry recognise that in order to maintain a position as a leading IFC, there needs to be a strong track record of effective regulation. IFCs are often the first adopters of international standards set by global regulatory bodies, such as the Financial Action Task Force (FATF) and the OECD, and have often achieved a higher compliance rating compared to other financial jurisdictions around the world. The trusted and proven structures and neutrality of IFCs are able to provide businesses with greater security and confidence, with such structures also helping to enable economic stability and monetary benefits too. According to the industry report by Vistra, for some clients, increased regulation is actually becoming a draw when choosing a jurisdiction.

Therefore, in this age of continued uncertainty,

businesses are finding reassurance in moving to jurisdictions that have robust regulatory systems. IFCs are also taking the lead when it comes to regulatory innovation, and understand that if we are to truly harness the power and opportunities of fintech, existing policies need to be updated and in line with a sector that is evolving fast. For example, when it comes to cryptocurrency or crypto-assets there is no bespoke regulatory regime at present, and most transactions that take place hinge on trust of the underlying technology. However, this is still a relatively new space and as adoption grows, there is an urgent need to regulate the sector in order to reap the benefits of crypto-technology and to foster good governance.

This is why THE POTENTIAL FOR the BVI is DIGITAL ASSETS actively investing in regulatory AND A NEW DIGITAL innovation and ECONOMY IS HUGE recently launched its FOR THE UNBANKED POPULATION IN AFRICA, Fintech Regulatory Sa ndbox , joi n i ng LATIN AMERICA, ASIA many other IFCs that AND THE MIDDLE EAST have been quick to establish regulatory sa ndboxes. This initiative enables fintech businesses to test new fintech products in a controlled env i r on ment a nd w it h i n a b e s p oke supervisory framework while protecting market participants. The process is designed to assess whether new financial products are compliant with existing systems and to help develop targeted regulatory responses.

Initiatives like these are helping to stimulate innovation and leverage technology to deliver new financial products and services that improve business processes.

A key role in the ‘great reset’ IFCs are a sound platform for business establishment, growth and diversification and will be crucial to help stimulate emerging and developed economies in the next decade. As we have seen, a contributing factor to China’s economic growth has been due to IFCs like the BVI, which have continued to facilitate a large percentage of cross-border trade and investment among Asian companies – a trend that is only set to increase. As we look ahead and plan for business and economic recovery, we must continue to champion the unique facets of IFCs, from their ability to foster international business partnerships to their capability of incubating and supporting the growth of innovative financial technologies.

In doing so, IFCs can play a major role in the ‘great reset’ in the post-COVID-19 era. n

Winter 2021 |

119

w e a lth m a nagemen t

Investment Management Merck Mercuriadis, founder of Hipgnosis Songs Fund

The man who sold the world Recently established music royalty investment trusts such as Hipgnosis Songs and Round Hill Music seek to establish music as just another asset class Two can play that game words by

Jo Caird INVESTMENT CORRESPONDENT

The London Stock Exchange isn’t the most rock ‘n’ roll of environments. Or rather, it didn’t used to be. That appears to be changing however, thanks to the arrival to the market in recent years of music royalty investment trusts – funds that own the rights to pieces of music, including by some of the biggest names in pop and rock.

Hipgnosis Songs Fund, a British, Guernseyregistered investment company, floated on the LSE in July 2018, raising £200m for its IPO. Founded by Merck Mercuriadis, former manager to acts such as Elton John, Beyoncé and Guns N’ Roses, the fund’s first acquisition was a catalogue of songs from Terius Youngdell Nash, better known by his stage name, TheDream. While not a household name himself, The-Dream is an award-winning producer and songwriter, having co-written hits for the likes of Justin Bieber, Beyoncé, Rihanna and Jay-Z. Hipgnosis has subsequently raised an additional £845m through further share issues, most recently raising £186.4m in 72 hours in September 2020. An aggressive acquisitions policy has seen the fund add 117 catalogues comprising 57,000 songs to its pipeline, which together offer investors a yield of 4.17 percent, according to data by Winterflood. The fund has been part of the FTSE 250 Index since March 2020.

120

| Winter 2021

Hipgnosis had long boasted of being the “first and only” UK investment company offering access to song royalties, but that all changed in November when Round Hill Music Royalty Fund announced that it had raised $282m from its own IPO on the LSE. The company, which is managed by New York City-based Round Hill Music (RHM), a music publisher and owner and operator of music copyrights, hoped to raise $375m, attributing the shortfall to the “global turbulence” caused by the COVID-19 pandemic. The fund is targeting total returns of 9–11 percent per annum, with a dividend yield of 4.5 percent. Since its launch in 2010, RHM has raised $472m in two private equity funding rounds and expects to raise an additional $250m in a third fund due to close soon. This war chest has enabled the company to acquire a portfolio of over 120,000 songs.

The strong market for these funds is driven by an evolution in the way we think about music, Mark Mulligan, managing director of media and technology analysis company MIDiA Research, told World Finance. “You’ve got pension funds and global asset managers looking at music as just another asset class to put within their portfolios of assets with a certain risk and opportunity profile,” he explained. “Institutional investors have looked at music publisher catalogues in particular, at how the value of that asset class has augmented over the last half decade plus.”

The figures are significant. In March 2020, Will Page, a visiting fellow at the London School of Economics and former

chief economist for the music streaming service Spotify, published his annual report into the value of the music copyright business with the music industry publication Billboard.

He calculated that in 2018 (the most recent year for which data was available) the music copyright business was worth $30.1bn, a 9.3 percent increase year-on-year from 2017.

The music business is notoriously complex in terms of how royalties are apportioned and to whom, but the basic premise is that every time a song is purchased or performed, its copyright holders (and in most cases there will be several) earn some income.

Hipg nosis and R HM seek to pack their pipelines with high-earning songs: contemporary hits and classic tracks that receive a lot of radio airplay, are frequently streamed via services such as Spotify, or regularly licensed for use in f ilms and advertising. Out of the many thousands of tracks in the catalogues these funds own, only a few dozen will yield very high returns by themselves. RHM’s portfolio includes the rights to songs recorded by The Beatles and Frank Sinatra, while Hipgnosis owns copyright to songs by Barry Manilow and Dave Stewart of Eurythmics. By acquiring aggressively and widely, these funds increase the likelihood of a good return for investors. The music copyright business has not escaped the impact of COVID-19. With bars, shops and music venues closed dur ing loc a l a nd national lockdowns, Value of the music t h e r e h av e b e e n copyright business fewer opportunities for song plays, which means a fall in earnings for Value of Round Hill Music’s IPO copyright holders.

The International C on federat ion of Societies of Authors Value of Hipgnosis Songs’ IPO and Composers (CISAC), whose members operate in 120 countries worldwide, anticipates a fall of $2bn–$3.45bn in royalty collections in 2020.

But Mulligan is hopeful about the sector’s recovery from what he terms this “minirecession. It’s not a market like travel or movie theatres, which have been completely decimated,” he said. “There’s a very clear path to return because what’s been happening to music publishing income splits over the course of the last five years is a rapid acceleration towards streaming, and streaming is booming. It has a dent at the moment after uninterrupted years of growth; however, compared to the broader economy, its relative value as an asset class actually holds up.” n

$30.1bn $282m

£200m

w e a lth m a nagemen t

World Economic Forum

Setting the world to rights Despite being postponed and moved to Singapore the World Economic Forum will still take place in 2021 and COVID-19 has ensured the central themes for discussion are brought sharply into focus

words by

Sharon Gethings JOURNALIST AND WEF CORRESPONDENT

In January 2020, World Finance explored what might be on the World Economic Forum (WEF) Annual Meeting agenda in January 2021. But back then, few investors and policymakers envisaged a global COVID-19 pandemic and the dramatic turn of events that would result: a severe economic slump as major economies imposed lockdowns and travel restrictions. This would require an epic and unprecedented monetary and fiscal stimulus.

The WEF announced in December that the Annual Meeting 2021 would now take place from May 13 to 16 in Singapore and return to Davos in 2022, “as long as all conditions are in place to guarantee the health and safety of participants and the host community.”

Whatever issues the WEF plans to cover later this year, the current economic situation seems to be changing on an almost daily basis.

“In all the major economies there was a massive slump in activity following the outbreak of COVID-19, though massive monetary and fiscal easing created a V-shaped recovery going into the third quarter of 2020,” says Neil MacKinnon, Global Macro Strategist, VTB Capital. “Equity markets also had a V-shaped recovery, making it one of the fastest bear and bull markets in financial history. ‘Phase 2’ of the COVID-19 pandemic also threatened a double-dip recession, but news that there might be a 90 percent effective vaccine from 122

| Winter 2021

Pfizer in early November, hot on the heels of Joe Biden winning the US Presidential Election, took global equity markets to new highs.” Perhaps to stay on top of events, the WEF decided that the Annual Meeting will be preceded by what it terms “Davos Dialogues” during the week of January 25, a series of highlevel digital events during which key global leaders will share their views on the state of the world in 2021. The week will be dedicated to helping leaders choose innovative and bold solutions to stem the pandemic and drive a robust recovery over the next year. However, the agenda will not shy away from the ‘Great Reset Initiative’ promised by the WEF last year and the January Dialogues will each focus on one of its five domains. Before digging down into the mechanics and potential impact of the Great Reset, let’s look at a few of the other issues we mentioned in January 2020 that are still relevant.

Trading tensions The trade war between China and the US is still simmering. Tariffs remain in place on billions of dollars’ worth of goods, forcing businesses in both countries to explore new markets, make cutbacks or simply shut up shop. In spite of these tensions, at the start of 2020, the US economy had posted a record economic expansion and the S&P500 index was in an upward trend, making new highs as ‘phase one’ of the US-China trade deal had been agreed.

The deal requires China to increase purchases of US products and services by at least $200bn over 2020 and 2021. In December 2020, the then US President-elect Joe Biden told The

New York Times that he will not immediately end the phase one agreement or roll back punitive tariffs on Chinese goods imposed

by President Donald Trump, adding that the United States needed to regain leverage to use in negotiations with China. After a summer of souring relations between the two states during the pandemic, the good news is that China’s purchases have increased in recent months as its economy recovers.

The leaders of the African Union have continued to discuss ways to ensure that the continent’s less developed economies are not negatively affected by a more liberal approach to trade. Although delayed by the pandemic, implementation of the African Continental Free Trade Area (AfCFTA) is set to begin in January 2021, with an initial focus on easing trade restrictions for SMEs, which account for 90 percent of jobs created on the continent.

However, there are more challenges than ever, particularly thanks to the pandemic – “an unprecedented health and economic crisis,” noted the International Monetary Fund (IMF), “that threatens to throw the region off its stride, reversing the development progress of recent years and slow the region’s growth prospects in the years to come.”

The fourth industrial revolution The W EF ’s fourth Januar y Dialogue, ‘Harnessing the technologies of the Fourth Industrial Revolution’, will explore “what organisations need to do in order to accelerate the uptake of technology and how can they avoid the issues that arise from a lack of governance.” There will no doubt be some

w e a lth m a nagemen t

World Economic Forum

event, particularly as many have been calling for a green economic recovery from the pandemic. The Great Reset campaign is calling for governments to end fossil fuel subsidies and funnel the money into low-carbon sectors instead. More broadly, the campaign is making recommendations to ensure that the recovery spurs the progress of sustainable development.

“In January the IMF thought global GDP would expand 3.3 percent in 2020,” MacKinnon told World Finance, “but this was mainly led by projected growth of 6.0 percent in China and 4.4 percent GDP growth for emerging market economies generally.

GDP was expected to remain anaemic at 1.3 percent for the Eurozone and in Japan at just 0.7 percent.” The outbreak of the COVID-19 pandemic, which was becoming evident by the end of January, ripped up the IMF’s projections.

THE DIGITAL WORLD ECONOMIC FORUM EVENTS DURING JANUARY 2021 > Monday 25: Designing cohesive, sustainable and resilient economic systems. > Tuesday 26: Driving responsible industry transformation and growth. > Wednesday 27: Enhancing stewardship of our global commons. > Thursday 28: Harnessing the technologies of the Fourth Industrial Revolution. > Friday 29: Advancing global and regional co-operation.

A greener future

reference to what the Harvard Business Review calls the “benign regulatory environment” that is partly to blame for Silicon Valley’s historic concentration of wealth and power – an era the publication believes is drawing to a close.

In July, research by Accountable Tech found that 85 percent of respondents felt Big Tech has too much power. Meanwhile, people on both sides of the Atlantic want tech companies to pay their taxes fairly and in full.

The ‘Great Reset’ All of this and much more besides will potentially be overshadowed at the Annual Meeting by what the WEF concluded after its risk analysis at the 2020 event (see Fig 1). It found that the five biggest risks to humanity and the planet in terms of likelihood and severity are climate related. Climate discussions are set to continue at the 2021

Fig 1

Ironically, the step change created by the pandemic has perhaps provided a unique chance to reframe the future by building a fairer, more prosperous society founded on greener, more resilient, and productive economies. “ This chapter presents an opportunity for governments and businesses to accelerate many of the shifts underway before the pandemic, while building a sustainable recovery,” says Steve Varley, Global Vice Chair – Sustainability, EY. “A recent study by EY and the European Climate Foundation found 1,000 ‘shovel-ready’ green projects that, with investment, could create almost three million jobs across the European Union alone.”

Others see tax policy at the epicentre of much of the change caused by COVID-19.

With climate being high on government agendas, including the EU’s Green Deal and US President-elect Joe Biden’s green policies, “there will be a host of new tax concessions and incentives for businesses to better integrate green thinking,” says Kate Barton, Global

Countries with most attendees at WEF 2020

United States United Kingdom Switzerland Germany India France Japan China Netherlands Canada

THE PANDEMIC HAS ACTED AS AN ACCELERATOR OF NEW TECHNOLOGIES THAT WILL RESTRUCTURE OUR ECONOMIES

674 270 159 137 133 120 99 74 69 63 0

SOURCE: World Economic Forum

100

200

300

400

500

600

700

800

Vice Chair – Tax, EY. Varley elaborates on this point: “Businesses have the power to drive prosperity and create value for a wide variety of stakeholders – from our shareholders, to our employees, to the communities in which we operate.” He believes we now have the opportunity to create green jobs at scale, that help communities grow and prosper in a sustainable way. We also have the responsibility to help carefully manage the transition from a high-carbon to a low-carbon world, in a way that mitigates any potential societal risks like unemployment or energy poverty due to increased energy costs.

Neil MacKinnon says: “climate change is already impacting macroeconomic stability and growth prospects and there is a need for guidance on international carbon price floors and border carbon adjustments.” This requires the need for climate assessment risks and stress testing for financial institutions, and corporate disclosure of climate-related financial risks. Climate change is also affecting how macro policymakers adapt monetary and fiscal strategies. In the UK, Chancellor of the Exchequer, Rishi Sunak is promoting the use of UK ‘green’ government bonds and the Bank of England Governor, Andrew Bailey, said recently that his objective is to build a UK financial system resilient to the risks from climate change and supportive of a transition to a carbon net-zero economy.

The weight of responsibility In the Eurozone, European Central Bank (ECB) President Christine Lagarde has said incorporating climate change risk into monetary policy is “mission critical”. The ECB is likely to incorporate ‘green bond’ purchases into its asset purchase programmes (the ECB currently holds 20 percent of the eligible green corporate bonds) and this could eventually help pave the way to fiscal union, a capital markets union, debt mutualisation, and a deepening of the green financial market. Ironically, the pandemic has acted as an accelerator of new technologies that will restructure our economies. As Isabel Schnabel of the ECB’s Executive Board recently put it, the pandemic is helping build “a deeper and greener financial market that reduces the cost of transitioning towards a low-carbon economy.”

What the situation will be in May when the WEF Annual Meeting takes place is anyone’s guess. But one thing that won’t change is the urgency for restricting carbon emissions. In late 2020, the UN reported that 2020 is on track to be one of the three hottest on record, completing a run of six years that were all hotter than any year ever measured before and that the world could hit the climate change milestone (exceeding 1.5°C above pre-industrial era levels) by 2024. n

Winter 2021 |

123

w e a lth m a nagemen t

Wealth Management

Marrying digital innovation with a personal touch The COVID-19 pandemic has changed high-net-worth individuals’ priorities, creating massive disruption within the wealth management sector For around the last 200 years, the wealth management industry has operated under the same basic process. Develop a personal relationship with a client, and then create a bespoke financial strategy for them using the best products and services available. It’s a tried and true model, but since the year 2000, the industry has been changing. As the clientele becomes younger, more digital-first solutions are being prioritised as investment tools. As the old money managers gradually retire, younger employees are reshaping the big firms.

While these changes have been brewing for two decades now, the issue suddenly came to a head in 2020. The COVID-19 pandemic has put immense pressure on global wealth markets, requiring them to meet new standards in digital service while offering the same exceptional customisation clients have come to expect. Very suddenly, any firms that were lagging behind were caught unprepared for our new COVID-normal reality.

After almost a year of absolute disruption, a path forward is beginning to emerge. The future of wealth management will retain the personalised service high-net worth individuals have come to expect, with the modern communication and analytics afforded by the latest technology. Customers’ needs are becoming 124

| Winter 2021

more specific, and only the most reactive, intouch firms will be able to find success. The 2020 World Finance Wealth Management Awards recognises the firms that are pursuing these new ways of doing business and defining the future of the industry.

Crisis averted The clearest predictions for the future can often come from the past. Boston Consulting Group’s Global Wealth 2020: The Future of Wealth Management—A CEO Agenda took its 20th anniversary to look over the last two decades to help predict where the industry is going.

Notably, the industry is very well adept at managing a crisis, having endured several since the new millennium. Between the dotcom crash and September 11 attacks causing dramatic uncertainty and a slump in global equity, the sector recovered all lost ground by 2003 and was hitting new records in 2005. Once again, the sector experienced a shock in 2008 as the global financial crisis wiped away over $10trn from private wealth in under a year. Following government bailouts and new central bank policies, private wealth had fully recovered by 2010. The last decade has been filled with strife from the lingering European debt crisis and the tumultuous

trade relationship between China and the US, but taking a long-term perspective paints a relatively rosy picture. The arrival of the COVID-19 pandemic is expected to put markets through their greatest test yet. Like other troubled periods in the last decade, global wealth is almost certain to contract in the short term, especially given the dramatic increase in newly unemployed people.

Depending on the speed of a global recovery, and how effective various health measures are, Boston Consulting Group estimates global wealth levels will recover sometime between 2021 and 2024. In all scenarios the group projected wealth managers can anticipate a hit in the short term, but whether the sector will experience long-term damage is in the hands of health officials.

But no matter how the world progresses after COVID-19, the wealth management sector will undergo a complete personal, as well as financial, transformation. Boston Consulting Group expects wealth management to bring together client needs, interactions and services in new, innovative ways better suited for digital systems. This represents a more tailored and detailed approach in terms of information, alongside the personal service that wealth managers have been traditionally good at.

Shifting priorities How the sector manages the recovery will potentially affect their success for decades to come. Capgemini’s recently released World

w e a lth m a nagemen t

Wealth Management

from sustainable investment products and 33 percent viewing the category as less speculative. These value-driven decisions are only expected to become more common. Firms are responding to this, with 80 percent now offering sustainable investment options, but their financial results will be highly scrutinised.

Technology transformation

SUCCESS WILL DEPEND ON HOW WEALTH MANAGERS CHANGE THEIR PRODUCTS AND SERVICES IN A POSTPANDEMIC WORLD Wealth Report 2020 paints a clear illustration of the world’s changing wealth as compared to the previous year. In 2019, high net worth individuals’ wealth and population grew by almost 9 percent globally. Geographically, North America and Europe surpassed the Asia-Pacific region for the first time since 2012. However, all of these results predate the COVID-19 pandemic. With trillions of dollars erased from global books, investment priorities have shifted.

Anirban Bose, Capgemini’s Financial Services CEO and Group Executive Board Member, said wealth managers are currently in uncharted waters. “This unpredictable period may also present opportunities for firms to reassess and reinvent their business and operating models to be more agile and resilient.

Analytics and automation, as well as emerging technologies like artificial intelligence, can enable firms to enhance revenues through better client experiences while reducing costs by streamlining processes.”

Success will depend on how wealth managers change their products and services in a post-pandemic world. COVID-19 has given people a chance to reflect on what is most important in their lives, and high net worth individuals are no exception. Responding to this, Capgemini reports that high net worth investors expect to allocate 41 percent of their portfolio to sustainable investment products.

The interest is not just ethical, with 39 percent of investors expecting to receive high returns

Alongside changing preferences, changing expectations subsequently follow. Given that part of the benefit of morally driven investments is seeing a positive change in the world, reporting and statistics are becoming a greater priority.

Capgemini illustrates this very clearly in its recent report. Before COVID, more than 60 percent of high net worth individuals surveyed reported a lack of satisfaction when trying to access information about new wealth management offerings or market information. This was particularly true for clients aged between 50 and 59.

Another point of contention is in regards to the role of big tech. Only 26 percent of wealth managers rate big tech as a potential disruptor to their industry, while 74 percent of clients reported a willingness to at least consider a big tech alternative to their current arrangements.

This is a startling gap between expectation and reality, illustrating that traditional wealth managers could soon be under threat from a sector they don’t have any insight into.

The challenge will be marrying the new expectations of digital interaction with the personalised services that go hand in hand with wealth management. The advantage of personal wealth management is the human touch that accompanies it. The do-it-yourself nature of digital systems comes close to undermining this distinct quality. The firms that will be successful in the future are the ones that can creatively bring these two concepts together in an innovative and desirable way.

In this increasingly competitive environment, an appetite for bold moves and disruptive practices is required to make headway on new products and services. As people begin to reassess their lives and portfolios for a new COVID-normal world, wealth management should expect a shake-up. The winners of the World Finance Wealth Management Awards 2020 are the businesses that are embracing the future and developing new products that exceed the expectations of both their old and new clients. n

WORLD FINANCE WEALTH MANAGEMENT AWARDS 2020 BEST WEALTH MANAGEMENT COMPANIES COUNTRY COMPANY Argentina Wells Fargo Advisors Armenia Unibank Privé Australia Escala Partners Austria Schoellerbank Bahamas Scotia Wealth Management Belgium BNP Paribas Fortis Bermuda Butterfield Bank Brazil BTG Pactual Canada Northwood Family Office China China Merchants Bank Denmark Nordea Finland Taaleri Wealth Management France BNP Paribas Banque Privée Germany UBS Ghana The Royal Bank Greece Hellenic Asset Management Hong Kong BNP Paribas Wealth Management Hungary Hold Asset management India IIFL Private Wealth Management Indonesia Bank of Singapore Italy BNL BNP Paribas Kuwait NBK Capital Lithuania INVL Luxembourg BGL BNP Paribas Malaysia RHB Mauritius Bank One Netherlands ABN AMRO MeesPierson Nigeria FBN Quest Merchant Bank Norway Nordea Oman Bank Muscat Philippines Bank of the Philippine Islands Poland CITI Handlowy Portugal Santander Totta Qatar Qatar National Bank Saudi Arabia SABB Singapore Bank of Singapore South Africa Old Mutual Spain Santander Sweden Carnegie Switzerland BNP Paribas Wealth Management Taiwan Cathay United Bank Thailand Kiatnakin Phatra Securities UAE First Abu Dhabi Bank US Merrill Lynch Wealth Management Vietnam Prestige Wealth Management Best Multi-Client Family Office, Liechtenstein Best Real Estate Investment Company

Kaiser Partner SFO Group

Winter 2021 |

125

w e a lth m a nagemen t

Wealth Management

A recipe for antifragility With a pandemic that has wreaked havoc on the global economy, our capability to bounce back is being tested. Perhaps it is wiser not just to weather the storm, but to also take steps to emerge from it better than before

words by

Elena Goitini HEAD OF BNL BNP PARIBAS PRIVATE BANKING & WEALTH MANAGEMENT

Nassim Nicholas Taleb, a brilliant scholar, mathematical statistician, former option trader and risk analyst, is an iconoclastic researcher whose work concerns problems of randomness, probability, and uncertainty.

Among his contributions to the universe of ideas, we can include the popularisation of the notion of Black Swan: an unpredictable event, typically one with extreme consequences, often inappropriately rationalised after the fact with the benefit of hindsight.

It would be tempting to see the COVID-19 crisis and its unforeseen consequences as one of these black swans, or at least, if we cannot share this vision, we can try to utilise Taleb’s fascinating proposition for reacting to this crisis: that of antifragility.

Antifragility is the art of reacting and taking profit from stressors, volatility and unpredictability; it is turning a hazard to our advantage. It is a concept that reverses the common notion of hazards, turning them into an opportunity to make us better, even if initially it may make us feel awfully vulnerable.

Antifragility is an idea that goes beyond the notion of resilience, of “to bend but not break”, because it implies a further step. While being resilient means resisting the storm in order to remain the same once the storm is over, being ‘antifragile’ means that not only are we 126

| Winter 2021

undamaged by shocks, but we even improve, having developed what Taleb defines as “the ability to gain from disorder.”

Can this idea help us in the current COVID-19 storm? What we are facing is a global crisis, a multi-faceted phenomenon bringing the world into uncharted waters, the repercussions of which are not just sanitary, but also humanitarian, social, political and economic. In the financial markets, it has marked the end of an extended bull run that started in 2009.

The wealth management business In a relationship-driven industry, wealth managers have been facing difficulties in the short term due to the high-touch nature of their business. In a scenario where physical situations such as face-to-face meetings are avoided, it may be difficult to maintain client engagement, to bring new clients on board or increase the Share of Wallet (SOW) with existing clients. However, wealth management firms can manage to turn social distancing and travel restrictions into an opportunity to build new competences, and to develop new ways for providing products and services.

Some say that we are living a double-trigger acceleration: the digitalisation process was already imposing a quick transformation to wealth management players, forcing them to update operational models, competences and ways of providing services. The COVID-19 pandemic has provided further stimulus to the ongoing trends, enforcing a definitive change, driven by the ‘perfect storm’: an unprecedented crisis on both the demand and the supply side

that has brought about a financial crisis.

These seismic circumstances have affected both investors and wealth management firms.

Investors have suffered from the impacts on their portfolios because of market drops and record levels of volatility. Concurrently, wealth management firms have shifted towards transactional revenues, partially replacing recurring revenues that originated through assets under management. These shrank along with market performance, and the surge in brokerage fees from panic-driven trading activity has masked the underlying trend of falling revenues.

Reactions by players in this scenario may be very different. They might be fragile when faced with the shock because they are not properly equipped, or they can show resilience, finding alternative solutions to maintain their standard degree of functionality while the stress increases. Our business’ current reaction to the COVID-19 crisis is a robust reaction to an acute stress: it is enduring to some degree and carrying over, by operating according to the same general playbook.

Unlike airlines or restaurants, wealth management firms have continued doing business even during lockdowns, managing their clients’ investment needs and providing advice services, by observing the social distancing rules via the available technology.

However, a robust and resilient business by definition goes back to its initial state once the external shock is over. The alternative solution is antifragility, which leads us to gain from chaos: only the players who manage to ride the wave of disruptive change quickly, to develop

w e a lth m a nagemen t

Wealth Management BNL BNP Paribas’ private banking and wealth management headquarters in Milan, Italy

“Unlike airlines or restaurants, wealth management firms have continued doing business even during lockdowns, managing their clients’ investment needs”

new competences and accelerate existing propositions, or acquire new ones, will have an advantage over competitors.

Antifragility is a competence that, today more than ever, needs to be acquired and developed. We must take advantage of the current circumstances to work on it and find our way to put it into practice.

A t B N L B N P P a r i b a s We a l t h Management, our route to antifragility passes through making the most of the dramatic change in the trajector y and direction of industry trends observed in the wealth management business following the COVID-19 pandemic. This crisis has uncovered the limitations of existing business models, based on the centricity of the physical relation with the private banker, and has imposed the need to radically reimagine them.

While some wealth management secular trends have been altered or even halted by the current global health and economic conditions, other trends have registered sharp accelerations. Social distancing has forced us to quickly find solutions to ensure continuity of transactions and to improve data knowledge through scalability of existing digital solutions.

The search for alternative ways to dialogue remotely (conversational banking), the utilisation of artificial intelligence in support to post-sales, a greater utilisation of big data both to evaluate commercial appetite and to better qualify advisory activities, provide just a few examples. Our being antifragile also means coping with five key attitudes we have been observing in relation to our clients:

1) C lo sene s s: Ne e d for i nc r e a se d opportunities for contact. This need can be satisfied by emphasising digital channels to reliably continue regular engagement between investors and advisers, even by teaching clients how to get the most benefit out of digital communication channels and tools to promote remote proximity.

2) Curiosity: Clients are more curious, they are more interested both in scenario analyses and investment typologies. In highly uncertain times, clients place greater reliance on their advisers, who must provide them with their best insights.

3) Cautiousness: The crisis has affected clients’ psychological profiles. They now have a greater need for security, not just for themselves, but also for their families, their wealth and their entrepreneurial activities.

4) Horizon: We have observed a tendency to shift towards longer investment horizons.

5) Belonging: We observe a stronger sense of belonging and social responsibility for clients’ communities and their countries.

We are convinced that some of these changes in clients’ needs and preferences, although brought about by the crisis, will not be temporary, but will constitute a structural shift, requiring a strategic reset of firm operating models.

Adding extra value We need to transform our business models in order to provide an intensified client experience allowing multiple points of remote interactions based on digital channels, by providing mobile touchpoints with ‘anytime, anywhere’ access, while granting customised and timely communications with investors.

The ultimate value added will depend on the ability to provide expertise through any means rather than an over-reliance on geographic proximity and physical interactions.

We need to consider technology as a value driver, and integrate it into every part of the value chain, from the on-boarding process with tools such as video conferencing and biometric authentication, all the way through

to digital trading and reporting. We need to quickly reinvent advisory and relationship management by means of technolog y, while personalising the content and advice experience delivered across channels. The current uncertainty, market corrections, and high volatility have proven the value of financial planning and professional advice to investors.

This will accelerate the trend towards more comprehensive financial planning and advice at the heart of the relationship between private investors and their wealth managers.

We need to use advanced analytics and data science to better understand and guide customers’ investment decisions, using data and analytics to fine-tune customer, product and pricing strategies to meet customer expectations.

Adopting a philosophy We need to develop holistic coverage models to provide personalised experiences that go beyond simple investment advisory and adopt a philosophy of total wealth management, by taking advantage of synergies that may be activated within universal banks. By doing so we can create value for clients by providing access to different kinds of products and services like wealth planning, real estate, and lifestyle experiences.

Value propositions to clients will need to progressively evolve towards a perspective of “Impact Investing,” with a focus on investments that can produce a positive impact while offering interesting risk/return opportunities for clients. We must learn to serve a more informed generation demanding cleaner, greener investment portfolios and investment strategies that focus on environmental, social and governance principles.

The wealth management industry is a highly interconnected ecosystem where all the players (asset managers, banks, securities exchanges and technology partners) have to be involved to turn the paradigm upside-down and observe the context, understand the new latent needs, challenge our certainties and use creativity to develop new ways of working.

Only those that will shift gears and deliver on the potential of these opportunities will likely establish or expand market leadership. We must all prepare for an industry that will look significantly different. Only in this way will the next storm not take us by surprise but instead leave us better than before. In the words of the Austrian writer, Karl Kraus: “Chaos is welcome, because order has failed.” n

Winter 2021 |

127

w e a lth m a nagemen t

Wealth Management

Growing big by first looking after the small With the help of fintech, XSpot Wealth has been able to bring top-class wealth management services to the smaller investors that traditional banks and other investment operators ignore, and it is booming as a result Finding the key through fintech words by

Dimitris Kantzelis CEO, XSPOT WEALTH

The idea around what is now called XSpot Wealth came in a small café in Knightsbridge, London, back in 2014. In a period of rapid regulatory changes, with MIFID I, and the discussions around MIFID II and its implementation, Bassel Ibrahim and I realised that if Europe decided to implement these changes, the entire wealth management industry would change forever. We were also seeing a growing momentum of millennials needing professional and transparent digital providers to help them start saving money for early retirement. We needed to come up with a solution that could relate to everyone and not just the few, a solution that we could easily explain to our family and friends.

As traders and senior analysts, we had many people who sought our advice on how to invest their money, thinking that we would know best. What they did not know is that this was a very difficult question; trading and long-term investing are two different things.

This is when we started thinking of creating a service that we could recommend to our families, friends – everyone! The name of the company came about because we were drawing on a piece of paper the four values we wanted our wealth management business to have: Flexibility, Transparency, Technology, Fair Fees. Then we connected the four words with an X. And then ‘spot,’ because ‘on the spot’ service is of paramount importance in what we do to deliver results.

128

| Winter 2021

Banks and traditional wealth managers with old-style methodologies, offering expensive products and having very high minimums, were not open to smaller investors. Most of our family and friends did not have the kind of cash required by most banks and traditional managers to start their saving plans. How could people get top-class wealth management services even when investing a few thousand?

The key would be revamping everything through fintech. Traditional banks and wealth managers were doing everything manually. For us, automation was already there; we were using algorithms and artificial intelligence (AI) in trading. This made us realise that if we could apply some of these rules in wealth management we could democratise investing and help everyone start their investment pots with great diversification, full transparency and very low costs. This would lead to a totally new era of people taking their financial future into their own hands. But it is very difficult to take what used to be a complicated service for the few and make it available to everyone.

It required big investments in technology, countless hours of programming, designing, filtering investment strategies using quantbased algorithmic tools and AI, to reach the point where we could offer XSpot Wealth plans to everyone.

XSpot has three types of accounts: › Smart Wealth allows clients to try all of our

plans for free to understand which is best, then complete the investor questionnaire online, have your risk profiled by our algorithm and choose from a number of investment plans appropriate for the risk profile. All automated.

› Junior Wealth, a somewhat similar setup to

Smart Wealth, is an account type designed for affordable saving and investing for children, with the aim to help them with a pot for when they reach adulthood. The difference from our peers here is that we give parents the ability to issue unique reference links to friends and family for birthdays and other festivities, so others can chip in to the account, and leave a note. So, when the child turns 18, they will be able to see who contributed to the account and read all of the notes! › Private Wealth is the offering that is the most different from anything being done by our peers, and the one account we are most proud of. No one else is offering this, as they only focus on online accounts. We call it the ‘new era in Private Banking’. We understand some people still want to meet, online or in person, with an experienced private wealth manager, discuss the issues around their wealth and investments, receive tax advice through our partners and pick from a range of different services. We can do this all for just 0.25 percent on top of a Smart Wealth account, which is just 70 cents per day for a €100,000 account. We have a team of very experienced wealth managers for this service, people who used to work with Citibank, HSBC, Pimco and other big regional banks. I would say the Private Wealth account is what differentiates us most from our peers.

w e a lth m a nagemen t

Wealth Management

trust a new digital wealth manager, but we are all very surprised by the results. This is the reason why we have many bankers asking to join our team.

The growth of demand

Flexibility and transparency We are very transparent in the entire process from opening the account, to the way we structure the plans, pick the actual securities that go in each plan, rebalance and charge. We believe this to be a key element of innovation.

People want all the available information, to be able to decide what is best for them and their investments.

We also give our clients full flexibility. Not only can they change strategy whenever they want, but they are free to take back part or all of their account within 24 hours if stock markets are open.

Our investment plans are designed Average account size at XSpot and stress-tested for Wealth almost any scenario, to passively follow all benchmarks, but perform much better during downward Size of the bigger accounts movements. We saw this during the market crash at the end of Q1.

Our plans outperformed the benchmarks in the sharp downward spikes, which is a big thing both for us, and our clients.

Our average account is around €20,000, ranging from €5,000 to €50,000 and upwards

€20,000 €1m+

towards €100,000–€200,000. But we are also delighted to have some big Private Wealth accounts of over €1m, clients who used to invest with major European and US banks, proving that our private wealth model is working. Even big clients nowadays understand that they will probably achieve better results with us and will also enjoy a more personalised and premium service.

We have an 83-year-old client so passionate about our model that he decided to quit a major Swiss bank and move his multi-million account to us. Our big strength is that we can deliver results even with small accounts, so traditional clients who used to invest with banks can try our services with small amounts and after a few months can top up their investment. In most cases, these clients bring a big part of their assets to us after six to 12 months, when they understand that we are really delivering results. Our wealth managers who used to work with big banks also had their doubts in the beginning over whether their clients would

“Many people are looking to get a good income from their investment and work part-time, travel the world and enjoy life”

Baby Boomers and Generation X are already sav ing and investing w ith traditional companies. We have our model to show them that they can try us and get better results, and we see many shifting from traditional players to us. However, investors of all ages understand that they will need to work well into their 70s to get a state pension in most EU countries. So, now more than ever, they understand that they need an investment pot that will be growing over the years, with the help of compounding.

This will help them feel less dependent on their job when they reach their late 50s, and allow them to take earlier retirement, or part-time work. I know many people who are looking to get a good income from their investment with us, and work part-time, travel the world and enjoy life.

Our growth plan modelling shows that with a €1,000 deposit today and a €300 average contribution per month for 30 years, your investment pot in the average scenario will be around €340,000. So from total contributions of €118,000 you end up with €340,000, almost three times as much, because of compounding and reinvesting.

The ages that most people in the EU retire at now vary from 65 to 67, but this will only go up, to about 70, we believe, by the time we approach our own retirement. The question is, who wants to wait to retire at 70? Many people nowadays want financial freedom from very early on. I know people working remotely and travelling the world in their 30s using income from their investments.

Hitting the target Our aim was always to democratise savings and investments. Since day one, we made it our purpose to look for ways to offer our clients more value and a better experience. We are confident that with XSpot Wealth, people from all levels of income can now take ownership of their financial future in any stage of their life.

We are on track to reach 10,000 clients and proceed to the next target, which is to become a global company with 100,000 clients and €1bn of assets under management. If we consider the wider industry, XSpot Wealth is a drop in the ocean, but with happy clients and a model that produces results, we look forward to becoming a major player both in Europe and the US. n

Winter 2021 |

129

TAKE FROM THE RICH,

130

| Winter 2021

GIVE TO THE POOR Investment platforms like Robinhood are making it easier for ordinary people to invest. But their mission to ‘democratise finance’ has left many novice traders navigating complex markets without sufficient protection, Charlotte Gifford investigates »

Winter 2021 |

131

RISK VERSUS REWARD

uring the pandemic, ordinary people piled into stock markets, many for the first time in their lives. Between January and September, big US retail brokerages E*Trade, TD Ameritrade and Charles Schwab saw the total number of average daily trades increase by three quarters to six million, according to Sundial Capital Research.

Lockdown boredom is one explanation for this trading surge. Another is the relative lack of sports betting opportunities and the hunt for returns amid record-low interest rates.

As newcomers flooded into trading, they were drawn to one platform in particular.

Robinhood, one of the most high-profile trading apps, reported three million new accounts in the first quarter of 2020. Half of these were first-time traders.

Robinhood’s mission is to “democratise finance for all,” according to the Californian start-up’s website. Many studies show us that one of the best ways for an ordinary person to accrue wealth is to invest for the long term.

Historically, however, the young and the less affluent have been excluded from the world of investing due to a lack of capital, lack of accessibility and poor financial education.

Online platforms have changed this.

“They’ve democratised finance, taking away power from typical city-slickers and giving it to investors instead,” said Andy Bell, chief executive of AJ Bell. “Investing is much more accessible to retail investors when it’s a couple of clicks away online. Previously, opening an account to buy and sell shares would have meant arranging a meeting with a stockbroker and going through reams of paperwork. Now you can be trading within a few minutes.”

It’s this anti-establishment narrative that has helped Robinhood draw in many young people disillusioned with the world of finance in the years after the financial crisis. But this idea isn’t as revolutionary as it sounds; it’s the latest iteration of a trend seen many times throughout history.

A look back in time Robinhood is far from the first brokerage to attempt to ‘democratise’ investment. After the Second World War, Charles Merrill – the cofounder of brokerage Merrill Lynch – set out to “bring Wall Street to Main Street” by selling stocks and bonds to middle-class investors.

Realising that a lack of financial education was one of the main obstacles preventing affluent people from investing, Merrill Lynch published 132

| Winter 2021

easy-to-read pamphlets on topics like ‘hedging’ and ran a full-page ad in the New York Times entitled, ‘What Everybody Ought to Know About This Stock and Bond Business.’ It also became one of the first Wall Street firms to open branches in smaller cities.

Despite this and despite the growing affluence of US citizens through the 1940s and early 1950s, relatively few owned stocks. The Brookings Institute produced a report in 1952 that estimated that the number of US adult shareholders was just 6.49 million in 1951 – half the amount recorded in the early 1930s.

The Cold War proved a key turning point in public attitudes towards investing. Between 1954 and 1969, the New York Stock Exchange ran a major advertising campaign called ‘Own Your Own Share of American Business,’ in which it promoted investing as a capitalist defence against the threat of communism. The campaign was highly effective. By 1970, there were 30 million shareholders in the US. This was also driven, in part, by stock splits that made round lots affordable for small investors.

Another key turning point came with the dig itisation of investment platforms. Electronic trading systems enabled consumers to bypass the trading floor, making it more affordable for them to invest.

