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WHY MANAGING RISK PERFORMANCE WILL BE LENDERS’ BIGGEST CHALLENGE THIS YEAR

Michal Smida, Founder & CEO, Twisto

 

  1. What are the key trends you’re seeing in lending?

Q2 was characterised by a conservative approach and a very proactive reaction to managing credit risk. There was substantial tightening in approval rates for onboarding new clients – this in part is due to the uncertainty of the potential impact of unemployment, as well as the increased challenge of gaining access to capital markets. We saw as much as 50% reductions in approval rates across the industry.

There was also a bigger focus on collections and managing risk in the existing portfolio, this includes more proactive and frequent communication with clients. Q3 has seen an easing of the above measures as prime client portfolios in the EU have recorded positive non-performing loan (NPL) performance. In some cases, customer payment behaviour has improved vs. pre-COVID, with some lenders recording their best performance to date.

 

  1. The 2008 financial crisis was the catalyst for alternative lenders. Do you think the current pandemic will be a similar agent for innovation and change, and if so, what might it look like?

The shift to digital has been an ongoing theme since 2008, which gave rise to many great fintechs, but also pushed banks to digitalise rapidly. What the current crisis has brought is increased customer adoption of what has already been in the market for some time. So we don’t see the change in the product offerings of financial institutions, but rather a change in customer behaviour and their willingness to use digital channels, which are not only much more convenient, but also safer and quicker to use in comparison to traditional offline processes.

 

  1. What are the biggest challenges for lenders in the next 12 months?

Maintaining and further managing risk performance. Q4 will be critical in proving the resilience of the customer base. As governments have stepped in to support businesses and the wider economy, the possible impact on unemployment has been delayed.

This in turn can lead to credit deterioration once the support stops. Venture capital and debt markets effectively shut down in Q2, with reopening noted in Q3. As many lenders require additional capital to sustain growth momentum, the key challenge will be attracting capital from investors who became even more selective and cautious.

 

  1. What do lenders need to prioritise to deliver a better customer experience?

It’s mostly about finding a sweet spot between a smooth customer journey and all the requirements coming from different stakeholders around areas such as risk factors.

Many financial institutions are not so brave in terms of challenging the status quo of the current financial conditions. We are doing our best to make bold decisions that might make a difference at the end of the day.

 

  1. You have already started to make the transition to lending 3.0. Why did you want to build a card programme?

Creating a payment card was the logical next step in fulfilling our vision of simplifying daily payments for customers. We started with simple deferred payments “Buy now. Pay later” for e-commerce, but in an age when the overwhelming majority of payments still occur offline, it was necessary to also enter that market and provide an omni-channel solution. The key was to have a better app and overall experience than traditional card issuers.

This was demonstrated in our recent launch of the Twisto app and card offering in Poland, which has been well received by customers, with over 70,000 sign ups and over 20,000 cards ordered in the first 30 days from launch. We are very pleased with the speed of execution through this launch, and strategic partners like Mastercard and Marqeta have been fundamental to enabling the success of the technology. We look forward to exploring expansion opportunities across the EU on the back of this solution.

 

  1. What’s your vision for your card programme and how it will help you solve your challenges and deliver a better customer experience?

At Twisto we believe that having a plastic card in your wallet is already outdated. Because of this, we’ve committed to our goal to stop issuing plastic cards by 2025. We believe that the future is paying with mobile phones. Thanks to Marqeta and our Digital First certification from Mastercard, we’re one of the first companies in Europe, or even the world, who doesn’t have to issue physical cards.

 

Interviews

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

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.

 

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Interviews

MAXIMISING THE SPEED OF RECOVERY: ALLOCATING CAPITAL EFFECTIVELY

Simon Bittlestone, CEO of Metapraxis

 

How has COVID-19 impacted businesses’ financial plans?

The uncertainty thrown up by the COVID-19 pandemic has meant that many businesses have been feeling the strain and extra pressure on their cashflow. While measures such as the Coronavirus Business Interruption Loan Scheme (CBILS) were put in place, for some businesses, these have been ineffective in providing much needed liquidity. This has affected smaller businesses significantly, as they are much more likely to default on loans than their larger counterparts, and therefore less likely to have a loan approved.

In April this year, a survey showed a pessimistic outlook for SMEs predicting that many would run out of cash in as little as 12 weeks. Taking into account various other factors at the time, Metapraxis predicted this time frame could be shorter still, giving certain businesses just 6 – 8 weeks.

 

What do you think the next few months hold?

While the outlook of businesses may have changed continuously since the beginning of the pandemic, it would be naïve to think we are out of the woods. The worst of the economic recession is still to come, so good allocation of capital and effective management of cashflow is now more  important than ever.

 

What factors do businesses need to consider in order to effectively optimise their strategy?

Financial results depend on how businesses split their capital across different strategies, projects, products or services, as well as various regions. Clearly it would be beneficial to back the most profitable service lines in a time of financial uncertainty, but in order to get this right, businesses need to consider three main points: multiplicity of inputs, complexity of comparison and multiplicity of output.

Multiplicity of inputs looks at the number of assets that can be supported. The more assets there are, the more complex the challenge of coordinating capital allocation appropriately. Tied in with that, a business also needs to be able to realistically compare one asset’s return with another’s. This is the complexity of comparison; it is hard for the board to choose which assets to support if they are not directly comparable with each other. Finally, and perhaps most obviously, all of this needs to fit into the overall goal of the business, and what areas it is trying to maximise.

To add to this already difficult process, multiplicity of output is going to change dramatically over the coming years, as companies begin to consider other factors such as climate impact, employee wellness and social responsibility as outputs.

 

What should businesses be focusing on in the short-term?

Businesses must focus their efforts on financial return. Doing so is a key part of any businesses’ recovery from financial hardship, even if they are caused by unpredictable ‘black swan events’ such as coronavirus.

Many things remain fixed in a short-term model. During recovery from such events there is not generally time to create a whole new product line, or explore a different service, although some more agile businesses have of course been able to achieve this. Building a top down model of the business is therefore key in order to streamline processes and manage cashflow, providing the necessary liquidity to survive.

 

What longer-term changes should businesses be aiming at implementing?

With multiple inputs and outputs to consider, the long-term equation is extremely complex. Businesses often underestimate the importance of building a model that allows directors to see the impact of different factors on profitability and cash flow. The ability to reach long-term goals very much depends on identifying future risks and changes in the market, and being able to react quickly.

This can only be done by analysing historical return on investment by business unit, region and product or service, and applying these ratios to test future assumptions. This allows management to run different scenarios quickly and then test these with operational deliverability. If the management team can analyse how various future scenarios might pan out and what the impact might be on the business, it can use this information to make better decisions.

Any company that doesn’t have a model like this will find themselves at a massive disadvantage as we approach the next two years of economic recovery andit is the finance team who must take responsibility for rectifying that.

 

What is the key takeaway for businesses who are looking to learn from COVID-19?

Capital allocation has always and will always be at the heart of any business’s operations. This is even more prevalent in times of economic recession when managing cashflow becomes even more vital for survival. When a business has a clear historical overview of its portfolio, how well products or services are performing, and how previous scenarios have affected profitability, it can make more informed decisions when it comes to assessing the impact of an unexpected event.

The ability to adapt to fluctuations is hugely important to the board, particularly the CFO, when it comes to successful cashflow management. Agility in financial planning, good scenario modelling and prudent assumptions will allow a business to better weather most storms.

 

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