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Year: 2017
Open banking is forcing traditional banks to evolve or be left behind
Disruption is the new buzzword in the financial services arena. Nowadays, it seems that the monetary landscape is constantly shifting, with new trends emerging and changing the face of banking. In the recent past, banks were the gatekeepers of people’s financial data, and they facilitated almost all exchanges of money.
Now, however, new technology has given rise to a multitude of fintech start-ups that are challenging banks, payment platforms, monetary policies and customer relations. In a world that’s increasingly digital, traditional banking platforms are fast becoming obsolete. Leading the charge of disruption is the proliferation of cryptocurrencies and alternative payment methods.
Another significant disruptor on the horizon is open banking. Deloitte’s 2016 report Banking Reimagined identified a growing trend towards eliminating middlemen and dismantling the borders between institutions and users.
The report claimed that we’re heading towards a future of trading without traders, investing without managers and transacting more directly through an ‘extended ecosystem’ of banks, third-party vendors, fintech firms and payment platforms.
As a result of continually evolving digital connectivity and institutional collaboration, the concept of open banking has materialised as an inevitable disruption in the financial world.
But what is it exactly?
Wide open
Open banking relies on the use of open-source application programming interfaces (APIs) that connect computing systems together through a shared digital language.
The idea is to increase transparency and accessibility for customers, while facilitating third parties – such as challenger banks, fintech firms, software developers and payment platforms – to build financial applications.
It’s a world where accountants, auditors and shareholders would have direct access to transactional data, and banks would move away from insular frameworks. The end result would significantly benefit the end user – the consumer – because the combination of smart data and smart systems would be able to, for example, recommend the best type of bank account and most suitable institution according to your financial history and behaviour.
Open banking is the biggest change to the system since the invention of the chequebook
Henry Chesbrough, Head of the Centre for Open Innovation at the University of California’s Haas School of Business, coined the term that became the name of his centre, and has written extensively about the topic.
‘Open innovation’ ascertains that companies need to become less insular and look beyond their own house to cultivate new innovations that will grow their business and enhance their services for end-users.
Chesbrough’s philosophy is based on the central idea that knowledge is not exclusive to a single entity, but exists in employees, consumers, competitors and third-party contractors.
Chesbrough’s ideas have taken flight and found their way into the banking sector as open banking. Financial institutions are increasingly finding themselves cornered, as consumers demand a holistic banking experience and increased access to third-party resources.
The US’ Mint app is a prime example. Developed in the late 2000s, Mint provides an overview of consumers’ finances by amalgamating their banking history into one place.
The demand from consumers was so great that, less than two years after its launch, Mint was registering 7,000 new users on a daily basis; it now boasts over 20 million. However, fintech start-ups like Mint are still powerless against the regulated banking establishment, which is where open banking comes in.
The doors of innovation
While the financial world was arguably blindsided by the rise of cryptocurrencies, preparations for open banking are now in full swing. Europe and the UK are leading the charge, with software companies like TESOBE in Berlin forming the Open Bank Project as a source of open APIs and third-party apps for banks to utilise.
In the UK, the Competition and Markets Authority (CMA) has commissioned an open banking initiative to bridge the gap between new banks seeking to increase their clientele and more established ones that are not competitive enough.
In September 2015, the Open Banking Working Group (OBWG) was set up at the request of the UK Treasury to explore how data could be used to help people transact, save, borrow, lend and invest their money.
Through the research and work of the OBWG and other establishments, such as Sir Tim Berners-Lee’s Open Data Institute, an open banking standard has surfaced. According to these institutions, the open banking standard is expected to come into full effect in 2019.
On July 5, the CMA publicly released a list of API specifications for accounts, transaction information and payment initiation. Imran Gulamhuseinwala, a trustee of the Open Banking Implementation Entity, said on its website: “The specifications provide the platform for developers… to build new web and mobile applications that will deliver a safer, more personalised, and easier banking experience for consumers.”
This framework was developed in tandem with the payments API, which is scheduled to go live in January 2018, and will allow third parties to “create secure payments on behalf of customers and submit payments for processing”.
Open banking has become such a topic du jour that the SWIFT Institute commissioned a case study, resulting in a comprehensive research paper entitled The API Economy and Digital Transformation in Financial Services: The Case of Open Banking. Published in June 2017, and available to download from the SWIFT website, Markos Zachariadis and Pinar Ozcan’s investigation shows how challenging, yet inevitable, the new system is.
They conclude that open banking is a priority for banks and financial institutions looking to expand their clientele. “Those who move early to establish an attractive platform will obtain a customer base that is increasingly unwilling to switch to competitors, as more and more third-party developers offer services as part of the platform,” according to the report.
In fact, 2018 is gearing up to become the year of open banking. The EU’s revised Payment Services Directive (PSD2) was passed in November 2015, and is expected to take effect in January 2018. It will give third-party, non-banking firms, including online retailers, the access to handle payments for customers with bank accounts directly and securely.
What will be fascinating to see is how this new response to open banking will be impacted once the General Data Protection Regulation (GDPR) comes into play on May 25, 2018. This new regulation will replace the old data directive that has governed Europe since 1995.
The aim of the GDPR is to unify EU regulations in ways that will place control of personal data on a customer level, and simplify the ways data is stored, shared and transacted within and without the EU.
What’s the catch?
As passionately as open banking proponents sell the concept, the reality is that its future is muddied by unknown factors. How banking establishments that have functioned for generations will feel about sharing their modus operandi with young fintech start-ups and software developers is a question mark that casts a long and crooked shadow over the entire transition.
For open banking to truly work, these powerhouse banks need to commit fully to Chesbrough’s ideal of openness, even with competitors – not something they’re especially famous for.
Then there’s the regulations of the online data-sharing world; with PSD2 and the open banking standard moving ahead, regulators are obviously adapting and taking notice of the shifting landscape, but how long before the average consumer feels fully assured that their money is secure and private?
In a digital world where cyber warfare can be waged and hackers have the savvy to break through online barricades, sending sensitive financial data directly to third parties through APIs may feel scarier than going down to your local branch and dealing directly with the teller.
Even in view of the multitude of unknowns within the sector, however, experts are sure that open banking is the future. Perhaps those who are feeling weak at the knees over this eventuality should look to the Royal Bank of Scotland (RBS) for reassurance.
RBS is embracing open banking, assessing how APIs can help it engage with its customers, as well as how it can transform its in-house organisation. Alan Lockhart, Head of Open Banking and Fintech Solutions at RBS, claims that every bank will have to come to terms with open banking, whether they like it or not, because, as he told CNBC: “[It’s] the biggest change to the banking system since the invention of the chequebook.”
This new approach to how financial data is handled, stored, transacted and dispersed is arguably a game changer for any company that deals with payments, in any shape or form. Brokers like FXTM, for example, which thrive on keeping clients active through a regular flow of deposits and withdrawals, will undoubtedly get in on the open source API action.
Emerging markets will also benefit from open banking. Countries in areas such as Latin America and Africa, where many people do not have bank accounts, are a prime target for this technology. The ability to identify financial products tailored to individual needs could, potentially, increase access to mortgages, credit, and investment opportunities.
From the ways customers fund their accounts, to the connectivity of various platforms, the possibilities this innovation offers are endless. Whatever your industry, focus, or market, an open future is certainly starting to look like a brighter future.
First Bank of Nigeria debunks the myths of private banking in Africa
A distorted view of private banking in Africa conjures the image of an institution that is shrouded in mystery and often ensconced in controversy. For the better informed, however, private banks have a very significant place in the history of banking and the future of Africa. This is also the case in developed nations, where their existence dates as far back as the 17th century.
A 2016 report on private banks by Scorpio Partnership shows that the top 25 private banks globally accounted for more than $11trn of the assets belonging to high-net-worth (HNW) clients, representing 56.3 percent of the total private banking assets under management (AUM). UBS, the Swiss private bank, alone accounted for $1.7trn in AUM – approximately 50 percent of Africa’s total GDP.
Cary Springfield, in an article for International Banker in July 2014, drew attention to the growth potential of a continent in which HNW individuals were estimated to hold combined assets of $1.3trn at the time. In the article, it was also projected that the continent’s private banking market would expand at a rate of eight percent over the next decade.
Outside of common observations, there are divergent views as to what a private bank truly represents. This is unfortunately compounded by the fact that the private banking business is often misunderstood – sometimes even within the larger corporate institutions in which such banks operate.
What is a private bank?