“Access to trading has gotten easier and cheaper. You ca n open an account at a discount brokerage w ith just a few clicks,” said Andreas Park, Associate Professor of Finance at the University of Toronto. Even before lockdown drove novices into the world of trading, investment platforms were growing. Around the world, more than 100 million people trade and invest online.

But the secret to Robinhood’s success isn’t just a user-friendly online platform. The startup is famous for removing some of the main financial barriers to trading. For example, in 2019 it launched fractional share trading, enabling traders to invest in stocks and ETFs with as little as $1, regardless of the price tag of the shares. “The chance to buy fractional shares makes trading easy and accessible for anyone,” said Inga Timmerman, Professor of Finance at California State University, Northbridge.

COMPANIES ARE COMPETING TO BE THE MOST TRANSPARENT WITH THEIR CUSTOMERS AND OFFER BETTER CUSTOMER SERVICE

RISK VERSUS REWARD

3

Million new accounts opened at Robinhood in Q1 2020

100

Million people worldwide trade and invest online

Acquiring new customers But Robinhood’s most significant customer acquisition strategy came earlier on, when it pioneered the zero-commission model. The elimination of fees for stocks is a core factor in allowing the newcomer to acquire over 13 million users in just seven years.

When the effectiveness of this strategy became clear, major brokerages followed suit.

In 2017, Charles Schwab slashed its basic fee for trading US stocks and exchange traded funds to $4.95. Two years later, it cut commissions altogether, along with E*Trade, TD Ameritrade and many other major brokerages.

“We are seeing new firms trying to enter our market, using zero or low equity commissions as a lever,” Peter Crawford, Schwab’s chief financial officer, told the Financial Times.

“We don’t want to fall into the trap that a myriad of other firms in a variety of industries have fallen into, and wait too long to respond to new entrants.” But investors weren’t too pleased with the brokerages’ decision. E*Trade generated about 17 percent of its revenue from commission; for TD Ameritrade, the figure was 28 percent. Because of this, the share prices of both brokerages plummeted in the aftermath of their announcements.

In a matter of years, Robinhood had turned the business model of investment firms upside down. As Bell points out, this price war has in many ways benefited consumers. “Not only has competition from online platforms driven down the fees,” he said, “but companies are competing to be the most transparent with their customers and offer better customer service.”

The real winners But by far the biggest winners in this scenario are market makers. In lieu of commissions, brokerages rely on payment for order f low (PFOF) in order to make a profit. Market makers like Citadel Securities will pay brokerages millions for this order flow. These firms then pocket the difference between the price to buy and sell, known as the spread.

Market makers are now cashing in on the boom in retail investing. High trading volumes – driven by market volatility and the influx of new investors – have increased the raw materials market makers need to make a profit, while also forcing spreads wider. Citadel Securities doesn’t share financial data publicly, but experts predict that its earnings have leapt.

Arguably, its success on the back of Robinhood would seem to undermine the platform’s mission to ‘democratise investment.’ »

Winter 2021 |

133

RISK VERSUS REWARD

» Critics of PFOF argue that it just makes wealthy executives wealthier. After all, Citadel Securities is run by the richest man in Illinois.

The practice has come under scrutiny by regulators around the world, who worry that it could create an incentive for brokerages to send orders to whoever pays the most instead of looking for the best outcome for the consumer. Canada has banned the practice outright. Robinhood itself was fined $1.25m by the Financial Industry Regulatory Body in 2019 for ‘best execution’ violations.

Market makers defend themselves by claiming they offer a better price than the market does, on average. However, the profit they’re generating off the back of Robinhood calls into question who the start-up’s real customers are, and whether the firm is really motivated to do the best by its users, as it claims.

Novice investors As Timmerman points out, the economic instability caused by the pandemic makes this a prime time to invest. “When volatility is high, like it has been for the last year, we realise that we have an opportunity to make money by trading,” she said. “Additionally, an event like the pandemic creates an opening for more stock picking as we can decide which industries will do well and which will not.”

Ma ny of t he se new i nve st or s a re millennials. Wealthsimple, another online investment platform, says that over half of its new customers are under 34. Worryingly, there is evidence that some of these new young investors may be taking riskier investment decisions than those who’ve been in the game 134

| Winter 2021

longer. According to a 2018 survey by CFA Institute, less than half of millennials with taxable investment accounts are “extremely or very confident” in their investment decisionmaking abilities.

And the pandemic may have inflated this confidence. According to data by E*Trade, more than half of investors under 34 said their risk tolerance increased during the pandemic, whereas only 28 percent of the general population said the same.

A high tolerance for risk can be extremely dangerous though. “In falling markets, people can get w iped out ,” s a id Pa rk , “in pa r ticula r if they used financial products that they don’t understand, s uc h a s m a r g i n a c c o u nt s , s h o r t positions, or futures and options. They’re not for everyone, and things can go badly wrong.”

Some of these traders may be better off passive investing, Park argues. He refers to a 2000 paper by Brad Barber and Terrance Odean, published in the Journal of Finance, entitled ‘Trading is hazardous to your wealth.’

“The authors found that market returns exceed the returns of those who trade the most by 50 percent,” he said. “So, while those folks made money, they would have been better off buying an index fund.”

A HIGH TOLERANCE FOR RISK CAN BE DANGEROUS. IN FALLING MARKETS, PEOPLE CAN GET WIPED OUT

A dangerous game It’s worth remembering that millennials still hold only a tiny percentage of global wealth.

In the US, they own just seven percent of total assets, compared to the 26 percent owned by baby boomers when they were around the same age. Without the benefits of low housing prices and the more competitive salaries that their parents enjoyed, investing could be a good way for millennials to close this gap – if only marginally.

In some countries, governments are actively encouraging people to participate in long-term investing. France’s state-backed investment bank BPI has launched an innovative fund to provide access for retail investors to private equity strategies, for instance.

Park points out that the argument that young traders don’t know what they’re doing is an oversimplification. “If experience would matter, then trading desks at banks would be stacked with 50-somethings, right? Where are they?” he said. “A colleague of mine ran trading cases in which he let professional traders operate in an environment where the price was determined by a computer that was programmed to run a random walk, so the price movements were unpredictable.

The professional traders insisted that they could tell when the market would move up or down. Of course, they could not. What matters is knowledge and understanding and really that often boils down to staying away and knowing that it’s pretty hard to beat the market.”

It’s this knowledge and understanding that novice investors sometimes lack. And platforms like Robinhood aren’t doing enough

RISK VERSUS REWARD to improve this. In fact, by gamifying trading, these platforms are potentially hooking young people on high-risk financial products. In some ways Robinhood’s interface more closely resembles a social media app than an investing platform. There are bursts of confetti when a transaction is made. Users can tap up to 1,000 times a day to try and rise up the waiting list for Robinhood’s cash management feature. These in-app rewards can lead traders to return to it again and again, encouraging excessive trading.

Real-world consequences Already this has had grave consequences. In June 2020, a 20-year-old student, Alexander Kearns, killed himself after mistakenly believing he had lost $730,000 through Robinhood’s app. The misunderstanding came down to a user interface issue; during options trading, the cash and buying power will sometimes display as negative until the other side of the trade is processed.

Robinhood responded to the tragedy by saying it would change the way buying power was displayed on the app, as well as adding in additional features to help users better understand how options trades work. “These changes will take a bit of time to roll out, but our teams are hard at work,” the Robinhood co-founders said in the blog post. But Kearns’ death brought to light the perils of trading in a vacuum, with only an app to consult for advice.

Many are now calling for these start-ups to be more closely scrutinised by regulators.

It’s not just traders who can suffer as a result of impulsive investment decisions. There are also real-world consequences to these actions. Market speculation can fuel dangerous levels of volatility.

Last year analysts attributed the market rally that took US benchmarks from corrections territory in March to an all-time high in August to risk-taking millennials and a bullish options market.

Speculation also led to a massive plunge in the West Texas Intermediate (WTI), the US benchmark for oil, in April. At the start of the pandemic, United States Oil Fund (USO), a hugely popular exchange traded fund (ETF) that deals in oil futures, absorbed $5bn from investors.

This drove USO to purchase more futures until it accounted for about a quarter of all May and June contracts for WTI. Its outsized position gave it an outsized influence on oil prices, which plunged into the negative. Commodity prices can have a huge impact on the global economy. Nowhere is this truer than in the oil market.

Sharp oil price changes have knock-on effects through the economy, affecting everything from employment to trade balance to inflation.

According to Robinhood, USO was the most purchased stock by the broker’s 10 million users on April 21. The size of the fund more than doubled that month. But many of these investors had made a mistake.

Losses in excess of equity They thought the fund was a proxy for the price of oil and rushed to buy the fund as its value plummeted by 37 percent in the first three weeks of April, convinced they would cash in when prices recovered. They didn’t realise they were not trading in oil prices, but the futures market. Many traders made huge losses as a result. Interactive Brokers Group said it was taking an $88m hit after customers incurred “losses in excess of the equity in their accounts.”

The trend towards retail investors speculating in complex markets is cause for concern.

Investment products linked to commodities futures are considered by regulators to be particularly risky. So, while democratisation of investment might sound good in theory, uninformed retail investors pouring into this market may not be so positive in practice. In 2019, the Securities and Exchange Commission (SEC) proposed that retail investors should only be allowed to buy and sell leveraged ETFs if their broker or investment adviser had first carried out checks to ensure that their clients properly understood the risks. But the proposed sale restrictions sparked disagreements among top US regulators and have since been dropped.

Many regulators still think there should be more protections for investors in ETFs made up of riskier assets.

After the pandemic Thanks to online trading platforms, more and more ordinary people are investing in stocks and ETFs. The pandemic has only accelerated this. The question now is whether the trend will outlast COVID-19. Timmerman believes it will. “I see it as a long-term pattern primarily due to the

accessibility that websites like Robinhood offer retail investors. The volume will most likely go down (as it does when things in the stock market do not go up) but the overall increase in the volume of retail trading is here to stay,” she said.

From one perspective, platforms like Robinhood have helped to democratise investing, as they’ve empowered young and less affluent traders to generate wealth. But they’ve also left these traders exposed. It’s clear from Kearns’ death that the gamification of equity and options trading poses risks to uninformed investors. Although SEC proposed improvement s t o the retail investor experience in the a f t er mat h of his suicide, these arguably don’t go far enough.

However, there i s a no t he r r e a l world benefit to the increased accessibility of trading. In a very short space of time, millennial investors have had a huge impact on Wall Street and the way its firms operate. They’ve driven brokerages to cut commission and upend their business models. They’ve pushed them to invest more heavily in online platforms.

They may also convince these companies to offer more environmentally and socially sustainable investments. According to Morgan Stanley, under-35s are twice as likely to sell a holding if they behave unsustainably.

Millennial investors are changing Wall Street.

In some ways, it may be for the better. n

MANY REGULATORS STILL THINK THERE SHOULD BE MORE PROTECTIONS FOR INVESTORS IN ETFS MADE UP OF RISKIER ASSETS

Winter 2021 |

135

markets

Forex

there was a clamour of speculation aiming to take advantage of the volatility spurred by diverging news and market analysis. “Volume across the board was up sharply in Q1 2020, including derivatives, most noticeably in outright forward contracts, which were up 40 percent in March,” commented Tod Van Name, Bloomberg’s Global Head of Foreign Exchange Electronic Trading.

On exchange currency derivative, offerings reflected a similar story across all geographies.

For example, Singapore’s SGX exchange logged a 58 percent year-on-year increase in its FX futures contracts to the end of March.

Nonetheless, after an intense initial period of setting up connections and access for traders to work from home, the market continued to operate for the most part pretty efficiently. Execution algorithms came into their own, enabling trades to be conducted by computer-driven systems that monitored For the largest financial market in the world, shifting price volatility and volumes, to achieve the best possible trading outcomes. Relatively operations to the spare bedroom was relatively painless, illiquid currencies, particularly those from thanks to the rise of e-platforms and online tools some emerging markets, still required voice intervention, but these, as the BIS survey shouting prices across a noisy dealing room figures show, account for a relatively small – to electronic platforms. These can be single- proportion of global FX turnover. The BIS bank, proprietary venues such as Citi’s Velocity, triennial survey, in terms of currencies, words by Deutsche Bank’s Autobahn or Barclays’ Barx reported that the US dollar was on one side of Richard Willsher and many others, or multibank platforms 88 percent of trades with the Euro the second MARKETS CORRESPONDENT providing prices and matching counterparties most traded currency appearing on one side of A far cry from the cut and thrust of a across banks, institutions and brokers; 360T, 32 percent of trades. traditional foreign exchange dealing room, Bloomberg and Refinitiv’s FXall are among the traders working from their home offices and largest of these.

The code of good practice The benefits of electronic trading are many. Bearing in mind the market abuse scandals spare bedrooms have proved the resilience of the world’s most liquid financial market. For example, every trade has an electronic in the FX market in the years following the Demonstrating how hugely liquid FX has audit trail, prices and trades can be executed financial crisis, there was one crucial issue become, the latest Triennial Central Bank very rapidly and trades can be monitored for that the market had to answer to: with Survey of the global foreign exchange market best execution. They feed into participants’ potential for mistakes and wilful misconduct, from the Bank for International Settlements straight-through processing and accounting could the market retain its integrity with its (BIS) found that in April 2019, daily trading systems and there is very little if any human participants away from the watchful eyes in over-the-counter FX and FX derivatives interaction and therefore little scope for human of their dealing rooms? The disciplines and error. When it came to the lockdown, as long as controls that digital market platforms enable reached $6.6trn.

To appreciate the key role of FX in the market participants had access to their trading have gone a long way towards ensuring good global economy, consider that any purchase platforms with appropriate levels of speed and market behaviour. The FX Global Code, “a or sale of goods or other assets denominated security, they could operate remotely. It was set of global principles of good practice in the in a currency other than the base currencies therefore e-trading platforms and online tools foreign exchange market,” introduced in 2018 of one of the counterparties will probably that enabled the global FX market to continue by the Global Foreign Exchange Committee of involve an FX trade of some sort. Imagine the to operate. the BIS, aimed to do the same. As far as we can impact should the market suffer a blow to its see, its principles have been widely adhered to operations or, worse, a complete breakdown. and have helped pilot the market through the Volume and volatility The outbreak of the COVID-19 pandemic in Which is not say that it was all plain sailing. In turbulent times of the first quarter of this year.

February and March of 2020 threatened just the last days of February and into early March, In summary then, well-wrought technology such an impact. Bank trading floors closed daily volumes of trades increased enormously. tools combined with sound, widely adopted or at most retained just a few staff. How bad Not only was there the pandemic impact, but principles seem to have pulled the market would it get? Could the market continue to governments across the world introduced a through. They have proved that a multifunction? For a number of years, particularly range of monetary and fiscal stimuli; there trillion-dollar global market can function since the 2008 financial crisis, there has been was the Russia and Saudi Arabia oil spat perfectly well with its participants dispersed a steady migration from traditional voice causing prices to nose-dive; many asset classes and working from their home offices and spare trading – think harassed-looking dealers experienced a sell-off and a dash for cash; bedrooms. n

Trading trillions from home

136

| Winter 2021

markets

Forex

When Wall Street met Silicon Valley Opportunities, as well as risks, abound in troubled times.

More than ever, investors need their financial infrastructure to facilitate fast and convenient trading, while armed with accurate information and incisive analysis

words by

Alla Darwish HEAD OF GLOBAL BROKERAGE, ACY SECURITIES

Everyone is looking for an edge as they navigate the global financial markets that are factoring in issues such as the COVID-19 pandemic, and the difference Joe Biden will make, and the right financial infrastructure is crucial.

The 11-year equity bull market, the longest since the Second World War, ended in 2020 as the pandemic took its toll. Now some investors are seeing buying opportunities.

Other investors are focusing on foreign exchange, sometimes to minimise risk.

Whatever your appetite for risk, contracts for difference (CFDs) are an increasingly popular way to access markets. When deciding how to participate in the markets, traders need to think about a variety of issues including access to fast execution, the latest market news and analysis, and of course, the ability to diversify your investment across a range of asset classes.

ACY Securities is a financial services firm that delivers strongly on all these key areas. In fact, the firm was founded with a mission to arm clients with the technology, knowledge and resources they need to trade with confidence.

ACY Securities is one of Australia’s fastestgrowing multi-asset CFD online trading providers, specialising in the provision of state-of-the-art technology and educational solutions that not only help traders better execute their trading plans but also help them make smarter trading decisions.

Technological capabilities A multi-asset powerhouse that offers traders the diversity of shares, FX, indices, precious metals, commodities, ETFs, and cryptocurrencies, ACY Securities is sometimes referred to as half Wall Street and half Silicon Valley.

138

| Winter 2021

Since its inception in 2011, the company has developed the strong technological capabilities associated with Silicon Valley. ACY leverages this know-how to empower clients with institutional-grade trading conditions, premium education and cut-through market analysis.

With ultra-low cost of trading, no dealing desk and super-fast execution, clients of ACY Securities enjoy the freedom of trading the markets the way they like, with the reliability of deep liquidity.

One measure of a broker’s success is the breadth of its client base, and we have helped thousands of traders and investors access the electronic communications networks (ECNs) and straight through processing (STP) they need for fast, efficient execution.

However, it is the high level of service and focus on client growth ACY provides to institutional investors and business partners that best demonstrates our technological capabilities and the reason why World Finance recently recognised ACY Securities to have the ‘Best Partnership Programme in Australia in 2020.’

ACY has a strong track record in helping businesses realise long-term growth and success not only because they place a high value on strategic alliances, but because they have the global reach, technology, bespoke solutions and support infrastructure to make it happen.

Australia’s best partnership programme ACY Partners is a special division of ACY Securities that is dedicated to attracting and servicing partners. The partnership programme, which has been recognised as the best in Australia, comprises five main areas: ‘Introducing Brokers’, ‘Fund/Money Managers,’ ‘Regional Managers,’ ‘White Labels’ and ‘Referral.’

Our valued Introducing Brokers partners get exclusive access to our dedicated partner portal, ACY.Cloud, real-time trade reporting, high-converting website marketing materials and support. In the Fund/Money Managers programme, partners can take advantage of

our customised MAM trading solutions with seamless real-time client reporting combined with the f lexibility of both MT4 and MT5 trading platforms. Tailored fee structures ensure managers can respond to all manner of clients’ needs. The Regional Managers programme, meanwhile, is one of our most exciting partner options, with attractive earning potential across our full range o f pr o duc t s .

THE CRITERIA TO QUALIFY AS T he c r i t e r i a to qualif y as A REGIONAL MANAGER ARE a regional STRICT, BUT THE REWARDS ma nager a re ARE SECOND TO NONE strict, but the rewards are second to none. We also help White Labels and brokers to establish their operations from the start, offering bespoke solutions combined with the flexibility of using your brand on ACY’s trading solutions. We provide leading MT4 and MT5 technologies, as well as the technical support to ensure they run smoothly, plus top liquidity pricing, tailored CRMs, client portals, admin portals, and lucrative commission structure under the APEX program, which provides

markets

Forex

ground up and is arguably one of the best client portals in the industry. It offers clients control and convenience in managing their trading accounts thanks to a user-friendly interface, a full range of advanced functionalities and an intuitive dashboard. Another key area that we are proud of is our premium set of trading conditions. Clients of ACY Securities enjoy some of the best trading conditions in the industry. We offer raw spreads starting from 0.0 pips, ultra-fast execution of orders, liquidity ensured by the world’s biggest banks, Equinix Servers located in New York, London and Tokyo, and a no-dealing desk.

A story of vision, innovation and growth

commission as low as $3 round trip. Finally, our Referral Programme is for finance bloggers and those running financial websites, offering an opportunity to help grow their income streams through referring those who are looking to trade the global markets with an established, awardwinning broker.

Tech that delivers an edge ACY Securities delivers an exceptional trading environment through ultra-fast execution speed, very low cost of trading, tradeable market analysis, and cut-through education to enhance clients’ experience. The combination of these factors gives ACY a competitive edge and a compelling value proposition. Finlogix is our technologically inspired suite of tools for brokers, media partners and anyone else operating in this highly competitive space. First developed in 2019, it offers intuitive charting powered by an HTML 5 charting platform, as well as financial widgets with real-time data and one of the fastest economic calendars in the industry.

Partners of ACY Securities can enjoy a wide variety of widgets with drag and drop simplicity and affiliate tracking codes automatically embedded in the HTML code. Finlogix’s premade code can be cut and paste with ease,

making it simple to upgrade the look and usability of any site. The MT5 Xchange platform, launched in April 2020, is another of our offerings that sets ACY apart. It allows clients to trade stock CFDs in hundreds of the world’s biggest companies through some of the world’s most prestigious exchanges including NYSE, Nasdaq and the Australian Stock Exchange as well as popular ETFs (see box).

It is a powerful, all-inclusive, fully integrated solution providing traders with access to the full range of markets at their fingertips. ACY MT5 Xchange makes it easy to diversify trading portfolios. With one account and one login, clients can trade their view across five of the major asset classes, including stocks like Apple, Google and Amazon; and Australian blue chips like BHP, Commonwealth Bank and Qantas.

Account management ETFs where ACY is another area where clients can trade stock technology makes › SPDR S&P500 ETF Trust all the difference, › VanEck Vectors Gold Miners enabling us to put our › Proshares UltraPro Dow30 clients in the driving › Proshares Ultra S&P500 s e a t . AC Y.C lo ud › Vanguard Select Sector was created by ACY › United States Oil Securities from the

At ACY Securities, our vision is always front and centre in what we do, which is to empower traders with the tools and resources they need to make smarter, more informed trading decisions and navigate the global financial markets with ease and convenience. We back our vision with some of the best talent in the industry, the required resources and well-thought-out planning to ensure we are able to achieve what we have set out for the business.

The management team at ACY Securities, which is made up of highly specialised and experienced industry professionals, is led by Jimmy Ye and Winson Cao, the directors and co-founders of the company. Young, dynamic and energetic, Ye and Cao lead by example through their entrepreneurial spirit and progressive outlook on business. With over 35 years of collective managerial experience, they continue to successfully build systems, implement cutting-edge technologies and lay the foundations that will see the company grow and prosper well into the future. Innovation is also ingrained in the company’s DNA and we are not afraid to think outside the box to improve client experiences across the board – from retail and institutional clients to IB partners, fund managers, regional managers, white label partners, and affiliate partners.

Being an agile and forward-thinking company, AC Y ’s aim is to create new technologies that provide a seamless trading experience for its traders and continue to enhance its award-winning partner programme so that we can help our partners grow and expand to new horizons. Our well-structured expansion plans also form a key part of the projected future growth and development for the company. While the company continues to see strong ongoing growth in Asia Pacific and South East Asia, it is also seeing rapid organic growth in the Middle East and European markets, which is a great vote of confidence not only in our products and services, but also in our brand and what we stand for. n

Winter 2021 |

139

markets

Forex

Counting the cost of lockdowns As many economies are still reeling from the damaging impact of previous lockdowns the question XM.com asks is whether they can withstand another one as the balance of saving lives versus saving the economy takes centre stage When the world went into lockdown back in March, it was hoped that shutdowns, quarantines and wartime-like curfews would do the trick in eliminating the deadly coronavirus.

But more than nine months on, an end to the pandemic is not only out of sight, infection rates across the globe are rising at a record pace. The worsening situation has placed world leaders in the unfortunate position of contemplating new nationwide shutdowns.

The new COVID reality There can be no doubt that we are living in perilous times as social distancing and wearing masks become part of our daily lives.

Increasingly, job cuts and ever-spiralling death tolls are also turning into permanent fixtures of this new reality. Despite news of a vaccine for COVID-19 breaking at the time of going to press the global recovery remains not only on shaky ground, but with the risk of a double-dip recession growing by the day as restrictions are tightened and more and more countries are swept by a second wave.

The devastating consequences of shuttering large swathes of the economy has meant that governments have had to spend like they’ve never spent before and central banks have had to get even more creative with their unconventional tools to fight the most severe downturn the world has faced in a generation.

The problem is that monetary policy is already reaching its limits and governments are 140

| Winter 2021

reluctant to commit to additional relief packages out of fear of pushing national debts to unsustainable levels. The enormous stimulus that ensued after the first wave may not necessarily be repeated as major economies are partially shut down again in the winter months.

Slow and uneven recovery There is already growing unease in financial markets about the prospect of a slow and uneven recovery amid fresh lockdown orders. The risk rally that was triggered by the tsunami of stimulus announced in March came to an abrupt end in September as the rebound in Europe and elsewhere started to show signs of strain and doubts emerged about whether the US Congress would approve another virus relief bill.

The virus situation in Europe has only become worse since late summer when new cases began to spike again, with most countries tightening their restrictions and unavoidably putting the brakes on their recovery.

However, the odds of further fiscal stimulus in the United States have improved somewhat, propelling stocks back towards their early September highs. This only goes to underline how the mere prospect of more easy money fuels stock market euphoria even when the economic outlook has never been so uncertain.

But for how long can the combined forces of fiscal and monetary stimulus shore up investor confidence when a full recovery is

looking increasingly precarious? The longer it takes for a vaccine to be implemented, the further a full recovery will be pushed into the distance, meaning governments and central banks will have to continue propping up their economies with unprecedented measures.

However, there is a limit to how much more policymakers can do. And even if they were to live up to their pledges of further spending and money printing if needed, there is a risk that additional stimulus will eventually be met with less enthusiasm by investors as it becomes evident that the economic backdrop isn’t about to get better without a fully approved global roll out of a vaccine.

Avoiding the dreaded lockdown The immediate dilemma for authorities, though, is whether full and prolonged shutdowns are inevitable. Having succeeded in getting the infection rate down to manageable levels during the summer, it appears that curbs on public gatherings, mandatory masks and local lockdowns can only go so far in keeping the virus at bay. Worryingly, it also seems that mass testing and travel restrictions are not as effective as hoped, which is not surprising when contact tracing is patchy and compliance on self-isolating is not 100 percent.

Following the near-complete reopening of their economies as well as the return of students to schools and universities, daily virus cases in many European states have now surpassed their previous records from April when the first wave peaked.

The surge has unwittingly prompted several European governments to backtrack on earlier assurances that a second national lockdown could be avoided.

markets

Forex

Political dithering

“The mere prospect of more easy money fuels stock market euphoria even when the economic outlook has never been so uncertain” Are ‘circuit-breakers’ the way to go?

As healthcare systems once again reach breaking point and death rates soar, scientists are urging for so-called circuit breakers, where much tougher controls are imposed for two to three weeks to slow down the spread of the virus. Some countries like the Netherlands have heeded their advice, closing bars and restaurants, which are widely considered to be virus hotspots.

Others such as France have gone a step further and banned all non-essential travel for its population, though the general trend in the latest round of restrictions is to find a middle ground. Even so, as sensible as this approach may be under the circumstances, governments are worried about the economic cost of asking

Fig 1

businesses to close their doors again. Layoffs are accelerating as wage subsidy schemes are phased out and demand in the hardest-hit industries has been permanently depressed by the pandemic. Even if job retention schemes as well as other initiatives were to be extended, they are extremely costly and unsustainable in the long run.

What is clear, though, is that the fiscal space hasn’t run out just yet for Western governments as large-scale asset purchases by their respective central banks have created a favourable environment to borrow and spend. In fact, the warning shots fired in their direction are almost all about the urgency to act now and do more as failing to do so could prove more disastrous in the future.

US Dollar Index: Year-to-date performance DOLLAR HALTS SLIDE AS VIRUS OUTL0OK WORSENS

104 102 100 98

When it comes down to it, the overriding duty to save lives appears to be taking precedence over the economy, at least in Europe. However, there is the concern that the delay in bringing stricter measures from when the virus first started to re-escalate has already cost lives, as history has shown that the less done at the early stages of the outbreak the greater the danger that even tougher ones will be needed down the line.

Yet, the rifts on lockdown policy are only widening, with many politicians strongly opposed to more stringent rules while others are arguing that existing curbs don’t go far enough. Even on the monetary policy front, there are signs of a split at key central banks like the Federal Reserve and the European Central Bank on whether bond purchases should be scaled up or down.

These divisions certainly don’t help promote confidence among the public and are less than reassuring for jittery markets. The US dollar probably has the most to gain if the uncertain path of the recovery becomes even cloudier, and the most to lose from fresh injections of fiscal and monetary stimulus.

At times of global crises, the dollar tends to attract the greatest attention from the safe-haven currencies due to it being very liquid. The Japanese yen is not far behind.

It’s still all about the dollar After going on the retreat once the market turmoil at the height of the virus crisis in March began to subside, both the dollar and yen have enjoyed a bit of an uptick in the autumn. This reflects a heightened sense of caution among investors as to how the pandemic will pan out over the next few months, though rising US political risks have also been a factor (see Fig 1).

The reverse has been true for risk-sensitive currencies such as the Australian dollar, which has been closely mirroring equities since March. The euro has also behaved much more like a risk currency during the pandemic as the narrowing yield differential between the US and the Eurozone has increased the potential upside for the single currency, making it very responsive to positive headlines coming out of Europe.

At the crossroads

96 94 92 Jan 20

Feb 20

SOURCE: Refinitiv Datastream

Mar 20

Apr 20

May 20

Jun 20

Jul 20

Aug 20

Sep 20

Oct 20

The direction that these currencies take in the coming months will very much depend on how the dollar responds to the impending headwinds. That in itself will be determined by what policymakers decide about how far to go with new restrictions and how much additional stimulus is required should the virus flare-up intensify further before mass vaccination programmes can be rolled out. n

Winter 2021 |

141

markets

Cryptocurrencies

The state fights back What began as a dream to wrestle control away from the state is becoming a model of adoption for the central banks that, once wary of digital currencies, are now learning to love them, writes Alex Katsomitros Last April, amid the COVID-induced panic that engulfed the planet, more shocking news came from China. The People’s Bank of China (PBOC) announced that it would start testing its own central bank digital currency (CBDC), a first for a major economy. Government employees in four cities were paid in digital yuan, while four commercial banks began internal tests. By December, around 50,000 lucky citizens had received 200 e-yuan (£23) in their digital wallets to spend on apps such as the food delivery service Meituan Dianping. A new era had started.

A change of heart It has not always been like that. When Bitcoin, the first cryptocurrency, appeared in 2009, central banks disparaged it as a fad, a dud, or even a fraud. Many banned its use. In 2013, China barred its banks from using it as a currency, citing concerns over financial stability. The same year, Paul Krugman, perhaps the world’s most famous economist, penned an op-ed entitled “Bitcoin is evil.”

Fast forward to 2021, and the mood music has changed. Central banks around the world set up working groups to discuss the merits of CBDCs. A survey by the Bank for International Settlements (BIS) found that most developed economies are considering the idea. International organisations like the IMF weigh the pros and cons of a novel financial architecture dominated by CBDCs. The Bank of England has released a roadmap leading to a digital pound sterling, a prospect that could 142 |

Winter 2021

help the UK’s COVID-stricken economy benefit from negative interest rates, according to Andy Haldane, the bank’s chief economist.

As for the US, it is grudgingly joining the party, with Treasury department and Fed officials openly discussing the possibility of a digital dollar. One reason for this Damascene conversion is that commercial banks have embraced the blockchain, the technology underpinning cryptocurrencies, with leading banks such as JPMorgan Chase using it for cross-border payments and settlement. “What has spurred interest in CBDC issuance is the realisation that it offers a holistic solution for updating financial infrastructure and enables instantly settled payments at no cost to customers,” said Josiah Hernandez, head of the CBDC Group, a think tank specialising in sovereign digital currencies. One such venture is Project Ubin, a project designed by Singapore’s central bank that aims to provide a global payments platform for central banks.

Sovereign digital currencies have also moved up on the agenda of political leaders, with G20 finance ministers contemplating the need for a global regulator to lay down the law in the Wild West of cryptocurrencies.

G30, an influential group of central bankers and academics, advises policymakers to take action before rogue players do it first.

Countries like Venezuela and North Korea are already using cryptocurrencies to push their agendas. The former has launched its own digital currency, aptly named the Petro, to bypass US sanctions. The Russian

government is also considering issuing its own CBDC, backed by gold. Elvira Nabiullina, who heads the country’s central bank, has said that it could be used to settle trade transactions with other countries. In the current climate of debased fiat currencies, stablecoins, namely digital currencies backed by stable assets, are emerging as a safe asset. “A goldbacked CBDC offers a compelling solution to slowing economic growth and rising inflation that many markets around the world are experiencing,” Hernandez said.

Replacing physical cash Another reason why central bankers are warming up to CBDCs is the slow but steady adoption of cryptocurrencies by the public (see Fig 1). Initial coin offerings (ICOs), once seen as a scam, are becoming a mainstream method for start-ups to raise capital. By late November 2020, the total market capitalisation of crypto assets stood at £476bn. COVID-19 has also boosted the use of digital cash, with digital payments becoming the norm. “The pandemic has led to an increased focus on digital cash to replace contaminable physical cash, in addition to creating more reliable, effective, and optimised mechanisms for the distribution of [COVID-19] relief funds. This led central banks to prioritise CBDCs,” Hernandez said.

Not surprisingly, it was a technology company that kick-started the race. In June 2019, Facebook announced the launch of its own digital currency, Libra. The project’s white paper stated that CBDCs could be integrated into the

markets

Cryptocurrencies Elvira Nabiullina, governor of Russia’s central bank

£476bn

Market capitalisation of crypto assets, by late November 2020

GOLD-BACKED SOVEREIGN DIGITAL CURRENCY OFFERS A COMPELLING SOLUTION TO SLOWING ECONOMIC GROWTH AND RISING INFLATION THAT MANY MARKETS AROUND THE WORLD ARE EXPERIENCING Libra network, sparking fears among central bankers that a private company would compete with them in their own game. In a dramatic testimony to Congress last July, Mark Zuckerberg warned US policymakers that if they didn’t endorse Libra, China would move first.

Chinese officials took notice, worrying that the yuan would not be included in Libra’s currency basket, amid a trade war with the US. “China’s trials have accelerated as a result of Facebook’s attempt to introduce Libra, even as the PBOC had been conducting research on a CBDC for many years,” said Dylan Loh, a China expert who teaches at the Nanyang Technological University in Singapore.

Fig 1

China first Many interpreted China’s announcement last spring as a part of its distraction tactics amid the global furore over the pandemic, which allegedly started in Wuhan. However, it was far from a spontaneous move. Xi Jinping, the country’s president, had announced the launch of e-yuan on October 24, 2019, a day the government has named “China Blockchain Day.” Relevant infrastructure was long underway, culminating in the launch of a blockchainbased service network that can support applications in various fields, from healthcare to insurance.

Unlike other digital currencies, the e-yuan is not a cryptocurrency, nor is it based on blockchain technology. As a centralised currency, it will be issued by the central bank and circulated through China’s network of state-owned banks. Although China is gradually becoming a cashless society, it has no plans to ditch banknotes and coins. Users will be able to turn their

Control via blockchain

How Common is Crypto SHARE OF RESPONDENTS WHO USED OR OWNED CRYPTOCURRENCY

Nigeria

32%

Vietnam

21%

S. Africa

17%

Turkey

16%

Peru

16%

Spain

10%

China

8%

US

7%

Germany

6%

Japan

4% 0

SOURCE: Statista Global Consumer Survey

5

10

deposits into tokens stored in digital wallets.

Domestic considerations have played a role.

Government officials hope that a digital yuan will reduce transaction costs, facilitate crossborder payments and include China’s 200m unbanked citizens in the financial system.

Some also point to a covert plan to rein in the country’s most popular payment services: Alipay (owned by Alibaba) and WeChat Pay. The government is imposing tougher antitrust rules on Chinese tech powerhouses, including the e-commerce giant Alibaba. Merchants will be able to use the digital yuan for free, whereas commercial payment systems charge a fee. “These two companies control 96% of the Chinese mobile payments market, and have been allowed to operate in a lightly regulated fashion thus far. Fiat money in digital form will likely result in a more resilient multiplayer financial ecosystem,” said Professor Michael Sung, Co-director of the Fintech Research Center at Fudan University.

15

20

25

30

35

Notes: 1,000–4,000 respondents per country

In a country where the tight grip of the state rarely loosens up, the launch of a sovereign digital currency has raised concerns over privacy. Many believe that China hopes to stem capital flight, a problem that has worsened over the last decade, despite strict capital controls. A report published last August by the blockchain firm Chainalysis found that Chinese citizens had moved $50bn in cryptocurrency out of the country within just 12 months. The digital yuan could be incorporated into China’s notorious social credit system, which rewards citizens for good deeds such as donating blood or punishes them for defaulting on loans or jaywalking. “Cryptocurrencies demonstrate a new opportunity for states to incorporate their values and ideology into money, whether that’s monitoring people’s behaviour or how »

Winter 2021 |

143

markets

Cryptocurrencies Christine Lagarde, President of the European Central Bank

» they spend their money,” said Olinga Ta’eed, a blockchain expert who teaches at Birmingham City Business School and is a member of China’s e-commerce Blockchain Committee.

He added: “China never had any problems about saying this. They openly admit that there is some degree of control.”

Sidestepping sanctions However, China’s plans could be even more ambitious. A CBDC used beyond China’s borders could consolidate the yuan’s position as a reserve currency, as Yi Gang, governor of the central bank, has implied. As a result, America’s most powerful weapon, the dollar, would lose some of its appeal. “There could be a ‘dollarisation’ effect across Asia for the yuan due to increased access through digital issuance and the strong trade and lending activity the country maintains in the region.

This could lead to less dependence on the dollar in the region and other markets with similar ties to China,” Hernandez said. “China seems to be approximately five years ahead,” said Philipp Sandner, head of the Frankfurt School Blockchain Center at the Frankfurt School of Finance & Management. He added: “If a country successfully launches a CBDC or a private payment system, such as Libra, is used heavily, it can change international capital flows substantially. Therefore, the dollar, as the most prominent reserve currency, could lose its dominance.”

A case in point are US sanctions. In a meeting of the BR ICS countries in 2019, policymakers and executives from Brazil, Russia, India, China and South Africa discussed the launch of a common cryptocurrency as an alternative to the dollar.

Such a system would help these countries skirt the international payment mechanism SWIFT, through which the US imposes sanctions on rogue states. “Having a CBDC 144

| Winter 2021

and allowing other regional actors to plug their financial system into this infrastructure will help China reduce its reliance on the SWIFT payment system and thus reduce the costs of US sanctions,” Loh said.

Chinese media have reported that the government has considered the launch of a gold-backed token on the back of the country’s position as a leading gold exporter and its access to gold reserves elsewhere through its Belt and Road Initiative (BRI). China could force participant countries to accept loans in digital yuan to boost its adoption. “I have no doubt that China will eventually roll this [the digital yuan] out nationally. Once this is done, and teething issues are addressed, it can look forward to blending this with its BRI programme,” Loh said.

Europe lagging behind Europe is watching the latest developments in Asia with consternation. The Eurozone recently came out of an existential crisis, culminating in the Greek referendum, and is now entering a period of uncertainty due to the pandemic. Many think that launching a digital euro would be too risky. For others, it seems inevitable. In November, Christine Lagarde, the head of the ECB, said that an e-euro will appear in two to four years, with a decision being expected by the middle of 2021.

One reason why Eurocrats are suddenly keen on CBDC s is that they sense an CRYPTOCURRENCIES imminent threat to DEMONSTRATE A Europe’s hard-won monetary sovereignty.

NEW OPPORTUNITY “Libra and the Chinese FOR STATES TO INCORPORATE THEIR CBDC were a wakeup call for central VALUES AND IDEOLOGY banks, including the INTO MONEY ECB,” Sandner said.

L a s t O c t ob er, t he

ECB published a report mapping out possible iterations of an e-euro. One reason why it could be necessary, the report notes, is to assert the “strategic independence of the EU”, notably “if there is significant potential for foreign CBDCs or private digital payments to become widely used in the euro area.”

The main question is whether the ECB will enable ordinary citizens to open e-euro accounts at the central bank, thus bypassing commercial banks. Although endorsed by blockchain enthusiasts, such an innovation would increase funding costs and possibly raise interest rates on loans. The ECB’s balance sheet would also balloon, forcing the bank to acquire assets held against the digital euro.

Fabio Panetta, who chairs the ECB’s CBDC task force, has said that the bank is exploring whether its settlement system could support retail depositors. However, most experts doubt that commercial banks would be left out. “They will put a stop to anything they think could be a threat to their core business, even if they pay some lip service to it. Central banks also don’t want the risks and the politics that go with retail accounts,” Ta’eed said.

The end of a dream If the pandemic proved that borders still matter, the rise of CBDCs confirms the role of the state as a financial arbitrator. Geopolitical tensions had already slowed down financial globalisation, even before the advent of COVID-19. With the rise of insular trade blocs, the era of borderless financial markets might be coming to an end. “It’s ironic that after so many years of hollowing out the state through privatisation and globalisation, it now roars back through CBDCs,” said James Cooper, Professor of Law and Associate Dean at California Western School of Law. One reason why central banks may be keen on digital currencies, Cooper marked, is taxation. “Getting records of people’s financial transactions so there’s a tax basis is important, because the state relies on tax to generate revenue for state activity.”

For the early pioneers of the blockchain, however, this may be a wild awakening.

Cryptocurrencies started as a libertarian dream that would free money from the long arm of the state, namely central banks and tax authorities. They may now empower the very Leviathan that Bitcoin’s inventors were trying to bring down. “A great dream often outlives its dreamer,” Hernandez said, pointing to other technological innovations that deviated from their original purpose. For more cynical analysts, such a development was inevitable.

