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WILL THE UK GOVERNMENT BE A FORERUNNER TO A SHIFTING GLOBAL ECONOMIC NARRATIVE?

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WILL THE UK GOVERNMENT BE A FORERUNNER TO A SHIFTING GLOBAL ECONOMIC NARRATIVE?

By Michael Stanes, Investment Director at Heartwood Investment Management

The tectonic plates of UK politics have shifted once again with the abrupt end to the Conservative Party leadership contest, the appointment of Theresa May as Prime Minister and a significant cabinet reshuffle that has refreshed a government that was left flailing following the UK referendum result.

All in all, we believe this week’s events should be taken positively. The UK now has more visibility in the near term with regards the political situation; more progress has been made than anyone had expected. In the short-term, this is good for politics, good for the economy and good for financial markets. Moreover, sweeping changes to the cabinet reshuffle suggests that it will not be business as usual.

So what’s next?

While negotiations around Brexit will be pivotal to the new administration’s success, it is unlikely to want to be defined by this issue alone. Theresa May’s focus on social justice, which she has made a centre piece of her forthcoming agenda, contributes a new dynamic to current political and economic consensus.

The new Prime Minister is clearly putting her stake in the centre ground of UK politics and, in her efforts to build ‘One Nation’ Conservatism, she is reaching out to those ‘ordinary’ voters who delivered the ‘Leave’ verdict, many of whom live outside of the larger metropolis cities. While historians will argue for many years around the root causes of the UK referendum result, there is a strong sense that disaffected voters in those areas of the country that have not benefitted from globalisation and yet have borne the hardships of years of austerity decided that things couldn’t get much worse. They demanded change and politicians have been scrambling to respond.

This is not just a UK phenomenon, but it has been a hallmark of the anti-establishment rhetoric globally since the 2008 financial crisis. Over the years, European political discourse has been increasingly infected by populist movements and we are now witnessing this trend in the United States. Despite all attention placed on the anti-establishment US Presidential candidate Donald Trump, it is noteworthy that Hilary Clinton, the candidate who is famously backed by Wall Street banks, has shifted her rhetoric to be more in tune with the some of the harder-left beliefs of Bernie Sanders.

Revising conventional economic wisdom

From the 1980s through to the early 2000s, inflation was considered to be the central bankers’ bogeyman. However, in a world of very low or negative interest rates, where there has been little progress in terms of productivity advances, income inequalities have widened and there appears to be no ‘escape velocity’ –i.e. a breakout to a more sustainable level of growth for the global economy – central bankers and governments are being forced to revise years of accepted economic dogma.

In many ways it can be argued that Brexit could be a catalyst for a new approach. The Bank of England has given assurances that it is ready to take conventional action and reduce interest rates as early as August. If Andy Haldane’s comments about taking a sledgehammer to a nut materialise, interest rates may well be reduced to zero. The Bank has already provided support to financial markets by reducing banks’ capital requirements and it may also consider expanding its asset purchase programme.

More interestingly, though, Governor Mark Carney has stated that the UK’s economic adjustment, as a consequence of the ‘regime shift’ of being outside the European Union, cannot be the job of monetary policymakers alone. It  requires government support. This marks a nuanced departure from standard central bank language. While other central bankers have asked for support in previous years from governments through structural reforms, notably President Mario Draghi of the European Central Bank, Carney’s comments refer to a different type of action: a fiscal boost as opposed to meeting fiscal targets.

A call to fiscal arms

Early indications suggest that Prime Minister May is heeding those calls to take up fiscal arms. In various speeches, she has spoken of the need to end the budget surplus targets; increase infrastructure spending via Treasury-backed bonds; support house building; and deliver an industrial strategy, which includes among other things, adding employee representatives onto company boards. Given the lack of wage growth in the developed world over the last few years, some economists are now arguing for a stronger employee voice to help redress the issue of lack lustre wage growth. It is believed that this approach could produce more creative thinking, innovation and investment from the corporate sector, which ultimately increases productivity growth.

Furthermore, Theresa May has also spoken about the need to protect UK companies from the prey of foreign ownership where their business activities are central to UK economic success – she cites the near sale of Astra Zeneca to Pfizer. Some would argue that some of her views could be conflated with Ed Miliband’s playbook! In the absence of a leadership  contest, it is worth noting that Theresa May’s economic thinking has yet to be tried and tested among her Party. Whether she is able to deliver a new economic agenda, which she describes as being targeted to everyone and not just the privileged few, is still up for debate. Her government has a wafer thin majority in Parliament, plus the majority of her cabinet can be characterised as market-liberal ‘Brexiteers’ from the right of her party.

