by John Lipsky – Acting Managing Director, International Monetary Fund
Kurt Viermetz Lecture – The American Academy in Berlin
Good evening. I’m delighted to be back at the American Academy in Berlin, and am honored to be delivering the Kurt Viermetz Lecture.
We meet at a highly uncertain time. While the global economy has bounced back solidly from the trough hit in 2009, the recovery remains uneven and subject to downside risks. Some countries—including many emerging economies in Asia and Latin America, as well as Germany—are doing well. But in many other countries, growth has not been strong enough to reduce unemployment rates significantly. More worrying, downside risks to the outlook have increased recently—reflecting persistent fiscal and financial stresses in the European periphery, uncertain progress toward fiscal consolidation in Japan and the United States, and possible overheating in some emerging market economies.
Stepped-up policy actions are needed to keep the global recovery on track. Some countries are delaying reforms, however, reflecting understandable concerns about their possible impact on near-term growth prospects. This is where economic policy cooperation can make an important contribution: when reforms are designed and implemented coherently, all countries can be better off.
This conclusion was demonstrated during the global financial crisis, when unprecedented international policy cooperation helped prevent a much deeper global recession. Policy cooperation is equally important today, as countries seek to secure the global recovery and create the conditions for strong, sustainable and balanced growth. But as the recovery proceeds along different paths around the world, keeping policy adjustments coherent has become more difficult.
Thus, a key challenge in the post-crisis era is to sustain international policy cooperation. In fact, greater cooperation and coordination here in Europe will be an essential element in overcoming the serious threats to the region’s stability and progress, and in completing the single market project. In my remarks today, I’ll discuss how new mechanisms for economic policy cooperation are helping the global recovery—but also the challenges still faced in sustaining cooperation over the longer term.
The global economy – more interconnected and more complex
I’ll begin with the global economic context—and specifically, how growing interlinkages among economies have made the world more complex, and by extension, have made policymaking more challenging.
Let’s start with a standard geographic map of the world. It needs no introduction.
Now let’s see what happens if we redraw the world map based on GDP at market exchange rates. The United States clearly is very large. So are Europe and Japan. Interestingly, some of the fastest growing economies are not so large, even though they are very important in terms of their contribution to global growth.
Now let’s transform this map into one that weights economies by trade. A very different picture emerges. Europe—and especially Germany—is very large. So is Japan. And a few countries with rather small populations, like Australia and Canada, also are relatively large.
And now, a final transformation, weighting countries by financial assets and liabilities. This shows yet another reality: The United States and Europe are very large—whereas most emerging economies appear quite small. And Africa is hardly visible at all.
These maps underscore how varied and shifting interlinkages have added considerable complexity to the global economy. This complexity helps explain some of the key policy failures leading up to the recent crisis. But the interlinkages that give rise to greater complexity also have been the source of major policy successes, both before and after the crisis.
When we consider what went wrong before the crisis, we must include failures of command and control systems in both the private and the public sectors. The inability to grasp the strength and breadth of macrofinancial linkages was a major failing. Financial interconnections simply were not perceived clearly—nor did we understand their implications for the real economy. And what began as a crisis of subprime mortgage financing in one country helped to produce the deepest global recession since World War II.
But rising global interlinkages also have been associated with some notable policy successes. Two in particular are worth mentioning:
First, increasing interconnectedness—especially of trade and finance—has produced the strongest sustained period of global growth in world history, lifting hundreds of millions of people out of poverty. As shown by the Commission on Growth and Development—led by the Nobel laureate Michael Spence—every case of a nation rising out of poverty involved a period of strong and sustained growth. In turn, each such case involved an economy that was opened to world markets. In other words, embracing globalization led to better economic outcomes.
A second success is the remarkable increase in global policy cooperation that has taken place in the wake of the 2008-09 global financial crisis. When the world last faced such grave danger—during the Great Depression—countries acted in their own, perceived self-interest with beggar-thy-neighbor policies that in fact deepened the downturn. This time, countries acted together to tackle the crisis. And as a result, the downturn lasted only three quarters—from mid-2008 through the first quarter of 2009—a remarkable result considering the severity of the threat.