“Data is the new currency,” Ta’eed said. “Why else will the central banks support CBDCs, if not to effect some kind of control?” n

markets

Art This painting of Sultan Mehmed II was sold at Christie’s in June 2020 for more than $1m

ways to make it feel like you’re actually looking at the real thing and give people The fall in the number of confidence that they paintings sold at auction are buying something of great quality, but nothing beats kicking the tyres yourself and Online-only sales at leading having a close look,” auction houses said Duthy. *(Figures from Jan–Sept 2020) The analyst expects the market to bounce back as in-person sales are gradually allowed to resume and confidence returns, most likely in the second quarter of 2021. Even after that happens however, auction houses are highly likely to continue to benefit from increased online activity. The leading auction houses have had an online presence for a long time now with Sotheby’s first collaborating with online auction portal eBay in 2002 and Christie’s launching a live online viewing room in 2006. But the pandemic forced them to up their game, investing in new platforms to enable better customer experience.

This investment has borne fruit: while sales were down overall, online-only fine art sales at the three leading auction houses jumped 240 percent according to a report by art market analysis firm ArtTactic. For the first eight months of 2020, online-only sales at Christie’s, Sotheby’s and Phillips totalled $321m, compared to $94.4m for the whole of 2019.

This consolidation of the online offer has been crucial for the survival of auction houses in this period but it also represents an opportunity going forwards. Sotheby’s reported to ArtTactic that over a third of online buyers were transacting with the auction house for the first time and that over a quarter were under the age of 40.

–20.2% $321m

Painting a cheerful picture The auction experience is both unique and built around people being together in the same room, but from the challenges faced in 2020 the industry found a way to evolve, writes Jo Caird The art world was better prepared for the coronavirus pandemic than many other sectors. Though local and national lockdowns forced galleries to close their doors and leading auction houses to cancel in-person sales – including some of the most important dates in the global art calendar – a swift pivot to online activity helped protect the art market from some of the worst ravages of COVID-19.

It has not escaped entirely unscathed, though. From January to September 2020 there was a 20.2 percent drop in the number of paintings sold at auction, compared to the same period the previous year, according to analysis

by Art Market Research Developments (AMRD).

With many auctions postponed in the first few months of the pandemic, there were simply fewer opportunities to trade, Sebastian Duthy, AMRD’s chief executive, told World Finance.

As auction houses honed their online offer and buyers were able to return to the market, the outlook improved.

“If you had asked me a few months ago, I would have painted a much gloomier picture,” Duthy said. “If you look to the figures in July 146

| Winter 2021

2020, it looked much worse than what it was.”

All in all, the impact of the pandemic on the market “is not as bad as one might expect,” said Duthy, offering as a comparison the period immediately following the 2008 financial crash, which saw a 26.6 percent fall in the number of paintings sold at auction compared with the previous year.

A buyer’s market It’s not just the number of sales that has decreased but the value of those sales too, with AMRD’s All Art Index noting a fall of 8.5 percent in the average value of fine art objects (paintings, sculpture, prints and photography) sold at auction from January to September last year. This is partly down to the fact that the pandemic has created a buyer’s market, with reports of the phrase ‘COVID price’ being bandied around in art market circles. It’s also a by-product of the loss, for the moment at least, of the often glitzy inperson sales that have historically attracted the biggest ticket items.

“People want to be able to inspect what they’re buying. Of course technology finds

Developing relationships If these businesses are to continue to successfully engage these younger collectors, digital natives who may not have deep pockets now but might do in years to come, they need to be responsive to the needs of this group.

“An auction house does its business not just by finding sellers, but developing relationships, because that seller might want to buy something they then might want to sell down the line,” said Duthy. Even if auction houses’ proportion of online sales fall back to a fraction of what they reached in August 2020, the art market can only benefit from the technology and relationships developed during this period of crisis. “We’re moving into the biggest inter-generational wealth transfer ever from the baby boomers,” said Duthy. “You’re going to see the market pick up where it left off.” n

markets

Art

The great art purge Many companies reacted to the global pandemic by looking to reduce their corporate art collections to generate funds but this process can also positively impact cultural diversity as well

words by

Patrick McCrae CEO, ARTIQ

In 2020 British Airways made headlines following its decision to sell off some of the oldest and most valuable parts of its art collection.

Struggling with mass redundancies, data breaches and a stream of cancellations, the company began purging artworks in a bid to offset its pandemic losses. Over the past few months, other major corporations have followed suit.

London’s Royal Opera House recently sold a prized David Hockney at auction for £12m and UK travel agent Thomas Cook likewise parted with a 3,000-year-old Egyptian statue, held in its archives since the end of the 19th century.

Meanwhile, the Royal Academy is facing criticism for its retention of a Michelangelo during a period of mass staff redundancies.

Corporates selling their art collections is not a new phenomenon, but the pandemic has certainly accelerated that trend. More businesses are looking at where they can extract latent value in assets, which has encouraged bigger collectors to dispose of their collections.

Over the summer, BA consequently sold 17 pieces of art that had previously decorated its executive lounges, including works by Damien Hirst and Bridget Riley.

These sales were primarily triggered by BA’s efforts to ‘preserve funds and protect jobs,’ but other corporates have been purging their artworks as a result of changing tastes and an evolution in ideas surrounding corpo148

| Winter 2021

rate responsibility in the arts. Deutsche Bank, which boasts one of the largest corporate collections in the world, for instance, recently announced it would be reducing its art collection by over 4,000 pieces, in part, to improve “the contemporary quality” of its collection. By selling corporate collections made up of household names, the company is freeing up money to invest in young or emerging artists.

Playing the long game In comparison, stagnant collections made up of Damien Hirst or Tracey Emin might look good, but do little to support the long-term art ecosystem. This sort of art is primarily viewed as an investment avenue the value of which is tied up for years on end in the hopes that one day it will return a profit. The sales we are seeing now are a case in point. There is a whole new generation of artists in need of long-term support and mentoring that can only be achieved through the acquisition or renting of new artworks.

It is no surprise then that corporates who are increasingly conscious of their image and brand are purging their household names in favour of collections made up of new, more culturally relevant, artists. The writing appeared to be on the wall with BA’s announcement in June 2020, but in truth the trajectory of corporate collecting had begun to shift before the pandemic.

We have also seen an increasing number of businesses selling their collections all together in favour of art rental, which offers bespoke collections and flexible leasing terms for a small fraction of the cost of ownership.

Corporates are able to engage and improve

the wellbeing of their teams, meet their social responsibility targets and provide economically sustained support of artists.

Not only is the trend of selling off art collections making physical space in lounges and lobbies for new flexible artworks to be installed, it is also creating space for new names to arise in the industry. Through art rental, artists who are at the beginning of their career are given a viable and sustained income by corporates looking to enhance their CSR portfolio. This is of particular value for those who, due to their background or economic circumstance, may not be able to afford to support themselves until they reach gallery representation or develop a market for their work.

Corporates, likewise, are able to curate collections that can be scaled up and scaled down depending on business and social requirements. With the rise of flexible working, this is something that will become increasingly important post pandemic. Offices are set to be transformed into cultural hubs and will need to be culturally relevant and consistent with business values. With equality becoming one of the defining narratives of 2020, businesses that are championing issues related to sexuality, gender, race and socioeconomic equality – for instance through the very visual displays of artwork – will be the ones that come out on top.

Promoting diversity We are also seeing a rise in the number of companies giving staff creative agency over their working environments. This is particularly important when it comes to art. According to a recent study

by Dr Craig Knight, individuals work 15 percent more productively in environments containing artworks and plants, a figure that doubles to over 30 percent for spaces where participants had a say in curation.

It is no surprise then that demand for art rental businesses such as ARTIQ has remained strong during the pandemic. International banking group Investec are shortly to install a recently curated collection of London and South African artists to show their passion and commitment to promoting diversity. Corporate patronage has long been a core part of business identity and will continue to be as we emerge from the pandemic; however the manner in which corporates support the cultural economy is modernising. The value placed on arts and culture by corporates is being sped up by the pandemic as they try harder to engage all stakeholders in a more visible way.

We are thus unquestionably witnessing a marked shift away from how companies have traditionally collected art. Emerging in the place of stagnant collections is a new type of arts patronage, one that can truly support the arts ecosystem and champion diversity across not only the arts, but society as a whole. n

Eurobank Best Retail Bank in Greece

7

markets

In Focus: US

Is America back?

The political strength of the president is often determined by their control of congress. In a divided government, Biden could be at the mercy of a Republican-led legislative branch, but the Georgia run-off elections could change that, writes Adrian Holliday Stock markets barely turned a hair on the change-of-president news in early November 2020. There was no dive or Armageddon, no rush for the exits in anticipation of a Democratic Biden administration determined to punish climate-heating polluters and other stock market villains. But the market’s positivity was less an endorsement for the president-elect and more an exhalation of relief that the US had narrowly avoided a contested result: a constitutional crisis with Donald Trump firing grandstanding tweets, or even refusing to quit the White House.

Above all, markets love certainty.

Market sentiment was also buoyed by COVID-19 vaccine hope shortly after, popping energy back into retail, travel and banking stocks. “We are still months away from any vaccine being widely available,” asset manager giant BlackRock noted in mid-November. “But the game changer is that we now know we are building a bridge to somewhere, providing more clarity for governments and companies about getting to the post-COVID-19 stage.”

But markets also have the certainty of the world’s most powerful democracy bitterly divided. In November 2020, Donald Trump pulled in the second highest number of votes in US election history, albeit less than his opponent. After four wild years, Trump’s centrifugal force is extraordinary. Chief investment officer Thomas Beckett of Punter Southall Wealth told World Finance that despite Biden’s victory, “it was a disappointing night for the Democrats and far below most expectations. It is going to be challenging for the Biden administration to achieve anything structurally significant with the Senate in the grips (just) of the Republicans.” The disappointment for the Democrats is considerable. Biden won, yes, but without a clear majority in Congress, depriving him of a solid political base.

Hot influencers in a swing state Biden’s capacity to govern may change with the Georgia run-off elections. Who wins in Georgia will determine which party controls the US Senate. Currently (as of December 2020) the Republicans have a 50–48 majority in the Senate. If Democrats take both seats in this once solid Republican state – now a 150

| Winter 2021

swing state – Vice President-elect Kamala Harris gets the tiebreaker vote. So the stakes are enormous. Georgia has massive racial divisions and inequality. The capital, Atlanta, is the cradle of the state’s civil rights movement.

Georgia hasn’t voted Democrat since Bill Clinton’s election nearly 30 years ago. Georgia, though, is increasingly polarised from rapidly changing demographics – mainly young and diverse, which favours the Democrats; think ‘hot’ influencers, Twitch and politically tinged live streams.

Pollster and strategist Frank Luntz told CNBC it’s the most important Senate election in modern times – and could go either way.

“Whether they roll back Trump’s tax cuts or introduce a green new deal – if the Democrats can win both of those seats back then they will be in control of the Senate and the President will have an agenda that won’t be able to be challenged by Congress.”

If Republicans win just one seat they control the majority and therefore the Biden agenda. So the Georgia run-off will determine the nuts-and-bolts of Senate decision-making and the committees spanning banking, finance, taxation and judiciary. The consensus is that the Republicans will hang onto the Senate.

“US voters have this admirable ability to not give politicians too much power,” Chris Beauchamp, chief market analyst at IG, told World Finance. “The perception among many swing voters may be that while we’ve given Biden a chance, we don’t want to give him the keys for everything.”

Blue-chip help with gridlock?

If there is probable Senate gridlock then the chances of meaningful future US economic stimulus to support the economy – many states were coming to terms with more COVID-19 shutdowns back in November 2020, putting the brakes on a recovery – may fall. VTB Capital global macro strategist, Neil Mackinnon, told World Finance, “At best, it may be $1trn which would be mainly fresh income support and replacing unemployment programmes. It’s highly unlikely we’re going to get a $2.5trn package.” That $2.5trn figure had even been endorsed by Trump, going along with the Democrats, “though that had likely

been driven by the opinion polls at the time” adds Mackinnon. Senate majority leader Mitch McConnell doesn’t believe Americans need a multi-trillion dollar aid package.

But Biden is determined to get collaboration from corporate America to tackle the pandemic crisis. Biden, remember, has been here before: in 2009 Barack Obama charged the Presidentelect with the oversight of a near $800bn stimulus package to drag the US out of the global financial crash. Little change is expected at the Federal Reserve. Fed chief Jerome Powell sees his tenure end in early 2022. Powell, a Republican, has paid attention to job growth, earning him brownie points from Democrats keen to see issues like wealth inequality – particularly racial wealth imbalances – raised.

The inequality point is complex but vital: the 2020 election demonstrated that the economy must benefit the working class more in future if the ideological chasm between Democrats and the Republicans stands a chance of narrowing.

Elsewhere, hopes for sterner financial regulation, urged by Democrat senator Elizabeth

THE 2020 ELECTION DEMONSTRATED THAT THE ECONOMY MUST BENEFIT THE WORKING CLASS MORE IN FUTURE IF THE IDEOLOGICAL CHASM BETWEEN DEMOCRATS AND THE REPUBLICANS STANDS A CHANCE OF NARROWING

markets

In Focus: US

Warren, could see Biden ultimately replace Powell, but the Fed boss himself has endured a fractious relationship with Trump. He remains a continuity figure. Currency moves are notoriously difficult to anticipate but a weaker dollar appears likely, helping US exports and lifting Asian currencies. While trade negotiations, particularly with China, will take a more conventional tilt, Biden leads a divided government, which impacts on the greenback because of policy uncertainty.

But with the money taps open from the Federal Reserve plus more government aid money to tackle COVID-19, inf lation may climb if enough spending gets underway from both businesses and consumers. In ‘normal’ times this would reasonably see the Fed hike rates. The Fed has switched its inflation target from two percent to an average of two percent. It’s a small but important nuance, allowing it to delay hiking rates for longer.

Many dollar-denominated investors may be deterred and look elsewhere for a home for their money.

Outlook for stocks

Joe Biden: THE 46TH PRESIDENT OF THE US A core Biden quality – the capacity to work with opponents – has never grabbed headlines. Biden is more the steady journeyman in search of a better outcome, though at some personal cost.

The twin tramlines of tragedy and success have closely tracked his life.

He became a US senator in 1972, defeating strongly liked rival J Caleb Boggs despite a campaign bereft of funding and, often, hope. But he clinched it by 3,162 votes – the closest Senate election of 1972 – thanks to an ability to connect with voters. But this achievement was over-shadowed by the tragedy, almost immediately afterwards, of his wife Neilia and their one-year-old daughter, dying in a horrific car accident.

He’s held down torturously difficult positions on racial equality, notably the Senate school busing programme, in the 1970s. The close relationship with ex-President Obama, a man he often calls his brother, has cemented support from African-Americans as well as blue-collar white voters.

While a big supporter of public healthcare and mental health

programmes, Biden’s also faced allegations of misconduct, overcoming accusations of assault by ex-Senate employee Tara Reade. In 2015 his son Beau, attorney general of Delaware, died of brain cancer, forcing Biden out of the race against Trump. He now needs every ounce of his low-key bipartisan stamina and judgement to steer America back from four years of comparative isolationism to the familiar ground of multilateral agreements, compromise and the ability to work together – the essence of what the US Founding Fathers intended. But he will also have to navigate a party with a diverse range of views. Many Democrats are going to be disappointed and the splits will be uncontainable.

A normalising of geopolitical relations will likely favour biopharma companies, as Biden is keen to expand the Affordable Care Act. Chinese stocks – think e-commerce and payment names like Meituan and Tencent – may also gain thanks to a more stable trading US outlook. Some blue-chip European stocks have taken a beating from Trump tariffs, particularly on the automotive and engineering front. But Biden has pledged to rejoin the Paris Agreement, which the US pulled out of in 2017. So, spending on infrastructure for EVs, wind and battery science is good news for this sector.

Much depends on COVID-19. Biden has assembled a task force led by three respected and qualified co-chairs: David Kessler, Vivek Murthy and Marcella Nunez-Smith. Other members of this taskforce are specialists in their own right, says Russell Shor, senior market specialist at FXCM, “and bring a high level of competence to the table,” he told World Finance. “That, to a large degree, has lifted the uncertainty of the COVID-19 spread and the insecurities accompanying lockdown,” Shor continues. “More testing is required, but two major uncertainties [Biden win and Pf izer’s and BioNTech announcement of a 90 percent potential vaccine] have diminished and this is good for markets.” The hope for the US must be for calmer waters ahead. There is a lot for Biden to get through during his four-year term and it would certainly be easier if it could start with the Trump sideshow being shown the exit door quietly. n

Winter 2021 |

151

markets

Oil & Gas

Oil over the world

The past year has seen the acceleration of several transformations in the oil and gas industry. Only the most dynamic and responsive firms will survive to see a successful future In 2020 the world underwent countless changes, many of which we still don’t fully understand. Industries are still trying to figure out exactly what this means for the world, but perhaps none more so than the oil and gas sector. Between the collapse of global travel, the overnight shutdown of many manufacturing industries and drastic changes to how energy is consumed in the home, energy demand has fallen to a level that should have taken decades to reach.

While the industry has a track record of recovering from crises, this time is different. A 2020 McKinsey & Company report titled ‘Oil and gas after COVID-19: The day of reckoning or a new age of opportunity?’ warns that financial and structural problems have broadly left the industry in particularly poor health.

Between the development of shale extraction, excesses of supply and all-too-eager financial markets, the sector was ill-equipped for a sudden shock. Combined with mounting social pressure and the gradual development of renewable alternatives, the oil and gas sector now has a challenging path ahead of it.

Despite the glum outlook, current d i f f ic u lt ie s have on ly a c c elerat e d a transformation that most had already accepted as inevitable. Oil and gas will undoubtedly continue to be a multi-trillion-dollar market for decades, although current factors will lead to more intense competition and a technological arms race among relatively flat demand.

C OV ID -1 9 may have ma de a transformation more urgent, but it presents a wealth of opportunities for companies that can accept the new normal and embrace the future.

This year’s World Finance Oil and Gas Awards highlights the companies and organisations that are best equipped to thrive in this new business landscape while meeting the highest international standards.

Negative gains It is no big secret that the oil and gas sector has been extremely competitive for some time now. In terms of shareholder returns, the overall industry has underperformed against the S&P 500 over the previous 15 years, according to McKinsey & Company’s 2020 report. It is a challenge for industries 152

| Winter 2021

like these to weather a shock at the best of times, let alone an event on the scale of COVID-19. The pandemic impacted every element of the economy, although not many fared worse than oil and gas. Throughout 2020, both commodities have endured their own tribulations. In January 2020, West Texas Intermediate crude oil was hovering around $60 per barrel before experiencing an unprecedented fall in price.

As the global transport industry shut down practically overnight, prices fell to around $20 per barrel in March. However, at the end of the month, failure between Russia and Saudi Arabia, alongside OPEC, to negotiate a deal to limit production and stabilise the market destroyed any hope of an organised recovery. Instead, in April, WTI crude staged a spectacular fall to negative $37 per barrel as storage costs weighed on investors. While temporary, with prices currently back to a more reasonable $40 per barrel, investors appear to be remaining cautious.

It’s the latest chapter in a wild ride for the oil industry, with 2020 representing the third price collapse for the commodity in 12 years. As a sector closely tied to the health of the wider economy, how the world emerges into a postCOVID-19 environment will have a dramatic effect on the future of oil.

Turning up the heat Gas has not fared much better. In its Gas 2020 report, the International Energy Agency described the year as a ‘meltdown’ for the gas industry. A mild winter in Europe saw a three percent year-over-year fall in demand across the continent. While a fall in prices prompted a shift from thermal energy generation to gas-fired generation, an increase in wind generation offset any gains that were made. In March, when global lockdowns truly began to set in, industrial generation substantially fell.

The news was not all grim. Switching from coal to gas in many US states led to an increase in gas-fired generation, a welcome sign for those in the industry. Between an increase in both gas-fired generation and personal electricity usage due to lockdown restrictions, the losses experienced in the US were somewhat mitigated.

Asia paints an unclear picture. While the region’s consumption appeared somewhat resilient during lockdown restrictions, much of the success was attributed to growing imports and countries increasing their stored reserves.

Japan, the world’s largest liquified natural gas importer, experienced a five percent decrease in imports over levels seen during the first five months of 2019. Gas imports increased in most of Asia’s emerging markets, despite decreased demand throughout the region, suggesting the true cost of COVID-19 will be fully felt in 2021. Subsequently, most producers cut their production targets.

The International Energy Agency suggests that overall demand could fall four percent year-over-year for 2020, referring to the fall as the largest recorded annual decrease since the natural gas market developed at scale, and it could be twice as large as the fall seen during the last global financial crisis. While the industrial sector is responsible for the lion’s share of falls, every consumption category has experienced a drop.

Peak predictions With 2021 looming, two questions remain: What needs to change in the oil and gas sector to make it sustainable, and how quickly do these changes need to happen? The answer to the first question is, unequivocally, do more with less. It’s a strategy the industry was already planning to undertake. In May, Mr John Browne, former BP chief executive, told the Financial Times that the COVID-19 pandemic has made the upwards trajectory of demand for oil that the industry has coasted on

markets

Oil & Gas

WORLD FINANCE OIL & GAS AWARDS 2020 BEST FULLY INTEGRATED COMPANY Africa: Asia: Middle East: Eastern Europe: Western Europe: Latin America: North America:

AS A SECTOR CLOSELY TIED TO THE HEALTH OF THE WIDER ECONOMY, HOW THE WORLD EMERGES INTO A POST-COVID-19 ENVIRONMENT WILL HAVE A DRAMATIC EFFECT ON THE FUTURE OF OIL

for over a century unlikely to continue. Instead, new behaviours created by the pandemic will permanently alter how energy is consumed.

The second is a little less clear. While a peak of oil consumption has been expected for some time, many now expect it to occur sometime in the early 2030s. Between the increasing adoption of electric cars and governments taking a harsher view on emissions, change is guaranteed, although it is now approaching faster than many expected. Any hope of a ‘COVID recovery’ to pre-pandemic levels, at least in terms of oil consumption, seems increasingly unlikely.

Despite facing many of the same challenges, gas is expected to continue to grow. According to the International Energy Agency, gas is still expected to experience a compound annual growth rate of 1.5 percent per year between 2019 and 2025, revised down from a pre-COVID-19 prediction of 1.8 percent per year. With demand expected to rebound, the fast-growing Asian market is expected to be responsible for much of the ongoing demand.

As more countries move towards net-zero emission targets, oil and gas producers are beginning to move towards securing their futures. The year-over-year increases in consumption that have been the norm for the last century are destined to end. This year the World Finance Oil and Gas Awards look to celebrate the companies that are well aware of the challenges that exist and are prepared for what is coming. If the hyper-competitive environment that is predicted comes to pass, the following businesses are the ones that are guaranteeing their success into the future. n

Sonangol PETRONAS Aramco Gazprom Eni Petrobras Chevron

BEST INDEPENDENT COMPANY Africa: Seplat Asia: Pharos Energy Middle East: Genel Energy Eastern Europe: Irkutsk Oil Company Western Europe: Premier Oil Latin America: Vista Oil & Gas North America: PDC Energy BEST EXPLORATION & PRODUCTION COMPANY Africa: Oando Energy Resources Asia: PTTEP Middle East: ADNOC Eastern Europe: OMV Petrom Western Europe: Wintershall Dea Latin America: PetroRio North America: Occidental Petroleum BEST DOWNSTREAM COMPANY Africa: Waltersmith Petroman Oil Asia: Rongsheng Petro Chemical Middle East: ADNOC Eastern Europe: LUKOIL Western Europe: OMV Latin America: Grupo Dislub Ecuador North America: Marathon Petroleum BEST UPSTREAM SERVICE & SOLUTIONS COMPANY Africa: Century Group Asia: Bumi Armada Berhad Middle East: Al Mansoori Eastern Europe: TMC Oilfield Services & Equipment Western Europe: Baker Hughes Latin America: Grupo CEMZA North America: Locus Bio-Energy Solutions BEST DRILLING CONTRACTOR Africa: ODENL Asia: Borr Drilling Middle East: Foresight Offshore Drilling

Eastern Europe: Western Europe: Latin America: North America:

PNG Drilling Odfjell Drilling Dolphin Drilling Weatherford International

BEST EPC SERVICE & SOLUTIONS COMPANY Africa: Oilserv Limited Asia: Daewoo E&C Middle East: Saipem Eastern Europe: McDermott International Western Europe: Wood Group Latin America: AESA North America: KBR MOST SUSTAINABLE COMPANY Africa: Axxela Asia: PTT Middle East: SNOC Eastern Europe: MOL Group Western Europe: Total Latin America: Grupo Dislub Ecuador North America: Petroteq Energy BEST OIL & GAS LAW FIRM Africa: Olaniwun Ajayi Asia: Ashurst Middle East: Simpson Thatcher & Bartlett Eastern Europe: ALRUD Western Europe: White & Case Latin America: Tanoira Cassagne Abogados North America: Babst Calland BEST INVESTMENT COMPANY Africa: African Development Bank Asia: Mizuho Middle East: Mubadala Investment Company Eastern Europe: Gazprom Neft Western Europe: Blue Water Energy Latin America: Aventti Strategic Partners North America: US Energy Development Corporation EXCELLENCE IN LNG Africa: Asia: Middle East: Eastern Europe: Western Europe: Latin America: North America:

Nigeria LNG PETRONAS Qatargas NOVATEK Gasum Peru LNG Sempra LNG

Winter 2021 |

153

markets

Oil & Gas

Working smarter and harder The COVID-19 pandemic has hit the offshore drilling sector hard. As companies begin their recovery, putting the client first will be key

interview with

Dr Ravi Kumar Mehrotra FOUNDER OF FORESIGHT OFFSHORE DRILLING

The impact of the COVID-19 virus will be farreaching and long-lasting for many industries.

The crisis was a particular blow for the offshore oil sector, which had only just recovered from the 2014 oil price crash, when prices declined 70 percent in the period to the start of 2016.

In January 2019, oil prices were around $70 per barrel. At the time of writing, oil sits just below the $40 per barrel mark (a reduction of over 40 percent). Oil demand fell as much as 30 percent in April 2020 alone, as lockdowns and travel restrictions forced people to stay at home. Additionally, E&P companies cut their planned Capex spends for 2020 by around $100bn.

If this were not enough, markets have not looked favourably on the market capitalisation of listed offshore service companies. Listed offshore drilling companies have seen reductions of up to around 80 percent in their market capitalisation during the past six months, offering a clue as to immediate as well as longer-term impacts of the current moment.

Modelling by Moody’s has suggested that global oil demand might not return to 2019 levels until at least 2025. The ratings agency has further said that there is a possibility that demand won’t return to 2019 levels at all due to the combination of weaker economic growth, behavioural shifts and decarbonisation, especially within the transport industry. The result of the US election will surely have an impact here too, given President-elect Biden’s pledge to rejoin the Paris climate agreement and push forward with a ‘Green New Deal’ to tackle climate change domestically.

The drilling sector is being hit particularly hard at the moment, as Dr Ravi Kumar Mehrotra, founder of Foresight Offshore Drilling (FOD), well knows. Having started the drilling division in 1989 (the company started in 1984) as part of Foresight Group International, a family-owned, global enterprise whose areas of business also include shipping and the infrastructure of ports and 154

| Winter 2021

gas, Dr Mehrotra is well placed to put the current challenges in their wider context and identify what’s required if the sector is to thrive. The marine engineer and executive chairman, who is a veteran in shipping and has spent more than 50 years in this industry, spoke to World Finance about navigating FOD through these treacherous waters.

What was the immediate impact of the coronavirus pandemic on offshore drilling?

In late 2019 we were beginning to see day rates improve as more E&P plans were firmed up in drilling. As of now, the drilling sector has experienced an environment where there are contract delays, suspensions, cancellations and terminations along with the somewhat inevitable squeeze on day rates.

How did FOD respond to those challenges in the first instance?

We have over 27 years of drilling experience and a fleet of six rigs, three of which are cyber rigs ordered from Cosco Dalian in 2013 to modernise the fleet. After successful marketing of the fleet ahead of the COVID-19 pandemic and ensuring contracts remain protected from adversities arising after the crisis, the fleet now has a utilisation of 100 percent with a backlog of 18 years. The fleet is delivering an operational up-time that exceeds 99.7 percent and is supporting clients such as ADNOC, ONGC, Oil India and Masirah Oil. How can a relatively small drilling contractor such as FOD compete with the larger corporations, particularly at a time like this?

With drilling costs accounting for 40–70 percent of offshore oil and gas development costs, it is clear why the oil and gas operators choose their drilling contractors very carefully.

Because of their size, larger corporations are often able to leverage their financial and human resources to outperform smaller businesses at every turn. However, as I often remind our team, reputation is all that matters; money, anyone can create. Small can be beautiful. The client sits at the heart of all we do and being smaller means that

we are not driven by standard practices and processes. This doesn’t mean we do not have accredited management processes, just that we have the agility to adapt to requests. We offer a more customised service by ensuring all levels of management in our group are fully engaged with our clients. This means we can fully understand our clients’ needs and develop solutions that are ideal for both parties. Most importantly, though, it means that all internal functions are aligned with the solutions being proposed.

Has the pandemic offered any lessons going forward?

It has highlighted the importance of robust partnerships with suppliers and service providers. By being able to demonstrate that business operations within our organisation remain strong despite market conditions, our partners have been willing to be flexible and support our efforts around debt management and cash f low optimisation. For small companies, the relationship with their partners and the support they can provide becomes an important survival mechanism. And again, it is about the organisation having the relationship – not just relationship managers.

Focusing on your customer is critical.

Dur ing the pandemic we, like many, experienced significant issues with crew change logistics. It would have been easier to try and pass on our challenges to our clients, claiming that the problems were not of our making or within our control. Instead, our operations and HR teams came up with imaginative solutions to overcome logistical issues, including quarantining staff before and after crew rotations. In this way, operations remained smooth and showed our clients how we were supporting them, not adding to their burdens at this challenging time.

By highlighting and exploiting every innovative aspect of our efforts, whether process, service or technological, we emphasise the unique elements that set us apart from the larger corporations. In turn our clients see

“The client sits at the heart of all we do and being smaller means that we are not driven by standard practices and processes”

markets

Oil & Gas

99.7 percent uptime with excellent safety per for ma nc e. A n even more tangible Year the company started ex a mple w a s t he deliver y of t h ree brand new rigs from construction through Number of rigs in r ig r e a d i n e s s t o the Foresight fleet operation in record time, not only getting % our rigs operating quick ly for our Utilisation of the fleet clients but delivering performance levels % that exceed the norm.

This could not be Uptime running of the fleet achieved without a workforce who are committed and engaged, ready to demonstrate that they can not only complete work quickly but thoroughly as well.

It also highlights that the transition from construction to operations can be seamless.

1984 6

100

99.7

Two Foresight Offshore Drilling new-build rigs under dry tow

evidence of the compelling value propositions that we offer, propositions that enhance our reputation and generate further support.

How do you remain agile enough to respond effectively in these challenging times?

Large organisations can have a strong focus on consistency, whether it is internal with staff or external to clients. This is often achieved through layers of oversight that can increase the time to formalise decisions or approvals.

At Foresight, we have short reporting lines irrespective of geography or task. This permits an agile approach to problem solving and demonstrates to clients a flexible and responsive approach that helps to reinforce a willingness to collaborate.

What is the secret of your success?

Our workforce. To succeed, everyone within the organisation must share the collective desire to test themselves and be prepared to work the extra hours or go the extra mile. The valuable learnings picked up along the way are what will enable the organisation to more quickly and efficiently achieve its desired outcomes.

Collaboration is crucial, particularly for us as a smaller company. There’s a shared understanding, a common purpose and a real sense of pride in what we do. It is our teams and our people who regularly perform miracles to get critical milestones achieved for our clients.

There are plenty of examples of the power of this approach, from having a fleet with 100 percent utilisation to running at an amazing

How do you foster such a culture within your teams?

Much of the credit for these achievements can be attributed to long-term employees who have been trained w ithin the company. We have learned that there can be no excellence w ithout in-house training. I established the Amer Maritime Training Academy in 2001 to ensure that new entrants to the drilling or shipping world can lear n both the ba sic sk ills and discipline to aid their development, while becoming clear on culture a nd expectations.

When times are tough, we endeavour to support our people and help them remain engaged with the business. This pays dividends when our valued clients are placed in their care.

Finally, what would you say is your company’s greatest strength?

Attributes such as agility, discipline, resilience, a clear focus on common goals and innovation are measures that help a small organisation compete with the largest of contractors. Building a strong reputation by focusing on these points gives us equal standing with the big players. But of course, for our organisation to be sustainable, we will need to continue evolving and adapting innovations. n

Winter 2021 |

155

markets

Oil & Gas

When a plan comes together Sometimes the task at hand can appear so daunting that the enormity of what must be achieved can be completely overwhelming. If that is the case then strong leadership and clear communication of a strategic plan can overcome this

words by

Sergei Evchik PRESS SECRETARY, IRKUTSK OIL COMPANY

Tr a n s p o r t i n g a 6 0 0 - t o n e t h y l e n e poly mer isation reactor takes a lot of preparation. So an operation to deliver 4,500 tons of equipment more than 12,000km – including five oversized units weighing 200 to 650 tons and measuring between 40 and 82 metres – to a new polymer plant near the Russian town of Ust-Kut is not an easy undertaking. The three-month operation carried out by Irkutsk Oil Company (INK) was in planning for four years. “We worked with our partners to iron out every nuance, from the exact carrying capacity of ships to plausible weather conditions,” says deputy general director Mikhail Larin. “When it seemed that every risk had been anticipated, 156

| Winter 2021

and the equipment was ready to go, the COVID-19 pandemic hit.”

Despite the unprecedented disruption caused by suspended manufacturing and closed borders, the operation was a success.

The journey from South Korea, where the equipment was assembled, to south-east Siberia took hard work by a collaborative team and company experts, as well as transport and logistics specialists. The wealth of untapped oil and gas reserves in eastern Siberia has been attracting attention from major market players for a number of years; complex operations such as this enable the gas industry to be further explored in remote territories, an area in which INK has been leading the way.

This operation is part of a new, large-scale project to create a system for the production, preparation, transportation and processing of natural and associated petroleum gas from INK’s fields. The polymer plant at Ust-Kut

will produce 650,000 tons of low and highdensity polyethylene per year, using ethane as a feedstock. These polymers are widely used in the automobile and aerospace industries, as well as in textiles and medicine; the plant will grant INK access to both the Russian and international polyethylene sales markets.

The start of a long journey In June, the operation could finally get underway. It started with a week-long loading process in Masan, a sprawling port in the south-east of South Korea, to transfer the machinery to the two ships that would carry it through the first leg of the journey. The scale of this time-intensive operation was evident before the cargo even left Masan. Once it was properly loaded, the ships embarked on a journey across the Sea of Japan and around the eastern coast of Russia, across the Okhotsk sea and up through the Bering and Chukchi seas that separate Russia and Alaska. After travelling west across the East Siberian sea, the two vessels reached Tiksi, a once bustling port in the Laptev sea that remains the most northerly settlement with a population of over 5,000. It took 26 days for the ships to travel the 8,500km from Masan to Tiksi Bay, which

markets

Oil & Gas

4,500

Weight, in tons, of equipment to be moved

12,000km Distance the equipment had to travel

4

The number of years spent planning

is 50km from the mouth of the Lena river, via which the cargo would make its way inland to Ust-Kut on a fleet of barges.

It was at Tiksi Bay that the team had to overcome the first of many hurdles. The remote port does not have sufficiently deep water levels to accept sea vessels, so the transfer of the cargo from the ships to the barges had to take place at sea. Loading at sea is incredibly complex: it requires crews to synchronise sea vessel cranes with swaying barges, account for storms and work with extreme precision. There is no room for error – in the event of equipment malfunction, recovery of an 80-metre-long, 357-ton ethylene column from the bed of the icy Laptev sea would be impossible.

Stormy weather conditions made this already precarious process more difficult. “It was a very serious operation,” a member of the project team reported, praising the professionalism of the seafaring team. Fortunately, a 12-hour respite of tranquil weather – described as a “gift” by the team – ensured that the transfer was completed successfully. It took six days.

The next leg of the journey involved the fleet of nine barges sailing up the Lena river, the eastern most of the three great Siberian rivers.

Larin describes this part of the journey as the

“biggest risk”, as low water levels or smoke from wildfires – which, during the previous summer, had engulfed an area the size of Belgium – could cause a major disruption. Additionally, river traffic could be a problem: at one point the Lena river’s fairway is just 65 metres wide, about the width of a football pitch. At almost 20 metres wide, two barges passing one other would not leave much room for manoeuvre.

The journey upriver was planned by Sergey Kushnir, the head of INK’s nautical management department. “I worked as a captain for several years, so I knew we could deliver oversized cargo by waterway.

This was the first time we transported such oversized equipment from the Tiksi Bay up the Lena river. One 89-metre-long barge carried equipment weighing 650 tonnes!”

He attributes the success to the coordination and professionalism of the specialists at the Lena United River Shipping Company. “It was exciting and interesting to watch the whole process,” he added.

The barges travelled between 100km and 200km every day, with crews on rotation day and night. Thanks to their perseverance, the barges arrived in Ust-Kut safely and on time, completing the 3600km trek in 28 days.

“Everyone was, of course, mentally exhausted by the final week,” said Sergey Balushkin, the captain of the tugboat. “But they were completely satisfied with their work.”

All waterways lead to the pier Meanwhile, as the barges travelled up the Lena river, INK was busy building the infrastructure needed to unload the oversized equipment from the boats and transport it to its final destination. Constructing the hydraulic mechanism that would transfer the heavy cargo from the river to the trucks required a project team comprised of employees from the departments of supply, transport logistics and warehousing, explained deputy director of production of INK, Ruslan Krupenikov.

To construct the pier, the coastal section of the Lena river was cleared and more than 18,000 cubic metres of sand and gravel, 2,500 cubic metres of concrete and 422 airfield slabs were brought in to build a retaining wall and a site for heavy cranes. Despite the initial project outlines, in addition to contractors, having been disrupted by the pandemic, in August the Lena river pier – along with auxiliary facilities and an asphalt road leading to the main construction site – was completed in time for the boats’ arrival.

On August 24, the first barge arrived at the new pier at Ust-Kut. Two days later, with the help of two cranes, the first of the largest and heaviest units – a 55-metre-long hardening

“You could see the culmination of the work that was accomplished by hundreds of professionals” water column, weighing over 300 tons – was unloaded and installed on a modular truck. The vehicle operator manoeuvred the 40m-long truck though sharp S-shaped bends with confidence and ease, despite the cold and fog of an early morning in Siberia; moving sometimes at just 1km per hour, the drive to the final location took seven hours.

The INK’s logistics department, led by Peter Klimetsky and Alexander Sheshin, directed the unloading of the cargo, a process that took just over three weeks overall. This last stage of the transportation was the most exciting, they said, “because you could see the culmination of the work that was accomplished by hundreds of professionals”. The project required the collaboration of many companies from across the globe, including Japan’s Toyo Engineering, the Netherlands’ Mammoet, Germany’s Deugro and Russia’s Kin-Mark.

The arduous, complex and extensive journey, involving marine vessels, barges, river tugs, manoeuvrable modular transporters and 750-ton cranes, lasted 91 days in total. But it is hoped that the benefits of this latest expansion

by INK – already the largest private producer of hydrocarbons in eastern Siberia – will be more than worth the work it took for the equipment to reach Ust-Kut. The plant’s production of ethylene and polyethylene is licensed

by Lummus Technology and Univation Technologies (UNIPOL) respectively; both licensors are global market leaders who have gone from strength to strength over 50 years of operation. The processes used in the plant will be efficient and reliable, on top of meeting environmental guidelines. INK has long been dedicated to boosting the local economy in eastern Siberia, having spent over $3bn on the development of the fields and licence areas, construction processes and transportation infrastructure since it was founded in 2000.

Once complete, the now fully equipped modern plant will create 1,500 new jobs in the region.

“This is a world-class project, and today worldclass work is done here,” said Nikolay Buynov, chairman of the board of directors of INK, praising the unprecedented organisation and hard work. “This project will change the city of Ust-Kut forever.” In proving its commitment to developing the gas industry in Irkutsk Oblast, INK could incite renewed interest in the region.

The success of this operation will no doubt inspire many more to come. n

Winter 2021 |

157

2020 was a record-setting year for gold and gold-backed financial products. Some think that a new golden era has just started, Alex Katsomitros investigates Âť

158

| Winter 2021

Winter 2021 |

159

THE GOLDEN YEARS

n the summer of 2020, while stock ma rket s were recover ing f rom a pandemic-driven slump, an old asset made its comeback with a roar. In August, the price of gold surpassed the threshold of $2,000 an ounce for the first time in history. Few people who had been following the market were shocked at the news. “If you asked me at the end of 2019, I would have been bearish on gold. But given COVID-19 and the fiscal stimulus put in place, this didn’t come as a surprise,” said Bernard Dahdah, senior commodities analyst at Natixis investment bank.

