Speech at Asian Financial Forum by David Lipton, First Deputy Managing Director, International Monetary Fund
It is my great pleasure to be here. I’d like to thank the Hong Kong government for inviting me to this important event and to all of you for taking the time to join us.
In this challenging time for the global economy, I can think of no better place than Asia for my first visit of 2012. Why do I say that?
Asia’s economies today are strong and showing great promise, in part because of the reforms introduced courageously, and not without painful consequences, when Asia faced its own crisis in the nineties.
But now it is problems in the rest of the world, Europe in particular, that pose a risk to Asian prosperity. Now, Asia has a stake in seeing Europe solve its problems and even in playing a role in that process.
Beyond that, Asia has its own challenges, both in the near and longer term.
By working together, more and better than in the past, Asia and the IMF can help ensure stability and prosperity for the region and for the world.
Today I would like to expand on these key messages by expanding on three key themes. I will start with the state of the European economy, trace its implications for Asia, and end with a few thoughts on the importance of revitalizing IMF-Asia relations.
Global Outlook and Policies
Only a few months ago, the IMF warned the global economy was entering a “dangerous new phase.” Sadly, that phase is no longer new, but it remains more dangerous than ever.
At the global level, the pace of economic activity is weakening. Although recent indicators in the United States have surprised on the upside and growth there is likely to continue, global economic activity has generally worsened in the last quarter of 2011, and the near-term outlook has deteriorated noticeably relative to our September projections. And, worse, the downside risks that we identified then have started to materialize during the last part of 2011.
The main reason is the escalating euro area crisis. Specifically, concerns about fiscal sustainability and banking sector losses have widened sovereign spreads to unprecedented levels for many euro area countries. Bank funding has all but dried up in the euro area, leading banks to delever by selling assets and restrict lending. Now deleveraging threatens to push growth below even the reduced forecast we will publish next week. The euro area crisis is spilling over and interacting with fragilities elsewhere, bringing risks to many others around the globe.
So, yes the European outlook is grim and the risks for Europe and the world are high. But rather than allow ourselves to be paralyzed by pessimism, it is time to focus on the more hopeful perspective of working our way through this crisis. If there is good news, it is that we know what policies are needed, and we are busy trying to muster the finance to support those policies. Provided political will can be found, there is a good chance to resolve Europe's problems, ward off the downside risks, and build a foundation for future growth.
What is that way forward?
The essential elements are the four "mores". More liquidity to manage the crisis—both for banks and sovereigns (including more resources for European backstops); more fiscal consolidation, with a prudent but credible pace that does not unduly hurt short-term growth; more growth to sustain adjustment and sever damaging feedback loops (which will require additional policy accommodation and putting more capital into banks to reduce the scale of deleveraging); and more integration—both fiscal and financial– to ensure the viability and stability of monetary union.
In recent months, Euro zone leaders have started to outline and indeed implement some of what is needed: they are acting to contain fiscal deficits and have agreed on a mechanism for future fiscal discipline. They established a trans-national safety net. They have taken a harmonized approach to recapitalizing banks, and a systemic risk board is now in operation. And recently the European Central Bank has unleashed impressive firepower to make long-term liquidity available to banks. The challenge for Europe in 2012 is to move ahead on all of those fronts, implementing, cooperating, but also making mid-course corrections as needed to strengthen each of those steps and ensure there is the firepower to do the job. The IMF is working with Europe, supporting its efforts to restore market confidence, rekindle growth and ensure the integrity of the common currency.
The stakes are high. Without bold action, Europe could be swept into a downward spiral of collapsing confidence, stagnant growth, and fewer jobs.
And in today’s interconnected global economy, no country and no region would be immune from that catastrophe.
Challenges for Asia
That is especially true for Asia.
Asia emerged from the 2008 financial crisis with its global standing strengthened, and is headed toward becoming the largest economic region in the world over the next two decades. On current trends, by 2030 Asia’s economy will be larger than that of the G-7 and will be half the size of the G-20. The center of the global economy is truly shifting from the West to the East.
That said, despite rapidly growing intraregional trade, and some economic rebalancing in the aftermath of the global financial crisis, Asia continues to rely too much on final demand from US and the Euro area. That is a vulnerability.
And Asia is vulnerable to financial channels of contagion. Deleveraging by European banks could have a significant impact on credit supply and asset prices in several Asian economies, as European banks have substantial claims on these economies. Trade finance could be particularly affected, as European banks are particularly important providers in Asia, and could be difficult to replace.