New policy challenges
Today, we face a new challenge—namely how to reestablish strong, sustained, and balanced growth. Currently, the global economy is growing at a fairly healthy clip. Our latest forecasts—released just last week, in the quarterly update of the IMF’s “World Economic Outlook”—anticipate global growth of about 4½ percent both this year and next. But as you can see from the chart, this average masks an uneven recovery across the world. While growth in the emerging economies is powering ahead robustly—and in some cases, verging on overheating—growth in many advanced economies is not fast enough to make up for the significant ground lost during the crisis.
Slow progress in closing the output gap means that unemployment remains stubbornly high in the advanced economies—with the notable exception of Germany, where employment is above pre-crisis levels. Slow job creation is especially worrisome for young people, for whom it is even harder to find a job. In the Middle East and North Africa, it is perhaps more obvious how high youth unemployment has contributed to great social tension. In other countries, youth unemployment may not be as high in absolute terms, but the risk of a “lost generation” of young people, forever marked by higher joblessness and lower incomes, cannot be ignored.
High public debt is another major challenge facing many advanced economies. The crisis led to an increase in debt-to-GDP ratios of 25 to 30 percentage points on average for this group. Most of this reflected the crisis, as it depressed tax revenues and required public support for financial sectors. But the long-term fiscal challenges reflect factors that pre-date the crisis, including demographic pressures and unsustainable social transfer programs. This slide shows the amount of fiscal adjustment needed over the next twenty years to first stabilize and eventually return public debt to pre-crisis levels relative to GDP. Virtually every advanced economy faces a need for substantial fiscal adjustment.
Focusing specifically on the challenges here in Europe, the overall recovery is broadly favorable—and the outlook for Germany is considerably better than that. But serious challenges in the periphery—including severe competitiveness problems, very high debt levels, and fragile banking systems—threaten this outlook, including potentially even for Germany. If these challenges are not resolved, the spillovers to the eurozone could be severe. European financial institutions could suffer major financial losses from their exposures to the periphery countries. Eurozone growth could suffer from a downturn in demand from the crisis countries. And there could be even worse consequences, if instability in the periphery shakes consumer and investor confidence.
Strong policy actions by national authorities in the peripheral European countries clearly are essential to overcome these challenges. But these actions are unlikely to succeed without a truly cohesive approach from all euro area stakeholders. With deeply intertwined fiscal and financial problems, failure to undertake decisive action could spread the tensions to the core of the euro area, and beyond. At the same time, moving ahead with the broader policy agenda—to secure stronger potential growth and establish a more resilient EMU—remains equally pressing.
Turning to the emerging economies, we find an entirely different set of policy challenges. Many of these countries either are near or already back at potential output. At the same time, real policy rates in almost every country are negative in real terms—meaning that monetary policies remain expansionary even though the need for monetary stimulus has passed. Easy liquidity has stoked credit growth, which remains elevated in almost every country—only in China is it slowing, albeit from very rapid rates.
These loose monetary conditions present a serious threat to one of the emerging economies’ most impressive accomplishments—namely bringing down inflation. As you can see, average CPI inflation in the emerging economies has declined tremendously since 1995, so that it is now in the 5-7 percent range. This dramatic policy achievement is an important reason why investment in emerging economies has become such an attractive proposition.
If we look at recent performance, you’ll see that after a long period of decline, there was a brief uptick in emerging economy inflation in 2007-08 as commodity prices spiked. But after that, inflation continued falling. Today, there is once again an uptick in energy and commodity prices. But current macroeconomic conditions are very different from those in 2007-08—today, these economies are close to, or even out of, excess capacity. Their fiscal and monetary policies are expansionary, and credit growth is very rapid. In other words, rising commodity prices is only one of several reasons that inflation is under upward pressure.
This combination of factors also is raising inflationary expectations. Here you can see inflation expectations for the BRICs—Brazil, Russia, India, China—in December 2010. And here are expectations today—a clear deterioration from six months ago.
To sum up: Although the global economy has weathered the worst crisis since the Great Depression, it still faces serious headwinds in both advanced and emerging economies. It also has become clear that to overcome these global challenges, we will need global solutions. In the remainder of my remarks, I’d like to look at how the IMF and the G-20 are helping to make this possible.