A private bank could be described as a financial institution that provides banking services, wealth management and lifestyle solutions to HNW individuals. These can be further distinguished by four categories. The first is by the client segment served, in which the focus lies largely on HNW individuals.
These clients would typically have more complex financial needs than the average retail banking client. The private bank thus provides core banking services, such as loans, credit cards, current accounts and savings accounts, as well as wealth management solutions.
A well-established private bank would also cater to the lifestyle needs of its clients, with many offering some form of concierge service.
Then there is differentiated strategy, which sees the profile and needs of the classic private banking client as distinctively unique. A typical private banking client requires more personalised banking, and is more rate-sensitive and exposed to other banking cultures than the average retail banking client, with some clients having existing relationships with offshore private banks with whom they continually benchmark the services they receive locally.
Every individual has a right to privacy, but this should not be misconstrued as a right to secrecy
Banks have learnt quickly enough that a separate but distinct strategy must be applied to this niche of clients.
Competencies are the third category. A private banker’s competence is demonstrated by their depth of knowledge of financial markets and products, as well as the quality of advice availed to clients at different life stages. This also sets private banks apart from other financial institutions.
For example, a 55-year-old HNW client, who plans to retire at 60, is expected to be naturally concerned about the adequacy of his or her retirement savings, and would look to their private banker for proper guidance. This implies that the private banker is well acquainted with financial planning principles.
It is important to note, though, that outside the rigours and disciplines of saving money, it is the quality of the investment advice given to the client, ultimately reflected in the prescribed asset allocation and choice of products, that truly conveys the value of having a private banker.
Indeed, a private bank should be able to apply the right tools to determine a client’s investment risk profile and also to come up with a plan for allocating investible funds into matching asset classes.
Finally, there is the demographics category. In the past two decades, there has been rapid growth in the number of upwardly mobile multijurisdictional families, driven either by children schooling abroad or parents choosing to invest in offshore properties or liquid assets.
With offshore markets being governed by separate rules for residency and taxes, the latter could be quite punitive if not properly planned. Given such differences, a private bank should be able to provide guidance to its clients or at least help them find the right professional advice to ensure that they are adequately protected at all times.
Existential threats
Having made the attempt to distinguish private banks from other structures or closely related institutions, it is important that we also understand the nature of the challenges encountered by these institutions. First of all, every individual has a right to privacy, but this should not be misconstrued as a right to secrecy.
Rather, a private bank should build a reputation for ensuring the privacy of its clients’ affairs while also adhering to the full requirements of the law.
More often than not, the greatest risk to the existence of a private bank lies in reputational breaches, hence the importance of having proper risk controls.
Another major challenge lies in determining the place of the private bank within the retail bank. There are different options, which may include running the business as a standalone enterprise or embedding it within a larger retail structure.
While there is no right or wrong way, it is important that the private bank has full responsibility for its clients, and that its leadership also has both the latitude and flexibility to take business decisions when required.
Beyond these structural considerations, the products themselves are a further challenge, as private bankers in local institutions often complain about limited product choices. You also often find, within such institutions, there are no clearly defined routes for product innovation or deployment, with many running on an ad-hoc basis instead.
However, a private bank cannot be successful without having the right suite of wealth management, asset management or advisory resources.
Regulatory pressure is another challenge facing private banks today. With the threats of money laundering and terrorist financing becoming more pervasive in many jurisdictions, regulators have in turn placed a greater responsibility on the senior management of private banks to be fully compliant without exception to all client onboarding and transaction monitoring rules.
While the measures are aimed to ensure that business is carried out in a responsible and compliant manner, the unintended consequence is a lengthened onboarding process, particularly where an offshore relationship is necessary for a client.
Notwithstanding, all private banks should adhere strictly to the applicable regulations within their jurisdictions and strengthen their risk control frameworks.
Finding a direction
Private banks often struggle to gain streamlined information on their clients and their preferences in order to support decision-making. For example, static data on age and gender, appropriately grouped, could help determine the life stage and types of wealth management products to be developed for such clients.
Similarly, information on their personal interests in a structured manner would support the creation and distribution of lifestyle products.
Often, you have clients looking for direction but feeling unfulfilled when product delivery is poor. In this respect, private bankers are expected to be several notches higher than regular relationship managers in terms of their knowledge; they are expected to be well informed on macro and microeconomic changes and the implications for their clients’ assets.
A private banker is also expected to have very sound knowledge of investment products and how they are applied.
Another challenge worth mentioning is that of technology, which is becoming more relevant by the day, particularly at a time when robo-advisors and their algorithms are replacing humans. To provide proper guidance to clients, the process around client risk profiling, as well as portfolio rebalancing in line with the approved investment or ‘house themes’, can be best driven where the appropriate technology tools and platforms exist.
The world’s top 25 private banks have total AUM of
$11trn
Africa has 150,000 HNW individuals, with AUM of
$1.4trn
The distinction between ‘old money’ and ‘new money’ also introduces a subtle challenge for wealth managers, not just in Africa but everywhere. Private banks must therefore seek new and creative ways to reach out to Millennials, who are typically tech-savvy and the recipients of ‘new money’.
African horizon
Private banks in Africa – and indeed Nigeria, with its distinct population size – are here to stay. They have formed, and will continue to form, an invaluable part of our banking history and future banking in the continent. Banking opportunities in Africa will continue to blossom.
Capgemini, in its World Wealth Report 2016, recorded that Africa has 150,000 HNW individuals, accounting for $1.4trn in qualifying assets. This is in spite of a drop in commodity prices and the subsequent impact on resource-dependent economies.
The key task facing wealth managers lies in sustaining growth and being more deliberate in their execution. Competition for business isn’t just with the banks, but also with other local and foreign providers of wealth management products, including ‘briefcase’ advisors that fly in and out of the continent daily.
Banks that will prevail are those that are both anticipatory and creative, given the thrust of inflation, dwindling resource prices, regulatory changes and so much more that these institutions have to live with on a daily basis.
Leading the private banking arm of the largest Nigerian bank by deposits, FirstBank Private Banking, has been both an instructive and enriching experience.
This has involved exploring the wonderful synergies existing within the retail distribution of over 750 business locations locally and seven offshore subsidiaries in the FirstBank Group, including the unique heritage inherent in FBNBank UK Private Banking.
Indeed, with eyes on the horizon, our strength is focused on continuing to build customised wealth solutions for our clients, and leveraging the opportunities presented by the improving distribution of wealth in Africa.
Initial coin offerings are more than just another economic bubble
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Crédit Mutuel offers a mix of solidity and flexibility for modern banking
Today’s economic environment is unprecedented. It is marked by negative interest rates and a near-flat rate curve, as well as increasing regulatory pressure. Aside from these already trying factors, the financial landscape is disrupted further by heightened and diversified competition from non-banking sectors, in line with the profound changes brought about by digital technology.
In spite of these myriad challenges, Crédit Mutuel endeavours to strengthen the unity of all of its related institutions, while still respecting the diversity of the 19 federations and six federal banks that make up its composition. In doing so, the bank strives to live up to the trust placed in it by its mutual directors, members and customers.
This trust was confirmed in 2017, when Crédit Mutuel became the winner for the banking sector in BearingPoint and TNS Sofres’ Customer Relationship Podium Awards for the 10th time. This string of victories highlights how Crédit Mutuel remains the preferred bank of French people.
The group’s motto, ‘a bank owned by its customers, that changes everything’, means, first and foremost, having a direct link to our customer-members, which requires us to listen, serve and be responsible.
This bond allows us to focus our investments in a way that best meets the needs and expectations of our customers and their respective regions, and to understand, before all other banks, the business sectors that will directly benefit customer-members in the future.
Cooperative approach
Crédit Mutuel is one of the soundest banks in Europe. Our ratings – A from Standard & Poor’s, A+ from Fitch and Aa3 from Moody’s – reflect this, and are among the highest throughout France. This recognised financial stability is a result of the commitment of all the group’s employees and mutual elected directors, which secures the trust of all our partners.
In 2016, Crédit Mutuel Group comprised 2,107 local banks, 19 federations and six federal banks. Together, they have found the right balance between responsible independence, unity and solidarity.
The National Confederation, which is responsible for prudential coherence, owns and guarantees the proper use of the Crédit Mutuel brand and defends collective interests. It also ensures the smooth operation and cohesion of the group.
