Bankable Insights - COVID-19 Edition - Building Back Stronger - August 2020
Dear clients, this edition of Bankable
Insights is focused on how organisations,
leaders and investors are responding to
COVID-19 across diverse...
*BANKABLE INSIGHTS*COVID-19 Edition
Building Back Stronger
August 2020
Dear clients, this edition of Bankable
Insights is focused on how organisations,
leaders and investors are responding to
COVID-19 across diverse industries.
COVID-19 is causing extraordinary business disruption but has also yielded new opportunities for business innovation and agility. There are several outstanding examples of how businesses have reconfigured themselves, using technology, resourcefulness and creativity, to continue operating effectively throughout the crisis.
With many of these strategic switches
already in place, we will find ourselves in a stronger position to compete and succeed,
when the pandemic finally abates.
The articles that follow reflect perspectives
from industry and business as well as
proprietary Standard Chartered research on building resilient trade and supply chains,
fraud and risk management, cash and
credit optimisation, and where future opportunities lie.
We know that the crisis is not over and the
road to rebuilding presents new challenges.
We are dedicated to working with our clients
in navigating the uncertainty caused by
COVID-19 and creating a more resilient future.
We hope you find this edition of Bankable
Insights helpful and look forward to engaging
with you further as you renew and pivot your business for the future.
Three ways COVID-19
is transforming fintech
Lucy Demery, Global Head of Fintech Banking at Standard Chartered
Published in May 2020
Three ways COVID-19
is transforming fintech
Here’s our analysis on
how the fintech sector
is weathering the
coronavirus crisis better
than other sectors.
All signs point to fintech being a standout sector during the coronavirus pandemic and beyond. COVID-19 has accelerated secular trends already underway – pushing larger swathes of the population online – and the sector is well positioned for the new global reality that is starting to emerge.
After an initial fight to protect employees, customers and local communities, the fintech sector is now coming through the crisis comparatively well. With lockdowns imposed across much of the world, large digital payment platforms have flourished. The most effective businesses are pivoting towards fintech use-cases in highest demand during this crisis.
It’s true that public and private funding has contracted, which is threatening early-stage fintechs. Financial investors need to double down on fewer assets and prioritise profitability. But looking ahead, we see interesting opportunities for strategic investment and consolidation – with more buyer-friendly pricing and terms. Strategic acquirors will be on the hunt for fintechs that provide access to
new customer segments or
product capabilities.
Here are three key themes that are set to shape the future of fintech:
1. Shifting the focus
Despite the challenging growth outlook due to global recession, there are some bright spots for the fintech sector. The trend towards digital payments has accelerated, along with an opportunity to offer new products and support to consumers and businesses.
With many “bricks and mortar” outlets closed, fintechs powering digital commerce have seen a significant boost. In Europe,
social distancing measures
prompted a 72 per cent increase
in the use of fintech apps in a
single week at the end of March, according to deVere Group.
During the crisis, people and businesses are adopting new
digital platforms by necessity.
We expect this to endure beyond COVID-19, as these online users
will have acquired a new pattern
of behaviour, discover new efficiencies and adapt to a “new normal” of digital life. This is especially true for fintech use-cases that are dominant during lockdown – health, consumer staples, online communications, education and digital content.
Fintechs that go out of their way to support customers during this difficult period are likely to drive outsized growth post-crisis.
How COVID-19 will impact fintech
A global pivot towards online platforms will boost e-commerce and digital financial products
Funding pressure will drive consolidation and a renewed focus on profitability
Incumbents will find new opportunities for strategic investment and transformation
Investors are therefore pushing their portfolio companies to refocus on their core product roadmap, customer service and mission. Founders are asking themselves, who do we want to be in the post-COVID world and what is the critical path forward from today to that new future?
Large, diversified payment platforms are performing well, as they are seeing higher volumes in select e-commerce verticals. The leading challenger banks will also benefit from a new focus on digital user experience – provided they can monetise their apps through traditional revenue streams.
Recent funding rounds should be deployed to acquire underwriting capabilities and business banking products. Select lending platforms will benefit from the rise in demand from small-ticket borrowers backed by government support schemes – provided they have invested in robust risk management.
Resources are likely to be diverted away from other areas of fintech. Lockdowns have undermined physical point-of-sale technology. Restrictions on cross-border movement will reduce travel payments and forex volumes.
An economic recession will undercut mass-market consumer fintech. Geographically, countries with weaker health infrastructure will be slower to recover. The fintech sector is certainly not without its challenges, so entrepreneurs and investors will need to be discerning in their focus.
2. Financial pressure and consolidation
Funding is contracting in the near to medium term, in both public and private markets. Fintech deal activity in the first quarter of 2020 dropped to 2017 levels, with half the number of deals relative to the same period in 2019. Many fintechs are struggling to preserve their cash runway, as revenue milestones are difficult to maintain when the real economy is under pressure. Venture capital funds now need to double down on fewer portfolio companies to the detriment of others. For more mature fintechs, private equity is constrained by frozen high yield bond and leveraged loan markets, while public equity markets are also challenging.
In a capital-constrained environment, we see outperformance by agile fintechs that have lower fixed expenses and an ability to pivot from “growth at all costs” to profitability.
Consolidation will be an important theme. Fintechs are likely to seek revenue and cost synergies via mergers or partnerships. In March, we saw TransferWise partner up
with Alipay, while in February,
Rapyd signed a deal to collaborate with Visa. Partnerships such as
these will be an important lifeline in the absence of fresh capital for organic growth. Late-stage
fintechs that recently completed funding rounds should also
drive consolidation.
3. Opportunities for strategic investors
In this rapidly evolving market,
we see interesting angles for strategic investors. As financial investors pull back, fintech
valuations are likely to compress, with an increase in down rounds, side rounds and convertibles. This will yield new investment opportunities for incumbent
banks, mature fintechs and big-
tech platforms.
Fintech segments that previously appeared expensive may become more accessible – such as digital retail banking.
As IPO markets cool, M&A will become the most viable exit option for fintech founders
and investors, so strategic buyers will benefit from improved pricing and terms.
Acquirors will be on the hunt for fintech targets that offer product innovation, streamlined infrastructure or access to new customers. We may also see financial institutions expand into adjacent “ecosystems” – in ecommerce, health and online content. As a result, fintech is likely to become more integrated with digital life.
These three themes combine to show how the fintech sector can emerge stronger from this difficult period, with a renewed focus on innovation and fundamentals. Along the way, this will create opportunities for strategic investors – if they can react quickly to market dislocation and think beyond the horizon.
The COVID-19 pandemic has caused intense distress in our communities, but we hope the fintech sector will continue to transform financial services for the benefit of us all.
For more information, see Standard Chartered’s report, COVID-19: Fintech Sector Impact & Response, 8th April 2020.
What are the
prospects for China’s post COVID-19 economic recovery?
Shuang Ding, Chief Economist,
Greater China and North Asia at
Standard Chartered
Published in June 2020
What are the
prospects for China’s post COVID-19 economic recovery?
As China puts job creation and social stability at the centre of its plan to recover from the impact of COVID-19, what’s the outlook for the world’s second-largest economy? Here is our analysis of the government’s response, the key risks and the reasons to be optimistic.