Global policy cooperation through the IMF
The global financial crisis holds many lessons for how the IMF can serve its members more effectively, and how it can better foster international policy cooperation. We already have moved forward in many ways in response to these lessons. Let me focus on four key areas: (i) surveillance; (ii) financing instruments; (iii) resources; and (iv) governance.
I’ll begin with surveillance, which refers to the IMF’s unique mandate to consult with its 187 member countries about their economic and financial policies, while ensuring that such policies are consistent with global economic and financial stability. There have been several important innovations since the crisis:
• We introduced the “early warning exercise”—in cooperation with the Financial Stability Board—through which we’ve strengthened our monitoring of tail risks faced by the global economy.
• We made the Financial Sector Assessment Program—or FSAP—mandatory for twenty-five IMF members with systemically important financial systems. Over the past year we’ve conducted the first-ever FSAP for the United States and for China—and we also completed an FSAP update for Germany.
• We have increased our focus on interlinkages among economies, and how policies in one country can impact—or “spill over”—onto others. We are focusing in particular on the spillovers from the five most systemically important economies and economic regions in the world—China, Japan, the Euro area, the United Kingdom, and the United States—and will present our analysis in a new series of spillover reports later this summer. For Germany, our analysis noted the importance of reforms that support strong domestic demand—both for delivering sustainable medium-term growth in Germany itself, and for contributing to a stronger European and global economy.
• We are improving our understanding of macrofinancial linkages. As I mentioned earlier, failure to recognize the specifics of these linkages was one of the contributors to the crisis. We are also paying more attention to the quality of growth as we ask ourselves how the distribution of income and unemployment rates may affect macroeconomic stability.
We also have made important enhancements to our financing instruments. We streamlined our financing programs so that they focus on the core policies needed to reestablish growth and stability. And to address the need for insurance-like crisis prevention products, we introduced the Flexible Credit Line and the Precautionary Credit Line, that provide large-scale liquidity at times of heightened financial stress to IMF members with strong policy track records. Another innovation is enhanced cooperation with regional financing arrangements. In Europe, we have partnered with the EC and the ECB to provide financing for Greece, Ireland and Portugal. And we are looking forward to deepening our cooperation with the Chiang Mai Initiative in Asia.
We are also exploring whether the global financial safety net needs to be strengthened further. During the crisis, short-term liquidity provision required a series of one-off actions by individual central banks. But will this model be sufficient to deal with future crises? It is worth considering whether a multilateral facility, perhaps with the IMF and central banks working together, is worth developing.
In the area of resources, our capacity to provide financial support has been boosted significantly. Our members agreed to double our quotas to about $767 billion, and to expand the New Arrangements to Borrow, a facility that allows us to draw additional funds from our members on relatively short notice. Since the crisis, the IMF has committed about $330 billion to member countries facing financing pressures. We also sold some of our gold holdings. While the proceeds ultimately will be used to help finance the IMF’s operations, these resources currently are helping to provide additional subsidized support for our low-income country members.
The final area of IMF reform is governance. Last year, our members agreed historic reforms that are delivering a greater voice for the dynamic emerging market economies, in line with their weight in the global economy. Once the latest round of already agreed reforms are in place, China, India, Brazil, and Russia will be among the IMF’s top ten shareholders (along with the United States, Japan, and the four largest European economies). At the same time, the voice of our poorest members has been protected. As a result, it is our expectation that doubts regarding the IMF’s “legitimacy” will have been laid to rest.
Global Policy Cooperation through the G-20
I’ll turn now to the changes in international policy cooperation that are taking place under the auspices of the G-20—the grouping that brings together nineteen of the world’s largest economies, plus the European Union. I’ll use the timeline of the five G-20 leaders’ summits to highlight the most important achievements so far.
Let’s begin with the first-ever G-20 leaders’ summit, held in Washington during November 2008. At this time, fears were rising rapidly about the economic fallout of the financial crisis. G-20 leaders decided that a broader policy response was needed to deal with the crisis, and agreed on an action plan involving closer macroeconomic policy cooperation, as well as regulatory and other financial sector reforms.