Crédit Mutuel is a strong model of mutualism, which I am convinced is a resolutely modern idea. Through the variety of services that we offer, we are much more than a bank, thanks to the strength of our organisation, which fits into the global network.
We find this to be the case because, at heart, we are a network of local banks, and so collaboration and mutual support is integral to our existence. Furthermore, because we are constantly focused on using technological innovation to support individuals, ethics, responsibility and professional conduct, the example we set can be found throughout our governance.
Remaining the bank of the future means continuing to bring together seemingly contradictory values.
Staying close
The first of our core values is ‘performance and proximity’. This means remaining close to our customers and members, even if they are far away. Through this commitment, we are able to unite regional groups around the values of mutualism – subsidiarity, solidarity and soundness – and around our Crédit Mutuel brand.
In this way, we can actively, responsibly and effectively finance the development and vitality of our regions, while also responding to tomorrow’s economic and societal challenges.
Crédit Mutuel Group in numbers
Net banking income
€16.8bn
Net income
€3.3bn
Common equity tier 1 ratio
15.7%
Leverage ratio
6.1%
Liquidity coverage ratio
144.3%
Crédit Mutuel Group works alongside all those involved in the regional economy, including self-employed professionals and small and medium-sized enterprises (SMEs). Rated as the number-three bank for SMEs, Crédit Mutuel finances some 680,000 customers and has a market share close to 16 percent.
The group is strongly positioned among business start-ups, which can be attributed to its many partnerships with start-up support organisations. Its partners include leading start-up support networks such as Initiative France, France Active, BGE and ADIE.
Crédit Mutuel’s local banks are central to the physical, digital and telephone relationships we have with customers. We respond to customer needs by offering simple, innovative and secure products and services, and also through the quality of our advice.
This has given rise to new types of interaction between account managers and customers and, concomitantly, to new professional prospects for employees, with the goal of further enhancing their responsiveness and availability. As such, customers can contact their account managers at any time.
This can be via the internet through smartphones and tablets, through secure emails and phone calls, or even through social networks. Our account managers can also communicate with customers via sales points and electronic payment services.
In providing so many different avenues, we merge local banking with physical and digital channels to ensure even better convenience, attention and advice.
At present, customers can already subscribe to products and perform processes via our remote channels. By the end of 2018, they will be able to subscribe to most of the group’s products.
For example, they will be able to take out consumer loans using an electronic signature, view all their accounts (including those with rival banks), capture documentary proof using their smartphone, and consult their bank statements and contracts online.
‘Soundness and solidarity’ is another core value at Crédit Mutuel, which means ensuring that all our federations and federal banks continue to enjoy balanced development and financial security.
In a world marked by fragmentation and the pursuit of individual strategies, Crédit Mutuel is developing a socially responsible and future-oriented approach. We are committed to securing the trust of our customers and members, our mutual elected directors, and our employees.
While respecting the independence of its local banks, federations and regional banks, the group’s strong emphasis on unity also provides them with necessary support, in addition to contributing to economic and social development.
Owned by customers
Crédit Mutuel is a cooperative, mutual bank governed by the French cooperatives law of September 10, 1947. Created more than a century ago, its origins date back to the local cooperative associations set up by Frédéric-Guillaume Raiffeisen, which laid the foundations of the cooperative movement, including the principles of social responsibility, solidarity among members and regional roots.
Now, 150 years later, Crédit Mutuel still belongs exclusively to its 7.7 million members, who own its capital and shape its strategy within a framework of democratic governance.
As a mutual bank, Crédit Mutuel makes all decisions with its members in mind. Though it expands, it continues to remain true to its founding values: proximity, solidarity and social responsibility.
At heart, we are a network of local banks, and so collaboration and mutual support is integral to our existence
These values form Crédit Mutuel’s identity, set it apart from other banks, and confirm the relevance of its business model in support of its members and society as a whole. Crédit Mutuel’s general meetings, which are organised annually by each local bank, give members the opportunity to voice their opinion according to the ‘one person, one vote’ principle.
At the end of 2016, Crédit Mutuel had 7.7 million members and 30.7 million customers at over 2,000 local banks, run by more than 24,000 member-elected representatives. These directors are themselves committed, active members who participate in the administration of a local bank alongside employees. As members of the local community, they convey and promote Crédit Mutuel’s values.
The mission of the central body – Confédération Nationale du Crédit Mutuel – is to defend the collective interests of its member-customers, while also protecting and promoting the Crédit Mutuel brand (to which it holds the rights), and ensuring the group’s prudential coherence.
In a tough environment, shaken by low interest rates as well as stiffer competition and regulations, Crédit Mutuel continues to forge ahead with a single goal: remaining united in its diversity and affirming the uniqueness of its banking model so as to build the bank of the future.
The results reflect the dynamic momentum of all the regional groups and their diversity. They reflect their multiple initiatives, the quality of their digital transformation and, of course, the trust placed in them by their member-customers.
At Crédit Mutuel, our key success factors are the dynamic momentum of our networks, the importance given to the training of staff and elected members, and, naturally, our local physical and digital presence, which ensures a constantly improving service for our customers.
As well as being a local bank that is present throughout France, Crédit Mutuel also has an international dimension. Underpinned by its strong financial position and the vitality of its networks, the group has continued to expand in France and Europe, and is now present in 13 countries.
As a bank committed to responsible and sustainable growth in support of the economy, it has kept its focus on adapting continuously, while still keeping its unique identity.
US dollar falls under Trump’s presidency
The almighty dollar is struggling. The currency has lost 10 percent of its value so far in 2017, marking its worst start to a year since 2002. Although currency fluctuations are inevitable, the dollar is now falling in the context of market conditions that are historically associated with an increase in value.
Geopolitical tensions, such as the ongoing military standoff with North Korea, usually see markets rushing to support safe-haven currencies like the dollar.
The fact that the US is involved in much of the ongoing international friction may be reason enough to undermine these historical norms, but other factors are also at work.
Current monetary policy at the US Federal Reserve would also traditionally be seen as supportive of a strong currency. Interest rate rises and the announcement that the Federal Reserve will start to reduce its balance sheet would normally see the dollar increase in value. These are not normal times, however, and the evidence suggests that currency markets did not envisage the impact of the new US president.
Words have consequences
Donald Trump’s surprise election win saw the dollar surge following campaign promises of substantial economic reform. However, proposed tax breaks for businesses and infrastructural spending have not materialised, with the Trump administration facing sustained resistance in Congress. And, as the market’s confidence in Trump’s economic policies has dwindled, so has support for the dollar.
Threatening to unleash “fire and fury” or shut down the government does not inspire market confidence
In addition, Trump’s provocative rhetoric is only fanning the flames of economic uncertainty. Threatening to unleash “fire and fury” or shut down the government does not inspire market confidence.
“The decline in the dollar is at least partly attributable to growing concerns about political risk for the US, with the failure of healthcare legislation, the possibility of a budget standoff and, most recently, further political uncertainty following the Charlottesville events,” explained William Cline, Senior Fellow at the Peterson Institute for International Economics.
On the other side of the coin is the bullish performance of the euro, which is exacerbating the dollar’s decline. “The larger move against the euro reflects considerable improvement in political risk in the eurozone, given the outcome of the French elections and the easing of concerns about Italian banks, as well as an improved growth outlook in Europe,” Cline added.
However, the dollar has also fallen by more than seven percent this year against the yen, by 14 percent against the Mexican peso, and by 13 percent against the Swedish krona. Independent of the euro, a clear trend is emerging whereby value is moving away from the dollar.
Time to worry
In a typically bullish interview with The Wall Street Journal in April, Trump remarked: “I think our dollar is getting too strong, and partially that’s my fault because people have confidence in me.”
Putting aside any assessment of his popularity levels, Trump is right to suggest that a strong currency is not necessarily beneficial to a country’s economy.
In the short term, for example, a weaker dollar means that US goods and services become more attractive to foreign markets, which could provide a boost to the country’s manufacturing industry and other major exporters.
“An easing in the dollar can help keep the US trade deficit from widening as much as it would have at its previous exchange rate,” explained Cline. “In trade-weighted terms and adjusting for inflation, the real dollar declined about seven percent from December to August. That would curb the trade deficit by about 1.2 percent of GDP, from where it otherwise would have reached in the medium term. That is a plus for growth.”
Between January and September, the value of the dollar index fell
10%
There will be concerns, however, that the fall in value is not simply the natural ebb and flow of the currency market, but an indication that the dollar is losing its status as the world’s chosen safe-haven currency. Cline, however, believes that talk of a US dollar collapse is premature.
