Leonardo Brummas Carvalho, CEO of Wealth Management at ITI Capital, explains why the social responsibility of finance is coming to the fore.

The COVID-19 crisis has not just posed a huge threat to human life on a global scale, it has caused mass devastation for thousands of businesses and all but crippled the economy. As a society, the extent of disruption caused by this pandemic has not been seen since the world was shook by war in the 1940s, and the financial impact has completely overshadowed the recession in 2008.

However, the comparisons to 2008 stop there. Over a decade ago, banks and financial services organisations were embracing high risk decisions as a matter of routine, where all the risk eventually fell in the hands of the consumers and working people, millions of whom were left unemployed and facing financial turmoil. The banks, on the other hand, walked away comparatively unharmed, having been bailed out by taxpayers.

As a result, the already questionable reputation of bankers, financial services and investment specialists plummeted further. Even today, business owners, consumers and mortgage owners do not feel that traditional financial service providers have their best interests at heart.

But, due to COVID-19, many consumers have no choice but to turn to banking services: taking out important investments to keep businesses afloat, to manage personal finances and to meet credit debt payments.

Thus, financial institutions have not just the opportunity, but the responsibility to win back the trust of the general public with deep pockets and generous investment – helping to boost the economy and support independent businesses and struggling individuals at a time when they need it most.

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Whilst it must be acknowledged that central and consumer banks in the UK have already introduced unprecedented emergency measures, such as mortgage and credit holidays, and cut interest rates on loans to 0%, they still could do more to fulfil the social responsibility they are now liable for and redeem themselves in the eyes of the public for actions in the early and mid-2000s.

Banks in general play a fundamental role in society, as they act as an intermediary in regulating credit and loans to the public – throughout history, banks have operated by awarding loans almost exclusively to large corporations and high net worth individuals who can guarantee repayment.

Today, the opposite can also be true and many institutions have the option to help communities, vulnerable individuals and propose social impact investments.

Now, in these challenging times, SMEs and workers are more vulnerable than ever, and would be deemed high-risk assets by numbers on a computer screen. Thus, bankers and financial experts must prioritise vulnerable communities, and not just look at the interests of their holders and senior managers, but also customers, employees and more broadly, the entire society.

The good news is that, over the last decade, digital platforms, fintech and cloud and software capabilities have evolved to the point where traditional financial service providers can overhaul operations, and cater to not just the high-paying clients, but to millions of consumers at the same time.

Unfortunately, many big banks are still running slow legacy IT systems, and therefore new technology and app services remain a priority for consumer banks.

Banks in general play a fundamental role in society, as they act as an intermediary in regulating credit and loans to the public.

On the other hand, fintech companies and financial start-ups have spent years dedicating themselves to transparency and high-quality services. At ITI Capital, we have identified the disparity that exists in advisory and investment services provided to high-net worth individuals, compared to the general public. Thus, we have dedicated ourselves to democratising the financial market, ensuring normal, hard-working people on all sorts of different wage brackets, are catered to with professional financial services.

This has all been facilitated by cutting edge technology such as artificial intelligence, which allows us to provide a huge amount of consumers with top-tier, fully regulated financial services which would otherwise only be reserved for high-paying clients.

If the entire financial sector had this mindset in the UK, consumers would be trusting again and businesses and individuals could be comfortable optimistic towards the near future.

So will the attitude from the major banks change from now until the end of COVID-19, whenever that may be?

Of course, government legislation and schemes have, in the short-term, enforced significant social change. The furlough scheme in the UK, for example, has provided millions of workers with financial support at a time when they would have otherwise been laid off by their employers. In the short-term we should hope that shortfalls in government schemes to combat COVID-19 are covered by the financial institutions, providing preferential interest loans to companies who can’t front the cash to pay salaries.

However, as previously mentioned, fintech start-ups and market disruptors are on the rise, and it appears as though the financial sector is naturally transitioning to processes facilitated by automation and artificial intelligence. Thus, within the next decade, we could expect to see fintechs, such as Monzo and Starling, become the new normal for consumer banking. Alternatively, we might see traditional banks embrace the new wave of technology, and self-democratise the financial sector by offering affordable and remote online services.

Regardless, if traditional banks are looking to excel in the new normal, or if fintech start-ups are looking to flourish, they should each prioritise one thing: serving vulnerable communities and society as a whole during the remainder of the COVID-19 crisis and beyond.

In a report on its second quarter earnings, Shell announced that it would cut between $15 billion and $22 billion from the value of its assets due to the collapsing price of oil and unlikeliness of a swift recovery.

Shell also predicted that the price of Brent crude oil would average at $35 per barrel through 2020, with a potential return to $60 per barrel – where it began this year – in 2023. The price of Brent crude has seen something of a rebound in recent weeks and is now trading at $41 per barrel. At the peak of the oil crisis, it traded at just $20 per barrel.

“Given the impact of COVID-19 and the ongoing challenging commodity price environment, Shell continues to adapt to ensure the business remains resilient,” the company said.

Shell’s warning follows a similar announcement from BP earlier this month, alerting investors to the fact that its assets may be worth $17.5 billion less than previously thought.

The first half of 2020 has seen oil prices plummet, driven in large part by the COVID-19 pandemic and resulting shelter-at-home orders that saw air travel halted and a steep decline in the use of motor vehicles and public transport.

Market conditions were further stressed by the brief Saudi-Russia oil price war that launched in March, vastly inflating the global oil supply. The combination of stressors in April saw US crude oil futures reach negative prices for the first time in history.

The question is: How hard exactly will this recession be felt in the real estate market?

We are seeing that the investor response in all market segments is increasingly different and that the current crisis has exacerbated the following existing trends.

