The financial impact of technological disruption needs no introduction. One of the more stark examples is the per cent market cap of tech constituents in the top 20 companies of the S&P 500. It rose from around 6% to more than 50% in past 25 years. In a 2017 scan, it was found that approximately 70% of S&P 500 companies discussed disruptive technologies in earning calls or filings. Media, travel, some parts of retail and telecoms were deemed to be have either been disrupted or in advanced stages of disruption, with banking and finance also firmly in the spotlight. Incumbents in more â€śphysicalâ€ť industries, including logistics, aviation, healthcare and real estate were deemed to have been at an experimental stage of disruption and had some years to go before facing significant digital disruption.
The Covid-19 pandemic is challenging sectors that have experienced relatively low levels of digital disruption such as aviation, automotive, oil and gas, shipping, logistics and consumer goods and testing the robustness of the banking sectorâ€™s own digital transformation efforts of the past decade or so.
During these disruptive times, measured as some of the most uncertain by the CBOE Volatility Index (VIX), companies have sought uninterrupted access to banking services, better visibility and control of liquidity, incremental funding of working capital, bespoke risk management solutions and unprecedented access to insights and advice.
Relevance is everything
The deepest global recession of our lifetime is upon us and precipitating a forensic examination of the relevance of existing digitisation efforts across sectors. The extent to which companies recover from Covid-19 and find their new normal will vary greatly by sector, with those affected by consumer attitudes toward social distancing like restaurants, leisure travel and offline entertainment the first to be affected and likely the last to recover.
Disruption in the banking sector has long past its experimental point, following a period of turmoil characterised by high amounts of venture capital pouring into fintechs, approximately USD16 billion in the five years up to 2016, and new players rapidly entering the financial intermediation space but still some way off what one might describe as disrupted by comparison to the retail and media sectors. Customised, convenient and digital alternatives have forced the banking sector to respond to clientsâ€™ heightened expectations.
In the same way that multinational corporations are assessing the post-Covid-19 changes to their clientsâ€™ expectations and adjusting their priorities accordingly, so are financial institutions. The following six factors that have historically driven digitalisation may serve as useful means of self-evaluation, against which decisions on how to re-prioritize, to serve clients better, can be made.
At the risk of over-simplifying, one might conclude that solutions enhancing agility, transparency, decision-making and risk management would move to the forefront in a Covid-19 new normal digital world. Scale is a given, speed is expected (even considered normal) and value will be measured by the contribution that can be made toward oneâ€™s clientsâ€™ transformation effort.
Through a quick glance at the Covid-19 policy measures taken across the EU â€“ more than 800 so far â€“ itâ€™s clear that the immediate economic focus â€“ overwhelmingly fiscal and micro-prudential in nature â€“ is to protect jobs, avert bankruptcies, ensure liquidity and provide relief to the real economy. But there will come a new normal. As such, some of the following themes are likely to prevail for transaction bankers and participants of financial intermediation as companies shift their focus from crisis management to responding to their new reality:
History has taught usâ€¦
While history isnâ€™t necessarily a predictor of the future, each of the crises since the start of the new millennium do offer useful lessons, if not checkpoints on our self-assured hubris, as we contemplate medium term responses to Covid-19. For instance, the bursting of the dot-com bubble in 2002 taught us that we need to be grounded when it comes to futuristic concepts. The subprime financial crisis of 2008 taught us about the high risk of new untried credit instruments and the importance of regulation. The flash crash of 2010 taught us that technology is a double-edged sword and when things go awry, reaction speeds can be accelerated. And the Greek debt crisis of 2011 taught us that itâ€™s tough to make adjustments during a recession.
On the one hand, we are at risk of exaggerating our fears and making misguided choices; on the other, we know from previous crises that we must be futuristically grounded, that technology can be a double-edged sword and that it will take courage to adjust during the current economic climate.