by Helen Sanders, Editor
Being fortunate enough to work from home, and watch the full annual lifecycle in our garden, from frosty ground to ripening juicy berries and apples with a reddening flush, the wonder of the natural ecosystem always amazes me. Every plant, insect and organism has its place. It takes what it needs from its environment, and in turn sustains other life forms (“eat and be eaten”, you could say). Apart from wasps, that is: heaven only knows what they’re actually for, except for hiding in the laundry on the washing line, ready to attack. So apart from wasps, the ecosystem is complex but entirely balanced. But what are the rules of an ecosystem that maintain this balance? And what does this mean for how we do business, and how we interact with other participants in our own ecosystems?
There are multiple ecosystems of which we are a part, both as individuals and businesses. Some are quite self-contained, such as a theatre. Every cast and creative member plays their role, as does the audience. Take out the sound or lighting designer, and everything goes quiet or dark. Take out a cast member and the play no longer makes sense. Take out the audience, and there’s really no point at all. From a trade perspective, while we tend to refer to the ‘supply chain’, this is better described as an ecosystem, often comprising a complex – and potentially fragile – network of parties from raw material producers through to suppliers, distributors, dealers, agents, retailers and customers. The financial infrastructure that supports it is, largely, less fragile, but both interdependent ecosystems are placed at risk both by the removal of one or more of its participants, and equally, the impact of external forces upon them.
The supply ecosystem
Looking first at the supply ecosystem, the geographic reach and number of participants are growing in many industries as companies seek lower cost production and invest in growth in emerging economies. As these ecosystems become more complex, a corporation’s ability to identify and manage risk, and maintain liquidity, reduces. Liquidity is critical to a well-functioning ecosystem of every sort, and if liquidity is maintained, it remains more resilient and adaptable. I’ll avoid the obvious example of watering the garden. Using the theatre example instead, all theatres in London were closed in 1642. This ordnance was then repeated in 1649, suggesting it hadn’t been all that successful, followed by another attempt the following year. Even then, they simply went underground. Why did the theatre companies continue to survive? Because there were still private venues, patrons and a paying public to keep them afloat, and as a result, they could adapt very quickly to changing conditions. As soon as the monarchy was restored and life became a little jollier, they almost miraculously reappeared. Without liquidity, they would have packed up their scripts and costumes and quit.
Most major corporations do not struggle to access liquidity and at the very least, they have assets they can convert into cash. However, liquidity across the wider ecosystem is more of a problem. Take this scenario: Supplier A that supplies to large Auto Manufacturer B goes into liquidation due to lack of liquidity. Supplier A’s collapse has serious ramifications for its own suppliers. It also impacts and potentially halts Auto Manufacturer B’s own production, at least while an alternative can be found. However, as Auto Manufacturer B slows production, its other suppliers, Suppliers B, C and D (etc.) that also supply components are also impacted, as are companies that provide goods and services to suppliers B, C, and D. Distributors relying on new stock are disappointed, as are both customers that have ordered new vehicles, and new customers.
Consequently, it is in the interests of every participant, particularly the largest corporations which the rest of the ecosystem surrounds, to make sure that every participant has sufficient liquidity both to sustain its business, and to invest in growth. While there are already supply chain programmes, such as supplier financing or distributor financing, to which corporations can then onboard their suppliers or distributors, these programmes are not enough in themselves to support the wider ecosystem.
Firstly, these forms of financing are transaction-based, linked to specific invoices or purchase orders. Therefore, while a corporation may be confident that a supplier has access to day-to-day liquidity, it does not have the assurance that it can invest in upscaling its operations to support its own growth trajectory.
Secondly, these programmes only address a single tier of the supply ecosystem, ignoring the complex web of smaller businesses beneath them, which may play an equally important, if smaller role. These businesses are effectively left to their own devices, and have to work with commercial and retail banks to seek financing, often at far less preferential terms.
Thirdly, while techniques such as factoring and reverse factoring are relevant to some industries, this is not universally the case, particularly industries with high capital expenditure.
The first rule of the ecosystem is therefore to consider who needs what to survive and grow. From a trade ecosystem, this means assessing and helping to mitigate the risk and liquidity needs of all participants, rather than individual ones. Banks have a key role to play in this, but few have the geographic reach, organisational model or the risk appetite to look beyond their large corporate customers to the smaller companies that make up their supply ecosystems. Furthermore, larger corporations and mid-caps/SMEs are typically serviced by different parts of a bank. As supply ecosystems continue to evolve, and corporate demands to manage liquidity and risk at a broader level increase, banks will need to revisit their financing strategies and the way that they help customers to evaluate and mitigate risk.
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Unintended consequences
Ecosystems are not only put out of balance by the removal of one or more participants. Introducing something new to an ecosystem, whether intentionally or unintentionally, also creates problems, from the mongoose in Hawaii to Dutch elm disease in Europe and North America. It is the problem of unintended consequences specifically that is impacting on the banking sector and therefore the corporate customers they support. Specifically, regulation designed to manage risk in the banking sector has a serious knock-on effect on other organisations. From Basel III to anti-money laundering and sanctions screening, many of the regulations directed towards banks are creating far wider ramifications, as has been discussed many times in TMI. Correspondent banking is a key example. As the regulatory burden on banks increases, they are increasingly exiting markets where the risks are perceived to be higher or more difficult to quantify. This has an immediate and material impact on customers, as local banks and customers operating internationally struggle to appoint new banking partners from a shrinking pool. The upshot is that individuals and businesses located in the world’s most vulnerable regions are losing access to the international financial system, which is far removed from the regulators’ original intentions.