Strong office market, weakness in retail, and resilience in the industrial and logistics sector

During the first quarter of 2020, we observed a solid performance in the office sector with 3.6% rental growth YoY. We don’t expect the growth to continue during Q2 and Q3, because this sector, in particular, is highly cyclical and the insolvencies and reduced demand caused by the recession will surely put downward pressure on rent. However, considering the long-term nature of commercial leases, this part of the market is expected to remain relatively stable. Our projection is for no rental growth in the next 2 quarters.

Reduced deal volume

Investment deals were down 75% in March and the number of cancelled deals is also on the rise. Nearly 3.5% of the commercial deals have been scrapped since March, compared to a 1% average over the past five years. The dampened demand for investment will draw down prices, but on the other hand, that increases the prospect of higher yields in the future. The mean yield for prime office space in Europe was 4.2% in the first quarter of 2020. If we see downward pressure on prices in the next few months, a rise in yield will be sure to follow.

The sentiment in the retail market is a lot different

Following all the structural changes in this market in the past few years, coming primarily from the rise in online sales, the outlook has turned from bad to worse. The timing of the recession could not be any worse for this sector - after two difficult quarters with 0.1%, and 0.3% decline in rents, we are expecting the decline in rent to steepen and the fundamentals to deteriorate quickly. One of the biggest issues here is rent collection. Recently, the British REIT Intu Properties shared a press release stating that they expect to collect only 63% of the rent due in 2020. That shock has also led them to discuss some of the negative bond covenants with their investors. Another prominent player in the UK market, Hammerson plc, expects to receive only 57% of all rents for this year.

In the retail space, we can currently observe the biggest gap between “good” and “bad” properties. Most recent analysis shows that the properties that are able to collect the biggest percentage of rents are the top percent of prime high-street properties. There’s also a huge divergence between the very large shopping malls and small to medium-sized shopping centres. Smaller properties are expected to suffer the bigger part of store closures. This is why when looking at European retail REITs, the most important part will be to analyse the individual tenants and assess the default probabilities.

The Convenience/essentials space has been left relatively unscathed

Companies like France’s Carmila SA and Italy’s IGD SIIQ S.p.A which focus mostly on grocery shops and pharmacies have performed relatively well during lockdown and are expected to outperform in the near term.

There hasn’t been much change in the market from a geographical perspective

Benelux and the Nordics are the hardest-hit regions where rental income fell more than 5% year-over-year. Considering that those are some of the regions that suffered the most during the pandemic, we expect to see continued downward momentum in these markets. Germany and France seemed more robust before the crisis, with rental incomes falling a modest 0.1% during the first quarter and yields mostly stable.

The one region that looks hopeful for the upside is Central and Eastern Europe. The retail market in the region has been hot in the past few quarters, and rental income grew 4% during the first quarter of 2020. Considering that most of the countries there weren’t affected as hard during the pandemic, and measures were lifted earlier in Romania, Poland, Bulgaria and the Czech Republic, we see the possibility for quick market recovery and even a positive year-over-year growth in both rental income and rental yields.

Industrial and logistics properties have proved to be some of the most resilient

In the first quarter, we observed a Europe-wide growth in rental income of 2.5% while yields were mostly flat. The logistics sector has seen a boost, widely due to an uptake in e-commerce during the quarantine period. UK’s Tritax Big Box Reit Plc and Belgian Warehouses de Pauw have performed exceptionally well and quickly returned to pre-crisis price levels. It’s highly likely that the fundamentals for this sub-sector will continue to improve and we may see a year-over-year increase in yields for the entire 2020.

Overall the market environment remains highly uncertain. We continue to monitor the most recent developments and in the near term, press releases for Q2 results will be the biggest driver of price volatility in the EU REIT space. Office space and logistics property providers seem to be holding up quite well, and we don’t expect huge movements in this space. Companies managing primarily retail portfolios have been hit particularly hard, and prices fell broadly in the past few months, irrelevant to individual performance and fundamentals. That’s why there is plenty of opportunities to be found. As mentioned above, retail operators focused on essential shops and prime high-street real estate are great prospects for superior risk-adjusted returns. And while Western Europe will face a lot of stress in the next few quarters, perhaps now is the right time to look east!

Prior to COVID-19, the industry’s main concern was Brexit and the uncertainty of a “no-deal” threatening the UK’s position as a global hub for insurance services. Another concern was the impact of IT failures, and breaches arising from cybercrime over the past few years. As a response to this, in December last year, the FCA, PRA and Bank of England asked firms to ensure their operational resilience by undertaking costly and time-consuming mapping exercises.

Unfortunately, this activity was not carried out sooner as only three months later the whole of the UK was placed under lockdown as a result of the pandemic, testing the resilience of its insurance industry like never before.

An industry under fire!

Restaurants, pubs, hotels and gyms were just some of the “non-essential” businesses forced to shut down as a result of government measures to prevent the spread of coronavirus. Many thought that their business Interruption Insurance would cover their financial losses, not realising this might not necessarily be the case. This has resulted in accusations that the insurance industry mis-sold its policies and demands that they should be amended retroactively.

Rightly or wrongly the reputation of the industry has been tarnished and needs to be addressed to restore consumer confidence, especially as the economic damage from the pandemic continues. The Chancellor Rishi Sunak stated last month that the UK is already in "significant recession" given the economy shrank by 2% in the first three months of 2020. A slow recovery is more likely to limit insurance companies’ revenue growth and lead to a fall in demand for products and services.

A brighter future is in reach

If the insurance industry is to return to anything like business as usual, companies within it will likely have to adopt a strategy that prioritises slimming down, restructuring and the use of technology to make efficiency savings.