“The dollar is still about 10 percent stronger than its average level between 2007 and mid-2014, when it started to rise in the face of falling oil prices,” he explained. “It is not yet time to worry about the dollar being too weak.”
And yet, some analysts are worried. Further uncertainty is scheduled for February next year, when Federal Reserve Chair Janet Yellen steps down, and ongoing international tensions show little sign of abating.
Could continual decline indicate a long-term lack of confidence in the dollar? History would suggest not – the dollar has been in worse positions than this and recovered – but with a political outsider like Donald Trump in office, maybe history doesn’t quite count for as much as it used to.
Samsung soars despite its year of scandals
In many ways, things simply couldn’t be going worse for Samsung. The mighty electronics empire had only just recovered from its now-infamous exploding phone debacle when it became embroiled in a political corruption scandal, culminating in the arrest of its de facto leader, Lee Jae-yong. And yet, as the Samsung crown prince languishes in jail, the company’s profits are soaring.
Incredibly, Samsung reported record-breaking quarterly profits for the three months leading up to June. Led by its seemingly unstoppable flagship division Samsung Electronics, the South Korean giant made KRW 14trn ($12bn) in profits over the past quarter, securing the brand’s position as the most profitable non-financial company in the world.
Indeed, it is hard to overstate just how successful the electronics behemoth has become: its profits are now greater than the combined operating profits of Facebook, Amazon, Google and Netflix; a figure estimated at $11.15bn. Even with its leadership now in tatters, the sprawling conglomerate shows no signs of slipping from the top of the smartphone market.
The family business
With booming memory chip sales at home and overseas, Samsung now appears to be consolidating its dominant position in South Korea, unshaken by the nation’s recent political upheaval.
“Samsung’s annual revenue is equal to more than 20 percent of the nation’s GDP, so they are in a sense the epitome of ‘too big to fail’,” said David Volodzko, National Editor of the Korea JoongAng Daily, the sister paper of The New York Times in South Korea. “There’s not enough evidence to suggest that this scandal will deal any lasting damage to the firm.”
However, despite starting the year strongly, Samsung faces some difficult leadership questions over the course of 2017. On May 11, 2014, the Chairman of Samsung Group, Lee Kun-hee, was hospitalised after suffering a heart attack. Since this date, there have been no confirmed sightings of or updates on South Korea’s richest man, and rumours of his death have continued to circulate online.
Despite some initial scepticism over Lee Jae-yong’s business experience, the heir has successfully overseen Samsung’s transformation into the world’s biggest smartphone maker
According to Samsung, Lee Kun-hee has spent the last three years recovering from the heart attack in a Gangnam hospital, and earlier this year the company marked 1,000 days without its leader. In the wake of Lee Kun-hee’s sudden absence, the leader’s son, Lee Jae-yong, stepped in to fill the leadership vacuum at the company.
Despite some initial scepticism over Lee Jae-yong’s business experience, the heir apparent has successfully overseen Samsung’s transformation into the world’s biggest smartphone maker, sending profits skyward and knocking close rival Apple from the top spot in the industry.
The de facto leader also managed to somewhat effectively contain the fallout of Samsung’s exploding phone crisis, preventing the incident from bubbling over into a full-scale brand image catastrophe with a swift and carefully managed global recall of the device.
However, just as the Samsung heir settled into the role at the top of the conglomerate, he found himself formally indicted on charges of embezzlement and bribery. His arrest and subsequent jailing means that Samsung is once again without a leader, with his impending sentencing threatening to scupper succession plans at the firm.
Leadership transitions can be immensely difficult, even for the most stable firms. Ever since its founding in 1938, top positions at the South Korean giant have been held by members of the Lee family, with second and third-generation Lees running more than 55 Samsung subsidiary companies.
With the company now considering an executive reshuffle, however, it may well be time to diversify from this family focus and bring some new blood to Samsung.
A show of strength
With its heir apparent behind bars, Samsung is determined not to let its leadership woes interfere with business. In July, the conglomerate announced it would be investing $18bn in South Korea, in a plan that promises to create almost half a million jobs. The announcement followed repeated calls from newly elected South Korean President Moon Jae-in for leading businesses to invest more domestically, as part of a job creation drive.
“Moon Jae-in has spoken about wanting to break up the nation’s chaebol [family-run businesses] and generally has an image of being tough on corruption,” said Volodzko. “Even with this pressure, the chances are good that Samsung will emerge bruised, but unbroken.”
At this crucial time, this hefty domestic investment may also go some way in alleviating shareholder fears that major business decisions might be delayed in Lee Jae-yong’s absence. By pressing ahead with future expansion, the conglomerate is sending a clear message to sceptics: the Samsung vision will not be disrupted.
Lee Jae-yong was jailed for five years upon the conclusion of his trial in August, but it now appears that the verdict matters very little. Even with its family patriarch permanently hospitalised and his only male heir behind bars, Samsung continues to soar. If it can surmount even these obstacles to achieve record profits, then the Samsung empire can surely withstand any blow.
The Chilean economy is set to be reenergised thanks to upcoming elections
Despite the current economic slowdown, upbeat forecasts for the near future have kept optimism up in Chile. In November, the country will choose a new president following the second and final term of President Michelle Bachelet of the Socialist Party.
The next administration will have to face a decelerated economy after years of sustained growth, due to a fall in the price of raw materials, among other reasons. That said, forecasts are on its side: with the centre-right candidate and former president Sebastian Piñera leading the polls, the market expects a significant shift to take place.
Although Chile’s performance is still dependent on copper prices, over the years the country has become a model economy in the region with an increasingly important role. In this context, the IPSA, an equity index representing the country’s 40 most relevant companies at the Santiago Stock Exchange, has reflected the optimism with strong performance, recently reaching an all-time high.
In this context, World Finance spoke to José Ignacio Zamorano, Head of Investment Banking at BTG Pactual Chile – World Finance’s Best Investment Bank in Chile 2017 – to find out more about the IPSA’s recent successes and the challenges facing the Chilean economy.
Why has the IPSA become so attractive to foreign investors?
In Latin America, Chile has historically been one of the most attractive countries for foreign investors. It has the highest sovereign rating, a stable regulatory framework and a market-friendly environment. Although the country’s growth prospects have somewhat dwindled over the last couple of years – in line with the rest of the region – the general consensus is that the economy will improve after the coming elections.
Chile’s financial markets have always been among the most developed in the region, which is largely supported by local pension funds (AFPs). With assets under management (AUM) exceeding 70 percent of Chile’s GDP, a significant portion is invested in local equities (see Fig 1). As such, AFPs play an important role in the country’s financial markets, while the local stock exchange is underpinned on the liquidity that they provide.
In addition, several Chilean companies now have greater exposure as a result of their expansion across Latin America, which has provided international investors with access to regional growth. This trend has also enabled investors to diversify local political and economic risk through investing in a Chilean listed vehicle. Today, approximately 40 percent of the revenue of companies listed in Chile comes from abroad.
What has driven the IPSA rally?
The IPSA has rallied 23 percent in the past year, and reached an all-time high in August. This impressive performance can be explained by better results and prospects for listed companies, together with increased interest from foreign investors and local institutional investors. For example, AFPs have increased their AUM in local equities by $3.4bn over the past 12 months.
Moreover, there has been a lack of recent large equity offerings. For example, in the last three years, more than $9bn has been withdrawn from the market through tender offers – mostly by foreign investors acquiring companies from local owners through mergers and acquisitions (M&As).
Meanwhile, only $5bn has been offered via new equity issuances, such as IPOs and follow-ons. This has forced financial investors wishing to unload their cash positions to buy in secondary markets, which explains the success of block trades this year. As companies continue to post good results, we expect a rise in primary offerings, such as capital increases, in the coming years.
If a pro-market government is elected, the Chilean economy is expected to return to the sustained growth it showed a few years ago
To some degree, the following three macroeconomic effects may also explain the recent IPSA rally. The first is a calm market, which reached historic VIX index lows this year after two high-volatility events: Brexit and US elections in 2016. Low interest rates worldwide are the second. Finally, an increase in the weight of Latin America in emerging markets indices, which has brought fund flows to those markets as investors look for higher yields, is the third.
What role are M&As playing in the Chilean economy?
M&A transactions have endured the recent economic slowdown. Landmark deals, such as the $26bn Enel reorganisation that we led, have confirmed foreign investors’ interest in the Chilean market, especially in certain industries such as utilities, infrastructure, retail and insurance.