Given these acute downside risks, what can policymakers in Asia do to mitigate the impact on their economies?
On the macro policy front, staying on course with fiscal normalization would increase the ability to respond to the shocks, and restore the fiscal space lost after the 2008 crisis. At the same time, a pause in monetary tightening now looks appropriate, wherever inflation forecasts are within central banks’ targets.
But policymakers also need to make sure that banks remain liquid and have secure funding, and try and reduce external vulnerabilities by lengthening debt maturities, securing credit lines, and further expanding currency swap arrangements, either bilaterally or through the Chiang-Mai Initiative. Some may also wish to consider IMF support, including from our new Precautionary and Liquidity Line —I will return to this later.
Should downside risks materialize in force, policymakers in Asia would need to respond swiftly, as they did in 2008/2009. The response would have to include reversing fiscal consolidation, for those with sufficient space to do so, and aggressively easing monetary policy. This might require cutting policy rates but also adopting a range of non-traditional measures, including the introduction of targeted credit easing measures, for example on commercial paper, corporate bonds, and SME credit. Introducing guarantees for bank liabilities and supporting trade financing could also be considered. To do so, Asian economies could use their ample foreign exchange reserves and, if and where necessary, regional reserve pooling arrangements.
From a longer-term standpoint, Asian policymakers also face the challenge of continuing structural reforms needed to ensure sustainable and strong medium-term growth, and reforms that make their economies less vulnerable to external shocks. These measures would also help alleviate widening income inequality in the region and support a sustained rebalancing of growth away from investment and exports towards private consumption.
IMF’s new Asia partnership
As Asia goes forward, the IMF stands ready to be a partner.
I realize that the potential for collaboration is clouded by memories of the Asian financial crisis of 1997–98. But now almost 15 years later, we all need to decide what lessons to draw. From the vantage point of 2012, one can see that the reforms taken during and after that difficult and traumatic period gave Asia the resilience to withstand the 2008 global financial crisis and are helping today.
In particular, the aggressive restructuring of bank NPLs, corporate debt and currency mismatches, helped Asia enter the global financial crisis from a position of strength. And more nimble macroeconomic policy frameworks gave Asian economies the room for a strong countercyclical response when the global financial crisis hit the region. But even more important, despite suffering from crisis spillovers, Asian economies have remained committed to free trade and closer financial and economic cooperation. It is thus not a coincidence, nor a surprise, that Asia has led the global recovery over the last three years.
We at the IMF also learned important lessons from Asia’s experience that we are now applying to programs across the globe, including in Europe. In particular, the Fund recognizes that while tough measures are needed to address deep economic problems, the conditions accompanying its programs need to be more focused on the problems at hand. And we are far more conscious of the importance of broad social support for the policies proposed and undertaken, and of the importance of protecting the most vulnerable parts of society, hence we place a greater focus on ensuring effective social safety nets in crisis cases.
Looking forward, two areas where our work can support this region’s interests are enhancing economic and financial surveillance for crisis prevention, and strengthening the global financial safety net:
Economic and financial surveillance. The global crisis has underlined the importance of looking at economic policies and conditions both in individual countries and globally, and at spillovers between countries. The global financial crisis also stressed the importance of macro-prudential oversight of the financial system.
The IMF’s analysis can play a useful role in this regard, including through a constructive collaboration with the ASEAN+3 Macroeconomic Research Office (AMRO.)
For example, we are focusing more on the spillovers into Asia from policies that are occurring elsewhere and, likewise, examining the global implications of policy decisions taken here in Asia. Our spillover reports on China, Japan, the U.S., the U.K., and the Euro Area are at the frontier of this type of integrated analysis.
At the same time, the Fund is stepping up its efforts to assess the health of Asian financial sectors, in close collaboration with the authorities. In the past two years, the IMF conducted its first-ever Financial Sector Assessment Program (FSAP) reviews of China and Indonesia, jointly with the World Bank. FSAP updates have been completed for Bangladesh, Cambodia, and the Philippines, and assessments are either underway or will soon be launched in India, Japan, Malaysia, and Australia.
Global financial safety net: As the crisis demonstrated clearly, capital flows can reverse very quickly in times of panic—even from countries with sound macroeconomic and financial conditions, such as many Asian economies. Developing an effective global financial safety net is therefore an essential element of a more stable global economy and can greatly help Asia withstand the risks of new external shocks.