If the insurance industry is to return to anything like business as usual, companies within it will likely have to adopt a strategy that prioritises slimming down, restructuring and the use of technology to make efficiency savings.

In the first instance, no one wants to talk about job cuts, but the industry has always been a bloated one. Unfortunately “downsizing” is a quick way to reduce expenses and was already happening before the pandemic. For example companies like Aviva announced around 1800 jobs were to go last year and Direct Line stated 800 people would be laid off in February. Such decisions will have to be made as part of a process realigning company portfolios in order to understand which parts of a business are driving value, in order to remove or readjust the parts that are not.

Finally, we should expect a greater impetus towards the digitisation of the industry. Technology will be key to benefiting the customer as we can expect to see a greater focus on service delivery and transparency. For insurance companies themselves, the pandemic has tested their resilience by forcing them to adapt to new ways of working. For example, many sales teams still fail to exploit digital sales fully, instead of relying on onerous manual processes which can take even longer when working from home.

This will begin to change as companies transform themselves digitally but will be a long, expensive process, that relies on buy-in from employees and senior management to ensure success. Efforts will be further stymied by a lack of available talent, as every industry is looking to technology to drive growth, and suitably skilled people to do so are in short supply.

If the insurance industry can get all these factors right and re-establish trust in their offerings, then their future will be a positive one. This will not only benefit our society as a result of the reassurance and protection they provide but will also ensure they can continue to play a key role in supporting the UK’s recovery.

While businesses are now considering – and potentially implementing – their “exit strategy” in a post-lockdown, post-furlough world, it’s important to note that positive prospects are arising from the current crisis that has had an impact on people and businesses around the globe. Businesses across every industry have had to adapt significantly and – whilst difficult decisions are likely to be taken in the near future – there are also many lessons to be learned and a chance for companies to gain competitive advantage.

During the last major economic crisis, the 2008 financial crash, many firms and their investors remained on the sidelines for too long, meaning chances were missed when all seemed bleak[i]. While, like the recession that followed the crash 12 years ago, COVID-19 has presented unparalleled challenges for most businesses, it has also presented good prospects for securing investment through M&A activity, particularly for the sectors that have seen a surge in use throughout the pandemic like technology and FMCG. This time around, the challenges faced during the crisis must be viewed as hurdles to jump, rather than walls preventing businesses from capitalising on opportunities.

One thing we have seen that has emerged in most of the competitive M&A deals in the last two to three years is that they have been backed by warranty and indemnity insurance. Generally, warranty and indemnity insurance has been for sound businesses, whereas now there is a move towards products that will back distressed businesses – and even insolvent businesses – whereby the insurer will directly give the warranty cover. This is a development which will really help to push a lot of the deals through in the current climate because no business is going to want to put their cash on the line and stand behind warranties when, actually, they’re selling for a lower value or bound to sell in the near future.

COVID-19 and M&A

When we first went into lockdown M&A activity stalled; however, rather than stopping altogether, deals were simply postponed. We are now seeing much more optimism and an appetite to get the economy moving again. Although many struggling businesses have taken advantage of loans and the furlough scheme to streamline costs and continue operations, the real task for businesses – especially those considering M&A – is working capital management. Capital management will help companies get into a position to move forward and survive once things start to return to ‘normal’ and they start repaying the debts they have accrued.

Although M&A activity is down more than 33%[i] this year, to the lowest level since 2014, private equity firms are focusing on the strongest sectors to invest in on the other side of the pandemic.

Why there’s an opportunity

Although M&A activity is down more than 33%[ii] this year, to the lowest level since 2014, private equity firms are focusing on the strongest sectors to invest in on the other side of the pandemic. COVID-19 has presented investment opportunities for many businesses, particularly in the food and tech sectors, and for some businesses, now is the perfect time to accelerate the M&A conversation.

Whilst a lot of active deals were postponed during lockdown, we have also seen several deals secured – and even exchanged and completed – within the food, technology and manufacturing sectors, as the FMCG industry faced unprecedented demand (namely supermarkets and online retailers) and was forced to adapt and streamline its operations. Research carried out by accounting firm PwC recently highlighted the chance for “attractively priced M&A opportunities”[iii] to arise in the food and retail sectors in the next 12 to 18 months, as many challenger brands will simply not be able to continue trading without investment.

The pandemic has also resulted in a change in attitude for many business owners and entrepreneurs as they consider what the ‘new normal’ looks like for them. Having experienced real downtime with their families during the lockdown period, their priorities may have shifted and they may be willing to accept a slightly lower value in order to be able to exit their business earlier and continue to enjoy the other things they have since come to value more. M&A and private equity are both commercially savvy ways for businesses to secure investment in the wake of COVID-19 and those willing to accept a lower offer have high chances of investment from buyers looking to bag a bargain as the crisis abates.

The greatest challenge will undoubtedly be uncertainty over future business performance in light of COVID-19. With valuations becoming more challenging and subjective than ever we may well see a resurgence of deals being structured to bridge valuation expectations, with greater focus on deferring returns through earn-outs, vendor loans notes and equity rollovers by sellers.

How businesses can secure investment in the wake of COVID-19

During the current climate, private equity firms have been seeking out opportunities to invest in businesses when so many others have had their apprehensions. With the ability to take positions in struggling companies – guide portfolio company management and help steadily grow businesses over many years[iv] – private equity firms can add real value, particularly in challenging economic times.

In terms of future investment in business, this is likely to be technology-led to streamline portfolio companies either to a) reduce headcount through automation or b) to get teams and individuals to work smarter. A lot of private equity firms have put their fundraising on hold however, many of them still have money to spend so their focus will be picking the right businesses and the best way to streamline them, presenting a great opportunity for struggling businesses who have already put cost-cutting measures in place.