Nonetheless, we are at the cusp of entering a new political and economic phase in the UK and by extension globally. The reshaped UK government looks on course to be a forerunner in a shifting global narrative, where more focus is placed on government action to stimulate growth and provide relief to somewhat exhausted central banks.

Finance

The ever-changing representation of value

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The ever-changing representation of value 1

By Vadim Grigoryan, Partner, Lunu Solutions

Ask a selection of people about cryptocurrencies and you’ll likely receive a wide range of answers. Some will wax lyrical about the huge potential of the underlying infrastructure that supports them, while others will dismiss them as nothing more than a worthless speculative bubble.

Cryptocurrencies have often been described in this way, mainly because – according to their opponents – they aren’t backed by tangible value. This is an argument that could easily be dismissed as very short-sighted, particularly if we remind ourselves that our current currencies all rely on trust – not exactly the most tangible of assets.

As Kabir Sehgal, a bestselling author and former JP Morgan vice-president, said: “In order to deal in money, humans must be able to think symbolically”. Financial history teaches us that money, in its first intent, was almost never meant to have intrinsic value – but to be a representation of it. For example, the porcelain-like shell of the cowry circulated around the globe for 4,000 years – longer than any other currency in the history of money. And its value was perceived not on its intrinsic utility, but on its beauty. Indeed, intrinsic value has long stopped be a measure of the real value of money. Let us not forget that each individual banknote costs a fraction of what it’s worth to produce – a $100 bill costs around 12 cents.

Money first appeared from the original evolutionary need to eat and survive by exchanging energy with another. That is why money has become whatever represents that energy: first food commodities – such as barley, cacao beans or salt – and then the tools to cultivate them. The symbolic distancing of money from its real value has developed over the years into coins, paper currency and mobile payments. Since money is fundamentally a mental abstraction of symbolic representation of value, what money is and what it will be can be is limited only by human imagination. Could something as invisible and intangible as cryptocurrencies be the next step?

Building value through trust

Something that has value should check two boxes: scarcity and utility. Scarcity of cryptocurrencies is often guaranteed by their design, in terms of a finite or limited supply (e.g. Bitocoin has a set cap of 21 million coins). Their utility is already embedded in the divisible nature of cryptos (unlike gold, which is very difficult to use transactionally, you can buy a coffee, a ferrari or a house with bitcoins). As such, the potential of cryptos to be a more efficient currency than what we already have would further increase with the wider adoption of digital currencies in retail.

We know that the representation of value has changed over time and is a fast-moving one in our society. That’s one reason why the concept of ‘money’ is much more abstract and complicated than most people realise.

But one thing that has never changed throughout the long evolution of money is the importance of trust. The reason money works is because people trust in its value; this is a key rationale behind most currencies – including cryptos. In fact, one of the key selling points of cryptocurrency is that it is built specifically on trust.

Although they lack the legal and institutional backing of traditional financial services, cryptocurrencies provide trust through technology. Blockchain technology enables the use of a distributed and immutable ledger of records, providing total transparency and making every transaction tamperproof. Data is decentralised and encrypted so that it can’t be interfered with or changed retrospectively. The crypto sphere is also intrinsically democratic. There is no central authority and no individual entity can change the rules of the game, which protects against government interference and makes it almost impossible to lobby private interests.

So, with this in mind, why are cryptocurrencies still largely used as an asset rather than a means of payment? It’s mainly because the real-life economy is still lagging in terms of providing crypto-based payment solutions. Many stores still fear accepting cryptos as a means of payment – whether due to technical limitations or concerns around fees and exchange rates – creating a vicious circle reinforcing the speculative nature of cryptos as assets that are just bought and sold.

We believe it’s time to break this circle and move towards a new financial model that accepts cryptos as a means of payment. It’s time for cryptocurrencies to be appreciated for the value they provide.

Recognising crypto personas

Our research into the ever-growing crypto community has uncovered an ecosystem of global citizens that share a philosophy; one pegged to a thirst for freedom, equality, inclusion and global interaction. For example, they are actively involved in social causes and place a high value on social responsibility for individuals and companies.

We also identified several different persona groups within that ecosystem, all of which have varying degrees of influence in the community.

  • Hamsters: this group is enthusiastic about cryptos, but lacks either the wealth or knowledge to shape the market or effectively navigate it.
  • Geeks: comprised of tech-savvy specialists who expect others to be up to their level of technical expertise
  • Cool cucumbers: a group of wealthier individuals focused on the investment opportunities and less emotionally involved with cryptos as a way of life

But the most powerful and engaged of the various user groups we identified, is the one containing individuals who have the financial capital and technical knowledge to drive and shape the future of the market – the Apostles. They are the community gurus, the public figures and the influencers who aren’t afraid to voice their opinions. Indeed, their minds have the power to drive widespread adoption of cryptos.