While China’s economy is a long way from where it was before the pandemic hit, we believe that there are positive signals in much of the domestic data. Officials are firmly focused on protecting employment, livelihoods, businesses, and supply chains, as well as on utilising expansionary macro policies - putting the economy on a firm footing as it heads into the second half of the year.
More support for a sustainable domestic recovery
China’s government is prioritising social goals ahead of GDP growth by creating employment and indicating that fiscal policy will be its preferred way to stimulate the economy. Officials have suggested that they are willing to almost double the budget deficit to support gross domestic product growth, while allowing money supply and credit growth to reach higher levels. There also appears to be a clear shift in China’s strategy; moving from an export focus to paying greater attention to domestic demand, to releasing consumers’ potential, and investing in new and traditional infrastructure projects.
Standard Chartered’s monthly proprietary survey of small and medium sized businesses in China shows a recovery gaining traction. The gauge rose to 51.7 in May from 50.9 in April, and the ‘current performance’ sub-index indicated expansion for the first time in four months, suggesting an acceleration in real activity. SMEs were also optimistic about their prospects.
While the latest data shows that China’s economy shrank 6.8 per cent in the first quarter compared with the same period a year earlier, there has been an improvement in momentum and in the leading indicators in recent months.
Even so, the recovery is not even.
As large companies fare better than others, policy is tilted toward supporting SMEs, with measures including temporary tax and fee cuts and an option to delay corporate income tax payments until the first quarter of next year. SME access to credit has improved, and more policy support is likely to bring down the cost of borrowing.
Shoring up consumer confidence, spending and the services sector is key to fostering demand, and the government’s focus on stimulating employment shows they are cognisant of this.
Risks to the domestic outlook include a potential recurrence of the virus, a stronger propensity to saving and a rise in non-performing assets at banks.
While we see the debt-to-GDP ratio climbing by around 20 percentage points this year, the risk is manageable as long as it represents a temporary spike in response to the unprecedented growth challenge.
The stimulus measures should support a gradual recovery for the rest of the year, and in our base scenario, the economy could grow at a rate of between 2 per cent and 3 per cent this year.
At the same time, we recognise that while supply resumption is encouraging, export side weakness is a major downside risk to growth. Standard Chartered’s SME survey showed export orders were still contracting in May and overseas demand remained sluggish.
Moving ahead,China can’t rely on short term economic stimulus and should also stimulate the creativity of the private sector and enhance productivity.
Strong external pressures, tough global environment
We are cognisant that external risks, such as trade tensions and a deeper global recession, are the biggest threats to the outlook and could put a brake on growth. Also, in the run-up to the US presidential election, blaming China has become a common strategy of both the Republican and Democratic parties, and bilateral tension could escalate on trade, investment, technology and geopolitical issues.
Should domestic and external risks materialise, growth will be lower than our central forecast. Our scenario analysis shows that if a second wave of the virus hits and the external environment and trade tensions worsen, then GDP may contract by as much as 0.5 per cent this year.
While anti-China rhetoric is likely to continue in the run-up to the US election, both sides have an interest in keeping the Phase One trade deal announced earlier this year intact, and both are likely to weigh the costs and benefits of any further action carefully.
Positive indicators of China’s recovery
Domestic fundamentals and government stimulus should help guide China back to a firm footing.
Much of the recent data looks comforting and the capital and currency markets show relative stability. Standard Chartered’s renminbi internationalisation tracker rose in March, suggesting resilience and confidence among investors, even amid the disruptions.
Most workers in the manufacturing and construction sector, one of the cornerstones of the economy, have returned to their jobs as factories work to resume normal capacity and project implementation accelerates.
While the initial signs are encouraging, there’s still some distance to go before China – and the rest of the world – is out of the woods. A broadening of the domestic recovery and an improvement in the global data would help.
Should the outlook worsen, many investors believe the government
will introduce more stimulus, with 84
per cent of respondents to a
Standard Chartered live poll predicting this will materialise before the end of the year.
While we don’t expect additional stimulus, this may change if there
are fresh signs that the economy is faltering. China’s officials are aware
of the longer-term challenges of taking on more debt to fund stimulus. However, they are
leaving room for manoeuvre if
it is needed.
Any more stimulus is likely to be on the fiscal side, rather than around monetary policy or credit, given that the government’s priority is to generate demand. Special bond issuance could be increased if needed and further stimulus might be directed toward funding new infrastructure projects. Credit growth is already high relative to nominal GDP, and the authorities may focus on ensuring credit is flowing
to the real economy instead
of circulating within the
financial system.
China’s economic recovery may
well be unpredictable. However,
there are many reasons to be positive. While risks remain - including the re-escalation of
trade tensions, another outbreak
of COVID-19, and a deeper
global recession - the government appears prepared to deploy more
of the policy tools at its disposal.
The initial data is promising,
and investment and consumer confidence is improving, setting in place many of the elements for
good growth.
This article contains insights
from the ‘Unravelling Uncertainty’
webinar series in partnership with The Economist.
Surviving the cash crisis: an outlook on capital markets and liquidity
Eric Robertsen, Global Head of Research and Chief Strategist at Standard Chartered
Published in June 2020
Surviving the cash crisis: an outlook
on capital markets and liquidity
As countries begin to emerge out of lockdown, questions are being raised about whether financial assets recovery will help
in economic recovery,
how long the recoveries can be sustained and what’s next for global liquidity. I discussed these issues with fellow panellists at a recent webinar titled “Surviving the cash crisis: The capital market outlook.
In the wake of the COVID-19 pandemic, central banks
and governments across
the world responded with tremendous monetary support. This spurred an impressive recovery in financial assets in the second quarter of 2020. But as countries begin to emerge out of lockdown, questions are being raised about whether financial assets recovery will help in economic recovery, how long the recoveries can be sustained and what’s next for global liquidity.
The ramifications of this
crisis will be felt for a long time to come. While markets remain optimistic for now,
the second half of 2020 will be defined by how
well they can absorb the avalanche of debt that’s coming their way and once stimulus is curtailed,
whether corporates are able to access the funds they need to grow business.
Investors find themselves in the middle of a tug of war: on one side, the virus, its consequences and the threat of a second wave. On the other, powerful economic forces put to work by central banks and governments.
So far, stimulus efforts are winning, shoring up short-term liquidity, propelling markets and bolstering
debt issuance.
Here are four themes set to affect the capital market outlook over the next year:
The central bank war chest
Two themes defined the first half of 2020: the global health crisis that emerged and took hold in the first quarter, prompting a Value at Risk (VaR) shock and the forced liquidation of assets around the world. As central banks and governments responded, turning on the stimulus taps, the second quarter was characterised by a recovery
in assets, liquidity, and
market prices.
Unleashing this mammoth support comes at a cost.
The combined balance sheet of the US Federal Reserve, the European Central Bank, the People’s Bank of China and the Bank of Japan spiked to $24.5 trillion, up by around $4.5 trillion since early
March, according to
Standard Chartered research.
These measures are effectively providing a bridge loan to corporates, financial institutions and investors, backed up by a widening of national budget deficits,
as governments put fiscal support measures in place.
While this money markets distortion will persist for the foreseeable future, most developed economies have the tools to control it. Encouragingly, we have seen that in emerging markets central banks have been able to ease monetary policy measures without impacting their currencies.