Having been forced to adapt and streamline their business functions as a result of the COVID-19 crisis, businesses will now have an acute understanding of how they can run most efficiently and cost-effectively. This means that these businesses are in a good position to secure investment from a private equity firm if they can demonstrate their business has scope for commercial growth under a streamlined business model.

Businesses looking to sell to a private equity house as a form of investment – having managed to streamline their business and still deliver on their commercial bottom line whilst demonstrating potential for growth – can benefit from additional support from private equity houses that they may not have had before, for instance; how to implement technology that enables the business to run more efficiently and with fewer overheads. The businesses in this position will not only benefit from all of the expertise of a private equity house when it comes to streamlining the business even further, but the private equity house will have knowledge of how to grow in a financially unstable climate and understand what their commercial targets should be.

Whilst there will undoubtedly be some businesses that create M&A activity because they just can’t survive post-pandemic, further down the line, businesses should have a better idea of what’s required to deliver their core business; what can be removed to save costs, and where technology can streamline their approach. On this basis we can expect positive activity from private equity houses and M&A – firms are currently waiting to see how the current situation unfolds and what businesses will look like once restrictions are properly lifted.

[i] https://www2.deloitte.com/us/en/insights/economy/covid-19/private-equity-m-and-a-deal-activity-post-covid-tax-implications.html

[ii] https://www.lexology.com/library/detail.aspx?g=c3a8a59f-dbf3-4476-8476-7c52e011b356

[iii] https://www.thegrocer.co.uk/mergers-and-acquisitions/coronavirus-will-lead-to-increase-in-opportunistic-manda-predicts-pwc-report/604711.article

[iv] https://www2.deloitte.com/us/en/insights/economy/covid-19/private-equity-m-and-a-deal-activity-post-covid-tax-implications.html87

Jan van Vonno, Research Director at Tink, looks more deeply into the trends currently altering Europe's financial sector.

Convenience and ease have become the new normal for consumers and the demand for better, more personalised digital experiences in the financial industry has skyrocketed. Thanks to PSD2 and the UK's Retail Banking Market Investigation Order, Europe has been leading the way with its open banking initiatives — representing the beginning of a journey to democratise money management, empowering everyone to access the right products and services to meet their financial needs.

Over the last few months, Tink has been reporting on the attitudes and sentiment of Europe’s financial institutions towards open banking, with our research revealing that 61% of financial executives feel more positive towards open banking than last year.

This is extremely encouraging — particularly considering the current climate we find ourselves in. With COVID-19 accelerating the shift toward digital channels, we expect this positivity to continue to grow as more financial institutions concentrate on the digital transformation of products and services.

However, our research also revealed that 46% of financial executives aren’t confident that the benefits of open banking are widely understood within their organisations. So clearly the industry has more work to do. To reap the full rewards of open banking, it’s essential for financial institutions to remain nimble, open-minded and strategic in their approach. Here are three things they can focus on.

Thanks to PSD2 and the UK's Retail Banking Market Investigation Order, Europe has been leading the way with its open banking initiatives.

Create a clear open banking strategy

Adoption of open banking starts with the belief that it will create value. Once financial institutions embrace this, the next step is to implement a clear and detailed open banking strategy which can be translated into concrete business objectives.

To do this, they need to embrace change — educating people at all levels of their organisation on the benefits of open banking and incorporating it into the product, service and technology roadmaps of their business. Thankfully, 59% of respondents indicate that they already have a clear strategy in place, while 58% view open banking as an opportunity.

It is important that financial institutions also look to embrace the role of a TPP — consuming APIs to enhance their current products and operations and leveraging the available data to improve customer acquisition, accelerate onboarding, increase conversion, lower risk, and improve customer satisfaction rates. A great example of a company that is doing just this, is Nordea — who are going beyond PSD2 and aggregating all their data (e.g. investment, savings etc). In addition to this, they have successfully created a business-to-developer (B2D) open banking strategy to produce APIs and create better solutions for their customers.

It’s important to note that while some financial institutions approach open banking as a long-term strategic play, there are also a growing number who see the opportunity for short-term, quick-win value creation. There is no right or wrong way to approach this as both offer their own rewards. Ultimately, the most likely scenario is that financial institutions’ open banking journeys will begin with more elementary open banking use cases, eventually evolving into more sophisticated use cases over time.

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Allocate budget (no matter how large) wisely

While the positive shift in attitudes is a solid indication of the importance of open banking, it doesn’t fully reflect the significance of the movement. The real proof is in increasing budgets that are being invested in open banking initiatives across Europe as the industry mindset moves from compliance to value creation. According to our data, open banking investment budgets for European financial institutions are typically between €50-€100 million, with 63% saying open banking budgets have grown since last year, with annual spending rising by between 20%-29%.

Of course, not all financial institution decision-makers have access to this level of budget. The key here is to focus on the low-hanging fruit and taking advantage of open banking by operating as a TPP. In doing so, executives can experiment with elementary use cases with clear outcomes before proceeding on to more advanced and exploratory use cases. In addition to this, creating an open banking scorecard can help measure the impact of investments and set clear parameters that help to navigate the open banking journey.

While the positive shift in attitudes is a solid indication of the importance of open banking, it doesn’t fully reflect the significance of the movement.

Forge fintech partnerships

What became clear through our research is that the general confidence in open banking isn’t purely reflected by the understanding of the opportunity it offers, the strategy, or the sum of investments. It’s also indicated by the number of partnerships that financial institutions have formed with fintechs to help accelerate innovation and realise their objectives. 69% have increased their number of fintech partnerships in 2019, while the majority of executives are also working with more than one partner.