The next summit took place in London, during April 2009. By this time, concerns about the global economy were at a crescendo. In the face of this threat, leaders decided that a global, cooperative solution was needed to overcome this global crisis. They agreed on a massive policy stimulus—fiscal and monetary—to shore up economic growth. They also agreed to provide the IMF with $1 trillion in additional resources.
The next summit was held in Pittsburgh during September 2009—a time when it was clear that the global economy was growing again. Leaders recognized that their unprecedented policy cooperation had played a major role in preventing a much deeper recession. The challenge faced in Pittsburgh was how to sustain cooperation into the recovery phase. This was addressed in two ways. Leaders agreed that the G-20 would be the premier forum for international economic and financial policy cooperation. They also launched the Framework for Strong, Sustainable and Balanced Growth—which provided a blueprint for policy cooperation in the recovery. And to underpin this framework, the G-20 launched the Mutual Assessment Process—or MAP—through which members would share their medium-term policy frameworks, and evaluate whether their policies are collectively consistent with sustainable and balanced global growth. The IMF was asked to provide analytical support for this effort.
Moving forward to the Toronto summit—in June 2010—leaders considered the results of the first stage of the MAP. The key question was whether a better global outcome could be achieved if countries acted cooperatively—rather than adopting policies without explicit consideration of what other countries were doing. Analysis prepared by the IMF showed that the answer was clearly affirmative—a cooperative alternative indeed provided a superior outcome. On this slide, the green line represents what we call the upside scenario, which reflects full policy cooperation between advanced and emerging economies.
The point here is simple, yet powerful. Arguments for policy cooperation need not be based on one country making a sacrifice for the global good. Instead, it can be motivated by the premise that if countries act coherently, they can achieve an outcome that is better for everybody. And in Toronto, G-20 leaders expressed their belief in this premise, and agreed to take the actions needed to achieve the upside scenario. They also agreed on the broad policy framework—which is presented in this matrix. Amongst the advanced economies, those with external surpluses need structural reforms. And those with external deficits need fiscal consolidation. Emerging surplus economies need to rebalance demand toward domestic sources. And emerging deficit economies need structural reform, and other demand management measures. And across the board, all countries need to repair and reform their financial systems.
The critical achievement of the November 2010 Seoul summit was that countries provided specific policy commitments for reaching the upside scenario. Leaders also decided to take the MAP to a new stage, and assess how excessive imbalances in member countries—whether internal or external—might contribute to global economic instability. The G-20 subsequently decided to focus their analysis on seven economies whose imbalances are considered particularly important in this regard.
The next summit will take place in Cannes this November. Between now and then, the G-20’s Framework Working Group will be drawing on a range of inputs—including IMF analysis —to assess whether the policy commitments made by the seven key countries and others are sufficient to reach the upside scenario. The G-20’s recommendations will feed into a Cannes Action Plan. In some sense, this will be the acid test for policy cooperation under the auspices of the G-20: Will countries take the steps needed to fulfill their commitments?
There is one additional aspect of this framework that I consider to be extremely important. For the first time, G-20 countries are committed to a specific mechanism that will support policy cooperation—over time. In other words, international policy cooperation has become a repeated game. Of course, this new framework won’t solve all the world’s economic problems quickly—nor is it intended to. Can it make a difference? I think so. But political support will be essential for it to succeed.
Financial sector reform
I’d like to touch briefly on one piece missing from my presentation so far—financial sector reform. Obviously this is a very broad topic, so I will limit my comments to three important developments: the creation of the Financial Stability Board, the agreement on four pillars of financial sector reform, and the new focus on macroprudential policies.
The Financial Stability Board was created in April 2009—at the behest of the G-20—as the successor to the Financial Stability Forum. The FSB was given a broadened mandate to promote financial stability, and was also expanded to include all G-20 members. With greater legitimacy, the FSB can be a more effective agent in advancing financial sector reform.
The second important development is the FSB’s agreement on four pillars of financial sector reform: (i) regulation, (ii) supervision, (iii) resolution mechanisms for systemically important financial institutions (or SIFIs), and (iv) assessment of the implementation of new standards. This provides an important framework to guide reform efforts at the national level, and also efforts to coordinate reforms across countries.