For corporates (especially those in less stressed sectors), this has lowered the cost of raising funds during the pandemic. But rationalisation may come when it’s time to pay back the debt, with cost cutting and headcount reductions, underscoring the persistent nature of the pandemic’s impact and its deep economic scars.
The recovery will take
time, according to a
Standard Chartered poll,
with 34 per cent of respondents saying it will be W-shaped, and a further 33 per cent saying it will
be shaped like a swoosh. Just 5 per cent predict a swift V-shaped recovery, while 26 per cent see a U-shape.
Reality bites
While fiscal stimulus measures have been effective, they come with a longer-term cost. At some point these debts will have to be repaid, and most likely the risks will be borne by governments around the world. But there will be a wide divergence between the impact on different economies depending on their individual appetite for debt or fiscal space.
Despite some wobbles,
the financial markets have recovered faster than the economy, generating a gap between Wall Street and Main Street. More than half (51 per cent) of respondents to a Standard Chartered survey expect rebalancing, where markets fall into line with the economic outlook, while 34 per cent see the difference between the two persisting, and 16 per cent say the economy will improve.
Markets are supportive for now – absorbing the expansion of corporate and government debt issuance – but they can also be fickle.
The pandemic has resulted in huge amounts of public and private debt, and it’s likely that there will be a tipping point where fundamentals come back in to view and investors become more discerning.
As fiscal and political constraints tighten, the US may diverge from the eurozone, with European governments continuing to support their economies for a longer period.
In Asia, Singapore and Indonesia both have fiscal space and relatively promising outlooks, while India has less room for manoeuvre. South Korea saw large capital outflows as the crisis took hold and remains exposed to global trade forces, making it vulnerable relative to other South East Asian countries.
The dollar’s
critical role
For emerging markets and for corporate borrowers, the trajectory of the US dollar remains key.
As liquidity disappeared, volatility spiked, and investors sought shelter in havens.
The dollar surged in March, pushing Bloomberg’s gauge of the greenback against a basket of currencies to a record high.
With so much dollar-denominated debt around the world, this caused a further tightening of global monetary conditions and made access to funding challenging,
with many markets freezing up. After the Fed offered a lifeline, the dollar weakened from its highs and the situation stabilised.
Looking forward,
Standard Chartered expects
the dollar to depreciate further, as the Fed’s interest rates fall into line with other Group of 10 central banks, and the relative strength of the US economy wanes.
The rise of US-produced shale oil was also a supportive factor for the currency, and the drop in oil prices – which will probably persist through 2021
– has taken away that prop.
Any resurgence in the dollar, particularly back towards the highs seen in March, would reinstate difficulties for emerging market countries and corporate borrowers.
Record issuance – and what comes next
Central bank actions
have also pumped up
bond issuance.
US investment grade (IG) companies have issued almost as much debt this year as they did in the whole of 2019, as central bank assistance keeps borrowing costs down. Average investment-grade yields are close to record lows,
making now a good time to issue a corporate bond, according to 6 out of 10 respondents to a
Standard Chartered survey.
For corporates, it’s a question of how much they want to leverage their balance sheet to access cash at the right price. While the withdrawal of capital has slowed,
many international investors are sitting on the sidelines, waiting to see how the crisis evolves. On a positive note, we could see an increase in ESG (Environmental, Social and Governance) investing with many governments using debt to finance healthcare projects in preparation for a similar crisis in the future.
Among the key risks is a second wave of the virus. Even so, the shock is unlikely to be as severe as the first wave, since governments and healthcare systems are better prepared, and some governments appear more willing to balance the health risks against damage to the economy. Fresh lockdowns would be damaging,
with Standard Chartered estimating that one month of shutdown leads to a contraction of around 3 percentage points in most developed economies.
The fundamentals of governments and companies will be tested in the coming months, as difficult
economic conditions bite
and access to cash and
debt issuance remains
critical for survival.
For now, central banks
have succeeded in
staving off the worst of
the liquidity crunch and shoring up investor sentiment. What comes
next depends on a complex set of variables: how long stimulus is kept in place, the market’s confidence in central bank and government measures, and the outlook
for the dollar.
Whatever the ultimate
shape of the economic recovery, it’s clear the
legacy of this pandemic
will be long lasting.
This article contains
insights from the
‘Unravelling Uncertainty’ webinar series in partnership with The Economist.
Six trends that are shaping the future of global trade
Saif Malik, Global Head, Global Subsidiaries at Standard Chartered
Published in July 2020
The COVID-19 pandemic has created massive shocks, both on the demand and supply side, to global trade. But trade serves a critical role in global economics, and as we move towards a new world order, new trade patterns may emerge. At a recent webinar titled “Riding the wave: The Future of Trade”, I discussed a range of possibilities around the future of global trade with my fellow panellists.
300 of the world’s 500 top companies had facilities in Wuhan, China,1 meaning the strict lockdown imposed there had ramifications the world over, while many countries were left scrambling for vital medical supplies2 due to bottlenecks in the movement of freight. The question now is to what extent the pandemic will lead to a permanent change in the way multinational organisations operate their supply chains.
Six trends that are shaping the future of global trade
According to the WTO, world trade is expected to fall by between 13% and 32% in 20203 as the COVID 19 pandemic disrupts normal economic activity and life around the world.
But as the global economy starts to recover, I believe that companies are likely to adopt new models in order to mitigate future risks. This could include greater diversification,
more near-shoring and on-shoring, and increased digitisation. Here’s an analysis of the key trends.
1. Governments seeking more control over critical supplies
There are multiple factors prompting firms and governments to reassess the inherent risks of over-reliance on one country or region. Chief among them is the need to exercise more control over the provision of public health related supplies like medicines and medical equipment.
China supplied about 42 per cent of the world’s exports of personal protective equipment in 2018, for example, as well as almost three-quarters of Italy’s imported blood thinners and 60 per cent of the ingredients for antibiotics imported by Japan, according to a briefing from the Economist.4 This is likely to lead governments to shore up industries that are deemed to be of national importance.
The difficulty global air freight has faced during the pandemic is another reason for caution. With much cargo transported in the hold of passenger jets, the reduction of flights caused
a spike in the cost of air freight,5
with rates between China and the US more than doubling to $7/kilogram during April and May. This then
had a knock-on impact on shipping rates, too.6
2. Reducing risk through diversification of
supply chains
These difficulties may lead both firms and governments to change their mindset from the “just-in-time” supply chains that were largely driven by the desire for lean inventories, efficiency and cost savings.
One alternative is the “just-in-case” approach, where supply chains are diversified to protect against future risks such as trade wars, hefty tariffs, punitive regulations, or a second wave of the pandemic. This may result in a shift in the favour of a broader range of emerging manufacturing hubs within Asia,
such as Vietnam, Indonesia or Malaysia. India is also positioning itself to be a beneficiary of more diverse supply chains and has the added advantages of time zone and world-class IT infrastructure.
Re-shoring or nearshoring is another option, and there was a pre-existing trend among US manufacturers to rely less on imports from China as a result of the trade war. In its annual Reshoring Index,7 consulting firm Kearney highlighted a “sharp reversal” of US manufacturer sourcing from Asia to domestic suppliers in 2019. However, in case of most countries, this is more likely to be led by government incentives rather than nationalism.
