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‘GLOBAL TRADE IN 2008 VS 2021: GLOBAL IMPACT, DIFFERENT CHALLENGES’

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A Q&A with Nawaz Ali Head of Insights at Western Union Business Solutions who draws comparisons between the financial crisis of 2008 and the coronavirus pandemic and provides some insight into how businesses can better plan for the year ahead.

 

2020 has been a tumultuous year for global trade with many drawing comparisons to the financial crash of 2008, how do you think the two crises compare?

Though both crises were global in nature and had far reaching impacts worldwide, it is important to note that the dynamics of today’s global trade have shifted in the past 12 years. Today, faster digital transformation can help enable the global services trade to counterbalance some of the impact of the protectionist policies, which we typically witness in times of crisis, on the global goods trade.

Even so, the recovery of global trade could still be very gradual as these more protectionist behaviours could also keep trade activity near to its lowest level over the past 10 years.

Unlike in 2008, this time both global supply and demand factors are at play, so the effects could last longer. Furthermore, this time around the crisis is broad and impacting all sectors whereas in 2008, the crisis was more concentrated in the banking sector.

The recent vaccine developments have been an important turning point, and we’ve seen an immediate positive impact if, for example, you look towards the recent spike in commodity prices. However,  global demand could still remain distressed  in 2021 due to  corporate insolvency risks and weaker purchasing power of consumers.

Similar to 2008, global interest rates have been cut to new historic lows by central banks which should underpin investment and support the recovery. However, the key factor for any recovery actually lies more in the mass development and distribution of the COVID-19 vaccine, and it is that uncertainty which spurred governments into also launching record amounts of fiscal stimulus.

Nevertheless, by putting the right plans in place for 2021 businesses will be able to better equip themselves to recover from the pandemic.

 

When a crisis hits, typically investors rush to safe-haven currencies to minimise their losses. Could this have a different impact today when compared to 2008?

Yes, the geopolitical differences between now and 2008 are stark. Today, the first signs of a capital rotation into risk-prone assets are emerging. With the US-Sino trade war, domestic mismanagement of COVID-19 in the US, and rising global geopolitical tensions, now could be the beginning of a major multi‑year global FX regime change as investors start to look for alternatives for the greenback.

Despite the fact investors have failed to find a credible substitute for the dollar since 2010, in this volatile environment it is critical that businesses ensure they understand their FX exposure and have plans in place for every potential scenario.

There is a disconnect between stock markets and the economy. Investors remain optimistic about the economic turnaround on the horizon, but the reality is far from certain. If the risk of long‑term economic damage rises, this optimism will likely fade and weigh on risk‑friendly currencies, including Sterling, and boost safe-havens like the Japanese Yen and Swiss Franc.

In short, with global interest rates converging, proper crisis management and economic growth differentials could overhaul the balance of power on the world stage after the recession.

 

Aside from the coronavirus pandemic, what other marquee events should businesses be planning around in 2021?

Of course, there are many other seismic geopolitical issues that should be taken into account when planning for 2021, which will have significant impacts on currency markets, such as Brexit, US-UK trade negotiations and regime change following the US election result – a Joe Biden presidency could have a material impact on the global trade environment.

Analysing the Brexit example alone, in a world gripped by virus-related supply chain disruption and growth concerns, a no-trade deal Brexit could exacerbate the economic shock. There are currently no tariffs on trade between the UK and EU and if a  trade deal or an extension of talks is not in place by Dec. 31, 2020, resulting barriers to trade could significantly harm export and import business and further damage any economic recovery.

Herein, the importance of a business evaluating the risks and opportunities related to the ongoing disruption in global trade on a more regular basis cannot be understated.

 

How can companies be better prepared for these challenges going into 2021?

The rise of geopolitical themes such as trade wars, and the growing influence of political figures on financial markets, has significantly increased the complexity around judging future market trends and their implications for international business. We discuss how businesses can better prepare for some of the most topical challenges  in our Are you Ready for 2021? guide.

 In summary, regardless of a businesses’ goals, understanding their FX risk and exposure should be part of every businesses strategy so that they can better pivot at speed and at scale in times of crises and minimise potential damage to their business.

 

Interviews

COULD YOU PROVIDE US WITH SOME BACKGROUND ON YOUR CURRENT ROLE WITHIN THE FINANCIAL SERVICES SECTOR?

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Q&A with Shanker Ramamurthy, Global Managing Partner – Banking at IBM, BIAN Executive Board Member

 

Can you explain more about your recent appointment to BIAN’s Executive Board and BIAN’s role in the industry? 