So far, the only pillar that has received substantial public attention is regulatory reform—and there have been some notable achievements in this area—for example, the agreement on Basel III. But in the IMF’s assessment, weakness in supervision—the second pillar—was every bit as important as weakness in regulation in bringing about the financial crisis. Progress on strengthening this pillar has been much slower.
Turning to the third pillar, a clear lesson from the crisis is that resolution mechanisms are needed that are capable of dealing with institutions that are “too important to fail”. But how do we resolve important financial institutions operating in multiple jurisdictions? This is fiendishly complicated work, and it will likely take a long time to reach international agreement on how to move forward in this area.
The fourth pillar—assessment of the implementation of new standards—is one where considerably more progress has been made already. As I mentioned earlier, the FSAP has been made mandatory for the most systemically important economies from a global financial perspective. And the FSB already has a peer review process that will draw on the FSAPs.
The final development I’d like to note is the recognition that macroprudential policies are essential to increase the stability of the financial system. In a traditional form of financial regulation, the focus was on instruments and institutions. Today, we know that we need to think about how the global economy affects the stability of the financial system—and vice versa—to effectively safeguard financial stability. The new European Systemic Risk Board represents a key initiative in this area.
Wrapping up, it is clear that we face a challenging moment for the global economy. But it is also a moment of great opportunity, to strengthen economic policy cooperation and build a stronger global economy.
Here in Europe, integration since World War II already has been an incredible success. And in the wake of the global financial crisis, Europe has taken unprecedented steps towards strengthening fiscal discipline, underpinning the single financial market, bolstering competitiveness, and enhancing crisis resolution mechanisms. But for the euro area to live up to its full potential, more efforts are needed. I am confident that they will be forthcoming.
Thank you very much for your attention.
Lockdown 2.0 – Here’s how to be the best-looking person in the virtual room
suggests “the product you’re creating is not the camera, the lens or a webcam’s clever industrial design. It’s the subject, you, which is just on e part of the entire image they see. You want that image to convey quality, not convenience.”
Technology experts at Reincubate saw an opportunity in the rise of remote-working video calls and developed the app, Camo, to improve the video quality of our webcam calls. As part of this, they consulted the digital photography expert and author, Jeff Carlson, to reveal how we can look our best online.
It’s clear by now that COVID-19 has normalised remote working, but as part of this the importance of video calls has risen exponentially. While we’re all used to seeing the more casual sides of our colleagues (t-shirt and shorts, anyone?), poor webcam quality is slightly less forgivable.
But how can we improve how we look on video? We consulted Jeff Carlson for some top tips– here is what he had to say.
- Improve the picture quality of your call
The better your camera, the higher quality your webcam calls will be. Most webcams (as well as currently being hard to get hold of and expensive), are subpar. A DSLR setup will give you the best picture, but will cost $1,500+. You can also use your iPhone’s amazing camera as a webcam, using the new app from Reincubate, Camo.
Jeff’s comments “The iPhone’s camera system features dedicated coprocessors for evaluating and adjusting the image in real time. Apple has put a tremendous amount of work into its imaging software as a way to compensate for the necessarily small camera sensors. Although it all works in service of creating stills and video, you get the same benefits when using the iPhone as a webcam.”
Aidan Fitzpatrick, CEO of Reincubate explains why the team created Camo, “Earlier this year our team moved to working remotely, and in video calls everyone looked pretty bad, irrespective of whether they were on built-in Mac webcams or third-party ones. Thus began my journey to build Camo: an iPhone has one of the world’s best cameras in it, so could we make it work as a webcam? Category-leading webcams are noticeably worse than an iPhone 7. This makes sense: six weeks of Apple’s R&D spend tops Logitech’s annual gross revenue.”
- Place your camera at eye level
A video call will never quite be the same as a face-to-face conversation, but bringing your camera up to eye level is a good place to start. That can involve putting your laptop on a stand or pile of books, mounting a webcam to the top of your display screen, or even using a tripod to get the perfect position.