The second rule of the ecosystem is to assess the impact across the full spectrum of participants when introducing something new. Regulators are looking at ways of clarifying compliance expectations, and boosting market access. Similarly, banks are also considering how best to support their customers given the disconnect between their customers’ global expansion and their own retrenchment, whether through strategic partnerships or other routes. Maintaining balanced and fair market access globally must be a key priority to support growth through trade and investment in vulnerable markets, and different participants have a role to play.
Financial infrastructure
Bank-to-bank cross-border payments take place via SWIFT, which therefore supports one of the largest, and most sophisticated ecosystems in the world. SWIFT is being buffeted from all sides, with cybercriminals targeting participating banks that are perceived to have less robust controls, while fintech providers are encroaching on the cross-border payment space. This is no bad thing for anyone: financial technology vendors and banks have co-existed for the past 20 or 30 years, and the emergence of a new generation of technology firms that can challenge the status quo, and in turn motivate better solutions and services, is a positive development. This requires effort and collaboration amongst banks, of course, but this is already happening. SWIFT’s global payments innovation initiative, for example, aims to achieve same-day settlement on cross-border payments, payment tracking, and more transparent fees, the initial results of which will be announced at Sibos.
A bigger issue not simply for SWIFT, but for every participant in the SWIFT network and beyond, is the growing cybersecurity threat. SWIFT has always been famed for – and indeed continues to be – the most secure financial messaging network in the world, but every participant is a potential security target which can weaken the network as a whole. As defences and controls will inevitably differ across participating banks, some will be more vulnerable than others; however, as we saw with rule one of the ecosystem, everyone has a shared responsibility to the network as a whole.
The third rule of the ecosystem must therefore be to watch out for wasps. SWIFT has responded to security breaches promptly and firmly, but the threats will simply evolve. While SWIFT has historically focused its strategy on attracting new participants, which brings significant advantage in some respects, there may be more onerous participation obligations in the future which may force some smaller institutions without the ability to invest at the same level as their larger peers to withdraw, which would be detrimental to the community as a whole. Sibos is very timely this year following recent breaches, to discuss the issues and start to shape a community response.
The limits of technology?
The fourth rule of the ecosystem is perhaps the least straightforward, but effectively, the fourth rule of the ecosystem is to know your limits. As globalisation and technology innovation continue, it is tempting to assume that logical and physical limits are simply flimsy obstacles that can be trampled underfoot. Take physical limits first. Empires of the past have fallen as supply lines have become over-extended, and today, geographical factors, not just the natural barriers of mountains, oceans and rivers, but also climate, demographics, culture, infrastructure and access to natural resources, have as important impact as ever on international expansion. Incidentally, I recommend Tim Marshall’s brilliant book, Prisoners of Geography: Ten Maps That Tell You Everything You Need To Know About Global Politics on exactly this theme.
Technology and improved physical infrastructure can overcome some but not all of these obstacles, a reality that is often forgotten. We hear constantly about ‘disruptive’ technology, which is an over-used and frankly irritating description. Yes, the way that we communicate, access products and services, and do business is changing, and accepted norms are being transformed. These accepted norms were themselves transformational, so what we are seeing is simply progress, albeit that the scale of opportunity is greater. But just because we can do something doesn’t mean we should.
Earlier this week, I was invited to buy Amazon Dash buttons that have just been introduced to the UK. As a result, I can reorder basics such as laundry powder, hand cream, bin liners etc. at the press of a wifi-connected button placed strategically where I use the product most. Brilliant, obviously, and an example of the ‘internet of things’ of which we hear so much. But do I really need to have multiple buttons located around my house, followed by multiple cardboard parcels of basic household items delivered individually to my door every day? No, I don’t. Add it to an online grocery order, that is then scheduled to come once a week, fine, but surely there has to be a ‘check’ on innovation that considers the wider implications. This is not, incidentally, a Luddite view: technology has the ability to enhance our lives in many ways, not least global trading and financial infrastructure ecosystems we have talked about. However, the rules of the ecosystem still apply. In this case, what may appear convenient for a customer, and represents yet another new sales channel, is detrimental environmentally and in the appropriate use of resources.
A Sibos entreaty
This article will coincide with this year’s Sibos, with a packed programme of innovation and insight. Some of the themes are those that the industry has grappled with for many years: standardisation, co-operation, compliance and connectivity, amongst others. I hope that these discussions and debates observe the rules of the ecosystem: essentially, observe the needs of all participants; assess the full impact when introducing something new, whether new technology, business models or regulation; be realistic in your ambitions, and finally, most important of all, the final rule of the ecosystem, work together. In reality, not simply in theory. And obviously, watch out for wasps.