To do so, and also building on the experience of the Asian crisis, the IMF initiated a reform of its lending toolkit after 2009 and introduced more tailored crisis prevention tools, including most recently the Precautionary and Liquidity Line (PLL), designed to meet the liquidity needs of “crisis by-standers”: member countries with sound economic fundamentals and policies but which have actual or potential balance of payment needs mainly because of crisis elsewhere in the world.
In this regard, in the coming weeks, we will be making the case for a step up in the Fund’s lending capacity. In doing so, let me stress that the goal is to be able to augment the resources Europe will be putting into tackling its problems, but also to be able to meet the needs of “innocent bystanders” around the world. In a globalized world, the need for firewalls is global.
Finally, we are also working to better integrate IMF resources with regional reserve pooling arrangements like the Chiang Mai Initiative and enhance our cooperation.
Needless to say, a stronger partnership between Asia and the IMF will also require a stronger role for Asia in the Fund. Given its rise as an economic powerhouse, it is only natural that Asia’s voice in our institution should become increasingly influential. This trend is already under way. In 2010, the IMF passed an important package of quota and voice reforms, through which emerging Asia’s representation in the Fund will increase by 27 percent. Thanks to the reform there will be three Asian economies (China, Japan and India) among the 10 largest shareholders in the Fund, with Japan and China being the 2nd and 3rd largest members respectively.
Asia’s links with the IMF are being strengthened also through the selection of key IMF personnel from the region. With the recent appointments of Naoyuki Shinohara, from Japan, and Min Zhu, from China, as Deputy Managing Directors of the Fund, Asian nationals are now 40 percent of the IMF’s management team. In addition, Singapore’s Deputy Prime Minister and Minister for Finance, Tharman Shanmugaratnam, became Chairman of the International Monetary and Financial Committee in 2011.
Last, but not least, the IMF/ World Bank 2012 Annual Meetings will be held in Tokyo, recognizing the critical role of Asia as a bulwark of stability in the world economy, as well as the IMF’s growing and constructive partnership with the region. I encourage all of you to join us there in October.
Let me conclude by stressing that these are highly uncertain times for the global economy, which is threatened by intensifying strains in the Euro Area and fragilities elsewhere. With decisive measures in Europe and global support, it is possible to avoid a new phase in the crisis that would have spillovers to countries all across the world, including in Asia.
The IMF stands ready to work with Asia to help make sure that the risks for the region are minimized, and that the challenges the region faces in the long run are successfully met. While all eyes are on Europe right now, the Fund is continuing in its efforts to make Asia one of its key centers of engagement, and looking forward to Asia taking a bigger role at the IMF.
Achieving both objectives will help achieve sustained economic growth, in Asia and the world.
Beyond Transactions: The Payment Revolution
By Marwan Forzley, CEO of Veem
The uninterrupted disruption brought on by the pandemic accelerated the need for robust, digital-first tools created to support remote teams and accelerate online commerce.
As offices across the US moved to work from home for indefinite periods, specialized back office departments handling sensitive information have had to go a layer deeper to find tailored solutions that support the transition of their in-person workflow. For finance teams, payment approvals, issuance, and general management became a challenge overnight. Particularly for those who — even in 2020 — continued to send and receive paper checks through the mail.
For years and even to this day, millions of small business owners around the world have relied on slow and confusing bank processes to manage their business finances. Every day, they spend valuable time using old, complex and expensive platforms to transact with domestic and international vendors — never knowing where their payment is or even when it arrives at its destination.
With ongoing economic and logistical uncertainty looming as we move into 2021, this old norm should not be expected for much longer. This year has seen small business owners wear more hats than ever before, and has influenced a mass adoption of online financial applications that offer heightened security, save more time, and provide more value as budgets tightened.
A study conducted by Mastercard earlier this year saw online business-to-business payments skyrocket in popularity with more than half (57%) of small business owners across North America turning to digital services since the start of the pandemic to improve cash flow and modernize their payment processes.
If this study is of any indication, the days of making an appointment with a banker or sending a wire transfer through an outdated web portal have passed. And the time for the payment revolution is here.
Putting the user in the driver’s seat
Major world events have always acted as a catalyst for innovation and change. As of a result of the growing pains we experienced this year, in 2021 businesses can finally say goodbye to huge transaction fees and bank-imposed gatekeeping when it comes to managing their financial processes.
The financial technology firms, in partnership card and local bank networks and sometimes even each other, have been building and iterating on products over the past decade that were created to work flawlessly from a desktop or smartphone.