3. Weighing up the cost benefits
Of course, it is hugely complicated and expensive to relocate whole factories, or even R&D facilities
which rely on people as their primary resource, so the immediate impact may be limited. Indeed, a
Standard Chartered poll suggests that just 10 per cent of firms are looking at moving their supply chains, while 6 per cent are considering shortening them.
4. Move towards digitisation
Over the longer term, however, automation and robotics may alter the cost equation, partly offsetting
the relatively higher labour costs
of western markets. Similarly, digitisation may help to cut the costs associated with global trade, as the shift online experienced during the lockdown becomes more ingrained. The rise of digital trade platforms,
e-signatures, and digital customs clearance will all help keep goods moving more efficiently.
And as companies embrace digitisation, they can also use technology to help manage increasingly diverse supply
chains, for example by using
real-time visibility of inventory or machine learning to forecast purchasing patterns.
5. Geopolitical pressures
It is also important to consider changes in the broader business
and geopolitical landscape, as cost is only one driver of behaviour.
Companies will need to strategically map their own vulnerabilities,
looking at any areas which could lead to interruptions. This could include decisions by governments
to stipulate more local purchases;
limit the flow of data or deny entry visas to international executives.
There may also be domestic pressure to protect workers
against mass lay-offs prompted
by the recession. Pre-crisis,
the rise of protectionism from populist governments was
already undermining the WTO’s rulebook that has helped facilitate global economic growth over
the past 20 years.
There is also a shift in favour of services as they become an increasingly important part of
global trade over the next decade,
with trade in services growing 60
per cent faster than the trade in goods in the past decade and
now accounting for $5.1 trillion out
of the $17.3 trillion which makes
up global trade.8
At the same time, China is transforming itself from a low-cost manufacturing hub to a final
demand destination, redefining the dynamics between global and regional supply chains and cementing the trend towards more intra-regional trading.
6. Creating RESILIENCE in supply chains
Companies will always be partially motivated by the need to create shareholder value – and some may be quick to forget the drastic disruption of 2020. However, I believe there will be a greater emphasis on making supply chains less vulnerable, even if there is some financial cost involved.
Businesses across the world are reassessing their supply chain risks and will be helped by data and artificial intelligence as they weigh
up the evolving risks and new opportunities. It’s fair to say that the role of CTO or CIO has
never been more important.
It is my hope that the changes adopted will build more resilient supply chains with the strength to future-proof global trade.
This article contains insights
from the ‘Unravelling Uncertainty’ webinar series in partnership with The Economist.
How Big Tech can contribute to building a more sustainable future
Published in August 2020
How Big Tech can contribute to building a more sustainable future
Big Tech is undergoing a transformation in the COVID-19 pandemic, both in size and in public perception. How it uses these new-found responsibilities will shape both the economic recovery and regulators’ views on its future.
Big Tech stocks are pulling
global markets out of their slump.1 This reflects the digital transformation that has accelerated during
the pandemic. It has helped governments track COVID-19 and enabled businesses to survive by pivoting to e-commerce and digital business models.
As leaders strive to future-
proof against more disruption,
there are new opportunities for
Big Tech to deliver on this positive foundation, demonstrating a leadership role in efficient, resilient and responsible growth.
From business disruptor
to business enabler
The adoption of digital technology has been one of the most positive pivots of Big Tech’s role in the COVID-19 crisis.
The pandemic may have permanently transformed the way individuals live, communities interact, and businesses work.
From an organisational perspective, COVID-19 has compelled businesses of all sizes to digitise existing routine processes to improve productivity, facilitate automation, and create better customer and employee experiences – areas that are crucial for them to navigate their way through the prevailing uncertainty.
“I believe that technology and
being connected are now essential services,” says Kahina Van Dyke, Global Head of Digital Channels
and Data Analytics, CCIB at Standard Chartered. “And inclusive prosperity in our communities requires that this technology really needs to be provided to all of us.”
There are signs that Big Tech is conscious of this responsibility. Its companies are increasingly describing themselves as ‘utilities’, mindful of their role in stabilising business continuity and operations during the crisis.
The reliance on digital collaboration tools and video-conferencing platforms is a prime example. Another is the surge in demand for e-commerce during the pandemic,2 which has forced bricks-and-mortar retailers to adapt business models by embracing new technology. And traditional retailers are likely to keep doing so, offsetting high digital transition costs with warehouse robotics from specialists like the UK’s Ocado. Indeed, many businesses are looking beyond e-commerce, investing heavily in the full digital transformation of their supply chains.3 But this is still far from universal.
“In our most recent digital transformation survey in Asia Pacific, 6 to 7 per cent of our customers were digital leaders,” says Amit Midha, President, Asia Pacific & Japan and Global Digital Cities at
Dell Technologies. “But 10 to 12
per cent had no digital strategy
and no plans to get onto digital platforms. The point is, this is
where the opportunities exist.”
Unlocking the true
value of data
For Big Tech to move into an enabler role, business must lead the application of innovative technology to solve existing challenges more efficiently. Data is a key component of transformation and, to fully realise the agility and resilience benefits, companies will need more data and more access to it.
This need is powering a jump in the cloud-related businesses of Alibaba4, Microsoft5 and Amazon6, in particular. Google is looking to India7 to help grow its cloud services. This opportunity may lead to an increasing shift in power among the Big Tech firms to those who offer paid-for services, a trend Microsoft is already benefiting from.
As more data moves onto the cloud, storage costs will become cheaper with a multitude of different cost options and models. There will also be an explosion in data servicing industries, from the centres themselves to the complex infrastructure needed to support it.
However, to unlock the true value of data, it must be managed and ultimately shared for the greater good. Therefore, data – and who owns it – will continue to be a central theme of regulation.
Companies that show that they can be trusted to keep data safe will emerge stronger. “It’s a Fourth Industrial Revolution, this time of data and robotics,” says Midha. “There’s a brave new world out there, but we believe all businesses want to make sure customer data is private and protected.”
Moving the needle
on digital finance
Fintech is another sector to which COVID-19 has brought considerable change – one that has shown Big Tech and start-ups alike to be vital enablers. With physical contact disrupted, digital payments have proved a lifeline that has kept businesses functioning.
“Investments that the Indian government has made in digital infrastructure over the past 10 years are really paying off now, as we deal with the new COVID-19 normal,” says Padma Parthasarathy, Senior Vice President & Global Head, Consulting and Digital Services at Tech Mahindra. “Individuals and small businesses are now able to make and receive online payments. All this would not have been possible a decade ago.”
Globally, the crisis has challenged many early-stage fintechs, with public and private funding in short supply. Capital constraints will favour those who are able to transition from ‘growth at all costs’ models to profitability. More consolidation also seems inevitable.
“We need to create a healthy
start-up scene because these are our future big companies,” says Van Dyke. “Big companies need to continue to partner with smaller fintechs to find new solutions.”
This is now happening, as companies look to boost revenue and cost synergies, with TransferWise and Alipay’s partnership being one example.8
These trends also have important implications for consumers.
The IMF says digital finance
offers opportunities for greater financial inclusion,9 especially for lower-income households
and SMEs. However, it warns
there is also a risk for greater exclusion, if lack of access to
mobile phones and fast internet creates digital inequalities.
This is where banking partners like Standard Chartered can help. By collaborating with the wider financial ecosystem, with corporate and individual end users, as well as regulators, the financial industry can help advance technology agendas with a purpose.