In most cases, local investors have cashed out on wealth that was allocated in one single vehicle and then diversified their portfolios, either in different assets or in new ventures. Local companies have also benefited from multinational expertise and best practices, which has enabled them to become platforms on which international players can enlarge operations in the region.
What are the future prospects for consumer retail and energy in Chile?
Chilean retailers have achieved strong momentum during the second half of this year. The retail index outperformed IPSA by five percent in July, backed by an improved economic outlook and an increase in local consumer confidence in the wake of the upcoming elections.
We expect that the industry will be exposed to a better economic scenario over the next few years. There is also a market consensus to keep investing in e-commerce and logistics, as business is migrating in that direction and global specialists, such as Amazon and others, are now reaching Latin America’s biggest economies.
The Chilean energy sector has always been very dynamic, and BTG Pactual in particular has been very active in in this industry. To name just a few M&A examples in the last couple of years, there was the Transchile sale to Ferrovial, Actis’ acquisition of SunEdison, the sale of FenixPower to Colbún, and the acquisition of Guacolda by GIP.
In our experience, we have seen certain trends determining activity in the sector. The first is a fall in consumption due to the recent economic slowdown that has affected electricity demand growth rates. Second, there has been a limited number of new base-load plants, something that is related to the lack of social, political and environmental support, as well as economic incentives for large-scale projects.
Also, non-conventional renewable energy is now dominating growth, with significant projects for solar and wind energy in the pipeline. However, intermittency needs to be managed with battery energy storage systems and network improvements, in addition to being complemented with standard base-load capacity.
Despite recent tenders being awarded at very low prices, higher prices are expected in the future, in line with reasonable returns, which will further incentivise the development of new hydro and gas-fired power plants. Another trend is growing competition – just four players used to comprise more than 90 percent of the market, but now several new players are entering through M&As and greenfield projects.
How has Chile’s economy developed over the past few years?
After years of sustained growth, the Chilean economy is in a slowdown phase due to various factors: the fall in the price of raw materials, uncertainty and the deterioration of confidence. These have been mostly driven by the large number of reforms proposed by the current government.
All of this has led to a loss of confidence in the political system, and a lack of new initiatives and private investment. The recent decline in the country’s rating is effectively the result of continued low economic growth.
Nevertheless, the medium-term outlook is optimistic. If a pro-market government is elected in the November elections, the Chilean economy is expected to return to the sustained growth levels it showed a few years ago.
How has Chile’s role in the Latin American economic community changed and expanded?
Despite the current situation, in the last decade Chile has become one of Latin America’s fastest-growing economies, and is now a model for neighbouring countries. Chile has emerged thanks to its solid institutions, while international trade has also played a major role.
Although there is still room for improvement in terms of inequality and dependence on the copper industry, nowadays Chile is one of the most attractive
economies in the region.
How has BTG Pactual Chile developed over the past few years, and what are your plans for the future?
The past few years have been especially active for us. For instance, since January 2017 we have successfully executed more than a dozen transactions in our three main products – M&As and equity and debt capital markets – involving the retail, power and utilities, shipping, airlines, infrastructure, fishing, and agriculture industries.
Among our recent M&As, we would in particular highlight the transactions of SunEdison and Actis, G&N and Carlyle, CBS and BupaSanitas, Guacolda and GIP, and TMLUC and Nutresa. We have also been very active in equity capital markets, having led five of the last eight public placements over $100m.
And in 2017 alone, we launched Chile’s only two IPOs, executed four secondary offerings and led three tender offers. Finally, in debt capital markets, we recently acted as bookrunners in Latam’s $750m and Enjoy’s $300m international bond offerings.
For the future, our focus is to continue materialising cross-border transactions and international offerings, given our competitive advantages. These include regional offices that have a deep local knowledge in Chile, Peru, Colombia, Mexico, Brazil and Argentina, and a global reach through our New York and London offices.
US must tackle growing skills gap
The US has been experiencing a severe skills gap for the past 20 to 30 years, with the shift away from a manufacturing-based economy to a service-based one hurting many of the country’s 50 states. According to former Senator John Engler, the US government has an obligation to reskill the US workforce. Speaking on Bloomberg TV, Engler pointed out that North America is heavyweight in the aggregated global economy, meaning any changes in the US economy have a profound impact on the state of the global economic system.
While there are mounting issues for multilateral trade agreements, such as NAFTA, at present, Engler stated that such agreements have helped the US and its trade partners compete in the international economy. He indicated that President Trump is somewhat misdirected in his approach to “bringing back jobs” to the US, suggesting that the US has somewhat forgotten what made it the biggest economy in the world – its skilled workforce.
Engel’s argument is based on the US’ shift away from a manufacturing-based economy to a more service-based one, which demands a different type of skilled worker. “You can get a job climbing a pole being a lineman and you can start earning a salary from $70,000,” Engler said. “By getting some training experience you can achieve a $100,000 income. This all without a college degree, with the huge levels of debt incurred from going to college. You can get trained and you can go straight to work.”
Supply and demand
There are many jobs of this kind in the economy, but the government is not doing enough to help 20-to-30-year-olds qualify for such positions. They need more assistance through training programmes or further education.
A report by the National Federation of Independent Business found that, as of Q1 2017, 45 percent of small businesses were unable to find suitably qualified applicants to fill openings. CEOs across the US report shortages of workers for blue-collar jobs. Nurses, construction workers, truck drivers, oilfield workers and automotive technicians are just some of the roles that are lacking qualified applicants.
According to a survey conducted by CareerBuilder, 67 percent of employers are concerned by the current skills gap. 55 percent of employers state that they have seen a negative impact on their businesses due to extended job vacancies, with it damaging productivity revenues. A 2016 Harris Poll Survey showed that 20 percent of workers say their professional skills are not up to date. The survey further highlighted that 57 percent of workers want to learn a new skillset to land a better-paying, more fulfilling job, but half of them said they couldn’t afford to do so.
CEOs across the US report shortages of workers for blue-collar jobs
Reskilling the workforce
Gretchen Whitmer, a Democratic gubernatorial candidate, has set her sights on revitalising the prospects of workers in Michigan. Instead of following the protectionist model laid out by various populists, Whitmer is focusing a large part of her campaign on channelling talent towards vocational jobs. “Everyone shouldn’t have to go to college. It’s not for everybody. So many people are incurring massive amounts of debt, where they can’t even buy a house or start a family,” she said.
While Trump has been a strong advocate of the protection of US jobs in the manufacturing sector, Whitmer is looking to the future, broadening her vision for the region and searching for ways to make Michigan a green energy manufacturing hub of the Midwest. The first challenge Whitmer faces is the significant skills gap in the Midwest. Michigan must fill 15,000 jobs in skilled trades that don’t require a college degree.
Governor of Michigan, Rick Snyder, created the 21st Century Education Commission to address the state’s skills gap. Included in the commission is a plan to link community colleges with local employers to encourage better workforce training. Whitmer, however, thinks that the budget should prioritise education by reskilling the workforce through retraining opportunities and encouraging public and private partnerships.
Across the US, governors are looking for new schemes to combat the skills gap. Earlier in the year, President Trump signed an executive order to increase the number of apprenticeships offered and improve training programmes. Many government officials have looked to Europe for inspiration; Ivanka Trump and Labour secretary Alexander Acosta have spent time in Germany studying its vocational training model. Germany has recently enjoyed a boost in both wages and employment in comparison to other developed economies.
Earlier in the year, President Trump signed an executive order to increase the number of apprenticeships offered and improve training programmes
However, not everyone agrees with the rhetoric emerging from the US regarding the failings of its workforce. Alan Manning, Professor of Economics at LSE argues: “The retraining process tends to work best for younger workers, not necessarily for the older demographics of workers.” He agrees that education is hugely important to addressing the skills gap in places like the US and UK, but added that “these are long-standing problems and have always been there”.
This reiterates the US economy’s failure to manage disruptions at the local and national level. Additionally, the US seems to be lagging behind in comparison to its international peers. Manning stated that, if you look at the UK during times of similar workforce issues, it has kept employment up among older men in comparison with the US.
The real issue is not necessarily the reskilling of the workforce, but the matter of improving workers’ incomes. The US has to do more to provide a stronger safety net for people who are out of work so they have the opportunity to reskill while looking for new jobs.