A bumper year Unlike many financial products, the precious metal had a fine year. By the end of 2020, its price had increased by 25 percent, outperforming other major asset classes. Its ascent was temporarily halted by a drop in March, coinciding with the economic shock brought by lockdowns, but this was followed by a rally that led to the record-breaking peak. In autumn, its dollar-denominated price hovered between $1,800 and $1,900.

Nobody doubts that the gold rush is a side effect of an unprecedented healthcare crisis, forcing governments to throw the financial manual away. Gold is the world’s oldest safe asset, always thriving in times of uncertainty.

Historically, investors have reverted to it as a hedge against political and economic tumult, with its price jumping during wars, contested elections and economic crises. During the Great Recession, gold’s price trebled from early 2007 to 2011. The same scenario is now repeating itself.

Government responses to the pandemic played a major part. In the US, loose monetary policy, accompanied by unprecedented fiscal stimulus to blunt the economic consequences of lockdowns, weakened the dollar to its lowest levels against the euro over the last two years, increasing the price of the dollar-denominated precious metal. Arkadiusz Sieroń, an analyst at Sunshine Prof its, a precious metals investment company, said: “Gold reacted in a very bullish way not to the pandemic – its price declined initially in tandem with other assets – but to monetary and fiscal responses to the coronavirus.” Investors were left with few options other than traditional safe assets; unlike the credit crunch of 2008, a f light to emerging markets was less appealing.

Government bond yields in the US and Europe 160

| Winter 2021

were also lacklustre, with the former entering negative territory in March 2020.

Gold goes into first place In the long term, what makes gold shine so bright in the eyes of investors is what has become a semi-permanent feature of the global economy: low interest rates, occasionally falling below zero. “If rates are high, you lose money by holding gold because of storage and insurance costs. But right now with yields being negative, gold is cheaper than holding US treasuries,” Dahdah said. Normally, the precious metal is also disadvantaged against other assets due to lack of earnings such as interest payments. However, in an era of dwindling returns, it has emerged supreme. In financial markets, the pandemic kick-started a chain reaction, according to David Govett, veteran trader and head of Govett Precious Metals, a consultancy: “This was the trigger, which in turn created a sort of reverse snowball effect.

The higher it went, the more it attracted ETF, investment fund and speculative money.”

Even before the pandemic, many analysts were predicting that gold prices would rise, as clouds were gathering over the global economy. In 2019, the global debt to GDP ratio surged to a staggering 322 percent according to the Institute of International Finance, with many developed economies on

the brink of recession. Leveraged loans held by financial institutions and ‘zombie’ companies had reached stratospheric levels, pointing to devaluation of the dollar. Quantitative easing, aggressive government bond issuance and loose monetary policy were all depleting the value of fiat currency – a boon for gold holders.

Jan Nieuwenhuijs, a precious metals analyst and editor of the influential blog The Gold Observer, said: “Given the state of the global financial system I would have thought that gold’s price would be higher a few years ago from where it trades today. Due to monetary expansion in recent decades and the Ponzi scheme created by financial asset price inflation, gold is still undervalued relative to other financial assets.” Geopolitical tension has played a role too, according to Professor Arvind Sahay, Chairman of the India Gold Policy Centre at the Indian Institute of Management Ahmedabad: “Growing tension between China and US contributed to the increase in the price of gold.”

The party isn’t over yet In the short term, analysts expect gold prices to stay at the highest levels seen in the last 50 years (see Fig 1). The Bank of America forecasts gold to surpass $3,000 in 2021, while some analysts see an upper limit of $10,000 if central banks keep devaluating currencies. As long as

THE GOLDEN YEARS

Fig 1. Gold Prices US DOLLAR

2,500

2,000

1,500

1,000

500

0.0

1972 1976 1980 1984 1988 1992 1996 2000 2004 2008 2012 2016 2020

SOURCE: FastMarkets, ICE Benchmark Administration, Thomson, World Gold Council

Gold is the world’s oldest safe asset, always thriving in times of uncertainty

interest rates are suppressed, gold will remain king, Nieuwenhuijs said: “Major central banks will hold interest rates at or below zero, while trying to boost consumer price inflation above two percent to lower the debt burden. Deeply negative real interest rates will boost gold demand and drive the price higher. Gold’s price can get an extra boost if financial bubbles pop.” Even when the worst of the pandemic is over, few analysts expect interest rates to rise.

Dahdah said: “The Fed and the ECB will not raise rates the moment we have a vaccine.

Even if everyone gets vaccinated in 2021, some businesses have been so badly hit that we will need to have low rates for two to three years.”

However, other investors expect prices to drop sharply after a sense of normality is restored. Vaccines will be the game-changer that will redirect focus to other financial assets. In the follow-up to the financial crisis, gold prices collapsed from $1,920 in 2011 to nearly $1,200 in 2013, partly due to a temporary increase in interest rates. Govett said: “I am not sure that the pandemic will ever be over completely, but certainly with an effective vaccine developed, I would expect a definite reaction on the downside in gold.” A big question mark hovering over the market is the shape of US fiscal and monetary policy. The forthcoming Biden administration is expected to unleash aggressive fiscal stimulus, while

$2,067.15 The all-time high price that gold reached in 2020

$30bn

Value of gold bought by central banks in 2018

Notes: Data as of November 2020

the Fed has hinted at keeping interest rates low until the US reaches full employment and inflation hits two percent. This would be a boon for gold prices, said Sieroń: “The bull market should last as long as the US monetary policy remains ultra dovish, or as long as investors expect it to be.”

Asia on hold Skyrocketing gold prices have hit the market where the precious metal’s shine is appreciated the most: Asia. Historically, more than half of global gold purchases come from China and India, with countries such as Thailand, Indonesia and Turkey also being top markets.

Data held by the World Gold Council (WGC), the market development organisation for the gold industry, shows that around three out of four Chinese have bought gold in the past or are considering doing so in the future, while more than half of Indian investors own some form of the metal.

However, demand has sharply fallen this year. Global demand fell to its lowest levels since 2009 in the third quarter of 2020 according to WGC data, partly driven by dwindling demand in Asia. The pandemic has forced traditional buyers to postpone purchases and investors to ditch holdings, while lockdowns have hit the jewellery market.

China and India have seen a drop in demand »

Winter 2021 |

161

THE GOLDEN YEARS

» by 25 percent and 48 percent respectively in the first three quarters of 2020. In 2013, falling prices prompted a surge of demand in China that has left its mark on the market, according to Roland Wang, Head of WGC’s China branch: “The gold rush exhausted demand for the following years, especially after the price fell from the peak. China’s economic growth slowed and China entered the ‘New Normal’ phase.” Another reason for dropping demand, according to Wang, is changes in consumer tastes, with younger consumers preferring lighter-weighted 24k hard gold products with trendy designs. “While they provided attractive margins to jewellers as they are perpiece priced, their popularity contributed to a reduction in total weights,” he said.

The precious metal has become a political tool used to defy the dollar’s dominance as a reserve currency

Government initiatives The picture is similar in India, where gold is a highly valued status symbol offered at weddings and other festivities. Most of them have been postponed amid an economic crisis that cost around a tenth of Indian workers their jobs, while 45 percent of households saw their income drop. Over the last five years, annual demand has been falling by close to 20 percent compared to the first half of the decade, largely due to high prices and government initiatives to monetise gold. However, the country is still the world’s biggest gold stock owner, with 25,000 tonnes, or 13 percent of global stock, owned by households and temples, according to UBS. “It is a highly unlikely scenario that Indians will fall out of love with gold.

Millennials may be less interested in jewellery, preferring instead to hold it as an investment.

But jewellers are working hard to keep them interested by selling them gold jewellery of a lower price range, so that they get into the habit of buying gold,” said Sahay.

Experts expect demand to rise again when the pandemic is over. In autumn 2020, many jewellery chains were reporting sales getting back to pre-pandemic levels, while a good monsoon season is expected to boost demand in rural India. Growing demand in Asia will stabilise the world market, Dahdah said: “In 2021 we will probably see a return to more normal levels of gold purchases from China and India, which might put a floor under gold prices.”

Central banks hoarding gold Central banks have played a major role in the resurgence of the precious metal. Following the demise of the gold-backed Bretton Woods system in 1971, central banks fell out of love with gold, dumping their reserves in the last quarter of the 20th century. The UK famously sold half of its reserves between 1999 and 2002 when prices were hovering between $250 and 162

| Winter 2021

$270. The policy cost British taxpayers an estimated almost £7bn, and earned Gordon Brown, then Chancellor of the Exchequer, the unwanted accolade of being responsible for the notorious ‘Brown Bottom’ sell-out. When gold’s price dropped to an all-time low in 1999 and its role as a reserve asset was threatened, central banks reached the Central Bank Gold Agreement (CBGA) to limit sales.

The tables turned after the financial crisis when central banks returned to the market with a vengeance. Since 2011 they have been buying gold aggressively to beef up their reserves. In 2018, central banks bought 651 tonnes of gold worth nearly $30bn according to World Gold Council data, a half-century

record, while European central banks ditched the CBGA agreement in 2019 (see Fig 2). “The bear market that started a few years after the Great Recession lowered gold prices, making gold an attractive addition to central banks’ portfolio,” Sieroń said.

The precious metal has become a political tool used to defy the dollar’s dominance as a reserve currency. Russia and China have increased their gold reserves three and six times respectively since 2007, while Turkey has boosted its own reserves by 500 percent since 2017 in an attempt to support its plunging currency. For emerging economies, the geopolitical angle is important, Dahdah said: “Since the financial crisis they realised that gold

Fig 2. Supply and demand statistics n JEWELLERY n TECHNOLOGY n INVESTMENT n CENTRAL BANKS

● LBMA GOLD PRICE (US$/OZ)

Tonnes 6,000

US$/Oz 1,700

5,000

1,600

4,000

1,500

3,000

1,400

2,000

1,300

1,000

1,200

0 2010

2011

2012

2013

SOURCE: ICE Benchmark Administration, Metals Focus, Refinitiv GFMS, World Gold Council

2014

2015

2016

2017

2018

2019

0

Notes: Data as of September 2020

THE GOLDEN YEARS

25,000

Tonnes of gold possessed by India

7

Of the 11 gold ETFs listed in China were launched in 2020

500%

Increase in Turkey’s gold reserves in the last three years

is a great hedge to diversify away from the dollar whenever there is uncertainty about the US economy. For political reasons we saw China and Russia selling dollar holdings and buying gold.”

However, many analysts expect the trend to subside due to a combination of high prices and the need for liquidity that can facilitate imports of dollar-denominated goods. Dahdah said: “Because of COVID-19, you won’t see them buying gold. They have other fires to fight. It would be a luxury and it’s expensive.” October 2020 was the first month during the last decade that central banks were net sellers, although sales were driven from two countries, Uzbekistan and Turkey. “Sales by Turkey, Uzbekistan, Tajikistan, Philippines, Mongolia and Russia in the last quarter of 2020 only reinforce its liquidity feature at a time of stress for these countries,” said Sudheesh Nambiath, Head of the India Gold Policy Centre.

Growing market for gold ETFs One class of assets that has benefited from skyrocketing gold prices is gold exchange-traded funds (ETFs), which invest in the precious metal as their principal holding. Although a smallish market, they are seen as an oasis of serenity in the midst of a storm. They surpassed the threshold of 1,000 tonnes of new demand in 2020, while global holdings of gold ETFs hit a record of 3,880 tonnes in the third quarter of the year.

Gold ETFs are a relatively new financial instrument, with the first one appearing in India in 2007. On the back of growing investor interest, they now make up around a third of global gold demand. SPDR Gold Shares, one of the top

holders of gold, briefly became the largest ETF in the world a decade ago. In India, their appeal is linked to their legal status, Nambiath said: “ETFs and sovereign gold bonds are the only two investment products that are regulated. This gives a lot more comfort to private investors.”

The picture is similar in China, which as a major gold producer favours the launch of goldbacked funds. Rising gold prices gave a new lease of life to the market; more than half of the gold ETFs listed in China were issued in 2020. Roland Wang from World Gold Council said: “Gold ETFs in China are backed at least 90 percent by physical gold at the Shanghai Gold Exchange, and investors in China view them as a form of physical gold investment.” Geopolitical pressures have played a role too: “Having witnessed volatile stock markets, rising tensions between China and the US, the trade war and the pandemic’s impact on the economy, Chinese investors are increasing their allocation of gold through convenient gold ETFs.” Payment One reason services such as Alipay and WeChat also make why the accessible to world’s oldest them many retail investors, store of value allowing them to buy fractional amounts is making a worth as low as one comeback is y u a n , a c c o r d i ng its scarcity to Wang: “You can amid a boom convert your gold ETF shares into physical of financial ba rs, coins a nd products jewellery easily, just

one tap away from your phone on Alipay or other online platforms.” In the developed world, gold ETFs are becoming the go-to option for many investors, Nieuwenhuijs said: “A lot of the money poured into gold ETFs in 2020 was institutional money that normally traded on the COMEX (gold futures). However, due to the dislocation in the gold market since March 2020, rolling long futures positions became very expensive and some funds moved their positions to ETFs.” North America and Europe-listed ETFs accounted for 90 percent of global inflows in the third quarter of 2020, driven by low interest rates and uncertainty over government responses to COVID-19.

“Usually gold bull markets are driven by demand in the west, and ETFs are one vehicle Western investors use to invest in gold,” said Nieuwenhuijs.

Some analysts question the prospects of the market, notably issuers’ ability to back claims with physical gold. Unlike bars and coins, ETFs come with counterparty risk and are linked with the financial system through ‘custodian’ banks that source and store gold for them. Though growing, it’s a market doomed to remain small, Govett said: “ETFs on the whole are used by investors who find holding physical gold either too expensive or too complicated. These ETFs need to be backed by physical and gold is a much, much smaller market than any other major investment tool, so it doesn’t take a lot to move the underlying price higher.”

A new golden era One reason why the world’s oldest store of value is making a comeback is its scarcity amid a boom of financial products. Currently, it represents less than 0.5 percent of global financial assets, down from three percent 40 years ago, while its share of international reserves has fallen to 13 percent from close to 50 percent 20 years ago. It may become even scarcer amid worries over the carbon footprint of the gold-mining industry.

For some analysts, gold’s second coming is raising questions over the post-COVID-19 future of the global economy. In an era of low inflation, aggressive money printing and negative real interests, fiat money is losing its appeal, whereas governments cannot print gold. Many interpret central banks’ goldbuying spree as a sign of diminishing trust in legal tender. Increasing geopolitical tension may also boost its importance. There have been rumours of China launching a goldbacked cryptocurrency, while Germany has been repatriating its gold reserves from the US, possibly as a response to souring relations with several US administrations. In a volatile financial system where gold remains one of the few stable assets, the precious metal may serve once again as an idiosyncratic kingmaker, according to Nieuwenhuijs: “As they say, whoever has the gold makes the rules.” n

Winter 2021 |

163

i n f r a s t ru c t u r e

Investment

The need to build a sustainable future A comprehensive study of 10-year trends has discovered that private investment in new infrastructure has declined steadily since 2010 and a future of inadequate infrastructure is therefore closer than ever Trends over the past decade words by

Marie Lam-Frendo CEO, GLOBAL INFRASTRUCTURE HUB

At a time when mobilising private capital is more critical than ever, the capacity of the public sector – traditionally the primary source of infrastructure investment – has been put into question by unparalleled fiscal spending in response to the COVID-19 pandemic. The latest International Monetary Fund October Fiscal Monitor estimates that global public debt will approach 100 percent of GDP in 2020, a record high, while the World Economic Outlook October 2020 states that “there remains tremendous uncertainty around the future with downside and upside risks.”

Policy interventions will play a crucial role in amplifying the impact of limited global finance to its maximum potential.

The Global Infrastructure Hub (GI Hub) recently launched Infrastructure Monitor, an analytical report and website that provides data-driven insights into selected G20 infrastructure priorities. The inaugural 2020 annual report focuses on mobilising private capital and establishing infrastructure as an asset class, by highlighting 10-year trends in private infrastructure investment levels and financial performance. The findings have significant implications for investors and regulators and are a building block on the road to infrastructure as an asset class.

164

| Winter 2021

One of the key findings of Infrastructure Mon it or i s t h at worldw ide , pr iv at e infrastructure investment in primary markets is low and has been slowly declining over the past decade. Primary market transactions (new security offerings in either greenfield or brownfield infrastructure projects, for example) normally represent an incremental investment in infrastructure and are a more important metric for private capital mobilisation. In 2019, it came in at $106bn (0.13 percent of total global GDP), down from $156bn (0.25 percent of global GDP) in 2010.

Private investment of $100bn per year is a drop in the ocean compared to the estimated $15trn global infrastructure financing gap. While mobilising private capital is key, Infrastructure Monitor shows a lack of private sector appetite for new infrastructure investment.

Another noteworthy trend is the simultaneous increase in secondary market transactions (the trading of existing infrastructure assets, for example), which comprised 75 percent of private infrastructure investment in 2019, up from 34 percent in 2010. Possible explanations for the declining level of primary market private infrastructure investment could include: a limited pipeline of bankable deal flow available to the private sector as PPPs or privatisations, regulatory impediments, higher perceived risk by the private sector, or lower borrowing costs for the public sector.

Analysis by income groups reveals that 67 percent of private infrastructure investment

was in high-income countries over the past decade, calling for renewed emphasis on the United Nations Financing for Development action agenda. Private investments in middle and low-income countries have provided less attractive risk-adjusted returns. In particular, foreign exchange risk is fundamentally higher as the deals are almost entirely denominated in foreign currencies. With capital markets development in the Asia-Pacific and Latin American regions, the local currency component of deals has appreciably increased.

The study also sheds light on the sectoral composition of private infrastructure investment, revealing that transport and power (both renewable and non-renewable) have been the top preferences for investors over the past decade. Despite growing interest in cleaner energy sources, for middle and low-

i n f r a s t ru c t u r e

Investment Sheikh Zayed road intersection in Dubai, UAE

“Private investments in middle and low-income countries have provided less attractive riskadjusted returns�

Desirable risk-adjusted returns

income countries, private investment in more carbon-intensive and less sustainable energy has remained greater than renewables. With emerging and developing countries expected to account for 90 percent of global power demand growth over the next decade, there is a huge opportunity for private investors to tap into this market and for renewables to play a more prominent role.

Meanwhile, we have also seen a notable decline in private investment in social infrastructure, such as schools, hospitals and public housing. Private investment in social infrastructure declined the most from $19bn in 2010 to $3bn in 2019. This is despite Moody’s data showing that social infrastructure typically experiences lower default rates than other infrastructure sectors, in both developed and developing countries.

73%

Of private infrastructure investment globally was debt financed

27%

was equity financed over the past decade

Over the past decade, about three-quarters of private infrastructure investment globally was debt financed, and about a quarter was equity financed. In private investments, equity financing is typically higher than debt financing to compensate for higher intrinsic risk. On a relative basis, equity financing was higher in lower-middle and low-income country groups, the regions of Asia-Pacific and Sub-Saharan Africa, not to mention the transport, water and waste infrastructure sectors. Compared to other investment options, infrastructure equities have been less volatile and provide attractive risk-adjusted returns. Infrastructure debt is higher risk during the construction period, after which the yields are very predictable and stable.

There is limited recognition of this distinct performance of infrastructure as an asset class compared to other assets having similar risk levels regardless of time duration.

A public policy challenge is to better understand how public resources can mitigate higher risk during the initial period (the construction phase, as an example) to enable greater private investment in infrastructure projects and enhance overall performance.

Now is the time for the industry to explore other options, with true partnership between the public and private sectors, to help close the infrastructure gap. This has become critical as governments around the world face fiscal challenges as a result of the COVID-19 pandemic. A global discussion on the policy implications of the data-driven insights identified in Infrastructure Monitor could help pave the way for a more resilient, sustainable and inclusive future. n

Winter 2021 |

165

i n f r a s t ru c t u r e

Shipbuilding

Staying afloat and surging ahead Asian shipbuilders’ capacity for delivering cost-effective and complex low-emission ships is reflected in their full order books, a sign that they are cornering the market in the post-pandemic world, writes Selwyn Parker In the latest demonstration of the growing dominance of Asian shipbuilding, three vessels with a combined deadweight of 720,000 tonnes were launched in a single day in November 2020 from shipyards in China.

And ominously for rival western shipyards, the vessels – a giant oil tanker and two bulk cargo ships – were built in double-quick time.

The construction of the two cargo ships, each weighing 210,000 tonnes, took just 15 months from the signing of the contract to delivery. In a market that has become even more fiercely competitive than usual during the pandemictriggered downturn, Asian shipbuilders continue to pick up plum contracts from all over the world, with China in the vanguard.

France’s shipping giant CMA CGM has handed China State Shipbuilding Corporation the contract for all nine of its pioneering LNGpowered box ships, capable of transporting 23,000 standard-sized containers. The first of the 400-metre-long vessels, Jacques Saadé, was delivered in September 2020.

Climate-conscious construction Although Asian shipyards can build the biggest ships more cheaply than their western counterparts, it’s not all about price. They have embraced the latest, low-emission technologies, working with manufacturers of propulsion systems in the west. The LNG-fuelled Jacques Saadé, one of the most technologically advanced container ships, is a prime example. “In a similar way that electric vehicles stand in the spotlight in the auto industry, eco-friendly vessels like LNGfuelled ships do in the shipbuilding industry,” an official of Hyundai Heavy Industries, one of the world leaders, said.

Although global orders for new ships, known as ‘newbuilds,’ collapsed by about half in the first nine months of 2020 as owners sat out the pandemic, Asian yards are rapidly bouncing back. China’s Yangzijiang 166

| Winter 2021

Shipbuilding (YZJ) announced in early November 2020 that it had already secured $1.03bn worth of new orders, not counting the value of options (commissions for extra vessels contingent on a favourable market). “Our yearto-date new-order wins of over $1bn are more than we booked for the whole of 2019,” said YZJ executive chairman and chief executive Ren Letian. Orders that would once have gone to European yards have been snapped up by China. In late 2020, state-owned Guangzhou Shipyard International won the blue-ribbon contract for P&O’s two new 230-metrelong ferries that will start plying the English Channel in 2023. Bristling with advanced technology and design, these double-ended, quick-turnaround ferries promise to become flagships on the 21-mile crossing, one of the busiest waterways in the world.

Me a nt i me S out h K or e a , a no t her shipbuilding giant that prides itself on heavy industry, is also booking a run of lucrative commissions, like the $2.6bn order from United Arab Emirates state-owned oil and gas company, Adnoc, for three eco-friendly super-large crude carriers to be built by Daewoo Shipbuilding & Marine Engineering (DSME). The vessels will embody the latest low-emission technology in the form of a high-pressure, dual-fuel engine that can run on LNG, the first ultra-large crude oil carrier to do so.

A specialist in big ships, DSME has a full order book that includes nine LNG carriers, four container ships, two shuttle tankers, five very large crude carriers, and one very large crude gas carrier. Although orders are now pouring in, Asia shipyards had their difficulties in the downturn. Measured in terms of deadweight tonnes, output in China fell by 3.6 percent compared with 2019, while new orders declined by 6.6 percent, according to the Association of China’s National Shipbuilding Industry. Still, the revenues remain robust, especially for ex-

IN SEOUL, AS IN BEIJING AND TOKYO, SHIPBUILDING IS SEEN AS A FLAGSHIP INDUSTRY EMPLOYING HUNDREDS OF THOUSANDS OF PEOPLE port orders that account for most of China’s contracts. Between them, the country’s 75 major shipyards posted revenues of nearly $38bn, down by just 0.5 percent, in 2020. In the teeth of competition from main rivals China and, to a lesser extent, Japan, the South Korean government also arranged the merger of Hyundai Heavy Industries (HHI) and DSME into an umbrella company called Korea Shipbuilding, giving the country a 20 percent share of the global market for new ships, especially the highly profitable gas carriers.

High demand for high-tech The money’s no longer in relatively low-tech bulk carriers, having gone to the complex gas carriers that transport LPG, LNG, ethane and other low or zero-polluting fuels around the world. As the Wall Street Journal reported in 2019, LNG ships cost about £175m each on average with a profit margin that is nearly double that of more mundane vessels like bulk carriers that cost about $25m each. This is a business that South Korea is determined to

i n f r a s t ru c t u r e

Shipbuilding France’s CMA CGM has entrusted its biggest current shipbuilding contract to China

75

Major shipyards within China

$38bn

Revenues posted in 2020, down by just 0.5 percent

$2.6bn

The commission given to Daewoo Shipbuilding & Marine

by Adnoc

£175m

The total cost of an LNG ship

dominate. In Seoul, as in Beijing and Tokyo, shipbuilding is seen as a flagship industry employing hundreds of thousands of people.

That’s why governments are willing to pump in funds by way of subsidies, and if necessary, bail-outs. For instance, the South Korean government provided a $2.25bn liquidity lifeline to the merger of HHI and DSME, plus a further $2.6bn in cash.

Yet South Korea has a fight on its hands.

One of the busiest shipbuilders in all of Asia, state-owned Jiangnan Shipyard is also scooping up orders for high-margin gas carriers on top of the nine-ship contract from CMA CGM. In a coup in November 2020, Bermuda-headquartered Petredec, which owns the world’s second biggest fleet of very large gas carriers, signed with Jiangnan for up to six LPG carriers, all scheduled for delivery by 2023 in the kind of rapid project for which Asian shipbuilders are famous.

Simultaneously, the same shipbuilder is also constructing an aircraft carrier, three destroyers, a heavy-lift military hovercraft – all for the Chinese navy – and a sister ship to CMA CGM’s Jacques Saadé. To cap it off, in 2020 the yard signed a spate of orders to construct two giant ethane carriers, technologically advanced vessels that will be at the forefront of global shipping’s push towards decarbonisation as they transport the gas from the US to Europe.

And looking ahead, it will be business as usual.

At the end of October 2020, Chinese shipyards had booked nearly 57 percent of the global market for newbuilds. Ominously, they are also getting into cruise ships, until now a preserve of European shipbuilders.

Japan, Asia’s other shipbuilding giant, is watching all this government intervention with concern. Citing the mergers of China’s stateowned shipbuilders and of South Korea’s big two, Imabari Shipbuilding president Yukito Higaki sounded a warning to Tokyo recently: “Huge shipbuilding companies are now rising up in the world. I would like fair competition without any governmental support. However if current circumstances continue, it is possible that Japanese shipbuilders will not be able to stand on their own feet any longer.” This is a crucial issue for Japan where 99 percent of trade goes by sea.

The sun also rises Looking to the future, Japan is relying on innovation in the pursuit of virtuous, emission-free shipping. And the newly delivered car carrier Sakura Leader represents a milestone in that direction. In an all-Japan operation, Sakura Leader is owned by NYK Line, powered by IHI Power Systems’ latest dual-fuel engine, and was built by Shin Kurushima Toyohashi Shipbuilding. For good measure Mitsubishi

Shipbuilding provided the complex gas-supply system. Capable of carrying 7,000 units, the vessel is the first large, LNG-fuelled car carrier to be built in Japan and it certainly will not be the last. A sister ship for Sakura Leader is already on the way. Importantly, the engine ticks the International Maritime Organisation’s regulations on emissions without the need for ‘scrubbers,’ exhaust systems that clean up the burnt fuel’s residues.

The Japanese government, which has made zero-emission shipping a high priority, has designated the car carrier as a flagship project. Japan invented the car carrier – the first of these slab-sided vessels, virtually one giant container, was launched there in the 1960s and designers have been improving them ever since. The latest car carriers are built to the next generation ‘Flexie’ specification, that transport not just cars around the world, but trucks, bulldozers, railcars and other odd-sized units, all arranged on six floors of decks that can be raised or lowered according to need. As a bonus, a Flexie car carrier is narrower than previous versions so it can operate in more ports, but it can still carry up to 6,800 cars.

Japanese shipbuilders and suppliers work together in terms of innovation. Among other home-grown innovations, Flexie car carriers feature a spherical, sea-kindly bow and a tearshaped stern that reduces wind resistance, both jointly designed by Mitsui OSK Lines and Mitsui Zosen Akishima Laboratories.

At the opposite end of the scale, Oshima Shipbuilding, which generally specialises in large ships, has become the hub for another all-Japan project with a big future – a fully automatic, zero-emission, battery-powered ferry. Launched in 2019, the little vessel known as e-Oshima is challenging Norway, the world leader in electric ferries, with its automated ship navigation system that sets the route and speed while simultaneously avoiding collisions.

For Japan, the e-Oshima is not a hobby project. It’s part of a joint, government-led programme to become a world leader in battery-powered transport by sea. “The ferry looks like becoming a symbolic vessel in the new age ahead,” notes the Nippon Foundation, an organisation devoted to green seas.

It is an absolutely huge business market and one that remains crucial in global logistics and seeing how the largest firms continue to compete with each other is certainly going to be riveting. n

Winter 2021 |

167

i n f r a s t ru c t u r e

Aviation

The bottom line

The travel bug The pandemic has all but eradicated corporate travel within the last year, leaving airlines and hotels reeling from the effects.

Laura French reports on the damage to date, and asks whether business travel will ever be the same again In March 2020, the dawn of coronavirus effectively wiped out global travel in the space of a week – on a scale we’ve never seen before. Airline traffic tumbled 96 percent in April 2020 compared with the same period in 2019, according to data from the Transportation Security Administration (TSA), and it has only mildly recovered since, with passenger numbers still down 70 percent year-on-year as of October 2020.

In June 2020, airline industry group IATA projected total carrier losses of nearly €100bn to the end of 2021, and in October, IAG (parent company of British Airways) confirmed losses of €5.6bn in the first nine months of 2020.

Hotels have been just as decimated; a survey by the American Hotel and Lodging Association (AHLA) found that almost two thirds of hotels in the US were at or below 50 percent occupancy – “below the threshold at which most hotels can break even and pay debt,” according to the report. Hugh Taylor, Chief Executive of hotel management and consultancy business Michels and Taylor, said average occupancy levels across the firm’s clients in the UK and Europe had hovered at around 15 percent for the year.

“This is my fourth recession in my career, and I have never seen anything like it,” Taylor told World Finance. “Since March, business has essentially collapsed, and perhaps 90 percent of most hotels’ income has just disappeared.”

168

| Winter 2021

Slow recovery

96

Optimists might say % this is a passing phase, with a full recovery Reduction in air travel for April imminent in the next 2020 compared with April 2019 few years. For leisure travel this might well be the case, with Projected total carrier pent-up demand for losses by end of 2021 escaping those same % four walls likely to explode as soon as a Average hotel occupancy vaccine makes things in Europe during 2020 safe again.

But the same can’t necessarily be said for corporate travel, with recession-induced budget constraints and continued COVID-19 restrictions leading some analysts to predict a slower recovery for the sector. McKinsey research in August 2020 concluded that “the post-crisis return will take years and that business travel will return at a slower pace than leisure travel.” This is in line with previous trends; in the 2008–2009 recession, leisure travel fully recovered to pre-crisis levels in two years, according to the report, while business travel took five years. That was without the dynamics of a pandemic to contend with.

Taylor believes it will be at least three or four years before things get back to pre-crisis levels – including in the cities whose economies rely on business travellers. “London recovered within about a year amid the 2008 crisis,” he said. “This time our current forecasts suggest it isn’t likely to get back to 2019 levels until at least 2023, 2024 or possibly later.”

€100bn 15

The impact of this on the travel industry and wider economies at large is clearly significant.

In 2018, corporate travel spend hit $1.4trn, according to a 2020 trends study by the World Travel and Tourism Council (WTTC), representing 21.4 percent of overall spend in the travel and hospitality sector.

Airlines are reliant on the corporate market for their profits. While business travellers typically only represent around 12 percent of overall airline passengers, they account for as much as 75 percent of passenger revenues, according to a recent report by travel software company the Trondent Development Corporation.

Hotels are likewise hugely dependent on the corporate sector. The AHLA found that corporate travellers represented around 40 percent of all hotel guests in the US, spending $280.2bn in 2014 (compared to $660.3bn spent by leisure guests) and generating $141.5bn in tax revenue. “The majority of the big branded hotels make their money from corporate travel,” said Taylor. “Conferences, events and meetings and so on all generate significant revenues.”

Digital dawn While it’s easy to see the effects of this in the short term, the longer term is harder to forecast.

Some believe business travel will make a full recovery; others predict the advent of the Zoom era may spell the end of overseas business meetings for good. The reality is probably somewhere in the middle. Research suggests there will always be demand for in-person dealings; in a recent survey by travel forecasting agency Globetrender, 60 percent of respondents felt most deals and decisions couldn’t be made virtually. But as businesses across the globe reel from recession, how prepared they will be to fork out on a costly trip for a quick, one-off meeting that could be done online in an hour leaves a very big question mark.

“Even after the emergence of effective therapeutics or a vaccine, don’t imagine a return to pre-pandemic business travel patterns,” wrote Michael Litt, Co-Founder and Chief Executive of video platform Vidyard, in a recent Forbes article. “In-person meetings will be reserved for times when it’s absolutely necessary.” The McKinsey researchers likewise concluded that “some travel for internal purposes will be permanently replaced by virtual meetings and collaboration.” To what extent these forecasts play out in reality remains to be seen, but what is clear is that this is the start of a long, uphill battle – and travel businesses and the economies they serve will likely be bearing the brunt for some years to come. n

i n f r a s t ru c t u r e

Technology

Race for the superfuel Having been on the agenda for decades the pressure is currently increasing on companies to come up with zero-emission systems of propulsion

words by

Selwyn Parker JOURNALIST & AUTHOR

In September 2020 the giant container vessel Jacques Saadé, owned by French shipping group CMA CGM, set out on a roughly 80-day maiden voyage from Europe to Asia and back.

There’s nothing unusual in that, except that this brand-new 400-metre-long vessel is the first ultra large container ship to be fuelled entirely by liquefied natural gas (LNG), a lowemission fossil fuel that so far has only powered much smaller vessels.

In the next few years the Jacques Saadé will be joined by eight sister ships. But looking further to the future, the engines on these vessels will be able to run on zero-emission fuels – as they become available in the coming decade. This is a race with profound consequences for the planet, and even Big Oil is joining in. ExxonMobil, for example, is working with Synthetic Genomics to develop algae into a viable biofuel for transport. The goal is to produce 10,000 barrels a day – equivalent to 3.65 million barrels a year – by 170

| Winter 2021

2025. “With continued breakthroughs on the horizon, the hope is that some day, passengers may fly on algae-fuelled planes and packages will be delivered by algae-fuelled trucks,” the oil giant hopes.

An urgent situation As the world’s airlines embark on their commitment to a zero-emission strategy by 2050, refiners are trying to plug a yawning gap in sustainable aviation fuel (SAF). In mid2019 Total fired up a bio-refinery in France with a capacity of 500,000 tonnes a year made from waste and a variety of vegetable oils. And US-based LanzaTech will supply SAF to All Nippon Airways (ANA) from 2021.

The situation is urgent, warns LanzaTech’s chief executive Dr Jennifer Holmgren – “bold action is needed.”

On the bright side, Steve Csonka, executive director of American government agency Commercial Aviation Alternative Fuels Initiative (CAAFI), believes costs can come down. “We’re working to reduce the cost of production,” he told World Finance. “I believe SAF can be produced more economically.

Biofuel is the only proper way.” So what exactly is biofuel? The criteria require that it

be biodegradable, non-toxic, almost carbon neutral, and definitely not derived from a fossil fuel. There are conventional biofuels refined from organic crops, or biomass, such as corn or sugar, while “second-generation” biofuels are created from waste such as cooking oil, forestry ground waste, household rubbish and even plastic, the scourge of environmentalists.

Hybrid product Encouragingly, biofuel production is on the rise. In late September, Italian oil and gas group ENI opened a bio-refinery that will turn out 750,000 tonnes a year from used vegetable oils, animal fats, algae and other waste products that will be converted into Enidiesel+, a hybrid product with 15 percent biofuel.

British Airways and Shell are collaborating on a plant in Britain that will convert household and commercial solid waste into 13 million gallons of SAF a year. “The jet fuel coming from the plant could fuel all British Airways’ 787 Dreamliner-operated flights from London to San Jose, California and New Orleans in a year,” says director Robert Jeffery. Production is expected to begin in late 2024.

And in the Netherlands a KLM-led consortium has unveiled plans to build a plant

i n f r a s t ru c t u r e

Technology

800MW

The amount of ammonia by electrolytic hydrogen produced

€1.8bn

Cost to Fertiberia and Iberdrola to implement

2027

The year targeted for completion

that would produce about 33 million gallons of SAF a year from 2022, using local waste and residues as the basic feedstocks. The airline has contracted to buy 75 percent of the output for 10 years. Meanwhile, the science of SAF is progressing in leaps and bounds. Rotterdam The Hague Airport is examining the feasibility of producing SAF from nothing more than air – or more accurately, from CO2 drawn from the air, using a process known as direct air capture. It would then be refined on-site into renewable kerosene. “If all goes according to plan we expect to have the first flight with our blend take off by 2022,” hopes airport director Ron Louwerse. “The resulting kerosene can be blended to 50 percent and fuelled into planes that are currently in operation.”Because of pressure from authorities, zero-emission fuels cannot come soon enough for airlines. “The only way for the airlines to control their own destiny is to meet their targets,” says CAAFI’s Csonka.

Responsible roadways On the ground, a front-running alternative to biofuels is hydrogen: particularly in the form of fuel cells that, like batteries, produce electricity through an electro-chemical

process. Fuel cells have already been widely adopted in trucks, trains, buses and forklifts.

Their only emissions are water vapour and heat.

The essential energy source – hydrogen fuel – is stored separately. However, to qualify as ‘green’ hydrogen, it must be produced from solar, wind, hydro-electric, geothermal energy and other renewable sources. Promisingly though, the cost of renewable hydrogen has been falling steadily for years as production is ramped up, notably in giant projects in Europe, Australia and Chile.

Two big Spanish companies believe they have the answer – and it’s called ammonia. In early 2020, fertiliser producer Fertiberia and energy group Iberdrola announced plans to boost the production of ammonia by electrolytic hydrogen to 800 MW by 2027 at a cost of €1.8bn. “Producing ammonia through green hydrogen is the most efficient way for longterm and large-scale storage of energy,” believes Fertiberia chairman Javier Goni.

But why ammonia? It is the source of a clean fuel, especially for shipping. And it is relatively cheap and abundant. According to a report by the Korean Register of Shipping, ammonia works out 32 percent cheaper than hydrogen and 15 percent cheaper than methanol, another long-term alternative. “Hydrogen requires excessive costs for transport, and methanol requires excessive cost for capturing carbon dioxide needed for production,” the study noted.

Compared to other fuels, ammonia presents a low risk of self-ignition when correctly stored.

(The explosion on August 4, 2020 of a large amount of ammonium nitrate stored at the Port of Beirut was reportedly a result of long-term neglect.) However, ammonia is highly toxic and must be carefully handled.

Whatever it’s produced from, hydrogen is gaining ground in all forms of transportation.

In a landmark deal in late 2020, Volvo and Daimler Truck agreed to develop, produce and commercialise fuel-cell systems, primarily for heavy-duty trucks. “The hydrogen-based fuel cell is a key technology for enabling CO2-neutral transportation in the future,” believes Daimler Truck chairman Martin Daum. Incidentally, Daimler’s parent company Mercedes-Benz announced earlier this year that it had stopped all development on the internal combustion engine. “In the future the world will be powered by a combination of battery-electric and fuelcell electric vehicles, along with other renewable

“Most experts believe LNG is only an ‘interim fuel’ that will be replaced by zero-emission alternatives within 15–20 years”

fuels to some extent” predicts Martin Lundstedt, president and chief executive of Volvo Group.

Another automotive giant putting its faith in hydrogen fuel cells is Hyundai, which is rolling out heavy-duty trucks – up to 1,600 by 2025 in Europe alone. A pioneer of the technology, the South Korean group has been producing fuel cell-powered passenger vehicles for seven years.

Although they are up to twice as expensive, hydrogen-fuelled trucks have several advantages over diesel-juiced ones. They accelerate much faster, are quieter, and require much less maintenance.

Deep green seas Having seen what fuel cells can do on terra firma, the generally conservative shipping sector is beginning to embrace fuel cells. “Fuel cells will play a key role in helping marine industries address greenhouse gas emissions on the water and in ports,” predicts fuel-cell pioneer, Canada-headquartered Ballard. And prices are falling – the cost of Ballard’s latest module, FCMove, is a third cheaper than its predecessor.

This is long overdue, according to environmentalists. Until the International Maritime Organisation’s tougher regulations against CO2 emissions were introduced in January 2020, the vast majority of ships’ engines ran on low-grade, highly polluting bunker fuel.

And even though the LNG-fuelled Jacques Saadé is flying the flag for low-emission fuel, most experts believe LNG is only an ‘interim fuel’ that will be replaced by zero-emission alternatives within 15–20 years.

The pressure is coming from everywhere. The EU wants green hydrogen to replace oil, natural gas and coal as a fuel source for all heavy industry, not just transportation. Switzerland will apply a stiff road tax on diesel trucks. And China has embarked on the biggest clean transportation project in the world – in Shanghai, for instance, some 500 fuel-cell-powered delivery vans are at work. And finally, the cheapest fuel is the wind.