Driving sustainable businesses
To be sustainable, the current
rapid pace of technological
change and growth needs to demonstrate wider social benefits, delivering what the World
Economic Forum calls ‘The Great Reset.'10 However, the industry
still faces scepticism.
A recent poll for Standard Chartered asked if, in the future, Big Tech will primarily dominate industries or be the enabler of industry innovation. The response was mixed, with 53 per cent seeing these companies
as enablers, but almost 45 per cent predicting domination.
Yet the pandemic has produced multiple examples of innovation
and collaboration that would
have been impossible without the tools offered by digital platforms.
In China, Alibaba and Baidu offered gene sequencing software for free.11 Using tech platforms,
Ford collaborated on protective face shield production12 with global partners including India’s Mahindra & Mahindra. The lessons learned could help build sustainable supply chains, diversify sourcing, and connect SMEs with global markets.
Forging partnerships to serve the common good
A significant expansion in Big Tech’s remit has come from its partnership with governments. From South Korea’s use of location data to track the virus13, to Apple and Google’s contract tracing solutions14, many tools created by Big Tech have been used in positive ways.
The pandemic has also seen Big Tech advance into delivering basic societal needs like education and healthcare, a trend which is likely to increase. Shanghai launched 11 ‘internet hospitals’, affiliated to public hospitals, during the pandemic, delivering ongoing efficiencies for prescriptions and consultations.15
This increased role of Big Tech in society and its use of public data will inevitably renew calls for stronger regulation. Becoming ‘public utilities’ brings benefits of scale – but more scrutiny too.
However, Van Dyke says that the assumption that the concentration of stock market power is creating a ‘winner takes all’ future should
be treated with caution. “This assumes there are losers and
only a handful of winners.”
“In fact, Big Tech can be an
enabler for ‘aggressive
collaboration’. The expertise that finance, healthcare and education brings means we can use these platforms to work in partnership on the big challenges.”
What’s next for big tech
Soaring stock market valuations show investors believe Big Tech
can deliver. The best way to fulfil
that promise of growth will be to expand opportunities and
discover new partnerships.
Instead of concentrating
market power, these companies need to reach out to start-ups, in fintech and elsewhere, using knowledge and scale to spur innovation, co-creating to solve
the bigger challenges.
If Big Tech continues to be an enabler, there is a route ahead to
a more sustainable future.
This article contains insights
from the ‘Unravelling Uncertainty’
webinar series in partnership
with The Economist.
Four ways FIs can stay ahead of cybercrime during and beyond COVID-19
Matthew Probershteyn, Global Head
of Correspondent Banking Financial Crime Compliance (FCC), and Head of Corporate
& Institutional Banking FCC in the Americas
& Europe at Standard Chartered
Published in June 2020
Four ways FIs
can stay ahead
of cybercrime during and beyond COVID-19
The COVID-19 pandemic has created the greatest opportunity for systems penetration since the
birth of the internet with financial institutions (FIs) in many countries forced into new ways of working, colleagues dispersed remotely, and normal chains of communication disrupted.
FIs are responsible for keeping their clients’ money and data safe, but with the increasing digitisation of financial services, cybercrime has grown exponentially. Even before COVID-19, cybercrime was costing large organisations an average of USD13 million dollars a year.1 Bank losses
in 2018 were higher than those of
any other industry.2
The World Economic Forum includes
cyber-attacks within its top five threats to institutions because the losses extend far beyond the initial theft.3
FIs encounter reputational damage, disruption to operations, loss of customer data and the associated regulatory fines, all of which contribute to total losses. The issue also complicates the approach to “de-risking” (i.e. withdrawing financial services to higher-risk clients, often at the expense of financial inclusion), as FIs remain cautious in serving institutions or countries subject to increasing cybercrime risks.
Cybercrime in the time of COVID-19
COVID-19 has multiplied risks and forced cybercriminals and FIs to adapt. The rapid shift to remote working has disrupted workflows, reduced staffing levels, confused lines of communication, overburdened IT helpdesks and
has made rapid adoption of new platforms compulsary.
Furthermore, with business survival becoming an overarching priority, many FIs may have pushed down evaluating cybercrime risk on the list of priorities, making themselves
more vulnerable.
COVID-19 has also enhanced the motivation of cyber-criminals.
Many rely on the cash generated from their crimes to fund their day-to-day existence. As with other commercial enterprises, the pandemic has disrupted their usual markets and supply chains, increasing their motivation to identify new victims and greater spoils.
Although cybercriminals are exploiting COVID-related themes, they continue to use broadly similar tactics with greater speed and volume.
SWIFT Attacks
SWIFT Attacks on banks’ payments systems are not necessarily the highest in value but generally are the easiest to execute.Small payment type attacks, which cybercriminals know are not likely to be investigated, typically exploit vulnerabilities in banks’ funds transfer operations before payment messages are sent over the SWIFT network. Assailants may also tamper with the statements and confirmations that banks often use as secondary controls, delaying victims' ability to recognise that a fraud occurred.
A common related trend relates to sudden activity in accounts that were previously dormant, with the final act leading to an immediate cash withdrawal or outward wire transfer. By the time such activity is detected it is often already too late, but it is important to learn from it to prevent new attacks. Lower transaction amounts for large corporates can often go unnoticed.
Ransomware Attacks
Ransomware Attacks may also be particularly effective given the additional reliance on digital platforms created by the pandemic. While systems and processes are vulnerable, people are the most attractive targets for cyber criminals, who are focused on identify theft or deceptive cyber practices which give them access to IT infrastructure. Ransomware attacks towards corporations are also growing.
While physical money mule activity may have tapered during the pandemic, as the threat of global recession looms, the recruitment of money mules appears to be increasing though digital access to FI products.
Finally, while cybercriminals’ ultimate objective is to steal money, obtaining data is increasingly a means to this end. Personal data may be even more valuable as governments roll out more pandemic support funds. This has deep implications for FIs like banks that maintain very detailed client databases.
Adopting best practices
Regulators expect FIs to respond to cybercrime in a way that is commensurate with the markets in which they operate, and to stay ahead of evolving risks – COVID-19 included. We advise a multi-pronged approach to create effective and sustainable cybersecurity and financial crime compliance programmes.
First, reinforce your organisation’s information security approach and capabilities – especially important as normal risk processes are in danger of being overlooked as people work in social isolation.
Do the basics: ensure that operating systems are kept up to date, confidential information is encrypted, and that back-ups are well-designed and secured from the rest of
your network.
Employee awareness, driven by senior leadership at the board-level, cannot be overemphasised: staff should be trained and tested to be wary of phishing attacks, which are still the most common source of cybercrime -penetration. On the systems side, consider how the latest technologies like Artificial Intelligence can help predict risk, rather than just dealing with incidents as they occur. And ensure that dashboards include metrics that can identify cybercrime attempts and correlate this data with money laundering and sanctions risk events.
Second, consider the impact that a cybercrime event would have on your organisation and on your clients, and ensure your “playbook” has clear procedures if one should occur.
How would you manage a cyber-break to ensure functions such as financial crime compliance, legal and business lines remain aligned and able to tackle it concert? Stress-test yourself. Then do it again and do
it regularly.
Third, threat communication is key. FIs should have a detailed communication plan internally and externally. As well as internal awareness campaigns, consider how to communicate with clients, regulators and media in the event of a breach, including identifying
specific channels that will be used. Establishing the nature of the threats and challenges your institution faces, and work with partners and stakeholders to make them aware of the risks –as well as setting out communications protocols in the event of a breach.