For the first time, small businesses have access to needed, user-friendly financial tools packaged to make their lives easier. No longer reserved for major enterprises, those previously underserved by traditional banks can sign up for applications that consolidate billing, payments, working capital and more to one central dashboard.
With the owner in the driver’s seat, they can better communicate with vendors and customers and reallocate their time previously spent manually sending, receiving and reconciling payments toward growing their business — without ever stepping foot out of their home.
Genuinely seamless and automatic integrations with complimentary functions aligned to core financial activities mark a fundamental change in how businesses will choose to operate moving forward. Not only should experiences be integrated, but the entire lifecycle of the transaction should be digital.
Consider a freelance contractor that uses a time tracking and invoicing software to invoice a client. Through an integration between the time tracking tool and Veem (a complete online business payment tool) the client receives and captures the invoice within their Veem payment dashboard. Because Veem and Quickbooks are integrated partners, as soon as the invoice is received, a bill is automatically created, marked as paid, and reconciled on the client’s accounting software as soon as the funds are issued.
In this flow, the contractor only needs to send an invoice, and the client only has to approve the payment for everything else to move. Thoughtful integrations like these empower businesses to log-in to one application, but benefit from several, ultimately eliminating inefficiencies.
Understanding that old habits die hard, it’s expected that businesses of any size have questions when it comes to moving payments from a bank to an online provider.
Answering these questions with unprecedented product value and relentless transparency is the best way forward to bring more businesses onboard in 2021.
This means providing up front pricing, tracking, choice and flexibility to users. Before, during and after the pandemic, cash flow management remains the most critical part of running a small business. Digital payment providers enable the entrepreneur to have unparalleled insight, visibility, and control over their cash flow.
Through non-bank payment options, businesses can secure their information over a secure data network, watch their money move from origin to destination, and choose the speed at which they would like funds to move. By these tools working in harmony, the user can remove friction and spend more time focused on their business.
Separating the signal from the noise
2020 is a year that changed everything for the global small business community. In a report by Veem issued at the start of the pandemic, an overwhelming 80% of businesses shared that they anticipated COVID-19 to impact their business over the next 12-16 months. Problems surfaced that many didn’t even realize they had. And in finding those problems, businesses turned to technology to support them.
As enabling technology, it’s our job to listen and bring clarity and solutions to those contributing to and growing our local and global economies despite the hurdles and challenges they’ve faced.
Right now, small businesses deserve more. More access, more choice and more credit. In the road ahead we expect online payments and bundled user friendly financial services to play a pivotal role in the recovery of small businesses. The payment revolution will see the continuation of important and meaningful products that value the users time and enable businesses to launch, grow, and scale regardless of what’s to come in 2021.
The UK’s hidden payments crisis: why businesses should rethink their payments strategy
By Edwin Abl, Chief Marketing Officer at Modulr.
As the economic conditions imposed by the Coronavirus endure, businesses are facing a dilemma about how to reduce operational costs while meeting customer needs in as economical a way as possible. And all without compromising on their quality of service.
A recent survey of 200 payments decision makers across the UK, revealed there are hidden costs of payment processing which will have an exponentially greater impact on wider businesses if left untreated. It found, UK businesses are spending an average of £1.5m a year in costs attached to payments – money they simply cannot afford to lose to inefficient processes in these uncertain times.
Businesses need to plug any holes in their boat to avoid sinking. And for many this includes the examination and recalibration of their payments strategy.
The research reveals that the payments process now represents a huge 12% of a business’s total operational expenditure. With two-thirds (64%) of all businesses expecting the cost of payment processing to increase over the next two years.
Two thirds (67%) of payments decision makers surveyed believe the way they process, and service payments has had a direct impact on their customer experience. In fact, 62% of respondents believe the hidden costs of poor payments outweigh the hard costs. This indicates that a poor payments strategy is no longer something business leaders can ignore, as it now has a far greater and unseen impact on wider business mechanics.
The top three hidden costs attached to inefficient payment processes were ‘impact on customer experience/satisfaction’ (38%), ‘influence on relationships with other teams and departments (35%) and ‘impact on competitor differentiation’ (31%).
These findings suggest there is widespread consensus that getting payment operations right, directly creates performance boosts elsewhere in the business. When asked to estimate, as a percentage, the business performance boost received if hidden payment inefficiencies were resolved, the average margin for improvement was +14%, with traditional banking the sector most likely (31%) to predict a performance gain greater than +15%.