Between the practical expertise of various multinational corporations and the supervision of the US government, the country has to find a method to address the skills gap. By implementing the initiatives, policies, and programmes put forward by various institutions, the US might limit the damage caused by high youth unemployment. However, for these different approaches to have a sustained impact it is imperative that they work collaboratively.
Nigeria’s insurance opportunities rest with youth and technology
In the first parts of our interview with Val Ojumah and Adenrele Kehinde from FBNInsurance, they talk about how the business is working with communities to help them trust the country’s insurers, and about the growth potential in Nigeria’s retail insurance segment. In the final part we dive deeper into FBNInsurance’s growth plan, and how they’re targeting Nigeria’s growing youth with improved technology and service.
World Finance: What’s your growth plan, moving forward?
Val Ojumah: Into the future, we obviously know the external environment is changing very fast. There’s a huge opportunity arising from changing demographics. Many more young people are growing up now. Any company that is focused more on young people, and what they need, and all that goes with it, will obviously see growth in the future. And we are doing that.
There’s also a major migration of population from rural areas to cities, mainly because of jobs. Again, we recognise the impact of that in business, and we are also going to take advantage of all of that going forward.
World Finance: Are you using technology to help consumers engage with the insurance sector? Especially the youth that you’re reaching out to?
Adenrele Kehinde: Yes: nearly every Nigerian owns a mobile phone. So if you can do your transaction over a mobile phone, then you’ve got a larger part of the business.
All these young people, they want to get things on the go. They can’t wait, they can’t be filling in forms as we used to do. Business can’t continue as before. So we are following the trend, and we’re investing more money in technology.
Val Ojumah: Absolutely. If you ignore technology today, you will be counting your days on earth.
Before the end this year, we will have a mobile app, where every individual anywhere in the world can buy insurance from FBNInsurance. You can file a claim, you can check the status of your policy, you can do a whole lot more with that app. Going forward we will have a very elaborate digitalisation programme. So an essential growth plan in our business today.
World Finance: The chairman of the National Insurers’ Association has said that insurance has and will always be the backbone of the economy; how are you contributing to economic prosperity?
Val Ojumah: We’re contributing in several ways. Directly we have provided employment to about 3,000 people in just seven years. We are selling products that encourage people to save – and you know the impact of that on the economy.
Thirdly, the growth of the company has reflected in the gross written premium and in the profits before tax. We have contributed much more than most companies in the market to tax revenue for the government.
In just seven years we have done a lot more than anybody could have expected. And I think these are some of the ways we will contribute even more to the economy in the future.
World Finance: And so how do you see FBNInsurance evolving in the future?
Adenrele Kehinde: In the next two years, our strategy is to be among the first two in terms of return on equity. And we know that with the brand and with the support of our owners, we shall definitely get there.
At the moment, we have the fastest growth and we’ve won some laurels due to that. We’ve been rated A+ by Agusto Rating Index. We’ve won your award twice in three years. We also won the Cup of Nations award as the most profitable insurance company in Africa, from Sanlam this year. So we are growing, and we believe that the growth with continue.
World Finance: Adenrele, Val; thank you.
Adenrele Kehinde: Thank you very much.
Val Ojumah: Thank you very much.
Consolidation likely in Nigerian insurance following new requirements
A lot of insurers in Nigeria focus on government revenue, but FBNInsurance has been concentrating on growing the retail insurance segment. Adenrele Kehinde and Val Ojumah explain where the growth potential lies in Nigeria, and the likelihood of consolidation among Nigeria’s 50 insurance companies as new regulatory requirements come into force. Continue the conversation with Val and Adenrele, where they talk about FBNInsurance’s growth plan; or go back to watch the first part of the interview, about transforming client relationships to rebuild community trust.
World Finance: Tell me more about the growth potential that exists. A lot of insurers have been focusing on government revenue, but you’ve been seeking growth elsewhere?
Adenrele Kehinde: Yes. We are concentrating more on retail, because we believe that with the huge population in Nigeria, it’s a virgin ground.
So we are ensuring that we give people the service they need and the products that are tailored to their needs. And as a result, we are not neglecting government patronage completely, but just see it as a cream on the cake if it comes.
World Finance: Now Val, many foreign insurers have been attracted to Nigeria’s huge growth prospects, to the extent that your regulator has introduced a rule to make sure that those opportunities don’t just get leeched overseas. Can you tell me how this is working?
Val Ojumah: It’s working very well, but I believe what the regulator is doing is to encourage growth locally, while admitting the expertise and abundant foreign capital that exists in other parts of the world.
Reinsurance is an important aspect of the insurance industry. So it shouldn’t be left just for anybody. That’s what our regulators are doing.
World Finance: Nigeria has more than 50 insurance companies; do you see consolidation in the future?
Val Ojumah: That’s possible. I think there are too many marginal players among the 50. There are only very few strong ones.
With the introduction of the risk-based capital supervisory model, the regulator said that there’s a great possibility of consolidation. Also with the introduction of the IFRS accounting system, there is a chance that some of these companies may not meet the minimum requirements going forward.
We have also been told that there may be chances that the minimum capital required to be in business may be raised, so for some and all of these reasons there’s the possibility that consolidation will happen in the near future. Which is good for us!
World Finance: You have a strong brand through your owners FBNHoldings and Sanlam Group out of South Africa: how does this reputation support you, and how are you working to build on it?
Val Ojumah: The brand equity of First Bank of Nigeria has done a great deal to help us achieve our purposes. It’s something that we will always uphold, because in Nigeria practically every family over the last 120 years has had one association or another with First Bank of Nigeria.
Adenrele Kehinde: Yes: our brand is our heritage, and has given us the trust and confidence that we need in the industry. These are trusted brands that have been tested; and people talk to us just because of this brand. Once they hear First Bank, they will talk to us. They want to do business with us.
And we are guarding it jealously, as well. We don’t want anything to tarnish that image. So we do things right, and we make sure that we give excellent service at all times.
World Finance: Adenrele, Val; thank you.
Val Ojumah: You’re very welcome, thank you.
Adenrele Kehinde: You’re welcome.
FBNInsurance on engaging Nigeria’s communities to rebuild trust
Nigeria’s enormous population, growing middle class, and need for greater infrastructure investment, represents huge potential for the country’s insurance sector. But insurance penetration remains below one percent. Val Ojumah and Adenrele Kehinde from FBNInsurance discuss the reasons behind Nigerians’ lack of trust in insurance, and explain how they have revolutionising the insurer-client relationship to correct for the evils of the path. Continue the conversation with Val and Adenrele, where they talk about the growth potential in Nigeria, and FBNInsurance’s growth plan.
World Finance: Nigeria’s insurance penetration is very low: tell me more.
Adenrele Kehinde: It is indeed very low, and there are many factors responsible for it.
Nigeria is a very religious nation, and we believe that God is good enough as an insurance and a protector. Some people see insurance as very morbid, and a reminder that death is imminent. Also there’s a general lack of trust. After the indigenisation law of the 1970s, many rich affluent Nigerians became owners of insurance companies with their families. Unfortunately, some of these owners saw insurance as a personal business; and due to wrong investments, when claims were due to be paid, the money had been invested on long terms, and the money was not available to pay claims. Which eroded the trust of people. And as you know, insurance is a promise based on trust. And once that trust is eroded, it’s a challenge to change people’s mindsets.
We have decided to do things right. We do what we promise: by paying claims promptly, and by providing excellent services.
World Finance: In the seven years that you’ve been in operation, what would you say is the biggest change you’ve effected in the insurance sector?
Val Ojumah: We have been revolutionistic in the way we communicate with our clients, the way we treat our clients. We have decided to simplify the insurance policies so that the gap between what we’re trying to say and what they see in our documents is eliminated as much as possible.
We have introduced a documentation and a claims processing system that has shortened the decision time to buy insurance and the decision time it takes to complete a claim.
Over time we have paid claims where we shouldn’t have: to engage communities in a different way, to correct the evils of the past, and make people enjoy the insurance experience with our company.
World Finance: How does FBNInsurance view the role you play in society, and how are you working with communities to grow that trust again?
Val Ojumah: It’s a role that is important: to educate the public about insurance going forward. To bring insurance education closer to the people. Because the only way you can succeed in playing the retail sector is by making the public part of your business, and making you part of the public.
Today, what FBNInsurance is doing is centered around CSR, among communities where we operate, and some of them are directed at our policyholders. So one of the products that we use specifically for this purpose is the FlexiEdu. Every family in Nigeria wants to send their children to school; but it’s probably the most expensive part of every family. So, this product speaks directly to those communities, and those families.