As well as powering offshore wind farms that are churning out many times more megawatts than experts predicted a decade ago, it is being harnessed on ships to boost the engines.

A roll-on, roll-off ferry, Ville de Bordeaux, that delivers Airbus parts around Europe, is partly powered by a kite system while another French shipping group will install 4,200sqm of sails on two 136m cargo vessels. When not in use, the four sails simply fold out of the way. Other shipping companies are experimenting with the Flettner Rotor, essentially a tall cylinder that “spins” the wind into propulsion. Estimates of fuel savings range from 10 to 30 percent. While not exactly a superfuel, at least the wind doesn’t have to be manufactured. n

Winter 2021 |

171

i n f r a s t ru c t u r e

Technology

Unprepared for pre-orders This year consumers have been frustrated by disastrous pre-order events for the latest gadgets, so what are the systems behind new product launches that can go so wrong?

words by

Callum Glennen TECHNOLOGY CORRESPONDENT

In September, Sony’s PlayStation 5 was triumphantly listed by retailers as available for pre-order. But for eager gamers looking to grab the latest hardware, the event quickly turned into a disaster. The PlayStation 5 was supposed to be available for pre-order on September 17, but according to videogame news website Polygon, many retailers put their listing up early.

Customers who had signed up to receive an official email alert for the start of pre-orders discovered many retailers had already sold out, and those who did get online early experienced crashed websites, unexpectedly empty shopping carts and cancelled orders.

“Let’s be honest: PS5 pre-orders could have been a lot smoother,” Sony glibly tweeted the following day. A positive product launch experience is critical for success, but the unique challenges of 2020 combined with hastily implemented digital infrastructure has seen even the biggest companies struggle to hold a successful pre-order event.

Pre-pay to play In 2020, almost every retail category has been forced to develop some kind of pre-order system. COVID-19 has left consumers unwilling, or in regions with strict lockdowns, unable to visit stores in person. With international supply chains disrupted and many businesses in 172

| Winter 2021

tough financial positions, pre-orders are often the only way to guarantee a supply of stock.

“This year (2020) it has not only happened to consumer electronics: I have seen it in categories such as bikes, health and fitness items, which have been in such heavy demand,” Miles Clemans, Managing Director of inDemand Online Retail Services, told World Finance.

“Some of my clients have really struggled under the weight of pre-orders.”

For companies like Sony, this has been coupled with a massive surge in demand for home-based entertainment. An October report from McKinsey & Company described it as a new ‘homebody economy’, driven by people redirecting the money they would have spent on travel back into their home. If you can’t take your holiday to Spain, adventuring in a videogame might be the next best thing. This has made demand far more difficult to forecast, overwhelming companies’ websites with an unprecedented volume of traffic.

Clemans said systems are more of ten than not A PRE-ORDER the main point of EVENT NEEDS TO BE failure. “Pre-orders TREATED LIKE AN OLD- are a workaround FASHIONED, IN-PERSON to business as usual.

When the usua l LAUNCH, SIMILAR e-commerce system TO WHAT HAS BEEN sees ‘10 in inventory’, PERFECTED BY THE as soon as 10 units LIKES OF APPLE OVER are sold it will say THE LAST DECADE ‘out of stock’ and the consumer will

not be able to purchase. But along comes the pre-ordering system that overwrites it, and you start having exceptions to the rules, and exceptions to exceptions to the rules. That’s when systems start to get tested.”

Besides technology, COVID-19 has placed business communication systems under immense strain. Clemans said communication between internal departments, such as marketing and warehousing, is important, but a lot of companies need to think more about their consumers. “Demand has been so intense and they haven’t really thought through how to communicate at a consumer level to advise them ‘Sorry, we oversold within 30 minutes of opening up the pre-ordering.’

“A ver y negat ive ex per ience for a consumer is to get a refund without a very good explanation of why all that energy you expended getting excited has gone to zero.” In a rush to implement pre-order systems, Clemans said the testing of both technologies and systems is often overlooked. “Maybe a cursory test is done between one or two developers, but I don’t think that’s good enough. It needs to be a really comprehensive testing process that has gone through more levels than just the IT department, particularly marketing.”

For the fans In many ways a pre-order event needs to be treated like an old-fashioned, in-person launch, similar to what has been perfected by the likes of Apple over the last decade. A well-thoughtout plan coupled with clear communication between all parties is the core of any successful event, in-person or otherwise.

Some companies are getting it right.

Electronics maker Xiaomi releases many of its new products exclusively to the company’s ‘VIP’ fans first, making demand more manageable while engaging w ith its most devoted customers. Additionally, these VIPs tend to be a little more forgiving of the minor faults or problems new consumer electronics often have.

Although in many ways, simply limiting ambitions a bit might be the best solution. “A lot of these over-sales and issues arise out of greed,” Clemans said. “People get very excited about the amount of dollars that can be taken for nothing in return.

“There have to be some caps right at the start, because it could become 10,000 orders when you actually only have access to 1,000 in stock. That means you potentially have 9,000 emails to send to unhappy customers, if you do get to send them at all.” Depending on how COVID-19 permanently changes the way we live our lives, better systems and more realistic expectations will have to become the new minimum for retailers. n

i n f r a s t ru c t u r e

Technology

Smoothing the passage

Image courtesy of Port of Hamburg, Germany

Dawn of the smart ports The world’s largest ports are using technological advancements to move towards a vast ecosystem and a digitally enhanced global supply chain, writes Selwyn Parker A powerful drone speeds along an inland waterway near Rotterdam and drops a package of spare parts onto a barge on the move, just the latest development in the global phenomenon known as the ‘smart port.’ According to the port of Rotterdam authorities, the trial delivery in late September 2020 went smoothly and now they are pushing ahead with more flights to fully assess the technology’s potential in making the port, the busiest in Europe, into a more efficient, quieter, safer and less polluted environment.

Rotterdam is one of the world leaders in the adoption of digital technologies that are transforming these maritime hubs. “Drones can have a major impact on traffic and transport,” says Port Authority adviser Ingrid Römers. “The next few years will be devoted to the phased preparation of airspace and drone technology.”

Although only one aspect of the smart port, drones are already being deployed to detect levels of pollution in vessels approaching the coastline, to inspect the contents of stacks of containers rather than sending workers up on cranes, and as at Rotterdam, to save time by delivering packages instead of the crew having to come ashore.

Long-term projects Some ports are turning themselves into centres of innovation. For instance Singapore, the second-busiest in the world in terms of 174

| Winter 2021

total shipping tonnage, hires the country’s brightest talent to conduct ‘hackathons’, events at which they are encouraged to come up with innovations for its long-term project, the Smart Port Challenge. “The port is working with partners on maritime scale-up initiatives to identify and develop promising maritime tech companies to get them ready when the economy picks up,” chief executive Quah Ley Hoon told the Oceans 2020 conference in early October 2020.

Shanghai, the world’s biggest container port, is following the same path by attracting the best researchers from around the world with its own version of Silicon Valley. Similarly, Rotterdam has invited maritime-focused start-ups to base themselves there. A current project is an energy hub that uses artificial intelligence to predict patterns of consumption and production. The result should be more transparent and lower prices for users, predicts Nico van Dooren, director for new business.

“This is a solution that will help achieve the goal of a carbon-neutral port.”

ONE OF THE BIGGEST CHALLENGES PORTS FACE IS HANDLING THE SHEER VOLUME OF HAULAGE TRAFFIC IN AND OUT

Digital technology lies at the heart of the smart port. Hamburg, the third busiest port in Europe, has installed sensors, camera systems and smart lights on roads in order to monitor traffic, alert users when a bridge is lifting, and to smooth the passage of working barges and other vessels in busy times. One huge benefit of this is a reduction in the number of accidents.

One of the biggest challenges ports face is handling the sheer volume of haulage traffic in and out, but here digitisation and artificial intelligence are coming to the rescue. About 2,500 trucks circulate every day through Montreal, capital of Quebec, passing in and out of the port, the second biggest in Canada, and causing unwanted congestion and pollution in the city. One solution is an app, Trucking PORTal, that alerts drivers to the volume of traffic at port terminals in real time. And in a trend being widely adopted in Europe, it can also provide the latest schedules for the freight trains, something that authorities see as replacing many haulier movements.

Digital communication platform On the other side of the world, China has embarked on easily the most ambitious of all smart-port projects. Beijing aims to put all the nation’s ports, including Shanghai and their logistics operations, under the umbrella of a single, all-embracing, digital communication platform.

This is a key part of the maritime Silk Road, also known as the Belt and Road Initiative. It is a controversial but bold plan to link Chinese and European ports through the South China Sea, southern Pacific and the Indian Ocean in a vast ecosystem in which ports become hubs in a global supply chain. The entire project relies on digital platforms that harness the floods of data flowing around the world and convert it into information that ports can use. Thus ports become ‘intelligent infrastructures’ instead of mere turntables for cargo. Two ports – Piraeus in Greece and Djibouti in East Africa – are among the first to join the ecosystem.

The maritime Silk Road has its critics though, with doubts raised about the heavy debt that recipient countries are forced to take on. For example, China has seized the port in Djibouti because the country could not afford to pay back loans. Ultimately though, the goal of the smart port is to make them productive but congenial places where people want to live, or at least live nearby. In short, they will be given back to the citizens. n

i n f r a s t ru c t u r e

Financial Services

“Legislation will deliver on commitments to long-term market access between the UK and Gibraltar for financial services firms”

A boost for Gibraltar’s financial services Gibraltar gets the green light for market access to financial services as set out in the EU-UK Withdrawal Agreement.

A proposal for wholesale and retail access to Gibraltarlicensed firms could sweeten the deal

words by

Antonia Di Lorenzo

will be based on aligned legislation and supervisory practice, as well as high standards of financial regulation.

FINANCE CORRESPONDENT

Seizing new opportunities

Around 90 percent of Gibraltar’s Financial Services business is UK-facing and with Brexit looming, the Gibraltar Government sought and achieved not only inclusion in the Withdrawal Agreement via the Gibraltar Protocol, but also, more recently, a bespoke arrangement that guarantees market access to financial services for Gibraltar-based licensed firms. This commitment is now enshrined in UK law through the Bill, which is the legal framework through which this relationship will be maintained and is aimed to deliver certainty for Gibraltar financial services firms and minimise disruption to business.

Further, the UK Government recently published a Technical Notice for guidance on Financial Services in preparation for the end of the transition period on December 31, 2020. It proposes the introduction of the new Gibraltar Authorisation Regime (GAR), a modernised framework that will offer wholesale and retail market access to Gibraltar-licensed firms.

This new regime will be underpinned by bespoke arrangements for information-sharing, transparency and cooperation between the two governments and the regulators. It

On the occasion of the introduction of the Financial Services Bill, John Glen, Economic Secretary to the Treasury, said that the country must ensure a regulatory regime that works for the UK and allows it to seize new opportunities in the global economy now that the UK has left the European Union.

“Following the work we’ve done to prepare for EU exit and ensure a smooth transition to a UK rule book, this Bill is the next step in delivering a regulatory framework that boosts the competitiveness of our world-leading financial services sector and ensures that UK consumers are properly protected. It’s part of an ambitious programme to enhance the UK’s first-class standards and our attractiveness as a location for business, both of which will be crucial to help our economy bounce back,” Glen said. In his Written Ministerial Statement earlier on this year, Chancellor Rishi Sunak said the “legislation will deliver on commitments to long-term market access between the UK and Gibraltar for financial services firms based on shared, high standards.” A spokesperson from HM Treasury pointed out that the UK and Gibraltar have had reciprocal market access in financial services based on the EU Single

176

| Winter 2021

Market, so having left the EU together they will be committed to continuing as before. This measure will preserve Gibraltar’s regulatory autonomy and enable the territory to choose where it wishes to access the UK market in terms of alignment and cooperation.

The Gibraltar Government is also now consulting on GAR, which could provide permanent UK market access for Gibraltar-based financial services firms. Reciprocally, similar provisions are also being developed in Gibraltar law to enable UK firms to access the Gibraltar market.

Challenging scenario Ros Astengo, journalist at Gibraltar’s public service broadcaster GBC News, said that this is a challenging scenario especially as equivalence between the UK and the EU has yet to be agreed. “It is a unique arrangement between Gibraltar and the UK and does not extend to the Crown Dependencies or other Overseas Territories. It is quite an achievement, and highlights the unique and historic nature of the relationship between Gibraltar and the UK,” she added.

Astengo commented that Gibraltar worked hard to achieve a commitment on market access at an early stage of joint discussions on the impact of its departure from the EU, explaining that there have been countless meetings between the Chief Minister of Gibraltar, Fabian Picardo, and other senior officials, with their UK counterparts over the past four years.

“Keeping open channels of communication, even during lockdown periods, has been crucial. However, at the risk of downplaying the enormous work and detail that has gone into this agreement, I think the historic nature of the UK-Gibraltar relationship, and similarities in regulatory regimes and standards, not to mention language and laws, has been significant,” she said.

“As a result, Gibraltar will retain its position as a well-regulated and attractive jurisdiction for business with unique access to the UK financial services market,” Astengo added. “Of course, the UK has its own challenges with no future relationship deal in place and they have yet to come to an agreement on equivalence with the EU. But that’s a different story,” she concluded. n

i n f r a s t ru c t u r e

Financial Services

The shadow of a hard Brexit looms The ca astrophic t effects caused by the ongoing pandemic coupled with uncert ainty surrounding a trade agreement with the EU means tha t the UK must tread carefully from here on out

words by

Adrian Holliday JOURNALIST AND BREXIT CORRESPONDENT

The quest for national sovereignty – or a sovereignty recognised by a majority of Brexiteers – is almost at an end for Boris Johnson’s government. By the time World Finance goes to press, the picture will be clearer and several decades of mutual trading cooperation and easy travel will cease between the UK and the EU. New trading frictions will commence. Even with an agreement ratified by the end of 2020, the vast amount of red tape won’t be hugely reduced – the government’s harder Brexit line and quitting the customs union and single market has seen to that.

As early winter unfurled with much of the City of London emptied of life, Johnson did little to reduce the risk of an accidental nodeal. Though the influence of core Brexiteers was cut thanks to November’s ejection of chief adviser, Dominic Cummings, bringing much relief across Whitehall, there was little softening of the line from UK chief negotiator David Frost. In late November, Chancellor Rishi Sunak went on the offensive, claiming COVID-19 was a bigger threat to the economy than a no-deal scenario. Bank of England 178

| Winter 2021

governor Andrew Bailey disagreed, however, and the London School of Economics supports his contradictory views.

Since quitting the EU on January 31, 2020, the consequences of a hard position – which is what the UK has now largely chosen – have become more stark. The UK exports more than £25bn worth of financial services a year. Did the government do enough to protect it? “Very early on, we called for regulatory equivalence for financial services to be at the heart of a postBrexit trade deal,” London mayor Sadiq Khan said as negotiations neared the last furlough.

“But the government has instead placed its red lines around symbolic, but relatively niche ground.” The niche ground Khan referred to in barely coded words is fisheries. Fish is a subject that pulls in public – and therefore voting – interest as opposed to the City of London, even if the City employs more than 500,000 and the fishing industry 24,000. The nautical roots run deep.

Across the channel, European leaders have been overwhelmed by COVID-19, putting pressure on Michel Barnier, forced into isolation in late November, to keep dialogue on track despite the threat of on-off suspensions (both Barnier and David Frost contracted the virus earlier in the year). If Barnier pulls off an agreement it still must chunter through a number of committees before a plenary vote.

It has to be translated, be legally tight and approval must come from both the European Parliament and the EU Council.

Higher downside pound risk Speaking to World Finance, Western Union International Bank currency strategist George Vessey said markets had broadly priced in a deal, and that compromise was more likely to come from the UK than Brussels. “In terms of traders holding short or long positions on the pound,” said Vessey, “it’s pretty much flat. If you compare that to the majority of the last four years, around 80 percent of the time traders have held a bearish position on the pound, expecting it to devalue.”

So while there is anticipation for a deal, with that comes more downside risk for sterling. “If we get a deal, then the pound should start to appreciate, but the upside potential to appreciate is definitely less so than the downside risk, should we end up in a no-deal scenario. That is the concern – that markets are anticipating a deal exposes more downside risk to the pound if it doesn’t come

“For Boris Johnson now comes the hardest part – piloting a responsible path out of the pandemic while reviving his government”

i n f r a s t ru c t u r e

Financial Services

Does a post-Brexit European banking crisis loom?

The number of non-performing loans as a result of COVID-19 could hit levels well beyond those of the 2008 financial crisis thinks Andrea Enria, chairman of the supervisory board of the European Central Bank. “The European Central Bank,” Enria warned in the FT, “estimates that in a severe but plausible scenario, non-performing loans with euro area banks could reach €1.4tn, well above the levels of the 2008 financial and 2011 EU sovereign debt crises.”

to fruition.” The many overlapping EU and UK rules – one example of the possible chaos may see EU banks re-route derivative trades via New York if working equivalence isn’t agreed – is just one of the City anxieties. The scale of derivatives trading is huge. The Paris-based European Securities and Markets Authority, an EU agency, has been working on a solution, but detail has been scant.

Journey to the edge Meanwhile, many British registered financial operators will lose their right to sell funds or give debt or insurance advice right across the EU, even if Barnier pulls off an agreement.

But ex-EU trade spokesman Peter Guilford was confident that emotions, in the end, will be overcome. “The EU Commission’s job is to broker deals between forces bigger than itself, within Europe and outside,” he said in the FT. “It has nerves of steel, the hide of an ox and no fear of cliff edges.”

Stakes in previous trade negotiations – the so-called Uruguay Round, spanning 123 countries – he points out, “were higher than those of Brexit: more countries were involved, there were more sticking points and a less united EU, not to mention entrenched opposition from European and US farmers to a deal at all.” Practically, for British consumers, some food shortages may occur as around 40

percent of the UK’s food and agricultural products are currently EU-sourced. Grocer Sainsbury’s has already flagged up concerns about the supply of dairy and fish products unless EU controls for larger traders are waived. Fresh food supplies are certainly at higher risk. Inevitably, some supermarket prices will rise.

Another issue surrounding potential shortages is the current supply to the UK shores. The UK’s biggest container terminal, Felixstowe, has been ranked the worstperforming container port when benchmarked against key competitors, including Hamburg and Rotterdam. The so-called ‘Port of Britain’ – it absorbs more than 35 percent of all the UK’s container goods – is subject to constant congestion, according to new data from IHS Markit. Felixstowe Ports is owned

by Hutchison Ports, which blames Brexit stockpiling and COVID-19 related pressures for current delays, including around 11,000 containers of PPE. Some shipping companies have redirected ships away from Felixstowe due to worries about unloading capacity or berthing slots.

There are also complaints about the port’s vehicle booking system from trucking companies struggling to get loading slots, a problem that may be exacerbated without a trade agreement. Most Brexit voters gave Ireland little thought in the June 2016 referendum. But Northern Ireland is leaving the EU – sort of. While goods and people can move freely between Northern Ireland and the Republic of Ireland – a priority for peace – a customs border in the Irish Sea means goods coming from Britain are subject to EU customs rules. That means a customs declaration and detailed checks, in some cases. This remains in place for six years. Many Northern Ireland

unionists deeply resent the so-called ‘sea border,’ seeing it as a move that undermines their existing membership with the UK. The threat to override parts of the UK-EU withdrawal agreement via the recent Internal Market Bill, breaching international law, has ratcheted up tensions.

Across the Atlantic, the Biden administration will be intent on putting pressure on Johnson to ensure that the Good Friday Agreement is linked to future trade negotiations. Johnson’s – at times slavish – relationship with Donald Trump has gone down badly with Biden and we should expect Biden to bypass Johnson in favour of Angela Merkel, at least initially. If there is no deal and a lack of commitment to the Withdrawal Agreement then a US-UK trade deal gets much trickier.

The regional and local reality Whatever happens, the outlook for much of the UK does not look promising. The lack of access to EU funds for poorer parts of the UK may mean some inter-EU relations are reduced to the level of ‘town twinning.’ Europe remains vital to much of the north east of England with strong trading links to Oslo, Gothenburg and Rotterdam, as just one example of this. The north east, with its strong manufacturing centres including the car industry, is vulnerable to higher tariffs and trade costs, as is the West Midlands. The UK’s Society of Motor Manufacturers and Traders (SMMT) warned that failure to secure a good deal could cost the UK auto sector £55.4bn by 2025.

Potential cost, by 2025, to the UK And a default WTO tariff would pile on auto sector with a bad deal almost £3,000 to the price of a new electric vehicle, SMMT president Dr George Gillespie predicted.

No deal or thin deal, Britain is the only country that joined the EU and left. For Johnson now comes the hardest part – piloting a responsible path out of the pandemic while reviving his government. That means reaching out to the many he has sidelined or dismissed and addressing, with sincerity, the UK’s deep regional inequalities.

Confidential Cabinet Office notes reported by the media in late November point to a higher chance of UK “systemic economic crisis” – quitting the EU, COVID-19, a bad flu season, the threat of mass unemployment and higher risk of public disorder as many people’s finances deteriorate post-Christmas. It’s a hard winter ahead. n

£55.4bn

Winter 2021 |

179

of

DEBT

When the global pandemic struck in 2020 the world was brought to a standstill.

Government lending and support was swift and unprecedented in its levels but at what long-term cost? Selwyn Parker investigates Âť

180

| Winter 2021

Winter 2021 |

181

S INK O R S W IM

y any measure the COVID-19 pandemic has created an economic as well as a human calamity that is measured in a global sea of debt, worse in some countries than others, that will take at least a decade to reduce to normal levels.

Alarmist? Not in the view of IMF managing director Kristalina Georgieva, who in late 2020 used that very term ‘economic calamity’ in a briefing that spelt out the economic damage in hard numbers.

“We have seen global fiscal actions of $12trn. Major central banks have expanded balance sheets by $7.5trn,” she said, citing the various rescue measures launched since the pandemic first hit in early 2020. And there’s more to come. “[The IMF] expects 2021 debt levels to go up significantly – to around 125 percent of GDP in advanced economies, 65 percent in emerging markets, and 50 percent in low-income countries,” predicted Georgieva.

That is why, as we see, the IMF managing director wants a combined pre-emptive action to forestall what she calls a “lost decade.”

The latest figures (see Fig 1) confirm that pessimistic viewpoint. The EU alone will pump $876bn in the form of grants and loans to member countries under a programme called Next Generation EU that, it is hoped, will tide them over for the next few years. As international economist Jean Pisani-Ferry, a senior fellow at Brussels-based think tank Bruegel, pointed out in Project Syndicate, this is the first time that the EU has borrowed to finance expenditures. As such, it is a measure of the enormity of the problem. To put these sums in perspective, the global fiscal actions alone cited by the IMF managing director are not far short of the annual GDP of the US, while the EU’s $876bn rescue package amounts to nearly three percent of the entire bloc’s GDP. Even so, to take just the EU’s emergency package, it tells only a fraction of the whole story. Between the 27 member countries, the average fiscal support doled out to prop up the respective economies is expected to reach 7–12 percent of their national GDP. And, adds Pisani-Ferry, “significantly more is in the pipeline.” Although the French economist, an expert on public policy, sees a risk in the way the EU’s package may be distributed – for instance for political rather than economic purposes, these hand-outs could make the vital difference in struggling countries.

182

| Winter 2021

Innovative fiscal response And, as the IMF and other authoritative sources warn, this sea of debt is widening all the time. In the US alone, about $3trn will eventually be spent on wide-ranging programmes of economic support including the CARE Act that subsidised those thrown out of work as literally millions of businesses were forced to shut down. As the chairman of the US Federal Reserve, Jerome Powell, explains: “[It was] by far the largest and most innovative fiscal response to an economic crisis since the Great Depression.”

Beyond the United States, the accumulated fiscal response has turbocharged debt levels around the world (see Fig 2). As the graph also reveals, the pandemic hit many countries that were already vulnerable. About half of lowincome nations and several emerging ones were, judges the IMF, “already in or at high risk of a debt crisis and the further rise in debt is alarming.” The looming fear is that many of these countries could be hit by a second wave of economic distress. The IMF cites the risk of “defaults, capital flight and fiscal austerity.”

Just one of these is the collapse in remittances – money sent home by migrant workers to support their families living in low and middleincome countries. The World Bank expects the amount of remittances to fall substantially through 2020 and 2021 because there has been a collapse in offshore work, for instance in the cruise ship and construction industries, farms and factories abroad. Remittances are not pocket money – they prop up many countries.

In 2019, a record year, they totalled $548bn in low and middle-income countries, $12bn

The pandemic shock was essentially a case of a natural disaster hitting a healthy economy

IMF Managing Director Kristalina Georgieva

more than all foreign direct investment flows, according to the World Bank. In the Pacific and East Asia region, China and the Philippines are the biggest beneficiaries of remittances, but poorer countries all over the world will suffer from the decline in remittances.

Adding to the nightmare “The impact of COVID-19 is pervasive when viewed through a migration lens as it affects migrants and their families who rely on remittances,” said Mamta Murthi, vice-president for human development and chairwoman of the migration steering group of the World Bank. Nobody disputes that these unprecedented pay-outs are not

Fig 1. Debts and deficits PERCENTAGE OF GDP

n Loan guarantees/other credit measures n Discretionary fiscal n Debt ratio

18

$3trn

16 14

Predicted total cost of economic support in the US

12 10

$11trn

8

Estimated output to be lost from world economy in 2021

6 4 2 0

$876bn

Value of grants and loans to EU member countries

20

Debt ratio Fiscal measures Debt ratio Fiscal measures Debt ratio Fiscal measures Advanced economies Emerging market economies Low-income countries

S INK O R S W IM

Greater long-term risk

necessary. In most countries they saved – or at least delayed – countless thousands of firms from going bankrupt with devastating social consequences. Indeed a late-2020 survey by the Fed showed that households were coping, with 77 percent of adults saying they were “doing okay” or “living comfortably,” solely because of CARE and similar support programmes.

Still, as experts point out, the consequences of this spreading sea of debt are profound for investors, the banking industry, sovereign governments, the vast world of commerce, and individuals. Taking the banking industry first, although it has stood up remarkably well in most jurisdictions, it remains one of the hardesthit, facing years of negative interest rates that

will deter depositors, as well as fast-rising credit risk in what has become a deeply disinflationary environment. “For bankers, negative interest rates just add to the nightmare of squeezed margins and profits under pressure,” points out the editor of The Banker, Brian Caplen.

Although negative interest rates are not exactly new, they remain an experiment.

Denmark is one country that has kept its key policy rate negative since 2012 in the wake of the financial crisis, and Sweden has done so between 2015 and now. The eurozone has broadly held negative rates since 2014 and the European Central Bank believes they have helped foster more favourable economic conditions.

Fig 2. Debts and deficits 140

EXPECTED 2021 DEBT LEVELS %

120

In advanced economies

100

65%

n Advanced economies n Emerging market & middle income economies

PERCENTAGE OF GDP

125

In emerging markets

80

50%

60

In low-income countries

40

SOURCE: IMF

2013

2020

2006

1992

1999

1985

1971

1978

1957

1964

1943

1950

1936

1915

1922

1908

1894

1901

1880

0

1887

20

But that’s just Europe. On a wider scale the jury is out. Nobody knows exactly what effect global negative interest rates will have in terms of investment, bank profitability, inflation, savings, exchange rates, stock markets, longterm borrowing rates and other elements of the broader financial markets. “[Negative interest rates] are a panacea at best and they may prove costly in the long run if the greater risk they promote turns into a financial crash,” concludes Caplen.

The once mighty greenback has already become a concer n. A s the pa ndemic tightened its grip in the US and employment collapsed, Americans had to dig deep just to make ends meet, with severe consequences.

Notwithstanding CARE and other federal support, in the second quarter of 2020 the country experienced the most sudden plunge in domestic saving on record – in fact since 1947 – that hammered the dollar’s real effective exchange rate (REER), a vital measure for trade, competitiveness, inflation and monetary policy. As American economist Stephen Roach, a senior fellow at Yale University’s Jackson Institute for Global Affairs, pointed out in Project Syndicate: “The US dollar has now entered the early stages of what looks to be a sharp descent.”

The economist expects the REER to fall by as much as 35 percent by the end of 2021, which would mark the beginning of the end of the greenback as the long-standing safe-haven currency, a position it has occupied pretty much since World War Two. Two alternatives would be the euro and the renminbi.

The blame lies largely on the pandemic.

As Jerome Powell told an audience of business economists in October 2020: “As the coronavirus spread across the globe, the US economy was in its 128th month of expansion, the longest in our recorded history – and was generally in a strong position.”

Indeed, unemployment was running at 50year lows and, contrary to left-wing critics, all workers were taking home higher real wages, especially those in the lower-paid jobs. The banks were strong with much more robust levels of capital and liquidity than they held in the aftermath of the financial crisis. “The pandemic shock was essentially a case of a natural disaster hitting a healthy economy,” concluded Powell, echoing the verdict of economists in most other countries, notably in the western world. »

Winter 2021 |

183

S INK O R S W IM

» Debt-related vulnerabilities Fortunately, the world’s biggest banks are not in the precarious state they were when they entered the havoc of 2008. “Banks internationally are in a much stronger position than they were prior to the Great Financial Crisis (GFC),” points out Michele Bullock, assistant governor, financial system at the Australian Reserve Bank, in a review of the industry before the pandemic hit. “Regulatory reforms over the past decade have ensured that banks have increased the amount of capital and liquidity they hold.”

It should be noted though that the nonbank sector has been steadily eating the lunch of the traditional banking industry ever since the GFC. At the peak of the last crisis, the nonbank sector controlled assets of $98trn, seemingly an impressive gain. Today though, this upstart competition has nearly doubled assets under control to a staggering $180trn. Most observers expect this number to keep rising.

But the pandemic has affected those sectors with pre-existing, mainly debt-related vulnerabilities. As Bullock points out, corporate debt in many countries was high. Sovereign debt in Europe was also high. And the low profitability of banks in some countries poses a risk to financial stability.

As a result of the hit taken by the private sector, banks in many countries will probably be hit by write-offs of bad debts and nonperforming loans (NPLs), according to Moody’s in a mid-October 2020 report. In a dismaying review of the situation, the rating agency expects UK banks to see the biggest jump in NPLs as real GDP contracts in 2020, while US banks like Citi and JP Morgan (JPM) have high exposure to unsecured personal loans and credit cards (see Fig 3).

The result? “The current recession is likely to exacerbate these issues and potentially impact the financial system’s ability to cushion the shock,” Bullock warns. As it happens, the Australian banking system, which weathered the GFC reasonably well, is both profitable and heavily capitalised.

Bloated balance sheets The high sovereign debt by historical standards that the Bullock cites is a direct result of the GFC. As the governor of the Bank of England, Andrew Bailey, told the Jackson Hole conference in late August 2020: “There has been a large and sustained expansion of most central bank balance sheets in the past decade.” Like the latest torrents of printed money, central bank’s greatly bloated balance sheets were designed to preserve financial stability, more particularly to prop up a number of big banks.

184

| Winter 2021

US Federal Reserve chairman Jerome Powell

The latest pandemic-triggered sovereign debt has been piled on top of the money printed in the immediate wake of the great financial crisis of 2008 And those balance sheets were still bloated ahead of the pandemic. “Thus the level of reserves required by the banking systems in the major economies is persistently higher, though it is not straightforward to determine exactly how much higher,” said the governor, citing the influence of a number of factors that can change over time.

The overall result is that many governments entered the pandemic with higher government – or sovereign – debt. And they had to print money all over again in the first big test since GFC. Bailey added: “Monetary policy has had to respond to an unprecedented shock and for many central banks the main tool to date has been further quantitative easing, in an unprecedented scale and pace of purchases.”

In a nutshell, the latest pandemic-triggered sovereign debt has been piled on top of the money printed in the immediate wake of the GFC. Alarmingly, corporate debt was hitting record levels when the pandemic hit with serious implications for emerging economies.

In fact, the entire issue of corporate debt is being studied at the highest levels in central banking including by the Financial Stability

Fig 3. Loan books composition varies accross sample of banks n Wholesale n Commercial real estate n Mortgages n Credit card n Other personal

PERCENTAGE

100 90 80 70 60 50 40 30 20 10 0

HSBC

Barclays

Lloyds Nat West

BAC

Citi

JPM

SOURCE: Moody’s Investors Service, the banks, The Australian Prudential Regulation Authority, The Reserve Bank of New Zealand

WFC

ANZ

CBA

NAB

WBC

S INK O R S W IM

The wealthier western nations have sufficiently strong economies to get out of jail, although most forecasters say it will take about a decade aims to achieve nothing more nor less than the reform of the international debt architecture, more particularly where sovereign debt contracts are concerned. This would take the form of an “orderly debt restructuring” that essentially means a generous programme of debt relief on sovereign bonds for relatively impoverished nations.

The day after tomorrow

Nobel Laureate Joseph Stiglitz

Forum. According % t o a World Ba n k study relea sed in Reduction in size of late 2020, corporate world economy for 2020 debt in economically % wea ker countr ies has shot up from 56 Expected fall in the real effective percent of GDP to a exchange rate by the end of 2021 sky-high 96 percent. % Although the authors point out that “debt Of GDP, the value of corporate f i n a n c i n g o f f e r s debt in economically weaker many advantages,” countries it has regrettably served to “amplify solvency r isk s for f ir ms in emerg ing economies and their exposure to changes in market conditions. The economic downturn triggered by the COVID-19 pandemic has only heightened these concerns.”

In plain speak, too many companies in lower-income economies are wildly over borrowed. Worryingly, much of that debt falls due in the next two or three years.

4.4 35 96

Potential turning point The overall picture for less economically robust countries is grim. Indeed the accumulated damage is so profound that the IMF’s Georgieva believes the world faces a turning point in economic management similar to that which preceded the Bretton Woods agreement in 1944, a landmark arrangement between all the allied nations of World War Two. A response to the devastation and misery left by the war, the basis of Bretton Woods was that each nation’s central banks would cooperate by maintaining fixed exchange rates between their currency and the dollar. They

also agreed to avoid mutually damaging trade wars, similiar to those most recently initiated

by Donald Trump.

“Today we face a new Bretton Woods moment,” said Georgieva prophetically. “A pandemic that has already cost more than 1.3 million lives. An economic calamity that will make the world economy 4.4 percent smaller this year (2020) and strip an estimated $11trn of output by next year (2021). And we have untold human desperation in the face of huge disruption and rising poverty for the first time in decades.”

As the IMF president put it, there are two “massive tasks”: one is to fight the crisis and the other is to build a better tomorrow.

Solely because of a totally unprecedented global rescue mission, we have a sea of debt but, at least so far, no debt crisis. As the IMF noted in a blog in late 2020, the debt crisis has been staved off by “decisive policy actions by central banks, fiscal authorities, official bilateral creditors, and international financial institutions in the early days of the pandemic.”

The IMF was in the middle of these actions, pumping about $31bn in emergency funding to 76 countries including 47 of the lowincome ones. In addition, the World Bank’s Catastrophe Containment and Relief Trust offered medium-term debt-service relief to the poorest nations. And yet, this may not be enough. “These actions, while essential, are fast becoming insufficient,” the blog warns. The wealthier western nations have sufficiently strong economies to get out of jail, although most forecasters say it will take about a decade. The looming concern lies with the poorer nations. This is why the IMF and other agencies have mounted a campaign that

It’s been done before in Latin America. But this kind of restructuring is complicated and sometimes murky, as current attempts to sort out delinquent nations such as Ecuador and Argentina are showing. The problem is that much official – that is, sovereign – debt is now held outside the long-standing procedures established by the Paris Club, an informal group of officials from the main creditor nations. Consequently, many actual and potential creditors are in the dark about such basic things as how much a country owes or on what terms.

This is one reason why the IMF wants cleaner contracts that spell out the true situation. And with a debt crisis in the offing, the federation is making a case for clauses that, in the event of natural catastrophes or other heavyweight economic shocks, automatically trigger lower debt repayments or freeze payments altogether.

Will this happen? It may have to, according to the IMF, if the world wants to “prevent and, if necessary, pre-empt another sovereign debt quagmire” that could trigger “large-scale defaults that would severely damage economies and set back their recoveries for years.”

Looking on the brighter side, some, like Nobel Prize-winning economist Joseph Stiglitz, joins the IMF managing director in seeing opportunities in the current havoc.

Calling for a “comprehensive review of the rules of the economy” in the recovery process, he wishes for, among other things, monetary policies that deliver full employment of all groups, better balanced bankruptcy laws instead of creditor-friendly ones, and more accountability for bankers “engaged in predatory lending.” These may happen, but one thing is certain: as the sea of debt recedes the world will not be the same as before. n

Winter 2021 |

185

str ategy

Recession Successes

Finding light within the darkness As we head towards what many have hailed the worst recession since the Second World War, Laura French looks into some of the biggest downturns over the past 150 years – and the billion-dollar companies that were born out of them The World Bank predicted the global economy to shrink by 5.2 percent in 2020 – the worst performance since the end of the Second World War. Unemployment in the US reached a record peak of 14.7 percent in April 2020, and while it’s fallen significantly since, it’s hard to predict how the coming months will play out – especially as the effect of continued restrictions across the world come to bear.

Yet while it’s clear we’re in for some challenging times ahead, it might not all be doom and gloom; because for some, challenging times herald game-changing opportunity.

Researchers have observed a correlation between recessions and entrepreneurship; a Kauffman study in 2009 found that more than half of the companies on the Fortune 500 list were launched during a recession or bear market, as well as almost half of the firms on the list of America’s fastest-growing companies.

According to Dane Strangler, author of the study and a fellow at the Bipartisan Policy Centre in Washington DC, companies that form in those circumstances are often more resilient and nimble as a result. “There’s this trial by

fire idea,” he told the BBC in a recent article. “If you get started in a recession, you really have to scrape and scrimp to make that company successful. You are trying to make it when you can’t get financing, and trying to get customers when there isn’t any demand.”

A quick glance at some of the most successful names in tech confirm the trend; Instagram, WhatsApp, Uber, Dropbox, Airbnb, Groupon and Slack were all formed around the time of the 2008 financial crisis. Facebook got its real growth spurt over that period, while Google and Salesforce launched just before the burst of the dot-com bubble.

It’s not just a recent trend, either; Burger King opened its doors in the midst of a US recession in 1953, while CNN began broadcasting in 1980, when US inflation was at a sky-high 14 percent. Hewlett-Packard came into existence just after the 1937–1938 recession – when unemployment hit 20 percent – and FedEx started shipping parcels just as the 1973 oil crisis hit.

In a recent study on ‘necessity entrepreneurship,’ researchers Frank Fossen and Rob-

ert Fairlie put this trend partly down to the higher levels of unemployment that inevitably come with recessions.

Fossen, Associate Professor of Economics at the University of Nevada, told World Finance: “Those who have a job are usually reluctant to give up their comparably stable income to take the risk of starting a business. The unemployed do not have as much to lose, which explains why we observe more entry into selfemployment during recessions.”

Fairlie, Professor of Economics at the University of California, believes there’s no reason the COVID-19-induced downturn won’t give rise to new businesses just as the 2008 crisis did. “I think people have more time on their hands right now to think of creative ideas that will grow into successful businesses,” he said.

“My guess is that anything to do with tech and online shopping will be the most successful.”

To help inspire hope for the coming months and beyond, we look at five of the all-time biggest companies to have formed in recessions in the past, and how, against the odds, they grew into global, billion-dollar behemoths.

in 1908 and a string of several rapid acquisitions followed, including Oldsmobile, Cadillac, Catercar and Elmore.

“Industrial leaders realised that there was strength in unity and diversity,” wrote journalist Gerald Perschbacher in an article

for Old Cars Weekly. “In the case of both Billy Durant and Henry Ford, a stringent national economic setback paved the way for the promise of fantastic futures in motoring.”

Not all of the acquisitions paid off; General Motors started losing money and Durant was ousted in 1911. At that point he co-founded Chevrolet, then bought a controlling stake in GM and returned to the company as President in 1916 – bringing the new brand with him in a merger. But it was when Alfred Sloan took to the helm in 1923 that the company got its real growth spurt, expanding internationally and buying Vauxhall Motors and a controlling stake in Opel – which remain its core divisions today.

Now the company has a workforce of more than 160,000 and a market capitalisation of $61bn. It hasn’t been without its hiccups in between, but if ever proof was needed that global giants could be formed at the most unlikely of times, this would surely be it.

General Motors Formed: 1908 Background: The Bankers’ Panic of 1907 Current value: $140bn The bankruptcy of two major brokerage firms and a run on all the banks associated with them caused the 1907 Bankers’ Panic and sent the New York Stock Exchange plunging by almost 50 percent from the previous year’s peak, marking the first major financial crisis of the 20th century. While the event itself was short-lived, the after-effects were to last for the following two years, and become one of the key motivations for establishing the Federal Reserve System in 1913.

It was in this climate that horse carriage manufacturer William Durant bought Buick Motor Company, transforming the ailing, debtburdened business into the biggest-selling car brand in the US. He founded General Motors

186

| Winter 2021

str ategy

Recession Successes

IBM Formed: 1911 Background: Sherman Antitrust Act 1910–11 Current value: $28.2bn 1910–11 saw the emergence of another panic, this time caused by the enforcement of the competition-regulating Sherman Antitrust Act. What ensued was a 26 percent plunge in the US stock market. While many businesses suffered double-digit declines over the following year, businessman Charles Flint saw it as an opportunity to merge three existing companies into the ComputingTabulating-Recording Company – now International Business Machines (IBM).