Finally, work together.
The financial services sector has
a strong incentive to detect and prevent cybercrime. Agreeing best practices, passing on information about threats, sharing case studies of where things went wrong and what succeeded are key components to disrupting criminal networks. Include your law enforcement and regulatory partners. Cybercrime is here to stay, but by sharing our experiences we can ensure the threat remains manageable and that confidence
in vital financial services remains
high in the digital era.
This article contains insights from Standard Chartered’s Correspondent Banking Academy’s Fighting Financial Crime webinar series.
Why increasing awareness and collaboration are
key to tackling
COVID-19 fraud
Patricia Sullivan, Managing Director, Global Co-Head, Financial Crime Compliance at Standard Chartered
Published in June 2020
Why increasing awareness and collaboration are key to tackling COVID-19 fraud
Crises are invariably
exploited by fraudsters
(e.g. Ebola, the 2008 Financial Crisis, MERS), and COVID-19 is no exception. Financial institutions (FIs) are on the front line when it comes to preventing fraudsters from exploiting the pandemic. Collaboration is key to success.
What we’re seeing
In recent months fraud risk related to COVID-19 has become more common accentuated by the unprecedented changes in work, social and economic conditions for everyone.
Law enforcement and regulators across the globe have put out advisories warning of increased fraud threats and red flags.
The range of schemes presenting to FIs is diverse but the hook- COVID-19- is the same. In March and April 2020, Standard Chartered Bank experienced several instances of unauthorised payment instructions purportedly from FI clients; clients sending payments
for PPE and related
materials to fraudulent
sellers, and identification of mule accounts used to receive fraudulently
obtained funds. In one
case Standard Chartered cooperated with Singapore’s police to freeze a suspicious account of a retail individual client usedin a SGD10.2 million (USD7.2 million) attempt to defraud a French pharmaceutical company through a purported sale of surgical masks and hand sanitizers. The close cooperation between public and private sector law enforcement helped to return a substantial percentage of the defrauded assets to the pharmaceutical company.
These types of impostor fraud are a feature of the COVID-19 pandemic. Imposters attempt to fraudulently authorise or redirect invoice payments
or fraudulently acquire company account details
by posing as creditors or suppliers or authorised signatories. During the COVID-19 outbreak, they may pose as a bank’s customer service department and inform victims that their bank details have changed because of the pandemic. Figures from the US FTC indicate that such scams
are proving lucrative.1
Meanwhile, other fraudulent schemes proliferate.
Fake “charities” are
soliciting pandemic-related donations. Fraudulent fundraising drives are being propagated through social media and diverting people to bogus websites.2 By mid-April, the UK authorities had discovered some 70,000 of these, related to fake charities, false information portals and scam product offers.3 We are also seeing a rise in fraudulent acts by corrupt officials with Uganda making an arrest in April of four government officials including two senior technocrats for alleged fraud in the procurement of food aid for vulnerable people during the coronavirus lockdown.4 And while financial crime departments sharpen focus on COVID-19 themed frauds, BAU (business as usual) frauds continue to abound.
What has changed?
While the methods for committing fraud are not new, the pandemic has complicated anti-fraud mechanisms.
The mass movement to remote working for employees has reduced the vigilance around detecting potential fraud, while fraudsters have also become more agile because
of pressures on their normal supply chains.
For instance, with everyone striving to stay abreast of pandemic news and developments, there has been an increase in malware incidents. As more and more people move to digital payment platforms, there are also more opportunities for cyberfraudsters to exploit those who are less familiar with technology.
In preparation for the end of lockdowns, there is evidence that fraudsters are on a recruitment drive for “money mules”, targeting the newly unemployed with work-from-home offers.5 Fraudsters move funds through the mules’ bank accounts to launder their illicit profits. Complicating banks’ AML defenses, the typical profile
of such mules can be very different from one country
to the next.
While COVID-19 presents increased fraud threats and challenges, there are also exciting new technologies available to help FIs sharpen fraud detection.
At Standard Chartered,
with the use of new
innovative technologies
such as ThreatMetrix we are rolling our new controls to identify suspected mule accounts through the
analysis of digital footprints touching accounts.
For more information,
please see 'Understanding digital identities in the
world of cybercrime
and compliance.'
Additionally, several vendors now offer real time detection scenarios for use in payment screening to detect potential fraudulent payments.
Over time, with testing and continuous tuning the scenarios will demonstrate increasing effectiveness in fraud detection. Some regulators are offering FIs the latitude to experiment with new ways to prevent
fraud and know their customers. In the UK, for instance, the Financial Conduct Authority has encouraged banks to ask new customers to send “selfies” via email,
so they can confirm their identities by comparing the image with the photos on
official documents.6
How to identify and respond to fraud
Innovations like these are valuable tactical tools in the fight against fraud, but a holistic approach is also needed to mitigate the risks of fraud for individuals and communities. Cressey’s Fraud Triangle, below, gives us a framework through which to fully calibrate our Fraud defense frameworks for the COVID-19 era and beyond.
The pandemic has
expanded the “Opportunity” segment due to the sudden shift to remote-working,
the rapid adoption of new platforms and procedures, increased digital access by criminals and victims,
and the availability of government rescue funds.
“Pressure” likewise comes from a variety of factors that could be inflamed by the pandemic, including reduced incomes stemming from lockdowns, the inability to meet debt repayments, problem gambling and substance abuse.7 8
‘Rationalisation’ is how a usually honest individual persuades himself that
his actions are justified
and worthwhile. In this respect, the pandemic
may have led to increased numbers of disgruntled or desperate employees, particularly as some employers have cut salaries without going through consultation or contract-revision processes.
FIs should consider the risk that hitherto dependable employees might yield to the temptation to divert government bailout funds into their own bank accounts.
There are four key pillars to effective fraud response: Collaboration, Intelligence, Metrics and Awareness.
In the COVID era the first of these, Collaboration,
has become all-important.
Internally,
cross-functional collaboration is essential to understand your institution’s COVID fraud-risks, and then
to prioritise
them so they
can be dealt
with in order
of potential severity. Metrics are vital to understanding how to prioritise those risks and see how patterns of fraud are changing.
Internal and external collaboration is then crucial to tapping the intelligence you need to react quickly.
Working in a Financial Information Sharing Partnership (FISP) model
with regulators and enforcement agencies is valuable in this respect,
as well as monitoring
open-source intelligence and internal data, and sharing information with peers.
Within a financial institution, consider how your AML/ Fraud/ Cyber teams
work together to share information as COVID-19 has highlighted the increasing convergence of cyber, fraud and AML risk. Cyber security risks create the window for criminals to perpetrate a fraud such as business email compromise (BEC), which is then cashed out and laundered through accounts (mule or account takeovers) held at the same FI or multiple others.
Finally, collaborate with clients. Tell your clients and front-line personnel what
the risks are, but also make sure you listen to them,
to establish two-way awareness. In a rapidly evolving situation like the COVID-19 pandemic, institutional awareness can only be ensured by pooling experience, which will in
turn reinforce monitoring, intelligence and collaboration against fraud.
This article contains insights from Standard Chartered’s Correspondent Banking Academy’s Fighting Financial Crime webinar series.