So what we do is use funds from this product to donate to charity organisations, to women’s organisations, and other community organisations that speak to developing education and education facilities in their areas. It’s come out quite successful in our favour over time.
World Finance: Val, Adenrele – thank you.
Val Ojumah: You’re very welcome, thank you.
Adenrele Kehinde: You’re welcome.
Singapore unveils plans to create 4,000 jobs
On 30 October, the Monetary Authority of Singapore (MAS) announced the launch of its Industry Transformation Map (ITM). The ITM aims to achieve an annual growth of 4.3 percent in the financial sector, and to hit a productivity value of 2.4 percent. It also aims to create 3,000 new jobs, along with 1,000 more in the fintech sector annually.
Through collaboration with financial institutions, the MAS will create common utilities for services including electronic payments. Increased investment into R&D solutions, such as distributed ledger technology for inter-bank payments and trade finance, is also on the cards.
“Prospects for the financial sector are good. Asia’s growth continues to be strong, driven by a growing middle class, rapid urbanisation and the expansion of Asian enterprises, which will generate demand for financing and risk management solutions,” MAS board member Ong Ye Kung said at the launch of the ITM.
These new developments highlight the country’s move to a greater presence in the global financial system
“However, the sector is going through a period of significant change. With technology transforming the way financial services are produced, delivered and consumed, it is critical that Singapore’s financial sector also transforms to stay relevant and competitive.”
Furthermore, the MAS is looking to expand cross-border cooperation with other fintech centres. This process will harness new technologies and simplify regulatory compliance for financial institutions.
As the financial sector accounts for about 13 percent of Singapore’s GDP, these new developments highlight the country’s move to a greater presence in the global financial system.
The ITM also emphasises Asia’s growing influence as a financial trading bloc and the shift in financial power from the low-growth economies of the West to the fast-growing economies in the East.
The Argentine economy, led by Puente, is ready for change
Argentina’s electoral season opened with a landslide win by Cambiemos in the August 13 primaries. The ruling coalition amassed large wins in the cities of Buenos Aires, Córdoba and Mendoza.
Moreover, the government saw promising results in the provinces of Buenos Aires and Santa Fe, which put it at the gates of becoming the first administration since 1985 to carry the country’s five largest districts in one election.
Puente believes the recent election should be assessed with two questions in mind: has the result increased the government’s ability to move ahead with its reforms agenda and macro rebalancing plan?
And does the result signal a lower chance of Cristina Fernández de Kirchner leading a populist alternative in the 2019 election? In our view, the government’s comfortable win shows that the answer is ‘yes’ – an answer that will ease recent tensions in the foreign exchange market.
Crisis averted
In summer 2017, when polls suggested a very tight election in the Buenos Aires province, markets were concerned that Kirchner might command a lead that would again put her at the head of Peronism.
In that scenario, not only would she have been well-positioned to put her hat into the 2019 presidential race, but she would also have had effective veto power over every reform that the government proposed.
Upon the June announcement that Kirchner would seek a Senate seat in the province of Buenos Aires, political uncertainty moved to the centre of the scene, shifting the focus away from incipient economic activity recovery and disinflation tactics.
The Argentine peso weakened almost nine percent in less than a month, amplifying depreciation expectations and forcing the central bank into tightening monetary policy further. Ultimately, Cambiemos’ landslide win defused the risks of this volatile scenario.
While we predicted that the market would rally with a tight Cambiemos win, the result of the primaries is even more encouraging than we expected. The primary results show that Kirchner’s Peronist party is going through a deep crisis: most of the key figures of Peronism have suffered large defeats on their home turfs, and the party is heading for back-to-back losses for the first time in its history.
The Argentine Government needs to tackle the large fiscal deficit, one of the world’s highest inflation rates, and currency overvaluation
In August, Kirchner garnered fewer votes than Peronism’s meagre 2015 performance in Buenos Aires.
Former Chief of the Cabinet of Ministers Sergio Massa was backed by just 15 percent of the electorate in Buenos Aires, and less than seven percent in national terms.
Juan Schiaretti, the popular Governor of Córdoba, lost by a historical margin, while former president Adolfo Rodríguez Saá suffered his first defeat in more than 30 years. With Peronism devoid of a clear leader and most governors willing to strike a deal with the government, Cambiemos has a unique opportunity to push ahead with its reforms.
The peso strengthens
In the short run, these changes have been very positive for the peso, which has strengthened significantly as local currency assets boomed in reaction to the lower risk of a populist revival.
In our view, hawkish local rates will continue to attract US dollar inflows as non-residents increase their investments in Argentina and local investors distance themselves from US dollar assets.
We favour linkers that offer peso discounts and fixed rate domestic bonds, such as the 2021, 2023 and 2026 ARGTES, to capture attractive capital gains.
Likewise, we support short-term central bank debt and monetary-policy-linked floaters due to their attractive carry in a lower volatility scenario for the foreign exchange.
We would favour positions in the long-term, high-convexity century bond. We also find euro and US dollar discounts attractive.
In the medium term, we have a constructive view of Argentine risk in the context of the recent primary win, which gave the government the political capital and mandate it needed to strengthen the changes to Argentina’s macroeconomic framework.
Now that the primaries have passed, Argentina needs to focus on rebalancing its economy. The three main problems that the government needs to tackle during its remaining term are the large fiscal deficit, one of the world’s highest inflation rates, and currency overvaluation.
Results are starting to appear on the inflation front, though a lot of work remains to be done. The fiscal front should be next.
In the first two years of the administration, savings from lower subsidies were spent elsewhere, keeping fiscal stimulus high in order to protect the lower classes and ensure success in this year’s election. With its political position strengthened, we believe that the government is committed to reining in public finances.
Start-ups are growing like never before thanks to economies of scale
Within start-up incubators and accelerators across the world, aspirations are constantly high. Internet start-ups always begin tiny, but come armed with future plans of global success. For many, an international presence is only a few years along on the roadmap.
Incredibly, this is often a plausible target: the likes of Airbnb and Uber have proven as much, and have given entrepreneurs solid justification for dreaming big. Never before have opportunities to grow a global business from nothing seemed so plentiful.
The goal for most of these start-ups is the pursuit of an economy of scale; growing the business to a point where it is so large it can offer products or services at a rate that simply cannot be matched by smaller competitors.
The 21st century has been defined by the opportunities and possibilities opened up by technology, particularly the internet, producing businesses capable of growing swiftly to sizes that would have been impossible in the past.
While this new rate of growth has created unique challenges, the rewards for successfully overcoming these barriers are too great to ignore. The opportunity for a start-up to take on the world has changed the way companies are formed.
Sizing up
Developing an economy of scale is one of the oldest business models, and first truly came to prominence during the Industrial Revolution. At its simplest, an economy of scale describes the cost advantage that comes with producing a large number of products as opposed to producing a smaller number.
As an example, producing a single hat from scratch is an expensive endeavour. While the raw materials and labour needed for making the hat may be the same for every hat, the work needed to design and purchase specialist equipment needed to produce it is the same no matter how many are produced.
The challenge for start-ups is to avoid becoming the very companies they set out to overthrow – out-of-touch behemoths that are too slow to adapt
Based on this, making 10,000 hats works out to be a considerably less expensive endeavour per hat than producing just one, reducing the price each individual item can be sold at. This model can be applied to any industry that works in mass production of goods or services.
Throughout history, the ability to achieve a greater economy of scale has been fundamentally linked to advances in technology. As machinery allowed for greater levels of productivity, the cost of many products and services has been pushed further and further down.
Ships became able to carry much more cargo with few additional costs, and the development of processes like production lines simply meant more could be done with a day’s work. This all contributed to the evolution of big, global businesses capable of producing massive product volumes with small overheads.
In recent history, this pursuit of an economy of scale has come to define and differentiate the modern internet start-up company from competitors of the past.
The likes of Airbnb and Uber do not offer any sort of remarkable new service – taxis and hotels are not revolutionary ideas – but it’s the size they operate at that has set them apart.
Others have sought out an economy of scope, where a business keeps costs low by doing a huge variety of different things. It’s this model that has pushed Amazon to its current heights, with the company now operating in everything from supermarkets to software design.
It is trends like these that most start-up founders are keen to emulate. Matt Kuppers is the CEO and founder of Startup Manufactory, a start-up consulting business that works with entrepreneurs to fine tune their business models.