I lead the banking consulting practice across IBM Consulting, focusing on banks’ digital transformation, core banking, and payments. Additionally, I am the President of the IBM Industry Academy, a dynamic and diverse community of IBM’s industry experts aiming to form new solutions to help our customers win in a constantly evolving industry landscape. The Academy offers IBMers the chance to work together and collaborate with industry experts from all areas of IBM.

Since my career began almost three decades ago, I have been lucky enough to work across six continents in various consulting and leadership roles in the financial services sector. This experience, coupled with my current role, has provided me with a unique insight into the digital trends affecting all industries and enables me to serve IBM’s financial services clients better.

BIAN stands for the Banking Industry Architecture Network. It is a collaborative, not-for-profit organization of institutions and professionals from the financial and technology industries, including leading banks, technology providers, consultants, and academics from all over the globe. Member organizations are committed to lowering the cost of banking and increasing the speed of innovation adoption in the industry. Members draw upon their combined industry expertise to define a revolutionary banking technology framework that standardizes and simplifies banking architecture to overcome limitations preventing growth and efficiency and encourage ease of management in their existing environments.1

The opportunity to become a member of the BIAN board was an invitation I could not turn down. I am honored to be part of BIAN’s executive board to provide counsel and support their work in helping financial institutions negotiate this time of immense opportunity and disruption. For the financial services industry, BIAN’s open framework, services-oriented architecture, and standards model are more critical than ever before.

 

Shanker Ramamurthy

After working in the financial services industry for a number of years, what is it that makes you so passionate about the industry? 

I am delighted to see the impact of exponential technology on financial services because these innovations provide an opportunity to bring positive change to people’s everyday lives. I am also a strong advocate for financial inclusion and emphasize its importance as part of my practice. Financial services should be accessible for all, regardless of financial means and where you are in the world. In this respect, I am committed to helping banks widen the availability of banking services and reduce the cost point of doing so.

 

The importance of financial inclusion is evident. But what measures can global banks take to increase the availability of banking services and keep cost points low?

The financial services industry still has much to do to achieve inclusive banking globally. Having said this, incumbents, fintechs and techfins have made significant investments in technology and innovation, with this end in mind. Unfortunately, we live in a world where globally, billions of people still do not have access to basic financial services. Critical areas such as payments – particularly cross-border payments – remain costly, and access to credit continues to be a challenge for so many.

Global financial institutions will find success for their own business processes and their customers through a technology and business strategy to support the bank of the future and by prioritizing innovation powered by hybrid cloud and AI. Although there is much work to be done, it is encouraging that the combination of innovation will help democratize and transform finance like never before.

 

What can banks do to prepare for the future? 

Banks are facing an evolving landscape due to COVID-19 and changing regulatory environments. This is something banks and fintechs are navigating. At the same time, the financial services industry is being shaped by new consumer trends – from the rise of a cashless society to the pandemic-driven shift towards online banking and mobile payments.

The focus on technological development to accommodate these changes will continue. The banks that succeed will be the ones who have a technology and business strategy to support the ‘bank of the future,’ in which much of the middle and back office gets almost entirely automated and focus shifts to customers and customer value-adding functions. This transition requires rapid digitization and the adoption of exponential technologies powered by the hybrid cloud and AI. BIAN has an essential role in helping banks do just this.

 

What does the shift towards digital banking, including the increasing use of mobile contactless payments by customers, mean for the bank of the future?

Digitization drives innovation, new business models, and efficiency while simultaneously enabling extreme competition from traditional and non-traditional competitors. In tomorrow’s banking eco-system model, the value is increasingly accruing from customer-facing functions supported by platform-based business models. By extension, this has meant competition from both fintech and importantly, techfins (large technology companies that are moving into the less regulated aspects of financial services such as payments, electronic wallets, BNPL – buy now pay later models and more).

Banks in the future will automate extensively, and likely extend their business models to create ‘beyond banking platforms’ to support their customers in areas outside of the traditional banking value chain. The future of such models is being written in Asia by banks such as DBS in Singapore, State Bank of India, among others as they evolve their business models to combat the growth of ‘super-apps’ like Alibaba, Tencent, Grab, Gojek, and more in that part of the world.

 

How can the industry find its footing after such a change?

Banks have several natural advantages that come from incumbency, customer loyalty, and material regulatory barriers preventing non-traditional competitors from quickly breaching their businesses. Regardless, mastering the future will require banks to ask themselves three questions:

  1. Is our strategy ambitious enough?
  2. Are we executing fast enough?
  3. Do we have the talent and capabilities to win?