A risk-based approach to tackling COVID-19 crime: Lessons for FIs
Patricia Sullivan
Managing Director and Global Co-Head of Financial Crime Compliance
Matthew Probershteyn, Head of Correspondent Banking Financial Crime Compliance (FCC) at Standard Chartered
Published in July 2020
A risk-based approach to tackling COVID-19 crime: Lessons for FIs
As the pandemic continues,
the impact on our everyday lives and the way we do things will persist for some time.
While regulators have been proactive in communicating the types of risks to the public,
the onus is on FIs to adapt their processes and systems to maintain an effective risk-
based approach to combating
financial crime.
The COVID-19 pandemic is accelerating.1 Infection is spreading rapidly in some countries, while others that seemed to have overcome the virus are seeing localised outbreaks, prompting new lockdowns.2 3 The economic and public health repercussions from the exploitation and illicit trade in wildlife4 are enhancing the scope for financial crime especially around corporate and personal fraud. In addition, organised criminal groups are using the panic and confusion as an opportunity to exploit cybersecurity weaknesses, steal personal data, and use the stolen data to open fraudulent accounts to receive illicit proceeds and launder funds. To counter this threat, financial institutions (FIs) have to play their part to protect our communities, customers and the financial system and install a risk-based approach that is COVID-sensitive.
A risk-based approach (RBA) requires FIs to identify, assess and understand each of the risks to which they are exposed, and then to target their resources at the most serious risks and deprioritise where required.5 This approach must reflect the regulatory and legal stance of the individual countries in which the FI operates, and the particular emerging inherent risks associated with each country. Risks relating to anti money-laundering (AML), countering the financing of terrorism (CFT), economic sanctions and preventing bribery and corruption can vary enormously from one jurisdiction to the next.
In addition, FIs need to consider
the law and requirements of the jurisdiction which clears the currency used by their customers.
For example, if their customers want to use USD and they’re they located in Asia, then FIs need to ensure certain compliance measures in support of US Laws.
The new normal
Most FIs have existing processes to manage onboarding and subsequent Know Your Customer (KYC) and Financial Crime Compliance monitoring and screening works, but these processes need adaptation to handle and make room for the fast-moving and unknown variables stemming from COVID-19. In May 2020, the Financial Action Task Force (FATF), an inter-governmental body, warned that criminals were attempting to use the pandemic to exploit the financial sector to commit crimes such as fraud among others. Global health crises such as COVID-19 follow patterns we have seen before with Ebola, MERS and SARS. These include seeking to divert aid and natural disaster relief money and resources by exploiting disruption to communities, compliance systems, and good governance and supervision. On this latter point,
FATF notes, for example, that most of its members have postponed
on-site AML and CTF inspections
or are using desk-based
inspections instead.6
The chart below illustrates risk management challenges during COVID-19 and highlights where adaption must be considered in the ‘new normal.’
The pandemic response from FATF and many national regulators has been swift, well-communicated and assured, showing flexibility while urging resources to be directed
at the highest-risk crimes. Some have granted FIs extensions for
when they must file Suspicious Transaction Reports. Others have allowed FIs to simplify their due diligence in some circumstances, such as for new accounts created
to allow small businesses to
receive digital payments, or for governments to make emergency payments to individuals.7
In Australia, for example, the regulator Austrac noted that the pandemic had made it harder for FIs to adhere to the KYC procedures that are so critical to preventing criminals from channeling funds through banks.8 These often involve face-to-face meetings or the provision of original documents, requests that were in some cases rendered impractical by the official COVID response. Austrac offered some temporary flexibility in the rules, for instance allowing alternatives to the required identity documents, but made clear that
FIs’ should still apply risk-based systems and controls.
Standard Chartered’s Approach
As the pandemic began to spike around February and March 2020, Standard Chartered adopted a proactive approach to the risks that our staff, and clients were facing. Our financial crime compliance team convened three working groups which are now being integrated into our standard operations. Each has a different leader, and each is as important as the other two.
One focuses on communication to staff, to ensure their safety and wellbeing and that they receive timely COVID-related information relevant to where they live and work.
Remote working
and the stresses of
the pandemic have taken an emotional
and psychological toll on many personnel, and risk-management and services available to staff should take a holistic approach
that incorporates
such factors.
The second working group focuses on high volume and often time-sensitive processes such as transaction monitoring, live payments’ monitoring, and name screening, to ensure these have continued to adhere to the bank’s security standards despite the sudden shift to remote-working as well as an assessment of where adaptation is required to ensure that staff focus on risk relevant work.
Staff responsible for live payments-screening were well-equipped to work remotely under the existing business continuity plan and screening for sanctions related issues continued seamlessly due to extraordinary staff dedication. Transaction-monitoring however is post-transaction activity and not as time sensitive as payment screening and staffed by very large teams based in hub offices, making the shift to 100% remote working more challenging. It was vital to ensure they could work from home in a way that didn’t compromise their safety or security or overburden them given the absence of colleagues who were unwell or unable to work remotely. Considerations included staff well-being, flexible equipment, remote log in ability, and ongoing security of bank property and information.
Prioritisation of key risks and ensuring the teams did not lose the signal in the noise was paramount at this time. With key risks presenting due to COVID-19 fraud and other financial crime risks was not the time for a diminished work force to spend days sifting through false positives. Standard Chartered had already conducted extensive testing of artificial intelligence over several years to assist with transaction-monitoring, and the COVID emergency offered an opportunity to accelerate deployment. These smart algorithms have proved useful for clearing the many false positives
that result from transaction-monitoring, a task that would otherwise have been impossible given staffing limitations during the pandemic. Furthermore, machine-learning has been further deployed
to in name screening processes to uncover any undisclosed links between applicants and individuals that might flag a risk. Solid testing and documentation, partnering with excellent technology innovators, review and sign offs at Governance forums, and regulatory notifications paved the way for the ‘new
normal’ in surveillance. This will be
a positive legacy from the
COVID-19 experience.
The third working group analyses the novel financial crime risks emanating from the COVID crisis, in order to update the bank’s RBA. It found, for example, that some behaviours that would not normally have been considered suspicious now constituted a red flag. Businesses that would handle large volumes of cash were in many countries shuttered, due to the potential risk of infection from coins and banknotes. Therefore, those that continued to receive significant quantities of cash now merited further scrutiny.
We have also noted a larger volume of corporate fraud with missing money and accounting fraud emerging as common themes for misleading investors.
This trend is present in sectors
hit hard by COVID-19 such as
oil and gas.
In general, however, criminals have used the same tactics as they did before the pandemic, although sometimes with a COVID “hook”.
These have involved the same
attack patterns used to submit unauthorised payment instructions
to FIs, sometimes by subtly changing the authorised signers or the name
of the bank in a sophisticated way that suggests the culprits are organised groups of criminals,
not single fraudsters.
Information sharing
and a focus on
law enforcement
remain key
Standard Chartered has found that the best way of stopping such attacks as quickly as possible and evolving our RBA is the sharing of actionable intelligence on actual risk events and best practices. Exchanging intelligence where appropriate and typologies about criminal activities prepares regulators, law enforcement, FIs and their clients to recognise those same frauds when they encounter them, and furnishes FIs with the insights needed to update their risk-based controls in line with the new normal – the strongest defence against crime during the pandemic.