Jeff points out, “If the camera is looking down on you, you’ll appear minimized in the frame; if it’s looking up, you’re inviting people to focus on your chin, neck, or nostrils. Most important, positioning the camera off your eye level is a distraction. Look them in the eye, even if they’re miles or continents away.”
Low camera placement from a MacBook
- Make the most of natural lighting
Be aware of the lighting in the room and move yourself to face natural lighting if you can. Positioning the camera so any natural light is behind you takes the light away from your face, which can make it harder to see and read expressions on a call.
Jeff Carlson’s top tip: “If the light from outside is too harsh, diffuse it and create softer shadows by tacking up a white sheet or a stand-alone diffuser over the window.”
Backlit against a window Facing natural light
- Use supplementary lighting like ring lights
The downside to natural lighting is that you’re at the mercy of the elements: if it’s too bright you’ll have the sun in your eyes, if it’s too dark you won’t be well lit.
Jeff recommends adding supplementary lighting if you’re looking to really enhance your video calls. After all, it looks like remote working will be carrying on for quite some time.
“The light can be just as easy as a household or inexpensive work light. Angle the light so it’s bouncing off a wall or the ceiling, depending on your work area, which, again, diffuses the light and makes it more flattering.
Or, for a little money, use a softbox or a shoot-through umbrella with daylight bulbs (5500K temperature), or if space is tight, LED panels. Larger lights are better for distributing illumination– don’t be afraid to get them in close to you. Placement depends on the look you’re going after; start by positioning one at a 45-degree angle in front and to the side of you, which lights most of your face while retaining nice shadow detail.”
In some cases, a ring light may work best. LEDs are arranged in a circle, with space in the middle to put the camera’s lens and get direct illumination from the direction of the camera.
- Centre yourself in the frame
Make sure you’re getting the right angle and that you’re using the frame effectively.
“You should aim for people to see your head and part of your torso, not all the space between your hair and the ceiling. Leave a little space above your head so it’s not cut off, but not enough that someone’s eyes are going to drift there.”
- Be mindful of your backdrop
It’s not always easy to get the quiet space needed for video calls when working from home, but try as best you can to remove anything too distracting from your background.
“Get rid of clutter or anything that’s distracting or unprofessional, because you can bet that will be the second thing the viewers notice after they see you. (The Twitter account @RateMySkypeRoom is an amusing ongoing commentary on the environments people on television are connecting from.)”
A busy background as seen by a webcam
- Make the most of virtual backgrounds
If you’re really struggling with finding a background that looks professional, try using a virtual background.
Jeff suggests: “Some apps can identify your presence in the scene and create a live mask that enables you to use an entirely different image to cover the background. While it’s a fun feature, the quality of the masking is still rudimentary, even with a green screen background that makes this sort of keying more accurate.”
- Be aware of your audio settings
Our laptop webcams, cameras, and mobile phones all include microphones, but if it’s at all possible, use a separate microphone instead.
“That can be an inexpensive lavalier mic, a USB microphone, or a set of iPhone earbuds. You can also get wireless lavalier models if you’re moving around during a call, such as presenting at a whiteboard in the camera’s field of view.
The idea is to get the microphone closer to your mouth so it’s recording what you say, not other sounds or echoes in the room. If you type during meetings, mount the mic on an arm instead of resting it on the same surface as your keyboard.”
- Be wary of video app add-ons
Video apps like Zoom include a ‘Touch up your appearance’ option in the Video settings. This applies a skin-smoothing filter to your face, but more often than not, the end result looks artificially blurry instead of smooth.
“Zoom also includes settings for suppressing persistent and intermittent background noise, and echo cancellation. They’re all set to Auto by default, but you can choose how aggressive or not the feature is.”
- Be the best looking person in the virtual room
What’s important to remember about video calls at this point in time is that most people are new to what is, really, personal broadcasting. That means you can easily get an edge, just by adopting a few suggestions in this article. When your video and audio quality improves, people will take notice.