Such partnerships are invaluable, as they can provide financial institutions with the technology, expertise and vision to drive open banking value creation — creating both short and long term value for financial institutions and, in turn, for their customers. One thing to keep in mind, however, is that in order for partnerships to truly work, fintechs must be able to navigate the complicated procurement process and onboarding requirements that many larger banks have in place.

What it boils down to, is this: 2020 will be the year of value creation as the industry starts accepting there is considerable money to be made in open banking. The winners will be the banks that place a relentless focus on building clear strategies, using existing budgets wisely and prioritising fintech partnerships. This, in turn, will lead to a host of new use cases springing up across the customer journey — with institutions leveraging open banking data to improve customer acquisition, accelerate onboarding, increase conversion, lower risk, and improve customer satisfaction rates.

A huge opportunity lies ahead; the benefits of open banking are now ripe for the picking.

The International Monetary Fund’s June update to the World Economic Outlook paints a bleak picture for all nations in the short term. Examining the current economic trajectories of developed nations, the report estimates a contraction of 8% in the United States’ real GDP for 2020 – which, if true, would eclipse the 4.3% lost in the Great Recession of 2007-9. However, the full report specifies that the world’s GDP downturn “could be less severe than forecast if economic normalization proceeds faster than currently expected in areas that have reopened”, citing China’s revived service industry and investor enthusiasm as an example of an ideal rebound.

On paper, then, it would appear that the surest route to recovering the economy would be a fast yet vigilant return from lockdown, with businesses enabled to reopen once they have deployed adequate safety measures. This is the stated aim of the US government. The Congressional Budget Office have estimated that the COVID-19 crisis will cause upwards of $8 trillion worth of damage to the US economy, and a rough $6 trillion has already been issued to combat the economic and social ramifications of the pandemic. Given that the US’s national debt surpassed $23 trillion by the end of 2019, it is no surprise that the US’ political leadership intends to soften the blow by encouraging the swiftest economic recovery possible.

However, while China was reportedly able to gain control over the spread of COVID-19, the methods it used – which have included the restriction of free movement, militant policing of suburbs and the enforced wearing of masks even in citizens’ own homes – would be untenable in the United States, especially now that authority over lockdown measures has been largely delegated to the states rather than overseen directly by the federal government.

The Congressional Budget Office have estimated that the COVID-19 crisis will cause upwards of $8 trillion worth of damage to the US economy.

With well over a million active cases within the country and as-yet insufficient track-and-trace mechanisms in place to interrupt chains of infection, the efforts of individual states to return Americans to work are all but guaranteed to cost lives. The true variable is what kind of balance state leaders are willing to strike.

Walking It Back

The rush to reopen is further complicated by the ease with which it can go wrong, causing a greater surge in infections than leaders predicted. The only real recourse in these cases is to reverse the reopening process, thus causing minimal increases in business activity and further prolonging the need for strict lockdown measures to remain in effect.

This is what we are currently witnessing in Texas, a state that was at the forefronts of efforts to reopen for business as soon as feasibly possible. Governor Greg Abbott’s “Open Texas” programme was an attempt to open non-essential businesses in measured “phases” while meeting the minimum recommended health protocols of the Texas Department of State Health Services.

Each of these phases saw an uptick in recorded cases, which then came to a head in June as confirmed COVID-19 cases doubled in the span of three weeks and a record 5,100 COVID-19 hospitalisations were reported statewide. Rather than risk the health of staff or customers, companies like Apple voluntarily reclosed their stores across the state, and Abbott issued an order for all bars in the state to shutter once again.

A similar situation has unfolded in Florida, where a record daily rise pushed Miami beaches (a cornerstone of the state’s $88 billion tourism industry) to reclose, and across a number of other states whose reopening efforts have been comparatively less forceful. The worst of all worlds – an extended business-stifling lockdown and a spike in COVID-19 cases – could be on the horizon.

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The Human Cost

Ultimately, the weighing of lives against renewed economic activity might itself be useless. Speaking with Reuters, UCLA professor Andy Atkeson has theorised that a unilateral end to lockdown would simply mean that “Americans will lock themselves down” for fear of the resultant waves of deaths, meaning no significant increase in consumer spending. Also to be accounted for would be the overall loss of productivity from the many employees whose personal lives would be impacted by the resurgence. Mass death is simply not good for the economy.

This is not to say that the US must forsake all economic activity until a coronavirus vaccine has been produced. For another way, we can look to the example of South Korea, whose aggressive track-and-trace programme stamped out the initial wave of COVID-19 and has continued to isolate and contain smaller outbreaks in the months since. South Korean restaurants, bars and clubs remain open, and – crucially – deaths from COVID-19 have been kept low (the count stands at 282 as of publication). As a result, South Korea’s GDP is expected to fall by a mere 0.2% this year.

Whether there is time for the US to adopt similar policies remains to be seen. Whatever the case, every advance towards normalcy must be made with greater care than we have seen thus far, or else the costs will quickly eclipse any benefits reaped.

On Friday, the UK government announced the release of £400 million in government and industry funding for seven major research and innovation projects across the country.

Each of the funded programmes aims to drive long-term growth in the UK economy, with a focus on job creation, education and skills training, and the founding of future-proof industries that will assist in the country’s economic growth in the aftermath of the COVID-19 pandemic.

“Today’s announcement will ensure some of our country’s most promising R&D projects get the investment they need to take off and thrive,” said Business Secretary Alok Sharma in a statement.

Included among the listed recipients of the new funds are Cardiff University, which is researching emergent technologies such as 5G telecommunications and medical devices, and Artemis Technologies Ltd, which aims to introduce wind-electric hybrids for maritime vessels and a zero-emissions water taxi scheme.