This approach is aligned with the Wolfsberg Group’s December 2019 “Statement on Effectiveness.”9 COVID-19. It demonstrated the power of FATF and supervisors coming together to support FIs to identify current practices that are not required by law or regulation, that do not lead to the production of highly useful information to relevant government agencies and are of little value to FIs for financial crime risk management. With an appropriate risk-based evaluation, these practices could be discontinued, and resources employed more efficiently on areas that have increased value from a financial crime risk management perspective and are focused on defined AML/CTF priorities. Bravo.
This article contains insights
from Standard Chartered’s Correspondent Banking
Academy’s Fighting Financial
Crime webinar series.
Beyond the
COVID-19 shock: revisiting capital allocation
Shoaib Yaqub, Global Head of Financing
Solutions and Advisory (FS&A) at
Standard Chartered
Published in July 2020
Beyond the COVID-19 shock: revisiting capital allocation
As the challenge of surviving COVID-19 gives way to opportunities and potential for growth, how can CFOs and treasurers make sure they’re ready for the next phase?
For corporates, the next phase of the COVID-19 challenge is beginning.
After a conversation dominated by the tragic human cost of the pandemic and, from a business perspective, liquidity and survival, the focus is shifting to how companies will come out of the crisis.
Will there be a “new normal” with respect to capital structure? And what’s the optimal way to manage
both the challenges and opportunities presented by the post-lockdown world?
At Standard Chartered,
we’ve developed a framework to help corporates reassess their capital allocation.
Focus on the
long term
First, we must start with
the end in mind, meaning
any new capital allocation structure needs to focus
on the longer-term strategic objectives of the business. Yet with uncertainties remaining regarding the economic recovery,
as well as concern about
a second wave of the pandemic, financial agility remains paramount.
Second, getting to where
any corporate needs to be will require an assessment
of where they are now. Specifically, how has the sector evolved since the previous crisis and, indeed, since before the 2007-08 financial collapse?
And are these changes sustainable?
To help answer these questions, we analysed capital allocation and indebtedness trends across large corporates1 over the past 15 years, and observed two key trends:
- For a variety of sectors, the relationship between shareholders and corporates – with respect to how returns are achieved and valued – has changed.
- Investor attitudes towards corporate
debt levels have also evolved and now
support an increase
in leverage across
the board.
Understand that both sector and stakeholder expectations have changed
With respect to shareholder returns, the sector differences are stark. They also clearly reflect how the market perceives – or is beginning to perceive – changes in the overall structure of some of these industries. For instance, Oil & Gas had the second-best average dividend
returns over the past 15 years, after Utilities. Yet it suffers on a total-return
basis due to the past decade’s underlying volatility and the emergence of environmental concerns.
Meanwhile, other sectors have been able to rely on steadily increasing stock market valuations to provide investor returns. Least surprisingly
in this respect is the Tech sector, although the Non-Food Retail and the Fast-Moving Consumer Goods (FMCG – or “consumer products”) sectors also show strong value. Tech – as well
as Aerospace & Defence
and Hotel & Leisure –
has offered incremental shareholder value via
share buybacks.
Taking all three attributes together, FMCG comes out on top over the 15-year period. Meanwhile, Oil & Gas, Utilities and some other more established sectors remain reliant on cash dividends to maintain investor loyalty.
Why is this important for
the capital structure? Because, in each case, the investor base has some clear expectations that will permeate the thinking of any corporate treasurer when allocating capital – particularly when it comes to debt.
Rising debt levels
Despite a widespread expectation that corporate debt levels would decline after the global financial
crisis, they rose across all sectors. Average debt-to-EBITDA ratios of the S&P 1200 – the largest global companies – increased from 1.9x over a 15-year average, to 2.0x over a 10-year average and a 2.3x average for 2019.
While the rise is inexorable,
it is not a uniform picture,
with some sectors seeing a disproportionately larger increase than others
(see above).
It is possible to conclude, therefore, that indebtedness has been increasing without any significant backlash
from investors. And while there may be other factors underlying this tolerance, such as the low interest
rate environment, it still
marks a significant shift in investor attitudes.
Optimal capital allocation
What does this mean as we emerge from lockdown?
As the focus shifts from being reactive to the crisis to being more proactive – and even opportunistic – what should an optimal capital allocation structure look like for the medium and long term?
For most sectors, reinforcing balance sheet headroom, even if it is done to create a war-chest for potential M&A, will be critical and we see three possible routes to achieving this.
Route one involves “self-
help” solutions. The second involves generating a more efficient use of capital.
Route three requires a wholesale rethink of the
long-term capital structure.
“Self-help” centres upon factors within direct
control of the company – such as cost optimisation
and reducing capital expenditure. This means protecting margins while postponing investment in future income streams. Added to this may be an increased emphasis
on disposals, which means selling non-core assets to raise capital and pay down debt. Indeed, many Oil &
Gas corporates have managed to reduce (or not increase) their debt levels by doing exactly this, although arguably this also forms part of a conscious effort to
“right-size” the asset base
to boost productivity.
The capital efficiencies
route, meanwhile, relies on making the existing capital structure work more effectively, particularly with respect to working capital. Leaders in the FMCG
sector, for instance, have been quick to embrace supply chain finance and other innovative mechanisms that enhance income flows and generate working
capital efficiencies. Digitisation of transaction banking has helped improve cash flow forecasting.
And while many see this as
a chance to reduce debt,
the more ambitious can
utilise the enhanced
cashflow to invest in
top-line growth.
The third route involves the most change for a corporate and is often viewed as the last option. It involves a fundamental rethink of underlying indebtedness, including a bottom-up assessment of long-term liquidity needs, as well as the potential impact on their sector of regulatory, economic and societal changes. The assessment should include a detailed
and informed analysis of working capital requirements, revenues, acquisitions,
and disposals – all targeted
to generate the preferred capital structure.
Such a review may point to a fundamentally higher indebtedness, though one adopted as part of a proactive growth strategy.
It should certainly mean the removal of any legacy or emotionally driven target ratios that may now act less as a prudent benchmark
and more as an albatross around the neck of a corporate treasurer.
A tailored
approach in a recovering world
While the current pandemic is a once-in-a-generation event, it provides a clear measure of the required downside headroom for each industry. Of course, this may be a too-restrictive buffer on an ongoing basis. Yet for benchmarking purposes, it is worth revisiting pre-crisis policy with respect to working capital requirements for weathering such a storm.
Secondly, it is important to review how debt levels could impact the credit story of the business. Of course, credit rating agencies have a role here, although the story is usually more complex – as illustrated by the deteriorating credit quality of the S&P 500 without the expected adverse impact on borrowing costs.3 Critical, here, will be a company’s long-term objectives, particularly with respect to growth – and its expectations regarding funding such growth.
Finally, we think it beneficial to widen the lens to assess situations with a similar underlying story. For example, do corporates in sectors such as Tech or Life Sciences – that have a higher portion of intrinsic value in future growth – retain higher levels of cash to allow greater balance sheet flexibility, or leverage-up to grow rapidly?
The above represents just part of the analysis companies should embark upon as we emerge from
the crisis. It also shows that, far from there being one
“new normal”, there are many – often highly dependent on
the sector, but also on geography, and where the company sits on the lifecycle.
Given this, do you feel your capital structure and balance sheet is fit for the future?