Those three companies had themselves been formed in a recession. The ‘Long Depression’ of 1873–1896 – caused by a contraction of the money supply following the banning of silver coins and the collapse of several banks – had given rise to the International Time Recording Company, the Tabulating Machine Company and the Computing Scale Company.

They produced equipment to suit the time (literally); “a time clock for recording workers’ hours was needed as industrial production at the end of the century surged,” noted CNN Money. “Also, a tabulating machine was vital during the immigration wave, to tally up the expanding population.” Flint continued to build the company after the merger – albeit by “pulling off scams” with “inflated stock”

and “fake capitalisation,” according to author James Cortada in his recent book, ‘IBM History of Computing: The Rise and Fall and Reinvention of a Global Icon.’ But he laid the groundwork for future success; in 1924, Thomas Watson Sr became Chief Executive and rebranded CTR to IBM. Typewriters and computers ensued, and by 1956, revenues had reached $897m, according to IBM Archives.

For this reason, many credit Watson Sr with the real success of IBM. “Flint founded C-T-R Company, but I refer to Watson Sr as the

‘traditional founder,” said Peter Greulich, a former IBM employee and author of several books on the company. “Under his leadership, IBM weathered 10 major economic declines, three major wars, and four of the six largest declines in US stock market history. Over time it was Watson Sr who was remembered.” Yet with brand revenue of $77.1bn and a status as one of the most powerful tech companies on the planet, Flint has clearly left some kind of a legacy – even if the company does look a little different today than when it first launched.

film, Snow White and the Seven Dwarfs, in 1938. It took three years, 300 artists and 200,000 drawings to produce – and, at $1.5m (around $26m in today’s terms), went several times over budget. But the risk paid off; it became the biggest-grossing film in US box office history at the time with revenues of

$7.9m (equivalent to $141m) in the first year alone. High costs and low margins for the films that followed, including Bambi, Fantasia and Cinderella, led to growing debt, however.

But a turning point came in the 1950s, when Disneyland opened in California and gross income ballooned from a mere $6m in 1950 to a whopping $70m in 1960 (according to Bob Thomas’ book Walt Disney: An American Original). The rest is, quite literally, history.

Walt Disney World theme park opened in 1971; Disneyland Paris followed in 1992. And in March 2019 Disney acquired 21st Century Fox in a $71.3bn deal, adding to its growing list of brands and turning the company into the biggest media behemoth in the world.

The company now has 12 theme parks spread out across the globe, a cruise line and a streaming service among its reams of assets. A Disney Imagineer famously once said, “If you can dream it, you can do it,” and this global megabrand has proven the point – even in times of major economic strain. »

Disney Formed: 1929 Background: Great Depression 1929–1930s Current value: $130bn It was in 1929, at the dawn of the worst financial crisis in history, that brothers Walt and Roy Disney rebranded their existing cartoon studio into Walt Disney Productions.

Six years earlier they had set up shop in their uncle’s garage in Los Angeles, creating animated productions including Alice in Wonderland under the name Disney Brothers Cartoon Studio. But it wasn’t until the Great Depression struck that they shot to global fame, following the debut of Mickey Mouse in the short feature film Steamboat Willie.

The pair continued to build the empire, producing animated shorts of Mickey Mouse and playing on America’s need for joy at a time of national depression. They eventually released their first full-length animated feature

Winter 2021 |

187

str ategy

Recession Successes

»

Microsoft Formed: 1975 Background: The recession of 1973–75 Current value: $1trn When OPEC members imposed an embargo on the US during the Arab–Israeli war – causing the price of crude oil to quadruple and inflation to soar – the world tumbled into a deep, 16-month slump. The stock market crashed, with GDP falling 3.4 percent and unemployment hitting nine percent in the US [according to the National Bureau of Economic Research], causing a rather unfortunate stagflation.

It didn’t stop Seattle-born friends Paul Allen and Bill Gates launching what was to become the world’s biggest software company, though. Microsoft was formed in April 1975, against a backdrop of continued high inflation and low economic growth.

Growth was steady at the start: “In 1975, Microsoft had three employees, $16,000 in revenue and

one single software product,” reads a statement from the company.

But in 1980 the real magic happened, with IBM asking Microsoft to create an operating system for the IBM PC – MS-DOS. Daniel Ichbiah, author of a 1995 Bill Gates biography, puts this down to Gates’ “incredible powers of persuasion.” “Some of his actions were exemplary,” he told World Finance. “Especially the way he convinced the giant IBM to ally itself with what was at the time a tiny company.”

Microsoft was paid a royalty for every IBM computer sold. In 1986 the company went public

to global enthusiasm, leading 31-year-old Gates to be named the world’s youngest billionaire just a year later. In 1990, the company’s revenues topped $1bn for the first time.

Roll on 30 years – and several Xboxes, smartphones and cloud services later – and Microsoft is, as of 2019, a trillion-dollar company.

By 2011, Airbnb was in 89 countries and had one million nights booked on the site. Bigname Silicon Valley venture capitalists poured $112m into the company, propelling its value to more than $1bn and giving it official ‘unicorn’ start-up status.

It hasn’t been without its hurdles since, not least legal battles and a backlash from cities calling for bans, but the company has so far managed to weather the storms, expanding with several new launches and acquisitions, and recording revenues of $4.8bn in 2019.

The pandemic has thrown another spanner in the works; how it performs among investors will be revealed during 2021 in the aftermath of its much publicised and delayed IPO. But if anyone can pull through a financial crisis, it’s surely one that came to existence at the height of the worst global downturn in more than half a century. As the other companies on this list suggest, having origins in recession can prove useful training ground for future turmoil – and when the economy does eventually boom again, those who have endured the darkest times will be all the more resilient for it.

Airbnb Formed: 2008 Background: Global financial crisis of 2008 Current value: $100bn Among the string of billion-dollar success stories to come out of the 2008 crash was Airbnb. But this peer-to-peer rental giant didn’t start with the aim of becoming a billion-dollar company; instead it was a way for roommates Joe Gebbia and Brian Chesky to pay the bills.

In 2007, a design conference was coming to San Francisco and hotel demand was exceeding supply; so they turned their loft into “a designer’s bed and breakfast, offering young designers who come into town a place to crash,” in the words of Gebbia, who pitched the idea to Chesky in an email as “a way to make a few bucks” [the former showed the email at a TED talk in 2016].

They created airbedandbreakfast.com, bought three air mattresses and welcomed in their first three guests. The initial success spurred them on to turn the idea into a fully f ledged business, with the help of a new, third comrade, Nathan Blecharczyk. The start-up launched at SXSW in 2008, but it took nearly a year of investor rejections, a stint on the accelerator programme Y Combinator and a rebrand to ‘Airbnb’ before Sequoia Capital took a chance on the trio and threw $600,000 seed investment into the business.

188

| Winter 2021

str ategy

Branding

Building brands with emotion In an increasingly digital age, we are starting to see the top brands having to adapt quickly to a rapidly transforming landscape in which a digital presence is paramount to continued success The advent of online commerce has unleashed powerful new forces that influence nearly all brands from cars to cosmetics, according to the latest studies on brand-building. And, the studies say, the pandemic has accelerated preCOVID-19 trends. Firstly, emotion is important, and today’s consumers expect to have an online conversation with their brands.

“They want to have a totally transparent relationship with you,” explains Boston Consulting. “They want to know who you really are.

They seek the truth. They search out not only all your brand’s technical and functional features, but also its emotional elements.”

And sustainability sits at the top of consumers’ curiosity, running all the way from how well a brand treats its employees and suppliers to the energy efficiency of the factory.

Having seen which way the wind is blowing, energy giant BP has made a long-term pledge to turn away from fossil fuels – its core business – in favour of renewable forms of energy. And secondly, the digital age produces a flood of useful data that brand builders can deploy to help engage buyers. That is why Toyota treats complaints as valuable sources of information rather than a nuisance.

‘A complaint is a gift,’ the automotive giant tells staff. Every single complaint is tracked through the system until customers get redress, but it is also pushed through to the appropriate department – for instance, engineering – so that the problem is fully addressed.

Quality counts But it is not always just the numbers that matter, says McKinsey in a series of interviews conducted in the middle of the pandemic.

190

| Winter 2021

Companies should look for emotion as well as raw facts. “We tend to measure the quantity rather than the quality of something,” David Yin, vice-president of brand strategy and consumer experience at genealogy company Ancestry, told the management consultancy.

“There are plenty of quality signals that come through digital that are vastly underutilised.”

That means the custodians of brands must be careful not to offend consumers who are vitally interested in a product’s social impact.

“More and more customers expect their brands to do no harm,” adds Yin. “If you are actively doing harm in some way, you are pretty heavily punished by consumers nowadays. More companies need to be aware of that.”

Brazil’s Natura Cosmeticos is a shining example. Starting more than 50 years ago with a small shop and laboratory, it has leveraged the Amazon rain forest into a highly successful sustainable beauty business.

Bespoke features In this increasingly digital age, brands are founded on technology. One of the new wave of online retail platforms is fashion group Zalando, the Berlin-based e-commerce platform that sells 500,000 products covering 2,500 brands. Its bespoke software features a ‘My Zalando’ engine that mines sales data to provide customers with the latest style advice.

Launched only in 2008, Zalando boasted 2019 revenues of nearly €7bn. Like other online retailers, it has prospered during the pandemic – 2020 third-quarter revenues rose by nearly 22 percent.

However, Zalando has a long way to go before it catches Amazon, the most valuable

company in the world, with a capitalisation of $137bn and annual sales of $90bn and rising. Amazon’s stupendous success is built on an algorithm-rich platform that is the envy of bricks-and-mortar retailers. It is a comment on the rise of online retail that Amazon is worth more than the combined value of all North America’s main department stores.

Most of the big brands have built up their own technology rather than relying on offthe-shelf software. As well as being the world’s biggest coffee house chain with over 31,000 stores in 80 countries, Starbucks developed its software in-house. Known as an ‘apostle brand’ because of its impact and recognition,

WORLD FINANCE BRANDS OF THE DECADE AWARDS 2011–2020 TECHNOLOGY Apple COMMERCIAL SERVICES American Express AUTOMOTIVE Ferrari LOGISTICS UPS BANKING Guaranty Trust Bank INVESTMENT BANKING BTG Pactual RETAIL BANKING Garanti BBVA ISLAMIC BANKING Jordan Islamic Bank WATCHES Rolex RETAIL The Chalhoub Group ENTERTAINMENT Netflix SOFT DRINKS Red Bull TECHNOLOGY Google FOREX XM SUSTAINABLE INVESTMENT Nordea Asset Management APPAREL Superdry INVESTMENT MANAGEMENT AFP Confia

str ategy

Branding

ELECTRIC VEHICLES:

Tesla

TECHNOLOGY:

Huawei

COSMETICS:

Natura & Co

Easily the most influential automotive group of the decade, Tesla has made electric vehicles desirable. And in mid2020, Tesla became the most valuable car company in the world. While being revered for its zero-pollution vehicles, the brand also ranks highest on the cars’ appeal. Tesla owners see the brand as on a mission and majority owner Elon Musk as an engaging maverick who thumbs his nose at convention.

Amazingly, the brand does not put a cent into advertising, compared with General Motor’s annual advertising budget of over $3bn.

The Shenzhen-based company has, in a few short years, turned itself into a brand rivalling Samsung and Apple in electronic devices. Primarily a manufacturer of backroom equipment of routers, switches and other high-tech telecommunications equipment, the employee-owned Huawei has come out of nowhere in the last decade. As a consumer brand, it is now the world’s third-largest manufacturer of smart phones by market share, with 10 percent of the global market. Like most great brands, Huawei is driven by a vision. Namely, ‘to enrich life through communication.’

One of the world’s most profitable cosmetic companies, this Brazilian firm sees itself as a warrior for sustainability as much as a beauty business. Although founded back in 1969, Natura Cosmeticos embraced sustainable policies early on and is now seen as a standard bearer for the preservation of the Amazon, from which it extracts bio-ingredients and shares the profits with local communities.

Along the way Natura snapped up several like-minded brands: Australia’s Aesop, The Body Shop and, most recently, Avon.

In 2019, the group posted revenues of $6.04bn.

the Seattle-based chain now sells the bespoke technology to other companies, boosting revenues in the process. Interestingly, out of some 10,000 consumer companies worldwide with revenues of many millions of dollars, only 100 are considered apostle brands.

Fashion group PVH, which owns Calvin Klein among other high-recognition brands, went down the same route in 2019 by building its own digital technologies. As Boston Consulting Group reports, “the group launched the award-winning PVH Digital Assistant mobile app to help retail associates answer customers questions, look up inventory, and provide product information.”

Nike plunders them to manage its inventory across many retail channels, something no human can possibly do. In a similar way, Spanish fashion retailer Zara uses advanced digital tools to manage its supply chain, distribution and inventory allocation across thousands of stores around the world. But Zara, a company established by a husband and wife in 1975, does not stop there. In addition to its own core technology, the chain works with a team of outside software providers whose job it is to boost sales through augmented reality. For instance, if customers like the latest clothing range on a mannequin, they only have to point the phone at it to make the purchase.

In an analysis of the digital practices of top retailers, Boston Consulting concludes: “Select the technologies that will enable the company’s core digital capabilities. Then develop them quickly and independently, continuing to purchase the rest.”

a brand manager at Coca-Cola and Uber. “At their core I think brands are a feeling,” she told McKinsey. “They emote something that causes a kind of behaviour that’s irrational to some degree or we wouldn’t be wearing Rolexes and driving Porsches because we could buy cheaper versions of those products.”

The best brands are “sticky and memorable,” adds Yin. But they must also deliver.

“Brands are fundamentally an expectation of the quality of an experience and it’s really important to start paying attention, as digital companies evolve, to that expectation of quality.”

And what people say about a brand could be the best technology of all. “Word of mouth is one of the most powerful places where brands are built,” explains Yin, citing how Fitbit caught on with consumers because they told others about it rather than through a PR campaign. A prime example is eBay, a company that fulfilled a largely untapped need – online auctioneering – but then grew rapidly because a global community adopted it. What we are continuing to see is that some of the most successful brands of the last decade, and beyond, are those where a lot of value is created outside the company, as well as within. n

Proactive predictions Nike also took a big step into digital brandbuilding when, also in 2019, it bought Celect, another algorithm-rich platform developed by two professors from the Massachusetts Institute of Technology. Celect is so clever it can even sense the level of demand. “Its data scientists and engineers, who are now an integral part of the brand’s operations, are using the platform to predict when and where consumers are likely to buy certain styles.”

These insights come in handy in other ways.

Strong brands But some things do not change – strong brands are everything. “Retailers tell us that strong brands sell without promotion,” notes Boston Consulting. And strong brands arouse emotion, says Rebecca Messina, who has been

Winter 2021 |

191

str ategy

Sustainability

The importance of being green Regardless of industry, environmental sustainability has become an undeniable business imperative and power-hungry data centres are becoming the role models to turn to

words by

Travis Wright VICE PRESIDENT, ENERGY AND SUSTAINABILITY, QTS REALTY TRUST

Global warming from carbon emissions, increasing sea levels and images of pollution are increasing public and shareholder pressure on corporations to take an active role in finding solutions and be accountable by setting goals and publicly documenting results.

In the IT industry, reducing electrical power generation from fossil fuels is priority number one, followed closely by water conservation and waste management. For the average person, sustainability practices encompass recycling paper and plastic, conserving water, and embracing electric or hybrid vehicles and other eco-friendly habits. For the data centre industry, which is responsible for three percent of global power consumption, sustainability takes on a more intense and innovative path. Based on the sheer size and scope of its business, data centres, like enterprises, have an obligation to implement and promote more sustainable choices and solutions.

As an epicentre of connectivity, multitenant data centres provide a location for organisations to house their equipment and connect with the providers, partners and customers required to run their businesses.

Multi-tenant data centres are one of the largest per capita consumers of electric power.

Based on current estimates, data centres in the US alone will have consumed approximately 73,000 megawatts (MW) in 2020. To put this in perspective, the US Department of Energy estimates that large multi-tenant data centres may require more than 100 megawatts of power capacity, which is enough to power 80,000 US households, or a small city.

Worldwide, it’s estimated that data centres account for about two percent of total greenhouse gas (GHG) emissions – a number that is on par with the airline industry.

Technological advancements are difficult to 192

| Winter 2021

forecast, but several models predict that data centre energy usage could surpass more than 10 percent of the global electricity supply by 2030.

Because of this, data centres are responding and are starting to become powerful voices for change, playing a central role in lessening the impact on the environment. They are making public commitments to minimise their environmental footprints, invest in renewable energy, and devise long-term plans to improve their sustainable efforts. They are becoming cognizant and strategic in how they run their facilities, from what and how they purchase their energy to how they cool the data centre, and everything in between.

These data centres are following the lead of corporate giants such as Microsoft, Facebook and Salesforce, who are also establishing sustainability strategies to support the planet.

Microsoft released an aggressive plan to halve its carbon emissions by 2030. To help achieve this goal, the company is incentivising its suppliers and partners to reduce their own carbon footprints in order to continue doing business with it.

Drivers of change Today, hyperscalers, large enterprises and government organisations are demanding that data centre operators create a sustainable infrastructure to earn their business. In response, data centres are evolving.

The most sustainable data centres are being built on commitments to innovative green and renewable strategies – including green power, water reclamation, zero water cooling systems, recycling and waste management, and more. They do not contain obsolete systems (such as inactive or underused servers), and take advantage of newer, more efficient technologies. Taking cues from the hyperscalers, the most sustainable data centres recognise the need to lead with modular energy-efficient data centre designs from the onset, adopt the latest in building technology, and influence the overall supply chain for the actual sourcing of materials for these innovative new data centres.

20,000

The number of trees planted each year by QTS

73,000 (MW) Electrical consumption of data centres in the US

Economies of scale Benefits such as cost reduction, increased efficiency and knowledge that you are a better corporate citizen are obvious. What is not readily apparent is that by moving into a green multi-tenant data centre, sustainability benefits are also passed on to the businesses and consumers who collectively benefit from the data centre’s green IT infrastructure.

The economies of scale are extremely significant. Instead of a business (such as a large online retailer) attempting to deploy its own sustainable IT environment to power its service delivery, it can and should outsource to a data centre operator that has a thoughtful and transparent sustainability strategy. The sustainability benefits are then passed along to all the consumers using its services and there could be hundreds of businesses like this in a single green data centre.

In addition, when you deal with a true green data centre that is serious about sustainability, the benefits go far beyond the requirement that your power be green. There are environmental and philanthropic benefits that can be linked with your outsourced IT infrastructure.

Corporates who report annually on their carbon emissions consider on-site data centre in their scope two reporting, while outsourcing the data centre allows them to shift this impact to scope three. Furthermore, the offsite data centre is often already procuring 100 percent renewable energy, which brings that carbon impact to zero. This is huge.

str ategy

Sustainability

QTS data centre in Eemshaven, Netherlands

Corporates can have a big, impactful shift in their carbon footprint by simply outsourcing their data centre operations. The best green data centre operators are starting to formally document and report their progress in environmental, sustainability and governance (ESG) reports made public annually. For conventional enterprises and data centres that do not have measurable sustainability as part of their governance, it is coming.

QTS Realty Trust is one of a few data centre companies holding themselves accountable as global citizens and committing to sustainability best practices that are impactful, achievable and will ultimately set the standard for the data centre industry in the years to come.

The company has committed to minimising its data centre carbon footprint utilising as much renewable fuel, reclaimed water and recycled materials as possible by implementing a methodic sustainability approach featuring energy-efficiency measures and renewable energy procurement, all backed by continuous innovation.

Transparency is key to accountability QTS is documenting and publicly reporting on sustainability goals, metrics and best practices – one of only a few data centre companies to do so.

To support this, QTS recently published its second ESG initiatives report that documents the industry’s first formal commitment to provide 100 percent renewable energy across

all of its data centres by 2025. In 2019, CORPORATES CAN QTS won numerous HAVE A BIG, IMPACTFUL awards including the coveted GRESB SHIFT IN THEIR CARBON FOOTPRINT BY benchmark ranking QTS as the number SIMPLY OUTSOURCING one sustainable data THEIR DATA CENTRE centre company OPERATIONS among a ll data centres globally for its ESG initiatives. In 2020, the Environmental Protection Agency named QTS the winner of its first annual Green Power Leadership Award for QTS’ innovative Green Power Purchasing Model.

Today QTS has seven data centres running on 100 percent renewable energy. Approximately 30 percent of its overall data centre power requirements are sourced from renewable energy sources, representing over 300 million kilowatt-hours (kWh) of renewable power. According to the EPA, this makes QTS one of the largest users of green power among all data centre companies and the 12th largest user among the top tech and telecom companies.

Choosing a green data centre For those operating on-premises legacy data centres looking to move into green data centres, or for organisations already outsourcing to a less than green provider, the following are 10 tips when evaluating green data centre providers.

1) Check the providers’ ESG ratings with organisations such as GRESB, the Carbon Disclosure Project, RE100 and Sustainalytics, and look for documented commitments to 100 percent renewable energy.

2) Look for innovation in power such as the use of artificial intelligence to forecast power consumption, analyse data output, humidity, temperature, and other important statistics to improve efficiency, drive down costs, and reduce total power consumption.

3) Check the EPA ranking to find the data centres leading in green power commitments.

4) Look for zero water cooling solutions powered by 100 percent renewable wind and solar power.

5) Renewable energy should be impactful and cost-effective. Look for data centres with innovative green power procurement models that allow it to purchase renewable energy on parity or below the price of conventionally produced power.

6) Look for innovative, data-driven, service delivery models that tap AI, machine learning and predictive analytics that enable sustainability initiatives.

7) Look for data centre operators that work closely with utilities to develop tariffs and legislation that make it easier and more cost effective for everyone to procure renewable energy.

8) Look for providers with innovative philanthropic programmes such as the ‘Grow with QTS’ programme that plants more than 20,000 trees in the Sierra Mountains every year on behalf of its customers, or its ‘HumanKind’ programme that promotes clean water solutions in emerging markets.

9) Look for providers actively speaking and participating with leading organisations such as the EPA’s Green Power Partnership, REBA, the Data Centre Coalition’s energy committee and the RE100.

10) Look for providers touting on-site physical features such as smart temperature and lighting controls, rainwater reclamation, recycling and waste initiatives, and EV charging stations.

Alignment and execution around a core set of sustainability principles creates direct benefit to buyers of colocation services, their customers and the communities in which the data centres are located.

The fact that so many businesses are more environmentally aware means that contemplating what green, sustainable data centres can offer is becoming an increasingly important standard for choosing a data centre provider. n

Winter 2021 |

193

str ategy

Sustainability

Building resilience for a post-pandemic world The world was given a unique opportunity in 2020 to take stock of what truly matters and start to better plan for the future through sustainable infrastructure projects

words by

Michael Mondshine SENIOR VP, DIRECTOR – SUSTAINABILITY, ENERGY AND CLIMATE CHANGE, WSP USA

A good deal of the reaction to the pandemic has characterised it as a ‘black swan event.’

That characterisation implies that there was no way to forecast or prepare for the pandemic.

To the contrary, we were very much aware that there was the possibility, even the likelihood, of a global pandemic. We decided not to make the near-term investment to prepare, either in dollars, or in human resources, even though decision-makers had the tools they needed to do so. We are now paying the price and that price is far greater, probably by orders of magnitude, than it would have cost to simply be properly prepared.

There are lessons here in how we prepare for climate change. We know it is coming and, in many ways, we are deferring the cost to when it gets to crisis proportions. We know that this will only multiply the cost. Every company and every institution – international development institutions, Fortune 500 companies, even small and medium-sized businesses to some degree – needs to be doing a risk and opportunity assessment on the impacts climate change will impose, in the short, medium and long term. They then need to be putting in place mitigation plans that stretch back to their supply chains, because that’s where much of the risk occurs.

They need to understand that the resilience of the communities into which they sell, or service in the case of government agencies, is critical. You can have a business that is running but if your customers are shelteredin-place, as we have seen in the pandemic, your business goes away. You can have stores and restaurants open, but if nobody is willing to leave their home, that does not work. You need to be assessing the risks to your consumers, the risk to your suppliers and the risk to your 194

| Winter 2021

own business operations. The Task Force on Climate-Related Financial Disclosures (TCFD) provides an excellent framework to get started on that. WSP provides extensive support for risk and vulnerability assessments, as well as scenario analysis and disclosure aligned with TCFD.

Looking to the future We have a ‘Future Ready’ programme, which identifies key trends in social demographics, technology, natural resources and climate change. The pandemic has created some new trends that we are going to need to adjust for.

Examples include suburbanisation, as people continue to move towards the centres of cities but may not be comfortable in the densest locations; the increase in people working at home; and the change in transport and office environments.

We have also done substantial work around how healthcare systems can be more effective in the future, both in response to the pandemic but also in terms of existing challenges such as serving an aging population. We want to reduce costs by having more flexible healthcare facilities – not simply an emergency room or a local doctor’s office, but somewhere that can offer multiple services. This is not just an academic exercise. WSP project managers take the trends identified into consideration on each and every ‘Future Ready’ project they work on.

It may turn out that none of the trends apply and that’s fine. But in many cases, they will.

When we think about a next-generation building that will be in place for years – will it have a port for unmanned aerial vehicles?

It probably should, because of how commerce will be conducted in the future. When you design a highway, will it accommodate a future smart vehicle that enhances traffic flows and reduces the risk of accidents? By taking these factors into consideration we ensure that the economic utility of the project that we help design and build will be maintained and increased, not merely in 2025 but in 2040 and in 2060.

Working together offers resilience We need cooperation and collaboration.

They have been in surprisingly short supply in response to the pandemic. There’s often a barrier between commercial companies and the communities in which they operate.

This barrier comes about largely because of the different metrics that governments and commercial entities use to assess risk and value to their customers. The reality is that most of the risks of businesses are associated with risks to communities, be it the availability of electricity infrastructure, the availability of water, the availability of fibre internet, the ability to get to and from the workplace by a road or tunnel or bridge or the use of airplanes.

Commercial entities are dependent on their communities. WSP is in a unique position, relative to the economy and even relative to our competitors, in that we provide resiliency services to municipalities and states and also to individual commercial entities at a large scale. We have the opportunity to inform those clients about what’s happening on the other side of the commercial-government divide

str ategy

Sustainability

“Often the cheapest and most effective mitigation measure is collaboration and process improvement”

When it comes to climate change, or to technological shifts, the same patterns will dominate: many of the haves will either not feel the brunt of it, or even obtain some benefits.

The have-nots will suffer most. It is often the case that under-resourced communities live on the other side of some sort of barrier.

The clichéd metaphor is the wrong side of the railroad tracks, but it could just as easily be a geographical feature – a flood zone, for example. When we talk about ‘building back better,’ are we ensuring that the community’s resilience needs are taken into consideration?

Do they have a place to go for food and shelter during a disaster?

It doesn’t even have to be a disaster, it could simply be changing weather norms – a regular summer heatwave that formerly lasted two days may now last two weeks. Under-resourced communities tend to have less access to air conditioning – are you building in community resources where folks can go and not feel further endangered during an extended heatwave? You need to involve the community at the front end of the system.

Under-resourced communities also often rely more on mass transit than private vehicles.

It is one of the reasons why we have seen this incredible outbreak of coronavirus cases in under-resourced communities. Can you take that into consideration in your design of future transportation?

Building for tomorrow and help build partnerships across that barrier.

The knee-jerk response to climate-related risk is often to build capital infrastructure: put up a wall, a fence, a viaduct. But often the cheapest and most effective mitigation measure is collaboration and process improvement. When commercial entities speak to their local utilities or local governments, and local governments speak to their most important commercial entities, they can provide improved resiliency services to the community. We see that collaboration can reduce costs dramatically.

The majority of WSP’s business is associated with design engineering. A much smaller proportion is related to vulnerability assessments, disclosure and adaptation planning for commercial enterprises. However, it turns out that the latter is increasingly informing the former.

In fact, the distinction between the two areas is eroding over time as the staff and teams that provide resilience services to commercial enterprises increasingly bring their expertise to the municipal side of design engineering. Planning and execution of infrastructure projects have historically been sequential. You start

with planners and architects, you then check on environmental regulations and get permits, before turning it over to engineers, who turn it over to the builder. But something is lost along the way; so often the original planners at the front end of the project can barely recognise the project when it is done. That system often also fails communities, who have limited input until the process is almost complete. We have instituted a much more integrated planning development process that engages with the community about its risks and vulnerabilities right from the beginning of the project. If you want to ensure resiliency for communities, you need to get them involved.

Ensuring equity and social justice When bad things happen, those who are already on the short end of society’s resources suffer the most. We have seen this so starkly during the pandemic. The top 10 percent of wealth owners increased their wealth while the bottom 10 percent have suffered the most dramatic effects from unemployment and poverty.

The challenges around serving underresourced communities are more intense still when it comes to the Global South because, in many cases, these are the communities that will bear the brunt of climate change. Future trends should be taken into account through rapid economic growth and industrialisation and it’s the responsibility of those designing the infrastructure; what we are building today must be ready to support those communities in 2040 and 2050 and 2060. If there are water shortages, what are we going to do to make sure that those communities are not disproportionately affected? How can we make sure that the infrastructure will hold up to the new demands made by technology and climate change?

We have seen a sea of change in the last five years. Sustainability was once a cost centre outside the core business model, now it’s integrated into the heart of profitability.

When we talk to finance professionals, it turns out that resiliency and sustainability are good economics, good business, and good for reputations. n

Winter 2021 |

195

str ategy

Sustainability

BA’s goals for 2030

10%

Reduction to be seen in natural gas consumption

70%

Of electricity to come from renewable sources

75%

Reduction in water usage

Glass for a greener future On the topic of environmental sustainability this glass packaging company finds the glass is half full in its efforts to effect change

words by

Sandra Santos CEO, BA GLASS

Ancient and naturally occurring, glass is the only packaging material that can be infinitely recycled without changing its initial properties.

And given the natural properties of its raw materials, it has been considered the healthiest material, preserving the taste of food and beverages while ensuring that the contents are not contaminated in any way. Despite the amazing properties of glass, the glass packaging industry is aware that a lot can still be done in order to transform its production process into a ‘carbon neutral’ operation.

In BA, one of Europe’s leading glass packaging producers for food and beverages, with operations in seven countries and a turnover of €923m, we have been committed to sustainable growth for a long time, by working towards the reduction of our environmental footprint and the promotion of recycling as a sustainable behaviour in local communities.

For more than 20 years, the group has been investing in treatment plants to recover the glass collected after consumers’ usage, and reintroducing it into our production process by recycling. Indeed, today we own one of the most modern glass collection treatment plants in Europe.

196

| Winter 2021

But we want more, and in 2018 BA became a founding member of the Porto Protocol, thereby assuming new goals for 2030: to use at least 70 percent of electricity from renewable sources; to reduce natural gas consumption by 10 percent, replacing it with electricity; to reduce water usage by 75 percent; to increase the use of recycled glass by at least the same percentage as the increase in the collection rate; and to reduce CO2 emissions to at least the levels defined by the European Union.

To achieve these ambitious goals, the group implemented a holistic model, based on the measurement of our carbon footprint, the development and implementation of different projects to reduce greenhouse gas emissions (GHG), the development of new and greener technologies, and the investment in offsetting projects.

We measure our carbon footprint in all the three areas, considering the direct and indirect emissions of all our activity. This inventory will allow us to track and report our improvements with transparency, as this is one of our key values.

Making a difference Several projects are currently in place to reduce BA’s emissions. These include an ambitious programme of light weighting our bottles and jars in collaboration with our customers.

There is also an investment in photovoltaic installations on roofs, already implemented

in two of the Iberian facilities, following a medium-term investment plan. Additionally there is the implementation of environmentally friendly technologies at our production sites, replacing the less energy-efficient ones.

We promote the use of alternative raw materials in the melting process, and increasing the rate of glass recycled in the raw materials, anytime it is available. Furnace energy optimisation will occur by applying data-based tools. Plus there is the continuous revision of transport routes, and replacing ground transport by sea transport whenever possible.

Concerning the development of new technologies, we should highlight an industrywide project to develop the technology for a new hybrid furnace that will be fuelled by 80 percent electricity (compared with the current 20 percent), which will have an enormous positive impact on the reduction of CO2 emissions in glass packaging production. This project is being developed in partnership with most of the members of FEVE, The European Container Glass Federation.

Finally, thanks to the contribution of our shareholders, the group will be able to dedicate €7.3m of the 2019 results to support future activities in CO2 reduction and capturing, as well as the related R&D projects.

We invite you to learn more about our commitment to environmental sustainability, our projects and results in our sustainability reports, which can be found online. We all have a purpose. Our planet is suffering drastic changes regarding climate and its sustainability, and in BA we aim to be an active agent of its protection, towards a greener industry and a greener future. Now, it’s up to you! n

Are you looking for the right place to invest? St. Kitts provides a healthy climate for business and investment. Situated in the Eastern Caribbean, this exotic tropical island provides an array of investment opportunities in seven priority sectors, namely: Tourism, Financial Services, Information Technology, Agriculture, Light Manufacturing, International Education and Renewable Energy.

St. Kitts is rapidly developing with modern infrastructure; roads, international air and sea ports and advanced telecommunication services. Located just three hours by air from the east coast of the United States of America, St. Kitts is perfectly located for doing business.

The Government offers investment incentives; including tax holidays for certain qualified investment projects and businesses. There is No Personal Income Tax in St. Kitts or any restrictions on the repatriation of profits and imported capital.

The country’s Citizenship by Investment Programme is the oldest and most respected programme of its kind. Its passport provides instant visa-free access to over 150 countries.

Citizenship by Investment is an ideal gateway to the world for individuals and families in search of secondary citizenship.

Priority Sectors

Tourism Information Technology Agriculture Light Manufacturing Financial Services International Education Renewable Energy Tel: 869-465-1153 www.investstkitts.kn office@investstkitts.kn

str ategy

Sustainability

A sustainable supply chain future in North America By maximising fuel efficiency for lower energy consumption and emissions, CSX is delivering on its vision to help customers lower their carbon footprint and embrace sustainability

interview with

Bryan Tucker VICE PRESIDENT OF CORPORATE COMMUNICATIONS, CSX

In 2017, CSX embarked on a transformative journey, by implementing a new operating model to become the safest, most efficient, best-run railroad in North America, offering unparalleled service and environmental benefits to customers. At its core, the CSX model is about maximising efficiencies and identifying and eliminating waste. CSX can now uniquely partner with customers to provide end-to-end transportation solutions with industry-leading environmental benefits, enabling customers to achieve both an increase in efficiency and reliability and a decrease in their environmental footprint.

Why should CSX be considered a sustainability leader in the logistics industry?

Sustainability is inherently linked to a strong safety culture. We have significantly improved our safety performance and added comprehensive measures that have positioned CSX as an industry leader in safety.

Additionally, we have dramatically improved CSX’s operating efficiency and reduced the asset intensity of our business by implementing the scheduled railroading operating model. We cut the number of active locomotives across our network almost in half over this period; these efficiencies also drive significantly lower energy consumption. Through the increased use of technology, combined with more efficient usage of our locomotive fleet, CSX 198

| Winter 2021

became the first US Class 1 railroad to operate at a fuel efficiency rate of less than one gallon of fuel per 1,000 gross ton miles. In addition to realising record fuel efficiency, we achieved our 2020 greenhouse gas emissions reduction target ahead of schedule. While we are proud of these accomplishments, we are striving to be even better. In 2020, CSX became the first railroad in the US to align with the sciencebased targets initiative, setting a goal to reduce GHG emissions intensity by 37.3 percent by 2030, using 2014 as our baseline.

How is customer service linked to sustainability goals at CSX? In addition to improving our emissions profile, we are focused on helping our customers meet their own emissions reduction targets. Not only does every shipment on CSX consume 20 percent less fuel than it did a few years ago, but our best-in-class service product uniquely positions CSX to help customers further reduce emissions by converting freight off the highway and onto CSX without sacrificing the reliability of their supply chain.

In 2019, CSX restructured our sales and marketing operations to better utilise resources and facilitate knowledge sharing to improve how we serve customers. We also intensified efforts to partner with customers to help them achieve their unique logistical and environmental goals.

How is CSX contributing to a more sustainable future?

Trains have the advantage of being the most efficient land-based mode of transportation.

They are, on average, three to four times more fuel efficient than trucks and produce 75 percent fewer GHG emissions.

However, our customers are not able to realise these benefits if rail service is not reliable enough to meet their supply chain needs.

By focusing on efficiency and providing our customers with best-in-class service, we have uniquely positioned CSX to drive even greater emissions benefits by allowing our customers to safely shift freight that is currently being trucked, onto the railroad.

Thanks to greater efficiencies, including the smart application of technology, CSX is now better positioned to be a best-in-class supply chain partner to customers. Since the beginning of our company’s transformation, average transit time for merchandise car loads has been reduced by more than two days. This new efficiency results in faster transit times and greater environmental benefits due to decreased fuel usage and emissions. CSX aims to further reduce emissions by shifting more freight from trucks to our rail business, taking more trucks off the highways, improving congestion and further reducing emissions.

Can you provide an example of solutions you are employing to benefit your customers and the environment that we may not be considering?

Inland ports are intermodal facilities that alleviate truck congestion in high-traffic port areas by connecting directly to marine terminals via rail. CSX currently connects to three inland ports – in northwest Georgia, northeastern South Carolina, and Syracuse, New York – which offers shippers a strategic alternative to trucking to reach key markets.

These ter mina ls IN ADDITION TO provide importers IMPROVING OUR and exporters EMISSIONS PROFILE, w ith a n ef f icient WE ARE FOCUSED transportation ON HELPING OUR solution that works CUSTOMERS MEET w ithin the global THEIR OWN EMISSIONS supply chain while helping to reduce each REDUCTION TARGETS shipment’s carbon footpr int. Inla nd port service also taps directly into CSX’s focus on increasing intermodal capacity, expanding reach into new markets and providing superior supply chain solutions for our customers. These inland terminals not only generate economic opportunities in the regions they serve, but also convert freight from highway to rail.

CSX is dedicated to helping intermodal customers find new ways to convert more freight to achieve socially responsible outcomes. Every container that converts to rail advances a shipper’s interest in reducing their carbon footprint, minimising their impact on the environment and creating a greener, more efficient supply chain. n

str ategy

Pharmaceuticals

When pharma leadership becomes your own choice In a heavily regulated industry, it can be difficult to stay afloat.

Megalabs outlines some of the challenges and pitfalls faced by pharmaceutical companies, and explains the necessary steps that must be taken to become a leader in the field

words by

Marcos Giusti CORPORATE CHIEF MEDICAL OFFICER, MEGALABS

Very few industries, if any, have endured higher government regulation than pharmaceuticals.

In Latin America, the regulatory scenario is one of permanent change. The most profound changes began 20 years ago in Mexico, Brazil and Argentina, shortly followed by Chile and Colombia, and today they are radiating out across the continent. Brazil’s new board seat on the ICH (International Council for Harmonisation of technical requirements for pharmaceuticals for human use) has accelerated these changes, pulling the whole of Latin America into line. It is not an exaggeration to state that, today, in the countries mentioned, the regulatory requirement for pharmaceutical products resembles that of Europe. As a leading pharmaceutical organisation with a specialisation in prescription drugs, and with operations in more than 18 Latin American countries, Megalabs has seen and experienced these changes first hand over the past two decades. Within that timeframe, the Latin American population grew from 500 to 650 million people, and the social security systems in place do not always provide universal access to health care and medicines. This growth has also come during times of frequent economic, political and social turmoil. Latin America is synonymous with social, cultural and political diversity and this is a great resource for the continent and a major benefit. And at the same time, it is a hurdle that all companies seeking to do business in Latin America must face.

200

| Winter 2021

Sweeping changes in regulation have been a huge challenge faced by the pharmaceutical industry in Latin America in recent decades.

These changes have been uneven and some countries have been slower to adopt them, but it is happening and there is no way back.

For this reason, during the first decade of this century, Megalabs opted for a unified strategy to comply with newer regulations.

Therefore, the organisation committed itself to comply with regulations established by the most advanced health authorities in the continent: ANVISA in Brazil, INVIMA in Colombia, COFEPRIS in Mexico and ISP in Chile. For the remaining countries, the company would exceed expectations.

To comply with such requirements, Megalabs built a large campus including a new, state-of-the-art manufacturing facility for solids, liquids and injectables; a new pharmaceutical development centre and a new logistics operations platform, all of them fully operational. They are based in Parque de las Ciencias, near the city of Montevideo, in Uruguay. The Megalabs campus has become the centre of excellence for the entire organisation.

Ne wer reg u lat ion s have i nclude d a djustment s beyond pha r ma ceut ic a l technology, and these are carried out through solid, regulatory science expertise within its department of medical affairs.

Beyond pharmaceutical quality For the organisation, reaching the highest level of quality has become a self-imposed goal on which its survival depended, while at the same time, it was providing access to safe and effective medicines for hundreds of millions of people.