Most notably for the financial sector, £55 million has been granted to a consortium led by the University of Edinburgh, which is undertaking research into better understanding financial behaviours. £22.5 million has been earmarked to support the development of the Global Open Finance Centre of Excellence in Edinburgh and Central Scotland, the aim of which is to draw on expert knowledge from across Scotland to encourage and train emerging talent, create ethical standards and form new partnerships in the sector.

The news has been well received in financial circuits. Colin Hewitt, founder and CEO of Edinburgh fintech Float, commented that the funding “will do great things” for Edinburgh’s fintech scene.

“We have a well-established financial sector and a thriving start-up culture, with plenty of cross-over between the two,” he said. “The UK government has been extremely supportive of this community, and [its] continued financial support makes a real difference.”

Chris Brooks, CFO at Modulr, offers Finance Monthly their perspective on how businesses can turn payments to their advantage in fraught times.

As the Chief Financial Officer at Modulr and someone with over 15 years’ experience in the finance industry, I’ve witnessed a great deal of change in the way businesses manage their payments. But to date, no period has been as transformative as the one we’re entering right now.

For decades, small businesses have been let down by their payment processes. That’s because the majority rely on outdated, manual and inefficient payment services from traditional banks with legacy IT systems. The problem is compounded by the inefficiency of banks when disbursing loans, which are often critical to getting small businesses off the ground. In fact, some small business owners claim to have been left on the verge of collapse after the amount of time taken to process their bounce-back loans.

Sometimes it takes a crisis to shake businesses out of apathy. COVID-19 has shone a light on payment inefficiencies and highlighted the urgency of digitalisation.

Fortunately, fintechs are flourishing across the UK and providing new technologies that could transform the payment space. Here are three areas where payments innovation could help businesses become more resilient, future-proof and competitive.

Sometimes it takes a crisis to shake businesses out of apathy.

1. Maintaining security and business continuity

When COVID-19 led to sudden and widespread remote working, it starkly exposed the hidden inefficiencies in existing processes. Companies that were stuck in the old, manual way of managing payments suffered major disruption. While those that were ahead of the digitalisation curve managed to maintain business continuity.

In the accountancy space, many practices had already embraced cloud computing and payments automation. They were able to make the transition to remote working seamlessly – accessing client workflows from home and managing payments through centralised portals like Sage Salary and Supplier Payments, just as they would in the office.

But we’ve also heard from accountants who, prior to the crisis, had still been in the habit of driving to their clients’ offices and picking up folders of paperwork. Many more were doing things digitally – thanks in part to Making Tax Digital - but not in a completely centralised way, which required the ad-hoc sharing of files across insecure methods like email or third-party file transfer systems.

These workarounds are highly problematic in a time of crisis. Fraudsters will actively seek to exploit new vulnerabilities. According to UK Finance, Authorised Push Payment (APP) fraud cost UK businesses £138.7m in 2019. Only £33.8m was reimbursed. And since COVID-19, we’ve seen the emergence of entirely new scams and techniques.

Fortunately, new payment technologies such as Confirmation of Payee (CoP) are being introduced to help businesses safeguard funds. With CoP, payment service providers (PSPs) will be able to check if the name of the individual or organisation entered by the payer matches the identifying information of the account paid. This can prevent consumers and businesses from being tricked into pushing funds to a fraudster’s account.

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2. Reducing operational costs

As businesses seek to recover from the impact of COVID-19 and navigate this tough economic environment, finding ways to maximise efficiency and reduce operational costs will be critical. This is especially true for businesses that have furloughed employees and are forced to work with leaner teams.

Manual payment processes are a heavy burden for finance teams in today’s fast-paced, challenging environment. They waste time, incur errors and result in significant administrative costs. That’s why fintechs are developing sophisticated solutions that allow businesses to automate all aspects of the payments workflow.

A good example is payment splitting. This is when a business receives an incoming payment, divides it based on a calculated percentage, and sends two payments out to end beneficiaries. When done manually, it’s a time-consuming process. But automation offers a powerful solution, allowing payments to be split automatically based on customisable rules.

Imagine a property management business that’s collecting rent from tenants. Rent collections are typically complex and unwieldy, as payments are sent to the estate agent’s bank account and then manually reconciled and split before sending funds to the landlord. But with automated payment splitting, rules are set to automate the amount collected and sent on – drastically cutting down admin time and reducing operational costs.

That’s just one example of the power of automation. It can have a significant impact on all aspects of payments – receivables, payables, collections and disbursement. Not only does this reduce operational costs, it can help businesses to maintain payments continuity when employees are forced to work away from the office.

3. Improving cashflow management

Cashflow is the lifeblood of any business, and right now it’s even more vital for survival.

Faster Payments is a relatively new scheme compared to traditional methods like Bacs, but it’s already having an immense impact on UK commerce and business uptake is likely to accelerate. Initially designed to speed up the payment process for retailers, Faster Payments are meant to clear in less than 2 hours, though this is often far lower; at Modulr we’ve reduced it to seconds. This is a major improvement on Bacs payments, which can take up to three days to clear, meaning funds are held in limbo for that time period.

Cashflow is the lifeblood of any business, and right now it’s even more vital for survival.

The impact of using Faster Payments can be far-reaching. By allowing just-in-time payments and the ability for a business to hold onto cash right down to the very second, Faster Payments enables greater control, visibility and forecasting of cashflow throughout the year. Finance teams can more accurately predict what cash they will have and when, and plan to pay invoices at strategic times. This will be increasingly critical as businesses strive to recover from the impact of COVID-19.

To summarise; technology is going to continue disrupting all areas of business. And the same goes for the payments industry. New solutions being developed by fintechs can help companies to improve cashflow management, significantly reduce operational costs and protect their money.

