Covid-19 and the Disruption of Transaction Banking

The financial impact of technological disruption needs no introduction. One of the more stark examples is the per cent market cap of tech constituents in the top 20 companies of the S&P 500. It rose from around 6% to more than 50% in past 25 years. In a 2017 scan, it was found that approximately 70% of S&P 500 companies discussed disruptive technologies in earning calls or filings. Media, travel, some parts of retail and telecoms were deemed to be have either been disrupted or in advanced stages of disruption, with banking and finance also firmly in the spotlight. Incumbents in more 'physical' industries, including logistics, aviation, healthcare and real estate were deemed to have been at an experimental stage of disruption and had some years to go before facing significant digital disruption. The Covid-19 pandemic is challenging sectors that have experienced relatively low levels of digital disruption such as aviation, automotive, oil and gas, shipping, logistics and consumer goods and testing the robustness of the banking sector's own digital transformation efforts of the past decade or so. During these disruptive times, measured as some of the most uncertain by the CBOE Volatility Index (VIX), companies have sought uninterrupted access to banking services, better visibility and control of liquidity, incremental funding of working capital, bespoke risk management solutions and unprecedented access to insights and advice. Relevance is everything The deepest global recession of our lifetime is upon us and precipitating a forensic examination of the relevance of existing digitisation efforts across sectors. The extent to which companies recover from Covid-19 and find their new normal will vary greatly by sector, with those affected by consumer attitudes toward social distancing like restaurants, leisure travel and offline entertainment the first to be affected and likely the last to recover. Disruption in the banking sector has long past its experimental point, following a period of turmoil characterised by high amounts of venture capital pouring into fintechs, approximately USD16 billion in the five years up to 2016, and new players rapidly entering the financial intermediation space but still some way off what one might describe as disrupted by comparison to the retail and media sectors. Customised, convenient and digital alternatives have forced the banking sector to respond to clients' heightened expectations. In the same way that multinational corporations are assessing the post-Covid-19 changes to their clients' expectations and adjusting their priorities accordingly, so are financial institutions. The following six factors that have historically driven digitalisation may serve as useful means of self-evaluation, against which decisions on how to re-prioritize, to serve clients better, can be made.

• Speed and simplicity - There will be a new sense of urgency informed by the blistering pace at which change has occurred throughout the crisis. Facilitating a payment from payer to payee instantly, receiving a transparent online FX rate at point of sale and opening a bank account digitally are no longer new innovations.
• Scale - Whether it's digital access, remote flexibility, new ways of communicating, helping clients to pay or relocating employees during the crisis, solutions need to be cyber-resilient, secure and scalable.
• Agility - Traditional clients will pivot to new direct-to-consumer sales models at an even greater pace than pre-crisis and this means establishing partnerships with alternate payment providers and providing their underlying customers with flexible payment and financing arrangements.
• Price and value - Worldwide IT spend growth is correlated with GDP growth and it declined in the last two recessions. Corporate profitability is under pressure too. Investing to transform a business model in a resource-constrained environment will mean a sharp focus on how banking solutions help drive down costs or increase sales.
• Transparency - Following a significant decline in cross-border activity, the demand for more transparency on a previously sub-par cross-border payment experience, already somewhat addressed through SWIFT GPI, may be trumped by the need to provide enhanced visibility over complex, long and global supply chains.
• Certainty and risk management - Companies require access to relevant real-time tools and insights that help them assess risks or opportunities and make better decisions.

At the risk of over-simplifying, one might conclude that solutions enhancing agility, transparency, decision-making and risk management would move to the forefront in a Covid-19 new normal digital world. Scale is a given, speed is expected (even considered normal) and value will be measured by the contribution that can be made toward one's clients' transformation effort. Prevalent themes Through a quick glance at the Covid-19 policy measures taken across the EU more than 800 so far it's clear that the immediate economic focus overwhelmingly fiscal and micro-prudential in nature is to protect jobs, avert bankruptcies, ensure liquidity and provide relief to the real economy. But there will come a new normal. As such, some of the following themes are likely to prevail for transaction bankers and participants of financial intermediation as companies shift their focus from crisis management to responding to their new reality:

• As governments consider policy proposals to support access to finance for SMEs while balancing the protection of public funds, there will be a need for creative 'facilitated disbursement' solutions.
• Restructuring of sales will change how companies engage with their traditional clients, retool for remote sales, accelerate e-commerce as a route-to-market and create flexible payment arrangements.
• There will be a heightened focus on operational resilience, which may include a review and accelerated digitalisation of primary (logistics, operations) and support activities (further advances in the supply chain management function) in the value chain. Data will be ingested and used in new ways.
• Central banks and regulators are likely to increase their efforts to eradicate physical cash, intensify their diligence over global stablecoins and assess appropriate timing to launch their own central bank digital currencies. The timeline for a live deployment has been radically reduced.
• Digital signature adoption will accelerate with wider application across bank product documentation types.
• Banks and fintechs have evolved their relationships: from one of threat-incumbent to partner-collaborator and, as observed during this crisis, to co-creator. Whether it's finding ways to accelerate payments to small businesses expecting to receive cash grants in the future or its complex trade surveillance typologies linked to Covid-19, banks and fintechs will be stronger together.

History has taught us While history isn't necessarily a predictor of the future, each of the crises since the start of the new millennium do offer useful lessons, if not checkpoints on our self-assured hubris, as we contemplate medium term responses to Covid-19. For instance, the bursting of the dot-com bubble in 2002 taught us that we need to be grounded when it comes to futuristic concepts. The subprime financial crisis of 2008 taught us about the high risk of new untried credit instruments and the importance of regulation. The flash crash of 2010 taught us that technology is a double-edged sword and when things go awry, reaction speeds can be accelerated. And the Greek debt crisis of 2011 taught us that it's tough to make adjustments during a recession. On the one hand, we are at risk of exaggerating our fears and making misguided choices; on the other, we know from previous crises that we must be futuristically grounded, that technology can be a double-edged sword and that it will take courage to adjust during the current economic climate.