In the first decade of the century, countries like Chile began to require bioequivalence for most drugs taken by mouth. At the same time, laws were passed in most countries establishing a biosimilarity requirement for biotech products. Within Megalabs, processes to comply with newer requirements involved the entire organisation, from the finance department to quality assurance. However, having a mature and professional area of regulatory science and medical affairs to carry them out soon proved essential.

When we talk about generic products, the concept of interchangeability is key since it determines whether the generic product can be used in the same way as the reference product, the cost of which is generally higher.

Bioequivalence studies are clinical trials, carried out in healthy volunteers or in patients.

They are essays that use methodology wellestablished by international guidelines. In the simplest terms, these studies consist of two groups of individuals, one of which receives the test drug while the other group receives the reference drug.

str ategy

Pharmaceuticals

SWEEPING CHANGES IN REGULATION HAVE BEEN A HUGE CHALLENGE FACED BY THE PHARMACEUTICAL INDUSTRY IN LATIN AMERICA IN RECENT DECADES Megalabs campus in Canelones, Uruguay

The objective of the experiment is to demonstrate that both products generate equivalent blood levels, at the same time intervals. Real-life scenarios can be more complex, and the experiment must often be repeated under fasting and fed conditions.

Megalabs now conducts these experiments in specialised centres in various countries around the world. Every year, Megalabs carries out about 40 studies of this kind, with the aim that all of their products must be bioequivalent to their reference when they hit the market.

Megalabs also carries out studies to demonstrate the equivalence of complex non-biological products (CNBPs) and to demonstrate the biosimilarity of its biotech drugs. These often turn out to be the quicksand of regulatory science. Specifications are constantly changing and it is very difficult to stay afloat. But Megalabs has been doing it successfully, with biotech drugs such as Etanercept or Pegfilgrastrim successfully coming out of the pipeline, to mention just two of the most recent outcomes.

However, bioequivalence may not be enough

to ensure the therapeutic success of a drug. At the intersection between bioequivalence and pharmacovigilance lays the explanation for the therapeutic failure or success of a drug.

Megalabs focuses on obtaining bioequivalent products, but also has a pharmacovigilance service structured according to the regulations of the European Medicines Agency and ICH, named Inter-American Monitoring Centre (CIM). Pharmacovigilance is a key process to guarantee the efficacy and safety of a pharmaceutical product on the market and Megalabs’ pharmacovigilance services have successfully gone through a number of audits from licensors and inspections from health authorities.

Safety and accessibility Megalabs’ mission is to provide safe and effective therapeutic solutions that meet the needs of doctors and patients across the continent. Reaching the highest level of quality is a self-imposed goal, and to achieve that goal the organisation has had to go beyond pharmaceutical quality to meet cutting-edge

specifications. These specifications match those of the European Medicines Agency and ICH. Most interesting of all, due to Megalabs’ continental reach and its strong commercial capacity, this level of quality did not impact the final cost of the products. This way, quality does not undermine accessibility.

By exceeding the specifications of the health authorities in most Latin American countries, Megalabs significantly increases the quality of pharmaceutical products available throughout the Latin American continent. The interests of the organisation always remain aligned with the public interest. The growing gap between the competition has proven that Megalabs has chosen to be an industry leader.

In an industry as heavily regulated as pharmaceuticals, and on a continent as heterogeneous and volatile as Latin America, excellence is the only way for enduring success.

Megalabs is touching peoples’ lives and helping them to stay healthy. It is this defining motivation that forges a path forwards, and helps Megalabs strive to succeed in a challenging environment. n

Winter 2021 |

201

str ategy

Medical

Disruptive innovation for return and positive change Assessing the potential for disruptive innovation in generating excess returns: the case of CeiROx Life Sciences, currently known as BioTissue, a regenerative medicine technology platform Market dynamics Hicham Youssoufi Alaoui MBA, CFA – CEO, CEIROX LIFE SCIENCES

202

| Winter 2021

Fig 1

Projected growth of the target market n TOTAL AGGREGATE MARKET SIZE ● TOTAL POTENTIAL POPULATION 8

30

7

25

6 20

5 4

15

3

10

2 5 0

1 1

SOURCE: CeiROx Life Sciences

2

3

4

5

6

7

8

9

10

0

In millions of people

Disruptive innovation can attend to a market that is currently badly served. It can also present an outstanding relay to seek alpha in a return environment that has become less inclined to respond to classical financial instruments. The case of CeiROx Life Sciences, currently known as BioTissue, as a disruptive technology platform in the biotechnology industry, is eloquent in that it can be viewed as a standalone asset class. Disruptive technology can also be viewed as an extension of private capital in its quest to leverage the return of a financial portfolio.

Building return and looking for alpha has become an unparalleled challenge in a world characterised with the shattering of classic return metrics. Interest rates have become structurally low and f lat in the aftermath of the financial crisis and with the subsequent sovereign European crisis and the current pandemic-related one. This has also led to continuous ‘corrections’ for equity returns. Furthermore, global equity returns enhancements such as correlation and what has become known as ‘decoupling’ has brought with it serious questions. Today’s pandemic only highlights this observation. It is in this context that disruptive technology can be viewed a relevant relay to generate alpha and growth in a sustainable manner. The key challenge becomes how to assess a disruptive innovation that can be pertinent in playing this role of leveraging return. In my opinion, the assessment can be achieved through both a quantitative and qualitative approach. I intend to go through these approaches using the case of CeiROx as well as to analyse the calibration of the associated return metrics.

Quantitatively, a disruptive technology can be qualified as such in regards to the market it intends to serve. The big market premise is a condition for making an innovation truly disruptive. This condition measures the power of the innovation to alter the dynamics of the market. From this angle, we aim to build a business thesis that is pertinent and that stands out by recognising the fundamental and structural shifts in global demographics.

With a world population that is witnessing both a higher life expectancy and a more active life-participation, the direct consequence is the potential tissue damage especially in cartilage in synovial joints. This translates to a multi-billion-dollar orthopedics market that we are intending to serve. In terms of order of magnitude, the current annual incidence rate of cartilage defects across all synovial joints can be estimated at 0.9 percent of the overall population. Males have a lifetime risk of one in six while females reach a risk level of one in

In billions of euros

words by

four. Bringing together the aggregate patient population across all ages with degenerative or traumatic tissue defects, we get the following distribution of the target market over the next decade (see Fig 1).

The qualitative assessment of a disruptive i n novat ion re side s i n a na ly si ng t he characteristics of the market currently served.

Indeed, the pathology of cartilage defect in synovial joints (such as the knee and the hip) is not a newly discovered one. Both degenerative and traumatic defects are a well-established problem. However, the solutions that have been brought forward have all fallen short of treating the underlying pathology efficiently.

Most are only symptomatic in their effects while others are just delaying total loss of the joint’s functionality. This is the perfect example of a market that is maintaining the status quo. It is not about creating a new market, as is the case with artificial intelligence, for example, which makes its assumptions yet to be validated. CeiROx Life Sciences is addressing a market that is currently badly served, which allows us to serve an unmet medical need. This makes the market size assumption significantly hedged through on-going ill-treated cases because

str ategy

Medical

THE SOLUTIONS THAT HAVE BEEN BROUGHT FORWARD HAVE ALL FALLEN SHORT OF EFFICIENTLY TREATING THE UNDERLYING PATHOLOGY

of the complexity of the underlying problem: destroyed cartilage cannot be regenerated through the body’s own healing system. We achieve successful treatment by creating new medicinal paradigms as we are pioneers of tissue engineering and the forerunner of regenerative medicine.

Four domains of innovation Besides solving the status quo, assessing disruptive innovation is also reached through modelling the impact it accomplishes. A strong impact validates the disruption brought forward. We achieve great impact through the four domains of innovation: technology, product, process, and business model. From a technology perspective, our platform has developed through 20 years of research and developments of tissue regeneration concepts and applications from the skin to the bone.

We have also given birth to the two latest generations for cartilage tissue regeneration: the third and today the fourth generation.

We observed the limitations of the firstgeneration solutions that consisted of injecting cultured cells into synovial joints, and the second-generation solutions that consisted of associating to the cells’ membrane gels. We then developed a third-generation solution introducing a three-dimensional matrix as a carrier of the cells. We progressed afterwards to optimise our own solution through the introduction of a smart scaffold that ensures optimal cell distribution along with shape and mechanical stability. These have led to a strong clinical impact by achieving a good-quality regenerated tissue of hyaline type in cartilage, and restoring joint functionality.

In terms of product innovation, our fourth-generation chondro-tissue relies on developing a user-friendliness from medical, regulatory, and business perspectives. This has led in turn to a process innovation, which has been cut by half in terms of time. It has eliminated complex procedures with biopsytaking and clinical treatment, cost-intensive

cell-culture, and a burdensome regulatory framework. As in a domino effect, these aspects led to a business process innovation.

The reduction in complexit y through minimally invasive approaches as well as the possible scaling opportunities offer an innovative business process. While the first innovation domains focus more on the proof of concept in terms of clinical impact, the business process innovation domain focuses on the ‘proof of relevance.’ The latter assesses the economic impact that will condition the adoption of the technology, time-reduction and cost-saving being the cornerstone for successful market adoption.

Purpose and professionalism The other dimension to assess a disruptive innovation is to study the qualities of return it generates. Both the direction of growth and its rate are important in boosting the quality of returns. This connects with the underlying premise of f inance as a force of good: investment must f low to where capital is needed to solve the challenges of the moment.

And in the effort to rethink capitalism, there is a need to rethink the ‘direction’ of growth – as opposed to the rate of growth only. Our business propositions evolve around both facets. In light of demographics, the direction can only be around a regenerative medicine solution as opposed to prosthesis replacement or short-lived symptomatic answers. Growth is also built on solutions that fully leverage the body’s own healing system without introducing components of metallic or animal origin. As to the rate of growth, it is strongly correlated with its direction. The demographic trends, along with changing lifestyles, will accelerate such a rate. In addition, disruption presents a perfect platform to express ‘decoupling.’ Almost always coming from an upstart outsider, in the words of Clayton Christensen, disruptive innovation provides great opportunities for effective diversification.

Above all, a disruptive innovation can have a strong foundation only if its components respond to the sustainability assessment. This is achieved through a comprehensive answer to a complex living problem. At CeiROx Life Sciences, we have made every facet of our response relevant in a disciplined and consistent effort. Purpose and professionalism are the building blocks for trust in a technology platform and in an investment thesis. As a sustainable value proposition, we respond to Prince Charles’s call that capital need not be geared towards investment that generates negative externalities. There is nothing more positive than a more able population. n

Winter 2021 |

203

str ategy

Management

The Swedish experiment: forward-thinking or foolhardy?

As governments around the world walk a tricky tightrope between saving lives and saving livelihoods, Sweden’s controversial COVID-19 strategy makes for an interesting case study.

But will history remember the Nordic nation’s approach as a success story or a costly failure?

words by

Emily Cashen FEATURES WRITER

Since the onset of the COVID-19 pandemic, Sweden has stood out from the rest of Europe by resolutely refusing to lock down. In April of this year, as cities around the world turned into ghost towns, Sweden’s urban centres didn’t look too different to normal, with Swedes still able to drop their kids off to school in the morning and enjoy a coffee with friends in the afternoon.

It wasn’t quite business as usual, mind you.

Gatherings of more than fifty people were banned, employees were encouraged to work from home, university teaching was moved online and the nation’s elderly were urged to self-isolate. But Sweden’s approach was certainly less stringent than the nationwide lockdowns seen elsewhere across Europe.

Rather than enforcing new legal obligations on its citizens, the Nordic nation instead based its strategy on a sense of collective social responsibility – in effect, trusting its people to act sensibly and “do the right thing” to limit the spread of the virus.

To its critics, this approach was utterly irresponsible, putting the economy ahead of saving lives. To its supporters, meanwhile, it represented a more realistic, long-term strategy – and one that sought to avoid the potentially catastrophic social and economic effects of a national lockdown, including mass unemployment, delayed treatment for non-COVID-related illnesses and months of lost education for children and young people.

While the nation’s chief epidemiologist, Anders Tegnell, has insisted that protecting the economy was by no means the main aim of the strategy, by allowing businesses to remain open, Sweden appears to have fared better than many of its European neighbours when it comes to the COVID-19 economic downturn.

Although the nation still experienced an economic contraction in the second quarter of the year, with its GDP shrinking by 8.6 percent, this was significantly less than the estimated average for the European Union as a whole, 204

| Winter 2021

which saw a decline of approximately 11.9 percent. At the opposite end of the spectrum, meanwhile, those individual European nations that imposed particularly strict lockdowns were hit hard by the COVID-19 crunch, with Spain’s economy contracting by 18.5 percent after implementing arguably the harshest lockdown in the EU. By keeping society open throughout the pandemic – even with spending reduced as Swedes embraced voluntary social distancing – Sweden appears to have been able to soften the economic blow to small businesses and avoid the onslaught of job losses that is currently blighting countries across the EU.

Protection at a critical juncture So, while the strategy hasn’t worked miracles when it comes to the Swedish economy, with a recession still very much on the cards, its sup-

spread criticisms of the strategy that led the country to such an ignominious ranking, Sweden’s experts and health officials have stood by the controversial approach, with Tegnell recently telling the Financial Times that nationwide shutdowns are like “using a hammer to kill a fly.”

With a second wave of COV ID -19 sweeping through Europe and entire nations placed back under strict lockdowns, all eyes are once again on Sweden to see whether the nation changes tack. This time around, the nation has tightened up its approach, introducing an eight-person restriction on sitting together at restaurants and cafes. As for other recommendations – avoiding public transport and non-essential shopping – these remain voluntary guidelines, marking a stark contrast to the legally enforced curfews

SWEDEN APPEARS TO HAVE BEEN ABLE TO SOFTEN THE ECONOMIC BLOW TO SMALL BUSINESSES AND AVOID THE ONSLAUGHT OF JOB LOSSES

porters believe it has gone some way to protect livelihoods at this critical time. But the strategy has also attracted fierce criticism from around the globe, prompting the New York Times to label Sweden as ‘the world’s cautionary tale.’

It is undeniable that Sweden has suffered a worse fatality rate than its Nordic neighbours, registering over 6,000 COVID-related deaths since the pandemic began spreading throughout Europe in early March. While this might seem like a lower figure than the tens of thousands of deaths seen in Spain, Italy, France and the UK, for this small nation of just 10 million citizens, it gives Sweden the fifth-highest death rate per capita in Europe. Despite the wide-

and “stay at home” orders seen elsewhere in mainland Europe. Lockdowns, by their very nature, can only ever be temporary solutions, and as the spiralling cases in Spain, France and the UK seem to show, they appear to offer only temporary respite from the virus. While governments across the EU have f loated the idea of short, sharp, “circuit-breaker” lockdowns, as the months drag on, it’s clear that Europe needs to think about its long-term strategy. Swedish politicians have described the pandemic as “a marathon, not a sprint,” and only time will tell if the nation’s lockdown-free approach can go the distance and pay off in the long run.n

First comes your trust then come the awards

str ategy

Management

Out of office

The pandemic has transformed the way we work, with many questioning the need for a central office space in the future.

But what does the move towards continued remote working mean for the future of business? Asks Laura French In the early 1970s, NASA engineer Jack Nilles proposed telecommuting as an alternative to centralised office working. His vision was to reduce traffic, air pollution and energy consumption in city centres by establishing satellite offices, spreading the workforce more evenly across the country and heralding a better work-life balance. His book, The Telecommunications-Transportation Tradeoff, sparked widespread forecasts from futurists about the potential death of the office and the utopian birth of remote work. But the predictions didn’t quite come to fruition as envisaged.

Until now, half a century later, when a global pandemic has forced us into our studies, sheds, lounges and bedrooms, and brought about what many are hailing as the most significant workplace revolution of our time. 88 percent of businesses across the world made the switch to home working after COVID-19 was declared a pandemic, according to an international survey

by Gartner. And for many it has ended up being more than a passing phase, with both employers and employees waking up to the reality that the office-based 9–5 first brought about in the Industrial Revolution – and maintained for the 206

| Winter 2021

200-plus-years since – may have finally passed its sell-by date. Several big-name companies have already announced plans to go remote.

Twitter and Square said employees would be allowed to carry on working from home forever if they chose, while Mark Zuckerberg said in a public video in May 2020 that as many as half of Facebook’s employees could be working remotely for the next five to 10 years. On the same day, Shopify CEO Tobi Lutke tweeted that “office centricity is over, the future of the office is to act as an on-ramp to the same digital workplace that you can access from your #WFH setup.”

Long-term shift These aren’t just one-offs; 74 percent of companies asked by Gartner said they would switch at least some of their employees to permanent remote working after the pandemic. And it’s not just a one-way system, with 77 percent of employees (and 82 percent in the finance industry) expressing a desire to continue working from home more than they did prior to the crisis, according to recent data from McKinsey.

This revolution hasn’t come out of nowhere, of course. Workers have been calling for

greater flexibility for years, with millennials fleeing the confines of the office 9–5 en masse to join the ever-growing gig economy – which has been expanding three times faster than the traditional workforce in the US in recent years, according to a 2017 report, Freelancing in America.

Prior to the pandemic, 80 percent of employees wanted to work from home at least some of the time, according to a State of Remote Work 2019 study by Owl Labs – but only 3.4 percent of the US workforce actually did work remotely, according to FlexJobs. Now all that’s changed – and how things play out in the future will be interesting to see.

The plus points Research showing the potential benefits of remote work isn’t hard to come by; a study by Stanford University found that remote workers were 13 percent more productive than those working in offices, while American Express found that staff working remotely on its Blue Work programme (which lets employees choose from different styles of work) produced 43 percent more than those in the office, according to Global Workplace Analytics.

str ategy

Management

Working from home – in numbers %

3.4

Of the US workforce worked remotely pre-COVID-19

13%

Increase in productivity by remote workers compared with those working in offices

25%

Lower employee turnover for companies backing remote work

35%

Of employees would change jobs to work remotely full-time

74%

Of companies would switch some staff to permanent WFH

77%

Of employees said they wanted to continue working from home

88% Barclays CEO Jes Staley

Of businesses across the world adopted WFH after COVID-19 was declared a pandemic

Additional flexability According to the same source, British Telecom, Best Buy and Dow Chemical all noticed a 35 to 40 percent increase in productivity among their teleworkers. And that’s just one of a number of advantages, according to Timothy Golden, Professor at the Lally School of Management.

“Research has shown job satisfaction is increased by teleworking,” he told World Finance. “It provides additional flexibility to the worker, and often they’re able to better balance work and family and sort of manage that boundary.” He also points to another key factor – staff retention. “Remote work is known to decrease turnover among employees,” he said. “That’s because employees have more choice and autonomy in how they conduct their work, and also because there’s more flexibility around location. If someone wants to move city, they can do so without leaving their job.”

Owl Labs’ 2017 State of Remote Work report found that companies supporting remote work had a 25 percent lower employee turnover than those who didn’t. Given the average company spends more than $4,000 on recruiting a new employee (according to the Society for Human Resource Management),

improving staff retention rates could save businesses significant sums. It could also make attracting top talent easier in the first place. 35 percent of employees (47 percent of millennials) would be willing to change jobs if it meant they could work remotely full-time, according to a State of the American Workforce report by Gallup. More than a third would take a pay cut if the job allowed them to work remotely at least some of the time, according to Owl Labs’ 2019 findings.

Companies who aren’t bound by geography also have a global pool of talent to choose from. “Remote work widens the availability of talent to companies,” said Golden. “Potential employees could be anywhere in the world – they don’t have to be in the same city; they don’t even have to be in the same time zone.”

Then there are the more tangible cost savings; a State of Telecommuting report in 2015 found that companies saved an average of $11,000 per year for every teleworking employee. Dell has reportedly slashed its real estate spend by around $12m by offering employees the option to work remotely, while health insurance giant Aetna has saved almost $78m in real estate costs on the bank of its remote-working model, according to a report by Reuters. It’s not hard to see why so many are making the shift.

The challenges Yet remote work doesn’t come without its challenges. Lack of face-to-face contact can take its toll, according to Golden. “One of the most common disadvantages is the sense of isolation,” he said. “There’s also increased difficulty communicating. It takes a bit more proactivity in terms of reaching out to others to ensure that your work relationships stay healthy.” Jeremy Stein, Managing Director of the British Contract Furnishing A ssociation (who commissioned a report on the future of the workpla ce Annual real estate savings by a s a r e s u l t o f Aetna due to nearly half of its t h e p a n d e m i c) , workforce being remote agrees. “Research highlighted collaboration and communication as the biggest obstacle to working from home effectively,” he told World Finance.

“This was attributed to missing out on important information and a lack of informal communication points. A lack of personal development was also cited as one of the downsides.” McKinsey research meanwhile found that those working from home were more likely to be working “around the clock, and feel the need to be available 24/7,” according to senior partner Alexis Krivkovich, putting

$78m

employees at risk of burnout. Others have expressed concerns around data privacy and the potential security risks of relying too heavily on video-conferencing technology.

The future workplace For these reasons, many predict that a successful future workplace is likely to combine the benefits of remote work with the perks of office life. Barclays CEO Jes Staley has already stated intentions for the bank’s staff to return to the City at some point (despite reportedly saying in April 2020 that “the notion of putting 7,000 people in a building may be a thing of the past”). He said on a call announcing halfyear results in July 2020: “We do need to get people together physically, I think, to evolve and improve culture and collaboration,” adding the bank would still maintain “a major presence in places like Canary Wharf.”

Stein likewise believes a central meeting point will still have its place. “The office i s no t de a d ,” he COMPANIES WHO said. “One of the AREN’T BOUND BY key themes seen is GEOGRAPHY ALSO that the office of the HAVE A GLOBAL POOL future will act as a OF TALENT TO hub where teams CHOOSE FROM can get together to build team culture, cohesion, collaborate and integrate new team members. What we are seeing is the demise of the 9–5, five days a week, where people commute in on overcrowded transport systems to sit at their desk for the day.”

But for some, the positives of going fully remote might just tip the balance. A survey by financial services firm Hitachi Capital found that more than one in 10 SMEs in the UK want to make almost all of their staff permanently remote. A third said they envisaged having over 50 percent of their staff working permanently from home. Jeanne Meister, founding partner at Future Workplace and author of The 2020 Workplace, believes we shouldn’t underestimate the change. “The COVID-19 coronavirus is becoming the accelerator for one of the greatest workplace transformations of our lifetime,” she said in a recent Forbes article. “How we work, exercise, shop, learn, communicate, and of course, where we work, will be changed forever.” That might sound dramatic, but we’re living in unprecedented times. Will the office as we know it still exist in a decade? That remains to be seen, but one thing is clear – we’re on the verge of a major shift that’s finally putting f lexibility over facetime, and it won’t only be 1970s futurist Jack Nilles smiling at the prospect. n

Winter 2021 |

207

str ategy

Management

Litigation as an asset

A closer examination of how cash-strapped businesses are able to turn claims into money without the related risk and expense

words by

Ellora MacPherson CHIEF INVESTMENT OFFICER, HARBOUR LITIGATION FUNDING

Debenhams, Jaeger, Laura Ashley and TopShop are just a few of the high street names having gone – or being on the brink of going – into administration in the UK following a trading year obliterated by COVID-19. The who’s who of doomed retailers makes for stark reading. And similar stories can be found in many economies around the world. There is no denying that while the pandemic has hit many sectors hard, high street retailers have suffered significantly with the prospect of survival, let alone growth looking bleak.

For all businesses weathering the storm of the pandemic, minimising costs and realising value is more important than ever.

If ever there was a time for lateral thinking and alternative solutions, it is now. To put the wider landscape firmly in the picture, the latest Business Impact of Coronavirus Survey (BICS) conducted by the ONS found that 64 percent of the UK’s six million businesses are currently at risk of insolvency, with 43 percent of companies running on fewer than six months of cash reserves. It will come as no surprise that industries such as retail and hospitality are at particular risk. The survey also revealed that 14 percent of all UK businesses have already halted trading as a result of local lockdown restrictions. It is in this vein that the Business Secretary, Alok Sharma, has, under the Corporate Insolvency and Governance Act 2020, further 208

| Winter 2021

extended the easing of insolvency rules until March 2021. This legislation governs whether company directors can keep trading if there is no reasonable prospect that the company can avoid insolvency. If there is no such prospect, the Insolvency Act 1986 requires them to cease trading. These rules were originally relaxed in March 2020 to help troubled firms deal with the financial shock of the pandemic and plot a course through the crisis.

The commodity of time Businesses can take advantage of the breathing space this relaxation affords to try to avoid insolvency, which inevitably leads to redundancies and knock-on effects for suppliers and business partners. Thinking of new solutions and exploring alternative steps can buy precious time. One such alternative that has proven successful is to look at unrealised assets within the company that are not typical to their ordinary course of business.

This can include a range of options, including one many firms will not have thought of – the pursuit of legal claims against third parties.

The prospect for businesses having to litigate is often unattractive and is usually a distraction from their core operations.

Litigation consumes internal resources – management Size of the UK insolvency time as well as cash. litigation market per annum Disputes can take years to resolve and even then, there are no guarantees of success. But the reality is that any commercial dealing comes with the risk of disputes and when they do arise, they need to be dealt with. Businesses struggling in the

£1.5bn

current economic climate may still have good claims – some may even be directly related to the pandemic – with commercial partners being found to have wronged a company. It could be an unpaid debt, a breach of contract, a breach of a statutory duty or a claim for negligence against advisors. There may also be historical claims that the company has not previously had the time or resources to pursue.

The key is a mindset shift towards viewing litigation as an asset rather than a drain on resources (some disputes can be worth tens if not hundreds of millions). Identifying, bringing and prevailing on these disputes can change the game completely, and the growing sophistication of the litigation funding market has provided support to companies when it comes to ensuring that value is realised from claims.

Before the pandemic, the UK insolvency litigation market had grown by 50 percent over the previous four years to be worth approximately £1.5bn per year, largely assisted by an uptake in third-party funding. One study has estimated that the total value of claims funded through litigation funding is worth around £720m per year, accounting for roughly half of all insolvency claims.

Funders can provide funding for all of the legal costs incurred in bringing a claim on a non-recourse basis, as well as covering the adverse costs risk, should the claim not succeed. Funding can also be provided to meet liquidators’ fees, disbursements and other costs. A successful claim not only helps improve the financial position for the business but for its creditors and investors too. In the current and ongoing climate, that is an important factor to weigh up.

HMRC is often on the creditors list, so the wider public interest is a factor as well. But litigation funding in insolvency cases is not the answer to all problems. Not every claim will be suitable for funding and it is incumbent upon professional funders not to support meritless claims – the truth is, experienced funders will not entertain them, which makes their decision-making process a good yardstick for what can be pursued.

While governments have sought to insu lat e busine sses f rom t he r isk of insolvency in 2020 and 2021, there is no magic wand. The stark reality remains that many businesses, particularly those in more vulnerable sectors such as retail and hospitality, will take time to recover and until then, will remain in a precarious position. An important part of each business’ steps to improve its solvency should include consideration of the genuine claims it may have against third parties – and how securing funding for those claims may be in its best interests. n

POWERED TO PERFORM.

CSX provides comprehensive freight transportation solutions with an unyielding focus on safety and reliability. We bring diverse offerings and cost-effective service across our extensive network to meet your supply chain needs.

We are innovators, relationship builders, and transportation experts who go the distance to ensure a great customer experience. Backed by a record of strong performance, CSX’s forward-thinking employees are taking customers to new levels of efficiency and growth – moving your shipments with greater ease, speed and sustainability. When you need a transportation partner that delivers, CSX is powered to perform.

COUNTONCSX.COM

Against all odds:

The best of 2020 The World Finance 100 recognises the businesses and individuals that have forged a pathway to success in 2020, even amid the most challenging of circumstances Where to even begin with the year that was 2020? There is no way to really do justice to the upheaval the world has witnessed this year, with all of our lives – both personal and professional – completely transformed by the events of the past eight months. The word ‘unprecedented’ has been inescapable since the onset of the pandemic but is perhaps the only accurate way to describe the once-in-alifetime set of circumstances we have found ourselves in during 2020. The first year of the new decade was already due to be a significant one, with landmark events such as Britain’s legal exit from the European Union at the end of January, and the hotly contested US Presidential election in November. But these long-anticipated occasions were quickly pushed to the sidelines with the sudden arrival of the COVID-19 pandemic in the early spring.

It is impossible to overstate the speed with which the virus – and indeed, the measures put in place to contain it – completely transformed the world as we know it. The global economy is predicted to shrink by at least three percent in 2020, marking the worst decline since the Great Depression of the 1930s. Even now, with the first glimmers of hope for a vaccine rollout, it’s clear that we are living in a changed world. The events of 2020 will shape the global economic outlook for decades to come, and for many firms, their future success will hinge on how they react to the crises of today. In this year’s World Finance 100, we recognise those companies that have not just survived, but thrived against all odds, in what has certainly been the most challenging and unpredictable 12 months in recent history.

210

| Winter 2021

Bouncing back When reports first started circulating of a new virus emerging in China, it barely made the the TV news. But as the weeks went on, it became apparent that the situation was much more serious than we might first have thought.

Footage showed trucks spraying disinfectant through entire areas of the virus epicentre of Wuhan, and the world watched in amazement as the sprawling metropolis of nine million people was placed under a strict lockdown.

Even as the virus began sweeping into Europe in February, few people thought that the rest of the world would follow the draconian containment measures implemented by China – the economic, social and logistical costs would surely be too severe. As the situation worsened, however, and infection rates started to soar across the globe, one by one, entire countries began to shut down. By early April, over 100 nations had imposed some form of national or localised lockdown, affecting billions of people across the globe. The severity of restrictions varied from country to country, but globally the message was clear: stay at home wherever possible, and stay away from others. Weeks of lockdown quickly turned into months, with shops, restaurants, gyms, schools and offices all remaining shuttered.

As much of the world whiled away a whole

“The events of 2020 will shape the global economic outlook for decades to come, and for many firms, their future success will hinge on how they react to the crises of today”

summer indoors, China was already finding its post-pandemic feet. After a strict 76-day lockdown, Wuhan was cautiously reopened in mid-April – just as COVID restrictions hit their most severe across Europe, Australasia and Latin America.

Elsewhere in China, meanwhile, other cities were spared the stringent restrictions imposed on Wuhan, with the government taking more of a targeted approach to containing the virus, avoiding a full national lockdown and swiftly implementing an effective track-andtrace system to manage new clusters of infections. By concentrating efforts where they are most needed, China has managed to control regional flare-ups and keep the country open.

Since returning to work in April, its citizens have been spared the stop-start repeated lockdowns that have hampered Europe in the second part of this year, and the nation’s economy has rebounded strongly, growing by 4.9 percent between July and September.

Similarly, elsewhere in Asia, a focus on test-and-trace strategies has seen other nations also escape the worst economic fall-out of the Coronavirus pandemic. Vietnam, with its commitment to contact tracing, is one of very few countries in the world currently experiencing GDP growth, with its economy set to expand by 2.8 percent by the end of 2020.

South Korea, too, is due to experience an economic contraction of just one percent, making it the second-best performing major economy in the world behind China. As we move into 2021, it seems that it will be Asia’s economies that will be leading the world’s long, slow recovery from COVID-19.

The COVID quagmire While China’s test-and-trace system has allowed it to effectively control the spread of the virus, the same thing can’t be said for Europe or the US. Western leaders have struggled to keep case numbers down – even after lengthy and restrictive lockdowns in most of Europe – meaning that the virus has had a devastating effect on both public health and the economy across both continents. The US and the Eurozone experienced historic collapses in economic output in the first half of 2020, with GDP shrinking by 10.2 percent in the US and 14.3 percent in the EU as a whole. Individually, certain European nations fared even worse, with Spain’s GDP shrinking by 22.7 percent, and the UK not far behind with an economic contraction of 22.1 percent. Both countries have joined the likes of Italy, Germany and France in reintroducing tighter restrictive measures in the face of rising infections, with the first round of lockdowns failing to have a long-lasting impact on reducing transmissions.

The stop-start nature of lockdown measures across Europe has plunged businesses into a prolonged period of uncertainty, with many going to the wall and many more forced to entirely reinvent themselves at great cost, diversifying their offerings and services in order to stay afloat and comply with the new COVID-related restrictions.

Despite the absence of any nation-level orders on Coronavirus, the US has also seen a significant decline in its economic activity, with the effects of voluntary social distancing and consumer behavioural changes taking their toll on the nation’s GDP. The outlook for 2021 is slightly brighter for the US than it is for Europe, with the States expected to experience a swift, sharp recovery period in the first few months of next year. However, the lack of an effective testand-trace system means that recovery across both regions largely hinges on the development and deployment of a vaccine, which, despite some very promising updates from testing labs around the world, remains an unguaranteed ‘magic wand’ solution at this time.

Fig 1: Stock market success spreads

Number of S&P 500 stocks contributing to market gains in 2020 month by month 500 478

464

400 374

364

365

300 260 200

212

208 153

100

0

26 JAN

FEB

41 MAR

APR

MAY

JUN

JUL

AUG

SEP

OCT

NOV

SOURCE: FACTSET, WSJ

The winner takes it all Just as some nations have fared better than others, certain sectors have also proved more resilient to the COVID-19 crisis.

Inevitably, service sectors that tend to be more dependent on face-to-face interactions – retail, hospitality and arts and entertainment, for example – have been dealt a particularly cruel blow this year with the introduction of mandatory social distancing measures. Many of these businesses and venues have struggled to keep the wolf from the door after months of vastly reduced income. At the other end of the scale, meanwhile, are those sectors that have actually profited from the pandemic.

Unsurprisingly, as the real world has given way to the virtual one during repeated lockdowns, Big Tech has enjoyed record success this year. With millions of people effectively confined to their homes for many months, digital activity has soared, meaning that e-commerce, online streaming and cloud computing companies have all earned a pretty penny thanks to the pandemic.

Amazon reported a record profit of $5.2bn in the second quarter of the year, while its cloud computing division, Amazon Web Services, recorded revenues of $10.8bn for the quarter, largely boosted by companies shifting from the office to online. Entertainment juggernaut Netflix added 15.8 million paying customers to its roster between January and March, and Facebook saw its revenue rise by 10 percent to $18.3bn in the second quarter of the year, even amid an advertising boycott. Financially speaking, the tech giants have been the real winners of this pandemic, and with WFH here to stay – certainly in the near future, at least – their profits are set only to soar in the months to come (see Fig 1).

As we say goodbye and good riddance to what has been an incredibly challenging year and look ahead to an uncertain future, we are honouring the most resilient, forward-thinking firms that have shown tremendous tenacity in these testing times. Congratulations to each and every member who made the final listings for the World Finance 100. n

Winter 2021 |

211

PHARMACEUTICALS

MANUFA CTURING

INSURANCE

Pfizer

Mary Barra, CEO of General Motors

Ping An

When looking back at 2020, we have to mention one of the companies leading the fight against COVID-19. In early November, Pf izer and BioN Tech became the f irst developers to announce an effective vaccine, offering the world some light at the end of the long, dark pandemic tunnel. Tested on 43,500 people across six different countries, after two doses of the treatment, the vaccine can prevent more than 90 percent of people from catching the virus. As countries around the world race to get their hands on the vaccine, Pfizer will undoubtedly play a key role in paving the way out of the pandemic.

A trailblazer in her industry, Mary Barra made history when she became the first female CEO of a major automaker in January 2014. Under her stewardship, GM has invested billions into both electric vehicles and self-driving cars, and the company is now well on its way to an all-electric future. Indeed, by 2025 GM has committed itself to investing over $27bn in development, and bringing 30 new electric vehicles to market. “Climate change is real, and we want to be part of the solution by putting everyone in an electric vehicle,” Barra has said.

If GM’s investments are anything to go by, the company is already racing towards that goal.

The most innovative, forward-thinking companies are always evolving with the times, and China’s Ping An is no exception. While it has built a multi-billion-dollar empire around traditional insurance products, the company has been steadily pivoting towards technology, using cutting-edge digital solutions to expand its offerings. Its commitment to innovation is clear – each year, Ping An invests one percent of its revenues into R&D, focusing specifically on new technologies such as AI, blockchain and cloud computing. Ping An will soon be increasing its investment by a further 20 percent into technology.

US

US

China

PHARMACEUTICALS

Abbott Laboratories

US

PHARMACEUTICALS

AbbVie

US

MANAGEMENT

Accenture

Ireland

ENERGY

AES Corporation

US

RETAIL

Ahold Delhaize

Netherlands

AEROSPACE

Airbus

Netherlands

RETAIL

Aldi

Germany

RETAIL

Alibaba

China

FINANCIAL SERVICES

Allianz

Germany

TECHNOLOGY

Alphabet

US

RETAIL

Amazon

US

TECHNOLOGY

Apple

US

PHARMACEUTICALS

AstraZeneca

UK

TELECOMS

AT&T

US

INSURANCE

AXA

France

TECHNOLOGY

Baidu

China

LEGAL

Baker McKenzie

US

INSURANCE

Barents Re

UK

FINANCIAL SERVICES

Berkshire Hathaway

US

MEDIA

Big Hit Entertainment

South Korea

FINANCIAL SERVICES

BlackRock

US

MANAGEMENT

Booz Allen Hamilton

US

212

| Winter 2021

MEDIA

FINANCIAL SERVICES

TECHNOLOGY

Netflix

OakNorth Bank

Nvidia

US

UK

There’s perhaps no company so synonymous with staying at home – and when that was the order given by governments the world over, streaming giant Netf lix was there to keep quarantined households entertained. The platform enjoyed its biggest growth spurt in history last year, adding 15.77 million new subscribers in the first three months of 2020, and a further 10 million between April and June. The company’s business model has proved itself to be pandemic-proof, and with many upcoming blockbuster cinema releases delayed or moved to streaming, Netflix’s grip on our screens shows no signs of loosening.

Fintech f ir m Oa k Nor th had another impressive year in 2020, going from strength to strength while others f loundered amid the pandemic. The challenger bank has topped the Financial Times’ list of fastestgrowing European companies for 2020, and has approved more than £1.22bn in new loans to small and medium-sized businesses since March, including £400m through the British government’s Coronavirus Business Interruption Loan Scheme. As the country attempts to recover and rebuild itself, OakNorth expects to lend between £2bn and £3bn to SMEs in 2021 alone.

US

On balance, tech companies have had a rather profitable pandemic, and graphic-chip maker Nvidia enjoyed a particularly successful 2020, driven by increased demand for online gaming and remote computing services during lockdowns. As quarantined citizens looked for distraction and entertainment during the first wave of the pandemic, the total hours spent playing games on Nvidia’s platforms jumped by 50 percent, with the company posting a record revenue of $3.87bn in Q2. As a result, shares have surged since the onset of COVID-19, seeing the firm leapfrog Intel Corp as the largest US semiconductor company by value.

MANAGEMENT

Boston Consulting Group

US

MANUFACTURING & COMMODITIES

Boston Scientific

US

SOFTWARE

Calm

US

RETAIL

Carrefour

France

ENERGY

CEZ Group

Czech Republic

FINANCIAL SERVICES

China Construction Bank

China

LOGISTICS

CK Hutchison Holdings

Hong Kong

TELECOMS

Comcast

US

MANUFACTURING & COMMODITIES

Danaher Corporation

US

LEGAL

Dentons

US

LEGAL

DLA Piper

UK

ENERGY

EDF Energy

UK

ENERGY

EDP Renovaveis

Portugal

TECHNOLOGY

Facebook

US

MANUFACTURING & COMMODITIES

Foxconn

Taiwan

FOOD & BEVERAGES

Fraser and Neave

Singapore

LEGAL

Goodwin Procter

US

RETAIL

H&M

Sweden

ENERGY

Hanergy

China

FINANCIAL SERVICES

HDFC Bank

India

RETAIL

IKEA

Sweden

FOOD & BEVERAGES

Impossible Foods

US

Winter 2021 |

213

INSURANCE

FINANCIAL SERVICES

PHARMACEUTICALS

Atradius

Starling Bank

Megalabs

As the economic effects of the pandemic continue to be felt, businesses understandably need to know that they will be paid for the goods and services that they supply.

Specialising in trade credit insurance and debt collections, Atradius provides its clients with a sense of reassurance and stability, even in the most testing of circumstances. With insolvencies climbing and set to rise further in 2021, Atradius’ carefully designed credit insurance protects businesses against the risk of their customers going under. This safety net has been vital, and Atradius has shown itself to be a stable presence when it matters the most.

It was a year to remember for digital challenger bank Starling. In November, the app-based bank made history by becoming the UK’s first digital bank to report a profit – a particularly impressive achievement given that its rival challenger banks have been hit hard by the pandemic. As well as being named Best British Bank for the third consecutive year at the British Bank Awards, Starling also saw its revenues leap by 370 percent, and has doubled its number of business accounts, taking it to over 1.5 million in total. After achieving profitability, the company is now eyeing up an IPO, with aims to go public as early as 2022.

Latin American pharmaceutical giant Megalabs streng thened and expanded its impressive portfolio of products and therapeutic solutions during 2020. In July, the company announced that it would be partnering with US-based CBD company Mederra, and would be bringing its range of CBD products to Mexico, Brazil and Argentina, marking an exciting new chapter for Megalabs and entry into a new, fastdeveloping field. The firm has long been committed to innovation, and the partnership only serves to strengthen the company’s expansive range of products.