Bringing finance into the 21st Century – How COVID and collaboration are catalysing digital transformation
By Keith Phillips, CEO of TISATech
If just six or seven months ago someone had told you that in a matter of weeks people around the world would be locked down in their homes, trying to navigate modern work systems from a prehistoric laptop, bickering with family over who’s hogging the Wi-Fi, migrating online to manage all financial services digitally, all while washing their hands every five minutes in fear of a global pandemic… You’d think they had lost their mind. But this very quickly became the reality for huge swathes of the world and we’re about to go through that all over again as the UK government has asked that those who can work from home should.
Unsurprisingly, statistics show that lockdown restrictions introduced by the UK government in March, led to a sharp increase in people adopting digital services. Banks encouraged its customers to log onto online banking, as they limited (and eventually halted) services at branches. This forced many customers online as their primary means of managing personal finances for the first time.
If anyone had doubts before, the Covid-19 pandemic proved to us the importance of well-functioning, effective digital financial services platforms, for both financial institutions and the people using them.
But with this sudden mass online migration, it’s become clear that traditional banks have struggled to keep up with servicing clients virtually. Legacy banking systems have always stilted the digitisation of financial services, but the pandemic thrust this issue into the limelight. Fintech firms, which focus intently on digital and mobile services, knew it was only a matter of time before financial institutions’ reliance was to increase at an unprecedented rate.
For years, fintechs have been called upon by traditional players to find solutions to problems borne from those clunky legacy systems, like manual completion of account changes and money transfers. Now it is the demand for these services to be online coupled with the need for financial services firms to cut costs, since Covid-19 hit the economy.
Covid-19 has catalysed the urgent need to bring digital transformation to a wider pool of financial services businesses. Customers now have even higher expectations of larger institutions, demanding that they keep up with what the younger and more nimble challengers have to offer. Industry leaders realise that they must transform their businesses as soon as possible, by streamlining and digitising operations to compete and, ultimately, improve services for their customers.
The race for digital acceleration began far before the recent pandemic – in fact, following the 2008 financial crisis is likely more accurate. Since the credit crunch, there has been a wave of new fintech firms, full of young, bright techies looking to be the next big thing. Fintechs have marketed themselves hard at big conferences and expos or by hosting ‘hackathons’, trying to prove themselves as the fastest, most innovative or the most vital to the future of the industry.
However, even during this period where accelerating innovation in online financial services and legacy systems is crucial, the conditions brought about by the pandemic have not been conducive to this much-needed transformation.
The second issue, which again was clear far before the pandemic, is that fact that no matter how nimble or clever the fintechs’ solutions are, it is still hard to implement the solutions seamlessly, as the sector is highly fragmented with banks using extremely outdated systems populated with vast amounts of data.
With the significance of the pandemic becoming more and more clear, and the need for better digital products and services becoming more crucial to financial services firms and consumers by the day, the industry has finally come together to provide a solution.
The TISAtech project was launched last month by The Investing and Saving Alliance (TISA), a membership organisation in the UK with more than 200 leading financial institutions as members. TISA asked The Disruption House, a specialist benchmarking and data analytics business, to create a clearing house platform for the industry to help it more effectively integrate new financial technology. The project aims to enhance products and services while reducing friction and ultimately lowering costs which are passed on to the customers.
With nearly 4,000 fintechs from around the world participating, it will be the world’s largest marketplace dedicated to Open Finance, Savings, and Investment.
Not only will it provide a ‘matchmaking’ service between financial institutions an fintechs, it will also host a sandbox environment. Financial institutions can pose real problems with real data and the fintechs are given the space to race to the bottom – to find the most constructive, cost-effective solution.
Yes, there are other marketplaces, but they all seem to struggle to achieve a return on investment. There is a genuine need for the ‘Trivago’ of financial technology – a one stop shop, run by an independent body, which can do more than just matchmaking. It needs to go above and beyond to encompass the sandboxing, assessments, profiling of fintechs to separate the wheat from the chaff, and provide a space for true collaboration.
The pandemic has taught us that we are more effective if we work together. We need mass support and collaboration to find solutions to problems. Businesses and industries are no different. If fintechs and financial institutions can work together, there is a real chance that we can start to lessen the economic hit for many businesses and consumers by lowering costs and streamlining better services and products. And even if it is just making it that little bit easier to manage personal finances from home when fighting with your children for the Wi-Fi, we are making a difference.