Speaking to World Finance, Kuppers said most start-ups he has encountered have been pursuing economies of scale. “Everyone is looking for scalability. The founders that come to us with a business idea are always very keen to have a scalability element built in.”
For start-ups, scalability comes in a number of different forms. While many seek vertical scalability and dominance in a particular market, Kuppers said that many also pursue horizontal scalability. This might encompass the ability for the business to push into another country or market with the same product or service, for example.
While many businesses have worked to achieve this model and operate on a truly global level, what is remarkable about this current period in history is how quickly start-ups have achieved the size that they have.
Uber was only founded in 2009, and Airbnb in 2008, but they are now valued at $68bn and $31bn respectively. Other ‘unicorns’ (start-ups valued at over $1bn) include Spotify, Stripe, Dropbox and WeWork, none of which are more than 11 years old.
Kuppers said that what has allowed for businesses to achieve this level of growth in such a short time is, like in the past, technology. “The internet itself is a social network, if you like. It has since scaled around the world because it solved one of the major problems of humankind: communication over long distances.”
With the internet’s global reach, added to the fact that a computer program can be built once and then multiplied for free, companies have designed and developed business models that work on a scope that was impossible for previous generations.
“If you have a business that has a wide range or a high reach in terms of customers, it’s just the nature of the model that it’s scalable,” Kuppers explained.
Creating and updating an app is an extremely small expense when compared to maintaining a fleet of taxis or hotels, since an app only needs to be built once and then can be duplicated for effectively nothing.
With a large enough user base, individuals only need to be charged a tiny amount by a company to recuperate costs. This has lead to start-ups targeting a global scale for their operations, given the ease of expansion.
This has been the biggest change that the internet has prompted; businesses that can reach a global scale without much of a change to their business model. There is no real fundamental difference between a smartphone in China and the US, meaning any internet start-up can quickly move their app from one country to another.
The ease of reaching new customers has made global expansion relatively simple, and economies of scale never thought possible are now within reach of any ambitious business.
Brick walls
Despite this new ease of doing business prompting the meteoric rise of many start-ups, a host of barriers to growth still exist. While certainly easier than it was a few decades ago, Kuppers noted that the path to a global economy of scale is not straightforward. One major challenge is contending with differing regulatory requirements.
“Fintech is a good example, because it is a highly regulated activity,” Kuppers said. “If you hold funds on behalf of a third party and spend the money in the market, that’s a regulated activity in most countries of the world, but every country has a different regulatory body. You have to make sure that you are aware of these barriers and balance the costs to overcome them. It might be easier to scale into Germany or into the US market, for example, with a particular business model.”
Creating and updating an app is an extremely small expense when compared to maintaining a fleet of taxis or hotels
A particular category of internet start-ups plagued by regulatory challenges in the US are daily fantasy sports leagues. DraftKings and FanDuel were founded in 2009 and 2012 respectively, and allow players to win money from daily pots based on their fantasy American football teams.
Since launching, both have waged a lengthy state-by-state battle with regulators to be considered games of skill, in order to avoid gambling regulations. As of July 2017, 14 US states allow them to operate, according to ESPN, though the rest are still in a state of limbo.
Other start-ups have taken a more nuanced approach with regulators, seeking forgiveness rather than permission. Uber’s battles with regulators still dominate headlines, ranging from being completely kicked out of cities, to protests from frustrated taxi drivers.
In some cases, the legality of entire technologies is in question; driverless cars seem close to reality, but debate still rages as to what standards they should meet.
These roadblocks present a significant challenge for businesses that are designed to only work at a large scale. Many internet start-ups, particularly ones that have not gone public, operate on a model where profitability is an end goal, achievable only once a certain scale has been reached.
A prime example of this is Spotify, which has posted mounting losses even though it is adding customers in droves. The company’s user numbers are likely a key point in negotiating royalty payments to record labels.
While this year it has been able to draft up more favourable deals with labels, continuing to acquire new paying users is the key to its future success. Twitter and Snapchat are in similar positions, where consistently adding users is the only way to both plan for the future and grow advertising profits to a sustainable level.
With this in mind, setting growth targets that are realistic can be a challenge, particularly when large investors are involved. “Growth targets usually happen when start-ups have grown to a certain point where they start raising venture capital money,” said Kuppers. “So they bring in third parties who invest lots of money and have to remove barriers to growth. But of course, with lots of money comes lots of responsibility – third-party investors have high growth expectations, which means targets become more and more aggressive.”
Kuppers added that, in some cases, this could be a positive for start-ups. This pressure to grow, combined with the capital needed to support it, can push businesses to achieve things they would not have been capable of on their own. However, the added pressure can also be extremely damaging to a business.
“The higher the growth targets, the less a start-up is a start-up and the more it becomes a company or corporation,” Kuppers explained. “And that is something a founder kind of needs to weigh up: whether they want to retain the start-up culture and have things grow a bit more naturally, or whether they want to bring more people on board, have high expectations, and become more aggressive.”
There is perhaps no better example of the damage growth targets can do to a company than Uber. At the beginning of this year, former employee Susan Fowler posted a scathing blog accusing the company of tolerating outrageously sexist behaviour from employees simply because the culprits were meeting their targets.
By putting growth and success at the centre of the company, ahead of employee wellbeing, Uber’s culture deteriorated to a level that ultimately cost CEO Travis Kalanick his job. Responding to the crisis, board member Arianna Huffington declared the company would no longer hire “brilliant jerks”.
There is also a natural upper limit to how big companies can get. The inverse of economies of scale are diseconomies of scale, and these occur when a business becomes so large or unwieldy that cost and productivity gains are no longer seen.
The challenge for internet start-ups, then, is to avoid becoming the very companies they set out to overthrow – out-of-touch behemoths that are too slow to adapt.
New edge
While start-ups today seem capable of growing at an incredible rate, the start-ups of tomorrow will be posting even more ridiculous numbers. Right now, the world of business seems to be on the brink of another huge advance in technology.
This has been a grandstand year for cryptocurrencies (see Fig 1); on April 1 2017, their global market capitalisation was slightly over $25bn. In June, it surpassed $100bn and has since showed no sign of slowing down. Initial coin offerings are capable of a level of growth most businesses could only dream of.
Effectively, blockchain technology is doing the same thing as Uber and Airbnb, taking advantage of easier communication to reach a greater economy of scale than the industry it is seeking to disrupt.
“These ICOs raise millions in a matter of minutes, and the number of sign-ups on these platforms is unprecedented,” said Kuppers. “I would argue that cryptocurrency markets and blockchain technologies have the steepest growth rates in history.”
Kuppers added that the growth of cryptocurrencies has become an upward spiral. “The more people who sign up, the more people buy cryptocurrencies, and the quicker the price increases, and therefore more people learn about it and sign up. That’s currently the process, and this is going to last hopefully for another couple of years or so.”
While blockchain has been a boon for cryptocurrencies, the system has a wealth of other potential applications. As a process for storing and sharing information, blockchain has the potential to break down the same communication barriers that the internet did.
“The time is right for these kinds of applications,” Kuppers said. “Blockchain technology would not work if you only had five or six agents; you need hundreds of participants in the network for it to work. The internet is so big now that these complex technologies can actually be applied.”
This surge in interest has naturally resulted in a wealth of challenges for businesses operating in the space. US-based cryptocurrency trading platform Kraken is just one of many to suffer from intermittent services this year under the huge volume of transactions it processes.
On May 5, the company’s record for volume traded in a single day was broken after posting over $178m in trades, beating the previous record set in March by 25 percent. “That’s an economy of scale where you can see people pouring into the market and the marketplace can’t handle it anymore,” Kuppers explained.
Other cryptocurrency businesses dealing with this scale, like Singapore’s TenX, have taken a more muted approach. Despite raising around $80m in a token sale, the company has indicated it only plans to grow its staff at a gradual pace.
“Company culture, at the end of the day, is what made them so successful,” said Kuppers. “Growth is not everything, even if you could potentially grow much faster.”
While there has been tremendous short-term growth and interest, cryptocurrencies still have a long way to go before they prove their long-term feasibility. Still, the incredible growth they have shown in such a short amount of time raises the prospect of internet start-ups of the future being capable of even more impressive and rapid expansion.
As the world has become more interconnected through new technologies, businesses have found new channels for growth and capabilities to operate on a global scale overnight. While it comes with challenges that have not been faced before, this model will not be replaced anytime soon.
