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Towards the sunny uplands
Financial services and technology companies can look forward to a bright future. They need to get through 2022 first.
As usual for a year-end edition of Financial IT, many of our contributors discuss what is likely to happen in the coming year or so, taking a positive view.
One contributor, for instance, argues that businesses and financial institutions are on their way towards “hyper-automation”. This is a destination that is difficult to define exactly.
Nevertheless, some of the statistics from the recent past show what the journey is likely to be like. According to a report from consultant McKinsey that is cited by the contributor, the average business in Europe, the Middle East and Africa (EMEA) underwent seven years’ worth of digital transformation in calendar 2020. That year alone saw a 19% rise in eCommerce. The number of contactless MasterCard payments increased by 40%. One survey found that 95% of the financial services workers interviewed had worked from home at some stage since the beginning of the Covid-19 pandemic.
The excitement is not confined to big consultancies and large, well established businesses. Another contributor to this edition of Financial IT points out that, among small “Covidpreneurs”, an Application Marketplace is emerging. This means that business functions which would previously have been handled by in-person interactions, or on personal computers, are now taking place through apps on the mobile devices of the business owners.
Technology has further empowered consumers and will continue to do so. One survey found that over 40% of US home buyers in 2020 completed their entire home loan application online. Meanwhile, online retailers are no longer constrained by what merchandise they have in stock. If a customer orders something that is not in stock, the retailer can purchase that item from another supplier, add a small mark-up, and make delivery. The metaphorical aisles of the supermarket have become endless.
As ever, most operational problems which face financial institutions are seen as opportunities for solutions. We live in a world where there are simply not enough cyber-security professionals to meet the needs of financial (and non-financial) companies. One of our contributors is looking to create a series of eco-systems – spanning technology, education/training and human resources (HR) – that will address the issue over the coming years.
Don’t forget the financial markets…
All of this optimism is at odds with the air of caution which has pervaded the Editor-in-Chief’s and Publisher’s letters in recent editions of Financial IT.
In September, for instance, I commented on three major sources of risk. One could be described as “stagflation”. At a time that supply constraints have caused sharp rises in the prices of a number of goods and services, there have been signs that economic activity is slowing down – both in the United States and globally.
Meanwhile, the geopolitical situation has deteriorated. Right now, a good example is the (apparently) very frank discussions between US President Joe Biden and Russian President Vladimir Putin over the security and future of Ukraine. In September, the mainstream media was focused on the Aukus alliance between Australia, the UK and the United States in response to Chinese expansionism.
The third major issue is financial repression. Through quantitative easing (QE), the Federal Reserve – and other central banks - are creating money in order to buy bonds. Although much of the new money created is tied up in commercial banks’ claims on the central banks, it raises the likelihood of serious inflation in the medium term. In addition, QE forces bond prices up and bond yields down. Financial institutions which are required to hold large quantities of bonds – such as banks, pension plans and insurance companies – are forced to invest in assets that are providing negative real (i.e. after inflation) yields.
Our publisher Chris Principe discussed the implications of what he calls “Bubblenomics”. Some hard numbers confirm that the bubble in financial asset prices is, indeed, of epic proportions. Currently, stocks in the NASDAQ composite are trading at nearly 5.7 times sales. By way of contrast, the corresponding figure was just over 1.0 times in early 2009 – in the wake of the Global Financial Crisis. In the last 20 years, the previous peak in the price-to-sales ratio was just under 5.0 times in late 2005.
2022: a challenging year for many
Bubbles can deflate slowly. More commonly, though, they burst. It is virtually impossible to envisage that the world will get through 2022 without a brutal sell-off of stocks in major markets and an increase in volatility. Depending on the policy responses of central banks and governments, there may well be a major crisis in bond and currency markets as well.
This will be traumatic for many financial institutions and, indeed, companies that are operating in the real economy, too. It may complicate efforts by technology companies to raise funds that they need.
However, a financial crisis will likely accelerate the speed of change - as surviving institutions seek ways to improve their customers experiences’, to meet regulators’ requirements and to operate more efficiently.
In the darkest days of the coming year, it will be important to remember that the sunny uplands – where collaboration at the intersection of financial services and technology produces good outcomes – are not far away.
We wish all subscribers, advertisers and contributors the best for the festive season.
Editor-in-Chief, Financial IT
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