The 5 key steps UK businesses can take to drive payment efficiencies
There are five key areas payments decision makers and tech leaders should be looking to change, so that they can drive end-to-end payment process efficiencies:
1 – Locate hidden payment process inefficiencies
Visibility is a key issue. Respondents across large (46%) and small businesses (47%) say they have very clear metrics directly related to payment process costs. Only 8% say that they don’t understand the costs involved. Yet, businesses know they could do better with improved visibility of costs. Both large and smaller companies cite ‘lack of visibility for operational costs’ as the top challenge when it comes to achieving strategic goals around payment process and money services provision.
Digital banking companies, including lenders and FinTechs, identified ‘lack of visibility for operational cost’ as a challenge when it comes to increasing payment services revenue (37%). This is in comparison with all respondents mentioning other issues such as lack of skills (25%) and constrained resources (25%) as secondary and tertiary challenges respectively.
For many businesses, developing a cost model for current and projected payment process costs, both hard and hidden, is a top priority.
2 – Make payments key to stakeholder experience management
Customer, departmental and even supply chain partner experiences are increasingly intertwined. There is no doubt that customer experience is a top priority for payment services strategy. But enhancing the broader stakeholder experience is a close second, and certainly complements the former.
Employee experience affects customer experience. So, payment services innovation must extend beyond customer touchpoints. Happy employees who feel they are working with effective and efficient payments systems will be best placed to enhance the customer experience. And, employees in commercial roles who have bought into the benefits of efficient payments will naturally want to extoll those benefits to customers.
Companies with a sophisticated and integrated supply chain are likely to be the frontrunners in implementing the integrated payment services that benefit all stakeholders, due to their historic experience. As customer experience management evolves into a broader discipline of stakeholder experience management, including employees and supply chain partners, it will become more crucial than ever to include payment services experience
3 – Integrate and automate to support payment innovation
Payment innovation is driving a culture change, connecting previously siloed functions such as IT and finance. There is increasing integration of systems from customer relationship management (CRM) and enterprise resource planning (ERP), into accounts and payments. The research tells us that payment processes are impacting nearly every department, affecting areas including customer experience, brand, leadership, business agility and ultimately, revenue. Integration enables new business models for paying suppliers and customers.
Automation is key to driving efficiency, replacing manual error-prone and time-consuming processes with real-time and responsive, digital ones. This is particularly the case when it comes to operational and payment processes.
Indeed, 52% of large companies say that team hours spent on payment processes was their biggest hard cost attached to payments, compared with 26% of smaller companies who share that view. This suggests that automation could contribute more to cutting the cost of payment processes in large companies.
A host of payments-as-a-service providers (including Modulr) are supporting customers to do just this by enabling them to stream a whole unified product ecosystem of payments functionality directly into their own software.
4 – Bring business leaders together
Payments innovation is driving systems integration and creating a more collaborative stakeholder ecosystem. As all the C-level roles become increasingly focused on the customer experience, the finance remit now includes overall business operations and its associated risks and opportunities. The role is evolving beyond just accounting, tax liability and funding. Therefore, closer collaboration between senior leaders is key to driving efficiencies and enhancing customer experience.
5 – Innovate by adding finance and payments to vertical services
Companies with a vertical focus are well placed to innovate by offering new payment services. In many vertical sectors, especially employment services, software vendors are increasingly embedding financial services facilities, such as payments, into their technology platforms. Employment services SaaS providers, across payroll, accounting, bookkeeping and more are offering financial services to existing and new customers within their specific ecosystem.
This means they can develop hyper relevant, convenient and delightful financial products and services for their end users through highly flexible, ‘plumbed in’ payments. This creates an ecosystem of stickier products while boosting the lifetime value of each end user.
Moving forward – engaging technology to drive efficiencies
If the onset of the Coronavirus crisis has taught us anything, it is that there are many advantages to investing in technology and having a digital infrastructure as responsive as your customer-facing experience.
However, whilst digital technologies enable companies to provide customer service in new ways during lockdown. These same businesses are failing to transform their digital strategies, with the biggest priority still being cost reduction (41%).
By not shedding legacy technology and shoring up operational efficiency, UK businesses are following an increasingly risky strategy. And one which will have an exponentially greater impact on the wider business if left untreated. Particularly when this widespread failure to act concerns the customer experiences that sit at the very heart of a proposition – the payments.
To find out how you can drive payment efficiencies into 2021 and beyond, download the full report here for all the insight you need.
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