What to Know Before You Expand Across Borders
By Sean King, Director of International Tax at McGuire Sponsel
The American retail giant, Target Corporation, has a market cap of $64 billion and access to seemingly limitless resources and advisors. So, when the company engaged in its first global expansion, how could anything possibly go wrong?
Less than two years after opening its first Canadian store in 2013, Target shut down all133 Canadian locations and terminated more than 17,000 Canadian employees.
Expansion of an operation to another country can create unique challenges that may impact the financial viability of the entire enterprise. If Target Corporation can colossally fail in its expansion to Canada, how might Mom ‘N’ Pop LLC fare when expanding into Switzerland, Singapore, or Australia?
Successful global expansion requires an understanding of multilayered taxes, regulatory hurdles, employment laws, and cultural nuances. Fortunately, with the right guidance, global expansion can be both possible and profitable for businesses of any size.
Any company with global ambitions must first consider whether the company’s expansion outside of the U.S. will give rise to a taxable presence in the local country. In the cross-border context, a “permanent establishment” can be created in a local country when the enterprise reaches a certain level of activity, which is problematic because it exposes the U.S. multinational to taxation in the foreign country.
Foreign entity incorporation
To avoid permanent establishment risk, many U.S. multinationals choose to operate overseas through a formal corporate subsidiary, which reduces the company’s foreign income tax exposure, though it may result in an additional level of foreign income tax on the subsidiary’s earnings. In most jurisdictions, multinationals can operate their business in the foreign country as a branch, a pass through (e.g., partnership,) or a corporation.
As a branch, the U.S. multinational does not create a subsidiary in the foreign country. It holds assets, employees, and bank accounts under its own name. With a pass through, the U.S. multinational creates a separate entity in the foreign country that is treated as a partnership under the tax law of the foreign country but not necessarily as a partnership under U.S. tax law.
U.S. multinationals can also create corporate subsidiaries in the foreign country treated as corporations under the tax law of both the foreign country and the U.S., with possibly two levels of income taxation in the foreign country plus U.S. income taxation of earnings repatriated to the U.S. as dividends.
Under U.S. entity classification rules, certain types of entities can “check the box” to elect their classification to be taxed as a corporation with two levels of tax, a partnership with pass-through taxation, or even be disregarded for U.S. federal income tax purposes. The check the box election allows U.S. multinationals to engage in more effective global tax planning.
Toll charges, transfer pricing and treaties
When establishing a foreign corporate subsidiary, the U.S. multinational will likely need to transfer certain assets to the new entity to make it fully operational. However, in many cases, the U.S. multinational cannot perform the transfer without recognizing taxable income. In the international context, the IRS imposes certain outbound “toll charges” on the transfer of appreciated property to a foreign entity, which are usually provided for in IRC Section 367 and subject to various exceptions and nuances.
Instead, the U.S. multinational may prefer to license intellectual property to the foreign subsidiary for a fee rather than transfer the property outright. However, licensing requires the company and foreign subsidiary to adhere to transfer pricing rules, as dictated by IRC Section 482. The U.S. multinational and the foreign subsidiary must interact in an arms-length manner regarding pricing and economic terms. Furthermore, any such arrangement may attract withholding taxes when royalties are paid across a border.
Are you GILTI?
Certain U.S. multinationals opt to focus on deferring the income recognition at the U.S. level. In doing so, they simply leave overseas profits overseas and delay repatriating any of the earnings to the U.S.
Despite the general merits of this form of planning, U.S. multinationals will be subject to certain IRS anti-deferral mechanisms, commonly known as “Subpart F” and GILTI. Essentially, U.S. shareholders of certain foreign corporations are forced to recognize their pro rata share of certain types of income generated by these foreign entities at the time the income is earned instead of waiting until the foreign entity formally repatriates the income to the U.S.
The end goal
Essentially, all effective international tax planning boils down to treasury management. Effective and early tax planning can properly allow a company to better achieve its initial goal: profitability.
If global expansion is on the horizon for your company, consult a licensed professional for advice concerning your specific situation.
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