Answering these questions honestly and then putting in place programs to execute relentlessly is the only way for the industry to continue to thrive and take advantage of the extensive opportunities in the near future.

 

 

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HOW CAN MERCHANTS OVERCOME THE COST AND COMPLEXITY OF LOCAL PAYMENT METHOD INTEGRATIONS?

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James Booth, VP Head of Partnerships, EMEA at PPRO

 

As commerce becomes more digital and borderless, one of the biggest hurdles companies face is the complexity of facilitating the myriad payment options required to maximise sales in any given market. But, with 77% of global online sales now being made using one of 500+ trusted local payment methods (LPMs), it has never been more crucial for companies to get it right.

In the below Q&A article, James Booth, VP Head of Partnerships, EMEA at PPRO discusses the challenges businesses and merchants face when integrating a diverse range of payment methods, and how with the right expertise, businesses can overcome this to increase online conversion rates and unlock greater profitability.

 

How has the pandemic and rise of e-commerce added pressure to merchants/businesses to integrate local payment methods (LPMs)?

Offering a diverse array of local payment methods has always been important. The recent e-commerce boom merely turbocharged this need as consumers were forced online in their masses. During this time, digital payment options became a must-have for online brands to be able to compete. What we have learnt since then is that consumer payment behaviours that changed during lockdown are in fact here to stay. Selling across borders without offering LPMs is no longer an option, as consumers demand more choice than ever before.

For businesses and merchants who do not invest in LPMs at this pivotal time, they are at risk of missing out on potential customers. Our own research suggests that nearly 50% of online shoppers say they will abandon a purchase at checkout if their preferred or local payment option isn’t available. Not only does this mean that merchants will lose out to the competition in their own markets, but it also limits their expansion plans into new locations – as each region has its own LPM preferences. The opportunity for cross-border growth is at an all-time high, but to be able to succeed, a greater focus is needed on local payment preferences.

 

What is involved when it comes to integrating LPMs? What hurdles do merchants/businesses come up against when beginning this process?

Integrating LPMs is no easy task – it requires a number of considerations before a business can even get started. For example, market analysis plays a huge role – identifying which market you’d like to sell to and gaining insights into the preferred LPMs in that region is an important first step. This is where consultancy from a partner with on the ground local knowledge is extremely helpful. Especially when it comes to negotiating with the LPM directly regarding contracts. And often language can act as a barrier and add additional complexity to this process.

Time and cost are two of the biggest hurdles to consider. Adding just one payment method means  up to 1 million USD in integration costs and 6-12 months from contracting to initial operations. There is also the additional cost of operational complexity licensing, compliance, managing funds and more! As well as being costly, this process is extremely complex and time consuming for a brand going at it alone. That’s not to mention the added complexities surrounding regulations funds collection that could require the business to set up an entity in the region in order to be able to move any further with the integration process.

 

What are the financial implications associated with LPM integration? What impact can this have on the merchant’s decision to go ahead?

The costs and complexities can often be enough to stop a business in its tracks when it comes to integrating a new payment method. This can create an awful catch-22 situation whereby merchants are aware they need to integrate LPMs to be able to compete and grow their business, but are unable to keep up with the costs and complexities associated with implementing them effectively.

To overcome this, merchants need to partner with an expert who can provide strategic consultancy and easy access to new payment methods via a diverse portfolio. Only with this support can merchants successfully expand into the new lucrative markets on offer.

 

Are there any other factors merchants/businesses need to consider when integrating an LPM?

Even with the right mix of payment methods at the checkout, there are often other reasons why online sales don’t convert and baskets are abandoned. This may be because of a technological problem. A single misconfiguration, and an option unchecked in the backend, can cause payments to time out or fail.

In many cases, the issues impacting the success of a sale (the conversion rate) may not be entirely technical. Often, a poor user experience causes unnecessary cart abandonment. For instance, poor language localisation, offering a local payment method to shoppers in a country where this is not available, a confusing layout on the payments page or even relatively simple things like only telling a user about a surcharge when they reach the final payments screen — can all depress the conversion rate.
Considering the whole picture will be crucial to not only making LPM integration a success, but ensuring it fulfils its purpose – boosting online conversion rates and unlocking future online growth.

 

How can businesses overcome the cost and complexities associated with LPMs and implement them successfully?

Using the regional knowledge and the experience of strategic partners will be essential for any business beginning this complex journey. Even for the biggest of payment service providers, LPM integration can be overwhelming. Luckily for merchants, and the payment service providers who support them, local payment infrastructures are on hand to remove the pain points associated with implementation. By offering easy access to a diverse array of payment methods, these infrastructures can empower merchants to take on cross-border commerce.

 

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