With such a challenging and uncertain economic environment in the months ahead, there’s never been a bigger incentive for change. Companies are faced with a critical choice – to keep relying on slow, outdated payment methods, or overhaul everything and find better ways of moving and accepting money. By choosing the latter, businesses can boost their resilience and weather future storms. And those that move first might that find payments become their competitive advantage.

Gold prices reached their highest level in eight years on Wednesday, while market shares saw a dip in investor enthusiasm.

Spot gold XAU= rose by 0.6% to $1,777.53 per ounce. Earlier, it hit its highest going rate since October 2012 at $1,779.06 per ounce.

MCX Gold futures also saw a price increase, and the SPDR Gold Trust announced that its holdings had risen 0.28% to 1,169.25 tonnes on Tuesday. Meanwhile, the pan-European STOXX 600 index fell by 1.6%, indicating a potential three-week low.

Investor concerns can largely be attributed to rising COVID-19 infection rates in some areas of the world, with Latin America’s death toll recently having reached 100,000 and record single-day infection rates being recorded in some US states.

However, broad political concerns have added to anxiety. Reports that the United States is considering placing tariffs on $3.1 billion of exports from western European nations, and that the EU may bar US travellers due to surging COVID-19 case figures, have not aided market positivity.

Neil Wilson, chief market analyst at Markets.com, commented that “Gold is a clear winner from this pandemic,” noting that the commodity was initially sold off in March as investors rushed to acquire cash immediately.

“Since then gold has made substantial progress in tandem with risk assets since the March lows because of central bank action to keep a lid on bond yields. The combination of negative real yields and the prospect of an inflation surge due to massively increased money supply is sending prices higher,” Wilson continued.

This AI ‘arms race’ is being driven by two tech superpowers: the United States and China. The US is barrelling ahead, with Washington recently signalling its intentions to promote AI as a national priority. Last year, President Donald Trump launched a national AI strategy – the American AI Initiative – which orders funds, programmes and data to be directed towards the research and commercialisation of the technology. 

Government involvement and long-term investment in AI has paid off: US companies have raised more than half (56%) of global AI investment since 2015. China, meanwhile, is catching up quickly and is now vying with the US to become the dominant force in the area. In 2017, it laid out a roadmap to become the world leader in AI by the end of the decade – and create an industry worth 1 trillion yuan (or the equivalent of $147.7 billion). As part of the three-step strategy, China has announced billions in funding for innovative startups and has launched programmes to entice researchers.

Achieving economic and political prowess is the ultimate goal. Indeed, AI is a vast toolbox of capabilities which will give nations a competitive edge in almost every field. However, the question beckons: where does Europe stand in this race, and what is at stake? Nikolas Kairinos, founder and CEO of Soffos, offers his analysis to Finance Monthly.

Europe is falling behind  

Thanks to great access to home-grown talent and an inspiring entrepreneurial spirit, Europe is still a strong contender in this race. According to McKinsey, Europe is home to approximately 25% of the world’s AI startups, largely in line with its size in the world economy. However, its early-stage investment in the technology is well behind that of its competitors, and over-regulation risks stifling further progress.

Thanks to great access to home-grown talent and an inspiring entrepreneurial spirit, Europe is still a strong contender in this race.

Early last year, for instance, the European Commission announced a pilot of ethical AI guidelines which offer a loose framework for the development and use of AI. The guidelines list seven key requirements that AI systems must meet in order to be trustworthy; amongst the chief considerations are transparency and accountability.

The intentions behind such proposals are pure, albeit counter-productive. Proposing a new set of standards to be followed risks burdening researchers with excessive red tape. After all, AI remains a vast ocean of uncharted waters, and introducing ever-changing hurdles will only impede progress in R&D. Innovative new solutions that have the capacity to change society for the better might never come to light if developers do not have the freedom to explore new technologies.

Meanwhile, a European Commission white paper recommends a risk-based approach to ensure regulatory intervention is proportionate. However, this would only serve to deter or delay investment if AI products and services fall under the loose definition of being too ‘high-risk’.

Upholding human rights through proper regulation is of paramount importance. However, Europe must be careful to find the right balance between protecting the rights of its citizens and the needs of technologists working to advance the field of AI.

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The risk of ignoring AI solutions  

What is at stake if AI development falls behind? The risk of ignoring AI solutions is immense, particularly for sectors like the financial services industry which must keep pace with evolving consumer habits.

AI has given the world of banking and finance a brand new way of meeting the demands of customers who want better, safer, and more convenient ways to manage their money. And with populations confined to their homes for long periods of time in the face of the coronavirus pandemic, the demand for smart digital solutions that allow people to access, spend, save and invest their money has peaked.

Those who fail to adapt by leveraging AI are at risk of losing their competitive advantage. The real value of AI is its automation potential; AI solutions can power more efficient and informed decision-making, taking on the data processing responsibilities that would normally be left to humans. If used wisely, smarter underwriting decisions can be made by delegating the task of assessing loan and credit applications to AI. Not only is this markedly faster than performing manual checks, but the chances of making risky decisions will also be reduced: AI software can be used to build accurate predictive models to forecast which customers have a higher likelihood of default.

Accurate forecasting is needed to ensure the continuity and success of a business. Again, those businesses that utilise the AI toolsets at their disposal stand to benefit from advanced analytics. Machine learning – a subset of AI – is adept at gathering valuable data, determining trends, anticipating changing customer needs and identifying future risks. Those who turn their back on AI risk losing out on sound risk management, leaving their profits and reputation vulnerable.

Accurate forecasting is needed to ensure the continuity and success of a business.