Ne t h e r l a n d s

UK

Urugua y

RETAIL

Indra Nooyi, CEO of PepsiCo

Indian-American

FINANCIAL SERVICES

Johnson & Johnson

US

PHARMACEUTICALS

JPMorgan Chase

US

MANUFACTURING & COMMODITIES

Keyence Corporation

Japan

LEGAL

Kirkland & Ellis

US

LEGAL

LabLaw

Italy

LEGAL

Latham & Watkins

US

TECHNOLOGY

Lei Jun, Founder of Xiaomi

China

MANAGEMENT

McKinsey & Company

US

PHARMACEUTICALS

Medtronic

Ireland

PHARMACEUTICALS

Merck & Company

US

TECHNOLOGY

Microsoft

US

FINANCIAL SERVICES

Morgan Stanley

US

MANUFACTURING & COMMODITIES

Mukesh Ambani, Founder of Reliance Industries

India

INSURANCE

Nippon Life

Japan

FOOD & BEVERAGES

Oatly

Sweden

TELECOMS

Orange

France

ENERGY

Ørsted

Denmark

MANUFACTURING & COMMODITIES

Palfinger

Austria

MEDIA

Peloton

US

MANUFACTURING & COMMODITIES

Pirelli

Italy

CONSUMER GOODS

Procter & Gamble

US

214

| Winter 2021

LEGAL

TECHNOLOGY

INSURANCE

Afschrift Law Firm

Satya Nadella, CEO of Microsoft

Aetna International

The events of last year have shown that it has never been more important to have a good grasp on your finances. Headquartered in Belgium, and with offices in Madrid, Geneva, Luxembourg, Tel Aviv, and Hong Kong, Afschrift Law Firm continues to offer a dependable service, guiding its customers through these turbulent times. Its experts are widely versed in every aspect of taxation law, and are able to provide specialised local tax knowledge, as well as up-to-date information on international regulations. In this uncertain climate, the firm’s reliable service has once more proved invaluable to its customers.

With the pandemic prompting a sudden pivot to remote working, computing giant Microsoft has seen its revenues surge. Current CEO Satya Nadella has spearheaded the company’s move towards cloud computing – a strategy that certainly paid off in 2020. Businesses across the globe have started to rely on Microsoft’s cloud computing software for effective home working, as well as utilising the company’s popular video conferencing platform, Teams, for meetings held remotely. At the end of April, Microsoft Teams surpassed 75 million daily active users, and this number just kept multiplying as the pandemic marched on.

Perhaps one of the most positive takeaways from 2020 is the way in which we have all begun to think a little bit more about our health and wellbeing. Aetna is one of the world’s largest and most prominent providers of health insurance, providing comprehensive, tailored health plans to more than 800,000 members across the globe. Last year, Aetna has delivered extra COVID-19 specif ic support, ensuring that its members have had seamless access to healthcare throughout the pandemic, along with country-specific guidance on social distancing, working from home and ways to stay calm during stress.

Be l gi u m

US

US

INSURANCE

Prudential

UK

PHARMACEUTICALS

Roche Holding

Switzerland

ENERGY

Royal Dutch Shell

Netherlands

SOFTWARE

Salesforce

US

TECHNOLOGY

Samsung

South Korea

FINANCIAL SERVICES

Santander Group

Spain

RETAIL

Schwarz Gruppe

Germany

MANUFACTURING & COMMODITIES

Siemens

Germany

MANUFACTURING & COMMODITIES

Sinopec

China

ELECTRONICS

Sony Entertainment

Japan

LEGAL

Sullivan & Cromwell

US

TECHNOLOGY

Tencent

China

LEGAL

Tengri Partners

Kazakhstan

MANUFACTURING & COMMODITIES

Tesla

US

MEDIA

The Walt Disney Company

US

MANUFACTURING & COMMODITIES

Thermo Fisher Scientific

US

MEDIA

Thomson Reuters Corporation

Canada

TELECOMS

Verizon

US

FINANCIAL SERVICES

Visa

US

RETAIL

Walmart

US

RETAIL

Zara

Spain

INSURANCE

Zurich Insurance Group

Switzerland

Winter 2021 |

215

str ategy

Accountancy

Big four, big problems The top dogs of the accounting industry face an avalanche of disruption, from regulatory scrutiny to technological innovation

words by

Alex Katsomitros FINANCE CORRESPONDENT

For many years, Mauro Botta had been a successful partner at the accounting giant PricewaterhouseCoopers (PwC) in California, where he was responsible for auditing Silicon Valley firms. After witnessing many cases of dubious bookkeeping, he blew the whistle on his employer in 2012, alleging conflicts of interest between PwC and its clients.

The Securities and Exchange Commission (SEC), the US regulator, did not take any action after investigating his claims. However, the case took its toll on Botta’s career. Although he had been working for PwC for nearly two decades, he was fired in what he claims was retaliation for his whistleblowing. He filed a lawsuit for wrongful termination, with the trial expected this spring. Botta does not mince his words about the accounting industry. “It’s absurd to have auditors being paid by the companies they are supposed to audit and who are also in charge of appointing them,” he said.

Conflict of interest is inherent in the system, Botta said. “Nobody would ever wonder why tax audit is done by the government, because 216

| Winter 2021

this is in the public interest. So it is baffling that financial audit, which protects investors, has been outsourced to private corporations,” he said. “Are the companies that are scrutinised by the IRS (the US tax collector) considered its clients? Absolutely not.”

Collusion not an illusion Although an outlier, Botta’s story illuminates the many problems facing the accounting sector. The recent collapse of Wirecard was just the latest in a series of scandals involving one of the ‘Big Four,’ as the accounting firms Deloitte, Ernst & Young (EY), KPMG and PricewaterhouseCoopers (PwC) are known.

In December 2019, German prosecutors launched a criminal investigation into the EY partners who were auditing Wirecard, after it was found that €1.9bn were missing from the company’s balance sheet. “This was a failure of basic auditing. In a digital world, cash balances need to be independently verified,” said Atul Shah, an accounting expert who teaches at City, University of London. In the UK, the collapse of Carillion, BHS and Thomas Cook has raised similar concerns over auditing standards. In India, the local affiliate of PwC was banned from auditing public companies for two years due to its involvement in one of the biggest financial scandals in the country’s

history. All major accounting firms have been associated with tax scandals, revealed through a series of document leaks, such as LuxLeaks.

One reason why the Big Four are under fire is their expansion into areas beyond their traditional expertise. “They combine audit with consultancy and tax advisory [services]. Audit is about challenge, and the others are about advice, so the conf lict is between fulfilling a legally independent role and a supportive consultancy role,” Shah said. In the US, this trend began in the 1980s when accounting firms started offering professional and management consulting services. The collapse of the accounting firm Arthur Andersen over its sloppy auditing of Enron, an energy firm that went bust in 2001, should have served as a cautionary tale, but little changed despite stricter regulation.

Audit partners were increasingly under pressure to “cross-sell” consulting services to their audit clients, according to Professor Jeffery Payne, an accounting expert and KPMG Professor at the Von Allmen School of Accountancy, University of Kentucky, with their performance evaluations being affected accordingly. Over time, the Big Four became multinational behemoths, employing nearly one million people and generating $130bn in revenue in 2017.

str ategy

Accountancy

1 million

People employed by the Big Four

$130bn

Generated in revenue by the Big Four *Data correct for 2017

prosecutors charged three former employees of the PCAOB, the US audit regulator, over leaks of confidential information to KPMG, their former employer. The picture is similar in the UK, where former Big Four partners are often recruited by the Financial Reporting Council (FRC). “There is plenty of evidence of regulatory capture and revolving doors between politicians, regulators and the Big Four,” Shah said.

Breaking up is hard to do

“You would think that with the scale these firms have reached, the incentive to try to do something unethical is small, because they could afford to lose a big account like Wirecard.

However, for a single partner, losing an account is a big disaster for their career,” Botta said.

Critics also point to collusion between regulators and accounting firms, with the former packing their committees with Big Four veterans. Botta pointed to the case of Wes Bricker, a PwC partner who, after a stint as chief accountant at the SEC, returned to his previous employer, as an example. One reason this happens, according to Payne, is that it is more efficient for audit firms and regulators such as the SEC to work together when dealing with complex issues: “Having prior Big Four partners and personnel likely makes these conversations more productive and improves the consistency of financial reporting.”

However, such an incestuous relationship often has dire consequences. In 2018, US

“Technology favours small players, while the global brand of the Big Four makes them more vulnerable to reputational risks”

For many critics, the increasing dominance of the Big Four stif les competition; only breaking them up would solve the problem.

Such voices are prominent in the UK, where the Big Four audited four out of five public businesses in 2018. The competition watchdog has recommended splitting audit from consulting services. “As it stands as a whole, there is not enough competition in the accounting industry. There are significant barriers for entry – size matters and so does global presence,” said Ina Kjaer, former head of UK integration in the deal advisory team of KPMG and founder of Eos Deal Advisory.

In a plan issued last summer, the FRC requires the Big Four to operationally separate their audit practices by 2024, although it stops short of requesting a full-blown separation of audit from consulting services. The plan, which aims to ring-fence the finances of auditing departments from other operations, does not require auditors to be paid exclusively from audit fees, as requested by many experts. “The FRC plan does not go far enough, as it proposes a separation but not a full break-up,” said Kjaer, adding that introducing more competition in sub-sectors where the Big Four are involved, such as tax, restructuring and M&A deals, would be more beneficial.

Not everyone agrees with such a strict approach. “Breaking up the firms would not increase competition and would likely decrease their audit quality for large international c ompa n ie s. Aud it i ng f i r m s c ompet e aggressively to obtain new clients from other firms,” Payne said. Even for critics of the Big Four, such as Botta, a break-up could do more harm than good: “It will worsen the conflict of interest problem because as a smaller firm, you want to keep all your engagements. You also lose the core competency and worldwide networks these companies have.”

The smaller players have an upperhand Like many legacy companies in other sectors, the Big Four face an avalanche of technological disruption. Artificial intelligence, digital analytics and the blockchain are expected to make auditing processes faster and cheaper.

Technology favours small players, while the

global brand of the Big Four makes them more vulnerable to reputational risks, claim the academics Ian Gow and Stuart Kells in a recent book on the Big Four. Their management and consulting services are particularly vulnerable to disruption, according to a report by CB Insights, with start-ups such as Wonder matchmaking individual advisors with clients.

All major accounting firms have set up innovation labs, aiming to harness innovation to their advantage. But many question whether these behemoths can change their old ways.

“The Big Four have been investing quite heavily in technology, but they are not yet ready to change their processes and operating models to take full advantage of the technology available,” Kjaer said. Strict regulation may also hamper attempts to embrace technology, according to Payne, who pointed to the obligation of US auditors to “observe” inventory counts as an example: “What does ‘observe’ mean? Do auditors have to be physically present or can they observe by watching a video streaming from a drone?”

More inclusion needed The accounting industry has not avoided the wave of criticism coming on the back of the Me Too and Black Lives Matter movements.

The problem goes deep, Kjaer said: “The accounting industry, as most industries, suffers from a historic legacy of a macho culture, where diversity, inclusion and equality do not matter.”Particularly the Big Four have come under fire over gender bias and lack of racial diversity. In the UK, the pay gap between male and female employees remains high; KPMG and EY reported median total earnings gaps of 28 percent and 18.9 percent respectively in 2019. Just 11 out of 3,000 UK Big Four equity partners were black last year.

The sector is slowly adapting to changing attitudes towards equality and diversity.

Last year the UK branch of PwC launched unconscious bias training sessions. EY UK aims to double the percentage of ethnic minority partners by 2025. The problem, according to Kjaer, is that HR departments at big companies prioritise diversity KPIs that are too blunt, such as the number of women who get promoted. A lthough a positive measure, it is the bigger problem of lack of inclusion that goes under the radar, she said: “A more diverse workforce gets recruited and promoted, but they do not tend to stay at the company, as inclusion never rea lly happens. Unfor tunately, a lot of companies in our industry still have a culture based on internal politics and relationships, which makes them inhospitable in the medium term.” n

Winter 2021 |

217

str ategy

Tax

Taxation in times of a pandemic: challenges and perspectives Now is the time to rethink tax. How can we use it in a more diversified way to help us overcome the challenges brought about by the global pandemic?

words by

Thierry Afschrift MANAGING PARTNER, AFSCHRIFT LAW FIRM

We live in strange times. The COVID-19 crisis has seriously disrupted the world order, while at the same time putting significant pressure on public finances. Firstly, the flow of tax revenues is patchy and irregular, due to the decrease in the global taxable base, or the lengthening of the time taken by taxpayers to pay their taxes. Secondly, the numerous state aid, while insufficient to compensate for the real damage suffered by the affected taxpayers, is increasing the deficit over the successive lockdowns. The same applies to measures designed to mitigate the effects of the crisis on businesses, such as exceptional carry-overs of tax-eligible losses.

At the same time, a significant proportion of taxpayers have been stripped of their resources, with this problem affecting both natural and legal persons.

The question is, how will states manage to balance their budgets, preserve their GDP and finance themselves, in particular through taxation, without putting the taxpayers, who are already in great difficulty, in an impossible position? This seemingly impossible-to-solve equation highlights another reality: the inadequacy of the tax system as it exists today, consisting of centralising the management of most of a country’s resources at state level.

As regards the balance of the budget, the first step that is immediately necessary is of course to reduce public expenditure. However, the decrease in public spending should be offset by an increase in private expenditure, otherwise GDP and economic activity will contract. Today, however, there is both a 218

| Winter 2021

reduction in demand (impoverishment of certain sections of the population and a climate of insecurity unfit for spending) and of supply (prohibition of operation or discontinuous operation of enterprises). Therefore, one should boost business operations and empower consumers to spend more. It is, in fact, high time to remember that taxation is not only a financing tool but can also be used as an instrument of economic policy, especially since, even within the EU, the states still have autonomy in matters of fiscal policy.

We believe that, although this may seem paradoxical, the solution is to give up part of the expected tax. This is done by means of tax reduction mechanisms, tax cuts or exemptions subject to investing and/or hiring. States could then safeguard their GDP and, in the long term, their budgets. Thus, rather than collecting resources immediately through taxation, they could trust market participants to achieve better results in the medium and long term.

In the short term, states could still borrow to meet their immediate needs, especially since current rates are close to zero and the Stability and Growth Pact (SGP) has been suspended in Europe.

Business taxation post COVID-19 The pandemic will end, and it would be illusory to think that the announced growth alone would be enough to solve the problem, since it would, at most, be a return to the current disrupted balance. Corporate taxation will have to be reviewed, with greater emphasis on the overall tax burden and not just on the nominal corporate tax rate. Indeed, if, at first glance, tax is usually calculated on profit, a multitude of other taxes and fiscal charges would reach that profit before being subjected to tax. If we add the wage cost,

which is disproportionate to the economic achievements and production costs, we note that companies are severely handicapped.

Reducing these tax and extra-tax burdens would increase hiring and investment, while avoiding outsourcing and other subcontracting to countries with lower taxes and/or labour costs. The same requirements apply to individual companies and to the liberal professions.

Of course, tax relief must take place following a precise strategy and with a ‘going concern’ focus. Indeed, the goal is not to increase the profitability of companies only for the benefit of their shareholders, but to transform them into a vector of growth benefiting all the players in the economy. This would allow the increase of the global tax base in a more healthy way, and ultimately reduce rates. The simple reduction of the nominal tax rate is therefore not sufficient: it is imperative that we have a system where businesses have an incentive to hire and invest. Particular emphasis should be placed on investment, in equipment and personnel, in research and development as well as in technological innovation.

Indeed, the crisis has not only revealed the essential character of these fields, but also the dependence of states on the private sector, when the situation gets beyond their control. Therefore, it seems both appropriate and justified to promote the activities of such undertakings, mainly by introducing tax incentives, in order to enable these operators to develop their activities. Moreover, the development of these sectors, like many others, would contribute to the creation of high-value-added jobs, while attracting investors, and therefore capital. States would also benefit from this, by taxing the individuals and entities involved in these projects. These measures would certainly have a cost from a budget point of view, but the economic growth and the reduction of unemployment would greatly reduce the fiscal burden, which would

str ategy

Tax

IF WE ADD THE WAGE COST, WHICH IS DISPROPORTIONATE TO THE ECONOMIC ACHIEVEMENTS AND PRODUCTION COSTS, WE NOTE THAT COMPANIES ARE SEVERELY HANDICAPPED And what about individuals?

ultimately have favourable tax consequences for all taxpayers.

This approach aims to achieve the ideal situation in tax matters, namely the situation where the need of the state to finance itself can be combined with the need for companies to make profits and the necessity for individuals to have a job: a very large taxable base, subject to a tax at a modest rate. To do this, it would naturally be necessary for states to agree to transfer, de facto, part of their prerogatives to the private sector, since the management of resources would mainly take place at enterprise level and following the strategy adopted by it.

In this way, not only would the measures be more targeted, but in the long term, the state would regain its natural place in the market,

which, at most, is one of arbitrator and not of actor. The crisis has also brought back to the table the question of whether to tax GAFAM and other online sales or services companies, most of which will emerge stronger from the crisis. States may well consider introducing taxes based on turnover in their territories, either temporarily or permanently. Such a tax could be set at a modest rate, in order to prevent these companies from passing on the increase in their taxes to consumers and to ensure that such taxation is not seen as punitive, as some political statements could unfortunately suggest. However, given the significant importance of the expected taxable base, the revenue deriving from this tax would cover, at least in part, the cost to each state of the new measures recommended above.

In the area of taxation of individuals, states face two problems: the increase in full or partial unemployment, and the significant decline in the income of taxpayers (including those declared bankrupt following the crisis).

The crisis has thus aggravated the usual asymmetry between the obligation to pay tax and the limited financial capacity of the debtor, or more simply, between the legal obligation to contribute to the state’s expenses and the debtor’s capacity to contribute, especially since the effects of the crisis are felt more or less strongly depending on the social group in question. In light of the above, states will necessarily see a decrease in tax revenues, since taxes mainly affect personal income and consumption. The impossible equation mentioned above reappears here: how could countries bring money into the state coffers while protecting already weakened taxpayers?

Once again, it would be wise to act in the long term, even if it means increasing government debt in the short term. In this context, one could imagine revising the system of progressive taxation, in particular by widening tax brackets, while introducing incentives for consumption and investment in specific areas of general interest. In this way, part of the direct taxes that the state would deprive itself of would return to it through VAT. These would be specific taxes on certain products, and also income tax levied on those who would have benefited from the increase in the buying power and investment of taxpayers.

Indeed, it is clear that, for a stalled economy to restart, capital must flow, not remain confined to derisory – and currently negative – interest rate bank accounts.

It is said that in every crisis lies the seed of opportunity. The current situation could thus provide an opportunity for states to use tax in a much more diversified way than in the past.

New tax legislation should be adopted, in order to adapt the current rules to the requirements of the market and needs of the society, as these needs are shaped by the new realities. n

Winter 2021 |

219

220

| Winter 2021

TA XI N G TI M E S AHEAD Continued concerns over inequality coupled with a need for a post-pandemic economic recovery are putting the discussion about international corporate tax reform to the top of the agenda. Alex Katsomitros investigates Âť

Winter 2021 |

221

A TA X I N G I S S U E

If 2020 was the year of postponed enjoyment, it was only natural that Black Friday would come a little bit later than usual. In France, where this most unGallic institution has recently taken root, the government decided to postpone it by one week, yielding to pressure from small shop owners. As French officials acknowledged, holding Black Friday during the country’s second lockdown would benefit e-commerce powerhouses such as Amazon.

Just a few days before the announcement, the US firm had disclosed that its sales had received a significant boost during the lockdown.

Although a one-off measure linked to the pandemic, the French government’s decision reflects a deeper disenchantment with large corporations and their tax practices. Despite its record revenues of €32bn across Europe, the US company received €294m in tax credits in 2019 due to a pre-tax loss of €983m. Another US tech giant, Google, has been forced to pay over $1bn in fines and back taxes to the French state for underpaid tax from 2005 to 2018, lending credence to the belief that large multi-nationals (MNEs) have been playing the system.

with little physical presence are elusive foes.

The European Commission estimates that the gap between the tax rate facing digital businesses and other sectors stands at 12 percent.

The pandemic is expected to make things worse. Some fear that many corporations may attempt to boost dwindling profits through creative accounting. ICRICT estimates that global tax revenues may fall more steeply than the 11.5 percent drop from 2007 to 2009. The crisis has also revealed the privileges of tech powerhouses, Faccio said: “The pandemic highlighted the fact that there are two economies: the online one, which did very well, and the rest, which suffered the consequences.”

And justice for all If there is hope for change, it comes from a leafy suburb of Paris. In October 2020 the OECD, a think tank based in the French capital, published the blueprint of its proposals for corporate tax reform, the product of a long negotiation involving 137 countries. The draft has been hailed as a major step towards an overhaul of the system that could increase global tax revenues by more than four percent.

A broken system International corporate taxation has traditionally been considered a topic dull enough to preoccupy accountants and academics.

The Great Recession and the rise of populism turned it into a politicised subject, with pressure groups highlighting the links between inequality and the tax policies of large corporations. In the previous decade, the media shed light on the role of tax havens through a series of documents leaks, such as the Panama and Paradise Papers. Tommaso Faccio, an academic who heads the secretariat of the Independent Commission for the Reform of International Corporate Taxation (ICRICT), an advocacy group that includes in its ranks prominent economists such as Thomas Piketty, said: “Tax-related leaks showed that there are different rules for the one percent and the rest of us. Austerity imposed in several European countries exacerbated the feeling of the public that although public services and government revenues were hit, some corporations were getting away with it. That created the political momentum for change.”

The scale of global tax avoidance through obscure accounting methods such as transfer pricing is breathtaking. ICRICT estimates that a staggering 40 percent of foreign corporate profits are shifted to tax havens. Losses from profit shifting surpass $500bn annually according to IMF data, with $200bn missing from the coffers of developing countries. The rise of the digital economy has exacerbated the problem. For tax authorities, online companies 222

| Winter 2021

THE SCALE OF GLOBAL TAX AVOIDANCE THROUGH OBSCURE ACCOUNTING METHODS SUCH AS TRANSFER PRICING IS BREATHTAKING The proposal, which includes two ‘pillars,’ seeks to modernise international corporate taxation. The first pillar recommends an apportionment of global profits, including online sales, to the countries where customers are located. To find a middle ground between the current system, which bases taxation on corporate physical location, and more radical ideas, the OECD proposes a formula that differentiates between routine and residual revenues, with a percentage of the latter being allocated to jurisdictions where revenues are generated. The measure targets consumer facing and digital companies with an annual turnover over €750m, which has prompted fierce resistance from the US. For its part, the OECD hopes it will end the global race to the bottom, with governments scrambling to lure footloose MNEs with low tax rates. Professor Reuven Avi-Yonah, an expert on tax law teaching at the University of Michigan and one of the originators of the idea, told World Finance: “The customer base is relatively immobile, so this is the best way to address tax competition.” However, many

critics believe that such optimism is overblown, pointing to the failures of a similar initiative in the US to end tax competition between states.

Farid Toubal, an expert on MNE taxation who teaches at École Normale Supérieure ParisSaclay and who is a member of an economic advisory body reporting to the French Prime Minister, said: “There is no clear effect on fiscal competition. The US experience is instructive, as apportionment of sales at the state level did not prevent competition among US states to attract investment.”

The root of the issue Many experts claim that the plan only tinkers with the system, keeping intact controversial tax practices that allow MNEs to combine income from different countries to benefit from low tax rates. “The OECD’s proposal maintains the existing ‘arm’s length principle’ and transfer pricing system for a large share of corporate profits. The problems would also be maintained – including large-scale corporate tax avoidance and international tax competition,” said Tove Ryding, Policy and Advocacy Manager at Eurodad, a network of 50 European NGOs. Many believe that MNEs should be treated as unitary organisations, rejecting the idea that subsidiaries are separate from the main company. Others point to a simpler system that would mandate universal apportionment, instead of focusing on a slice of the revenue of specific MNEs. “You cannot find a meaningful way to determine what is residual and routine revenue. They have opted for this formula because they want to limit the impact of tax reallocation,” Faccio said. Complexity is a major concern. Determining residual and routine revenue involves high administrative costs, including the collection of data by tax authorities and international co-operation to avoid double taxation. “The complexity associated with more sophisticated allocation rules, paired with the need for tax authorities to collect new information, is likely to give more room to multi-nationals to circumvent corporate taxation, especially in low-income countries,” said Toubal, who added: “Simplicity should be the rule. It would help establish a fairer system, since not all administrations have the means to navigate complex rules.”

Another contentious issue is the tax base that will be targeted. Developed countries favour sales-based schemes focusing on consumption, whereas developing countries prefer formulas that highlight labour-intensive activities. A group of 24 developing countries has advocated for apportionment taking payroll into account. No solution is ideal, but a compromise is necessary, according to ICRICT’s Faccio: “The balance you choose between production and sales ref lects the values of the negotiator.” »

A TA X I N G I S S U E

THE WORLD’S LARGEST DATA LEAKS (IN TERABYTES & GIGABYTES)

2.6TB 1.4TB 260GB 38GB 4.4GB Panama Papers 2016

Paradise Papers 2017

Offshore leaks 2013

Bahamas leaks 2016

Luxembourg leaks 2016

3.3GB

Swiss leaks 2016

1.7GB

Wikileaks’ ‘cablegate’ 2016

Source: International Consortium of Investigative Journalists

GLOBAL TAX SNAPSHOT THE BIGGEST FACILITATORS OF GLOBAL TAX ABUSE $500bn+

Annual losses from profit shifting, according to IMF data

$200bn

COUNTRIES/TERRITORIES RESPONSIBLE FOR THE HIGHEST ANNUAL TAX LOSSES TO OTHER COUNTRIES*

Share of global total

Missing from the coffers of developing countries

United Kingdom

40%

Netherlands

Of corporate foreign profits estimated to be shifted to tax havens

Luxembourg

137

United States

Countries that took part in OECD negotiations for tax reform

15%

Of total tax revenues in Africa and Latin America come from corporate tax

9%

$70.4bn

Cayman Islands

$42.5bn

$36.4bn

$27.6bn

$23.6bn

16.5%

9.9%

8.5%

6.5%

5.5%

Hong Kong

$21.1bn

4.9%

China

$20.1bn

4.7%

British Virgin Islands

$16.3bn

3.8%

Of total tax revenues in OECD countries come from corporate tax Ireland

$15.8bn

3.7%

Estimated annual lost tax revenue to the EU from US multi-nationals

Singapore

$14.6bn

3.4%

$1bn

Bermuda

$13.8bn

3.2%

¤25bn

Fines and back taxes imposed on Google by French authorities

¤294m

Tax credits received

by Amazon in 2019

Switzerland

$12.8bn

3.0%

* Through facilitation of international corporate tax abuse and private tax evasion. Representative of losses incurred on an annual basis. Corporate tax abuse estimates based on 2016 OECD data. Private tax evasion based on 2018 bank data. Source Tax Justice Network.

Winter 2021 |

223

A TA X I N G I S S U E

» Minimum tax The second pillar of the blueprint includes a radical proposal: establishing a minimum corporate tax rate for all MNEs, regardless of their location. This would reduce incentives to shift profits to low-tax jurisdictions. Politically, it has also been less problematic, since it targets less powerful, low-tax countries. Although the number of the minimum rate is under negotiation, OECD officials have informally floated a figure close to 12.5 percent as a clincher.

Many worry that this measure will also add complexity to the system, given that the OECD plan suggests that companies will have to comply with minimum tax rates on a country-bycountry basis, rather than globally. Conservative pressure groups like the US National Taxpayers Union have highlighted potential clashes between the two pillars that could lead to double taxation, particularly in jurisdictions where worldwide income is taxed, such as the US. “Minimum taxation would reduce certain forms of tax competition, but may give rise to new forms, like competition for headquarters,” said Professor Clemens Fuest, head of the German think tank Ifo Institute for Economic Research.

All eyes on the OECD The role of the OECD, essentially a rich country club, has also come under scrutiny. Following the financial crisis, G20 countries tasked the organisation with the development of a roadmap to corporate tax reform, a process that led to the proposals published in October 2020. Many argue, however, that the right body to deal with the issue is the United Nations. “There is a question of legitimacy. This is a universal issue and the only forum with universal membership is the UN,” Faccio said.

Corporate tax income represents 15 percent of total tax revenues in Africa and Latin America, compared to nine percent in OECD countries.

The Group of 77, a coalition of developing countries, has called for the establishment of an intergovernmental tax body within the UN, but this has been blocked by developed countries. “At the United Nations, the dynamic is different, and we often see broad coalitions of progressive countries become agendasetters,” said Eurodad’s Ryding, adding that such a measure would increase “the level of ownership of the decisions” and thus reduce unilateral action.

Critics also point to the lack of transparency, with non-OECD governments having limited access to the details of the negotiation.

Although 137 countries participate in the negotiation, many African countries are not represented. “The OECD says that all countries participate on equal terms, but this is not really the case,” Faccio argued, pointing to numerous African tax authorities that don’t have the resources and negotiating experience 224

| Winter 2021

Head of the German think tank Ifo Institute for Economic Research, Clemens Fuest

of developed countries. For the EU, corporate tax reform poses a difficult conundrum. While member states are keen to increase tax revenue, any attempt to deal with the issue has run into a problem that lies at the heart of the union’s woes: different tax policies across the EU. The pandemic has complicated things further. Last summer, the European Commission prompted member states to avoid supporting companies linked to overseas tax havens.

However, many believe that the EU needs to deal with its own tax havens first. Countries like the Netherlands, Ireland, Cyprus, Luxembourg and Malta have come under fire for their lax attitude towards MNEs; tax schemes with imaginative titles such as ‘Double Irish’ and ‘Dutch Sandwich’ have become a quintessential part of Brussels lore.

The issue came again to the fore during the heated negotiations over the establishment of a recovery fund to support COVID-hit countries.

The slow progress of the OECD negotiation casts its shadow over the EU, Eurodad’s Ryding argued: “At one point there was hope that the OECD negotiations could pave the way for an agreement among EU member states, but now that the level of ambition in the negotiations is so low and the negotiations have stalled, that hope is clearly fading.”

Searching for a global agreement The tax regime of technology companies, which operate across EU member states but pay most taxes in a single jurisdiction, is at the centre of the debate. In 2018, the European Commission proposed a digital services tax of three percent as a temporary solution until a global agreement is reached, only to be blocked by a coalition of countries. A similar plan to force large corporations to disclose paid tax

THE OECD PLAN SUGGESTS THAT COMPANIES WILL HAVE TO COMPLY WITH MINIMUM TAX RATES ON A COUNTRYBY-COUNTRY BASIS, RATHER THAN GLOBALLY and profits has also been blocked, sparking a debate over the unanimity rule that requires all members to agree for legislation to pass.

The head of the Commission, Ursula von der Leyen, has threatened to use a treaty article that allows majority rule under exceptional circumstances. “Unanimity rule has prevented reform in the past. This is why the EU gave a chance to the OECD where countries like Ireland, Luxembourg and Cyprus are less influential,” Faccio said.

Reflecting the will of EU powerhouses like Germany, Italy, Spain and France to see a meaningful reform, the Commission has said that it will wait for the OECD negotiations to conclude in 2021. However, some accuse the Commission of being biased towards heavy taxation. “The agenda of the European Commission’s taxation and customs union directorate shows a great overlap with the agenda of tax activist groups, which are very vocal in the Commission’s recently established platform on tax good governance,” said Matthias Bauer, Senior Economist at the European Centre for International Political Economy (ECIPE), a Brussels-based think tank. The debate is further complicated by the departure of the UK. Many UK overseas territories have been added to an EU tax haven

A TA X I N G I S S U E

21 percent. Although tech powerhouses are traditional Democratic donors, Biden will not succumb to any pressure, Avi-Yonah said: “Tech companies do not have much clout in the Biden administration, which is likely to continue the antitrust cases against Google and Facebook.” A different US tax policy will drastically change the international agenda too, according to Faccio: “If the US implements a minimum corporate tax rate of 21 percent, the global negotiation will be different. The US rate is the benchmark, so the OECD will possibly figure out a global minimum tax rate around that number, rather than a low 12.5 percent that would kickstart a race to the bottom.”

A new era

French economist Thomas Piketty (right)

list. European officials fear that after Brexit the UK may opt for a low-tax regime, dubbed ‘Singapore-on-Thames,’ that would undermine the EU.

Blurred lines of the digital economy The biggest worry, however, is that many countries will act unilaterally. The UK plans to impose a digital services tax in 2021.

France also aims to impose a three percent tax on the turnover of technology corporations with earnings over €25m; the country’s tax authorities started approaching US technology companies in December, sparking a call for tariffs on French products on the other side of the Atlantic. Negotiations with the US came to an abrupt halt last summer. In a dramatic letter sent to several EU capitals, the US treasury secretary Steven Mnuchin declared that the US was at an “impasse” and had to focus on dealing with the pandemic.

Critics claim that unilateral digital taxes are counter-productive. “It is difficult to draw a line between the ‘digital economy’ and the rest, because the digital transformation affects almost all sectors,” said Toubal, who noted that tax planning is not limited to digital companies. Others believe that the side effects will be substantial, with consumers and

CRITICS BELIEVE THAT IMPLEMENTATION OF THE PROPOSALS COULD REDUCE CORPORATE INVESTMENT, HALTING POST-PANDEMIC ECONOMIC RECOVERY

small businesses suffering the most. “They [technology companies] will effectively pay these taxes, but at the same time pass them on to consumers. It is the users of digital services, mainly SMEs and small businesses, which suffer from such taxes, including restaurants, hairdressers and winemakers who pay more for advertising space on Google and Facebook,” Bauer said.

Waiting for Biden The debate on corporate taxation has strained Europe’s already difficult relationship with the US, although US multi-nationals are estimated to cost the EU nearly €25bn per year in lost tax revenue. Under Trump, the US took a unilateral approach, with every measure against US companies deemed an act of war.

When France announced its digital tax, the Trump administration responded in kind, threatening to impose tariffs on French wine.

Will the election of Joe Biden change the US position? Many analysts caution against optimism. “Even under Obama, the US government was only interested in protecting US multi-nationals. That is unlikely to change,” Faccio said. However, the Biden administration is expected to ditch the Trumpian America-First dogma. “Biden will take a multilateral approach, rather than the conflictual approach of Trump who was blowing hot and cold every other week. His administration will make an effort to reach an agreement,” Faccio said.

In the run-up to the election, Biden took a hard stance against big business. His platform included radical proposals such as closing tax loopholes and ending cross crediting. Crucially, he pledged to raise the corporate tax rate to 28 percent and double the minimum tax rates for foreign subsidiaries of US firms to

As expected, the pandemic has cast its shadow over the negotiations. Many countries have already approved the OECD blueprint, hoping to reach an agreement by mid-2021 when the worst of the pandemic will hopefully be over.

Critics believe that implementation of the proposals could reduce corporate investment, halting post-pandemic economic recovery. A Deloitte survey found that more than half of MNEs expect to be hit by the new tax regime.

Although acknowledging the danger, Pascal Saint-Amans, Director of the OECD Centre for Tax Policy and Administration, said that this is a price worth paying: “The two-pillar proposals would lead to a relatively small increase in the investment costs of MNEs. The negative effect on global investment would be small, as the proposals would mostly affect highly profitable MNEs whose investment is less sensitive to taxes.” Many believe that the prospect of a radically different post-COVID-19 economy has already shifted the debate. In a recent paper, Toubal and other academics argue that the pandemic has stressed the need for a more robust corporate tax system. “The crisis has revealed that some essential public goods, such as infrastructure and healthcare provision, have been underfunded in many countries, an issue that corporate tax avoidance has likely exacerbated. Some multi-nationals that have been avoiding corporate taxes for years are also receiving financial help from governments, which many find unacceptable,” Toubal said.

What everyone seems keen to avoid is a proliferation of unilateral action. “Under a worst-case scenario, resulting in a trade war, the failure to reach an agreement could reduce global GDP by more than one percent, at a time when we can least afford it,” said the OECD’s Saint-Amans. A compromise will be hard to reach, but the alternative should be more concerning, he added: “In contrast to what some may say, I believe the right question is: ‘What would be the costs if there is no agreement on a global solution?’” n

Winter 2021 |

225

wor l d f i na nce

The Econoclast

David Orrell AUTHOR AND ECONOMIST

Quantum thinking After decades spent in relative obscurity, quantum computing is finally having something of a moment

In 2019, Google announced that they had achieved ‘quantum supremacy’ by showing they could run a particular task much faster on their quantum device than on any classical computer. Research teams around the world are competing to find the first real-world applications and finance is at the very top of this list.

However, quantum computing may do more than change the way that quantitative analysts run their algorithms. It may also profoundly alter our perception of the financial system, and the economy in general. The reason for this is that classical and quantum computers handle probability in a different way.

The quantum coin In classical probability, a statement can be either true or false, but not both at the same time. In mathematics-speak, the rule for determining the size of some quantity is called the norm. In classical probability, the norm, denoted the 1-norm, is just the magnitude. If the probability is 0.5, then that is the size.

The next-simplest norm, known as the 2-norm, works for a pair of numbers, and is the square root of the sum of squares. The 2-norm therefore corresponds to the distance between two points on a 2-dimensional plane, instead of a 1-dimensional line, hence the name. Since mathematicians love to extend a theory, a natural question to ask is what rules for probability would look like if they were based on this 2-norm.

For one thing, we could denote the state of something like a coin toss by a 2-D diagonal ray of length 1. The probability of heads is given by the square of the horizontal extent, while the probability of tails is given by the square of the vertical extent. By the Pythagorean theorem, the sum of these two numbers equals 1, as expected for a probability. If the coin is perfectly balanced, then the line should be at 226

| Winter 2021

45 degrees, so the chances of getting a heads or tails are identical. When we toss the coin and observe the outcome, the ambiguous state “collapses” to either heads or tails.

Because the norm of a quantum probability depends on the square, one could also imagine cases where the probabilities were negative.

IT IS ONLY IN THE FINAL STEP, WHEN WE TAKE THE MAGNITUDE INTO ACCOUNT, THAT NEGATIVE PROBABILITIES ARE FORCED TO BECOME POSITIVE

In classical probability, negative probabilities don’t make sense: if a forecaster announced a negative 30 percent chance of rain tomorrow, we would think they were crazy. However, in a 2-norm, there is nothing to prevent negative probabilities occurring. It is only in the final step, when we take the magnitude into account, that negative probabilities are forced to become positive. If we’re going to allow negative numbers, then for mathematical consistency we should also permit complex numbers, which involve the square root of negative one. Now it’s possible we’ll end up with a complex number for a probability; however the 2-norm of a complex number is a positive number (or zero). To summarise, classical probability is the simplest kind of probability, which is based on the 1-norm and involves positive numbers. The next-simplest kind of probability uses the 2-norm, and includes complex numbers. This kind of probability is called quantum probability.

Quantum logic In a classical computer, a bit can take the value of 0 or 1. In a quantum computer, the state is represented by a qubit, which in mathematical terms describes a ray of length 1. Only when the qubit is measured does it give a 0 or 1. But prior to measurement, a quantum computer can work in the superposed state, which is what makes them so powerful.

So what does this have to do with finance?

Well, it turns out that quantum algorithms behave in a very different way from their classical counterparts. For example, many of the algorithms used by quantitative analysts are based on the concept of a random walk.

This assumes that the price of an asset such as a stock varies in a random way, taking a random step up or down at each time step. It turns out that the magnitude of the expected change increases with the square-root of time.

Quantum computing has its own version of the random walk, which is known as the quantum walk. One difference is the expected magnitude of change, which grows much faster (linearly with time). This feature matches the way that most people think about financial markets. After all, if we think a stock will go up by eight percent in a year then we will probably extend that into the future as well, so the next year it will grow by another eight percent. We don’t think in square-roots.

This is just one way in which quantum models seem a better fit to human thought processes than classical ones. The field of quantum cognition shows that many of what behavioural economists call ‘paradoxes’ of human decision-making actually make perfect sense when we switch to quantum probability.

Once quantum computers become established in finance, expect quantum algorithms to get more attention, not for their ability to improve processing times, but because they are a better match for human behaviour. n

There are banks and then there are banks People are different.

Banks are similar, very similar. With similar savings products, interest rates and asset management strategies.

Carnegie Private Banking is probably Sweden’s most different bank.

So different that we reboot our banking business with every new client meeting – for the simple reason that standardised solutions do not fit individual needs.

Carnegie Private Banking takes up where your ordinary bank leaves off.

For almost 100 years, we have been Sweden’s meeting place for knowledge and capital, accruing unique experience and relationships.

We bring together investors and investment opportunities so that new business concepts, companies, workplaces, prosperity and wealth are born. This ultimately builds our future society and our Sweden.

As a Carnegie client, with access to our expertise and unique investment opportunities, you will also become a builder of society.

We were named Sweden’s premier knowledge bank for high net worth individuals* by providing the special expertise, analysis and tools required to build and secure capital across generations.

Welcome to Carnegie Private Banking. We help individuals, entrepreneurs, families and companies to build prosperity.

* Sweden’s best private bank for four years in a row, according to TNS Sifo Prospera and Euromoney.