At the heart of any bank or financial firm, however, lies the customer. Traditional bricks and mortar banking is no longer the favoured option when money can instead be managed online. Yet, while online banking is by no means a new phenomenon, AI offers the hyper-personalised services that customers seek. Indeed, a global study conducted by Accenture recently found that customers today “expect their data to be leveraged into personalised advice and benefits, and tailored to their life stage, financial goals and personal needs.” Meanwhile, 41% of people said they are very willing to use entirely computer-generated advice for banking.

There is clearly an appetite for innovation from the consumer side, and financial institutions must step up to enhance their offering. Enhanced, real-time customer insights generated by AI will optimise recommendations and tailor services to each individual. AI-powered virtual assistants that offer personalised advice and tools which can analyse customers’ spending to help them meet their financial goals are just some of the ways that financial institutions can create a better customer experience.

These are just a few of the many incredible applications of AI within the financial services sector. Not only can it enhance a business’ core proposition, but the cost-saving potential and operational efficiency is becoming difficult to ignore.

AI technologies are transformative, and those who fail to invest in new solutions risk losing out on the multitude of benefits on offer. I encourage business leaders to think carefully about the about the outcomes that they want to drive for their institution, and how AI can help them achieve their goals. I hold out hope that Europe as a whole will ramp up AI development in the coming years, and I hope to see governments, businesses and organisations working together to continue to push forward the AI frontier and pursue innovative applications of this technology.

Nikolas Kairinos is the chief executive officer and founder of Soffos, the world’s first AI-powered KnowledgeBot. He also founded Fountech.ai, a company which is driving innovation in the AI sector and helping consumers, businesses and governments understand how this technology is making the world a better place.

Tim Wakeford, VP of Product Strategy at Workday, outlines the benefits of agile financial planning and the research backing it.

It’s hard to be certain how long the economic impact of the COVID-19 pandemic will last. Recent predictions estimate 2025 as the finish line for recovery, but this isn’t the first and won’t be the last forecast we see. However, as we adapt our strategies to recover, one thing remains clear: COVID-19 will have a lasting impact on how businesses make plans worldwide. I’ve been talking to many customers to understand what they’ve been doing to weather the storm and what they’ve valued the most is having the agility to respond quickly to changes.

Agility to gain business resilience

Being agile when faced with change has always been a defining characteristic of companies that respond well to competitive threats. A Workday study on organisational agility showed that top-performing companies were ten times more likely to react quickly to market shifts, proving that agility is often a synonym for performance. During the pandemic, agility has emerged as the defining attribute of organisations which are responding well to the current crisis. Moving forward, it will be the essential tool to draw a much needed resilient course for growth.

To build agility into an organisation, processes need to be transformed. Finance sits at the heart of this transformation, simply because it touches every aspect of a business. The finance department is responsible for the budgeting and forecasting of activities — all essential planning processes that will map recovery. Three out of four finance executives admit their planning processes have not prepared them for economic disruption, let alone a global pandemic. They have found the key to respond better to this and any future crises in adopting three agile processes: scenario planning, continuous planning and rolling forecasts.

To build agility into an organisation, processes need to be transformed.

Scenario planning to anticipate impacts

From the moment companies started to send employees home and supply chains were interrupted, the future became more uncertain and organisations were forced to ask themselves “what if?”. What if our workforce has to work from home for the rest of the year? What if our supply chain is interrupted for 60 days? With tools that provide the ability to build-out scenarios, businesses can ask these questions and understand what different versions of their future might look like. With roadmaps laid out, they’re able to not only identify future risk but also look for new opportunities. During the first months of the pandemic, we’ve seen organisations create up to 30 times more build-out scenarios than usual in our platform. The value of this strategy has been proven beyond financial planning: Oxford University, for instance, has an approach to scenario planning used by scientists and policymakers when facing situations of global impact.

As we move towards recovery, the future is just as unclear. A recent survey conducted by Deloitte showed that 89% of CFOs now feel there is a high or very high level of uncertainty facing their business. The more finance teams apply technology to model different future scenarios, the better prepared and more confident they will be to quickly adapt their strategy to these uncertain outcomes. Planning based on assumptions is better than not planning enough, and technology can make this process seamless without weighing on anyone’s time. One of our retail customers, for example, is planning their recovery by using multiple pictures of their budget based on different assumptions, all sitting in the cloud platform, to avoid any version control issues that offline spreadsheets can bring up.

Continuous planning to avoid obsolete budgets

A survey conducted by the Association for Financial Professionals in 2019 revealed that the average annual budget takes 77 days to be prepared. Think back to where the world was 77 days ago to understand that this is simply not a sustainable process. Forward-thinking businesses no longer approach financial planning as a one-time annual or quarterly event. Episodic planning quickly becomes obsolete and wastes valuable time.

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By deploying a continuous active approach to planning, leaders are able to quickly adjust budgets adapting to any shift in the marketplace or change in the organisation — something fundamental in the current scenario. We have found that companies that implement continuous planning are 1.5 times more likely to be able to reforecast within just one week, a level of agility that helps businesses avoid budget freezes.

Rolling forecasts to roll with the punches

Rolling forecasts are just as important in the toolkit of agile finance planning. They are a strategic way to approach forecasts because they are guided by key business drivers. We’ve found from our customers that they can help accurately predict changes from four to eight quarters in advance. By being able to visualise a consistent horizon, finance leaders gain the confidence to make critical decisions. In addition, the rolling aspect of the forecasts offers an invaluable way to course-correct quickly.

To survive a time of escalating uncertainty, agility is a safe harbour for any organisation. By deploying continuous planning based on build-out scenarios and rolling forecasts throughout the recovery, leaders will be better equipped to make forward-looking decisions, and not only recover but do it with a competitive advantage. Ultimately, the changes in planning processes implemented during this crisis will prepare businesses for any future storms they might face.