Over the coming years, this cohort of individuals will continue to grow and impose its expectations on retailers and stores. They understand the concept of money as a representation of value and recognise the role that secure, decentralised and globally connected cryptocurrencies can play in the existing economy.

If money is a symbol of value, this community appreciates the need for other symbols that represent other values in the world of tomorrow – such as transparency, empowerment and the end of the abuses of power that we have seen in the past.

Ultimately, although cryptocurrencies have been inching their way into the mainstream steadily since their introduction in 2009, the main stumbling block has been how to use them in everyday life. The good news is that we are during a transition. Trust is continuing to build, and the ‘value’ barrier is slowly being overcome. There is light at the end of the tunnel – driving cryptocurrencies and other forms of digital money forwards as the next step in money’s ongoing evolution.

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Revolut Junior introduces Co-Parent – teach children about money together

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Revolut Junior introduces Co-Parent - teach children about money together 2
  • Premium and Metal customers can invite a team mate to jointly manage their child’s Revolut Junior account
  • Setting Tasks, Goals and topping up up Allowances can also be done by a Co-Parent
  • Lead and Co-Parents both have full visibility and oversight of the child’s account

Revolut has today announced that parents can now add a Co-Parent to supervise their child’s Revolut Junior account and make learning about money easy and fun together, because teamwork makes the dream work.

Those on paid plans (Premium and Metal) will benefit from the new Co-Parent feature at no extra cost. The lead parent can invite a Co-Parent to join Revolut on any plan, including a Standard plan. The Co-Parent can be another family member, carer or  guardian who is responsible for the financial wellbeing of the kids.

Parents and guardians can use Revolut Junior to teach their little ones important lessons about finances and responsibility so they become more informed with each passing day. Both the lead and Co-Parent can use Tasks to teach children the value of money, Goals to help them learn to save and top up Allowances when they deserve a reward or just their weekly pocket money. Both will have full oversight of the child’s Revolut Junior account.

To add a Co-Parent to Revolut Junior, the lead parent can head to the Junior tab to find the Co-Parent invite link at the bottom of the screen.

Revolut Junior’s five top tips for parents/guardians to make learning about money fun 

  1. The power of together: Utilise the power of your joint experience and arrange a time or schedule a regular monthly meeting to sit down as a family to answer any money questions your kids may have.
  2. Set your own Goals: Learning the usefulness of savings is a valuable life lesson that will benefit kids when they hit adulthood. So if your child has been begging for a new game or toy, then encourage them to create Goals to save up faster and more steadily. Parents can add to it or children can choose to fund it from their allowances or by completing tasks, giving them some financial independence, but with full parental oversight!
  3. Sharing is caring: Show your child your app and how you use it to manage money so they see how the ‘grown-ups’ do this. Perhaps take a look at Budgets, and explain your reason for using this.
  4. Cherish your belongings: Get your child to put their top 10 favourite possessions in front of them and ask them to tell you why they picked each one. Explain the importance of selecting items they really like instead of comparing them with what their friends have.
  5. Money matters: Inspire your child to take some time for themselves to go through their purchases and expenditures in-app and use this time to reflect on if they still use all these items or if the buys were a good use of money.

Felix Jamestin, Head of Premium Product at Revolut, said: “We have added the Co-Parent feature to Revolut Junior so parents, guardians and carers alike can come together to teach their kids valuable skills for life. We have made sure that those with unconventional or multigenerational families will also be able to use this, so not only parents but grandparents, carers or members of their wider family can also support their child through their financial education with Revolut Junior.”

Revolut Junior’s Co-Parent feature is currently available to all Revolut Premium and Metal users in the EEA and the UK. It’s designed for kids aged 7-17, providing an account for children to use, controlled by their parents or guardians. So far over 270,000 kids have signed up to Revolut Junior. Revolut Junior has just launched in Australia, and plans to launch the product in Singapore and Japan in the near future.

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Banking on the Future: Why Payments Transformation is the Key to Success

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Banking on the Future: Why Payments Transformation is the Key to Success 3

By Simon Wilson, Co-Head, Payments at Icon Solutions

Standardisation, regulation and technological innovation means payments are well on the way to becoming instant, invisible and free. This is good news for everybody.

Well, not quite everybody. Banks are now faced with the significant challenge of transforming business models and legacy technology systems to meet the demands of a new era in payments.

Banking is historically a conservative and risk-averse industry where the pace of change varies between sedate and glacial. But now is not the time to ‘wait and see’ and finding the right approach to payments transformation must be the immediate and fundamental priority for banks.

Understanding the need to transform

Firstly, we must ask: Why has payments transformation become an urgent priority?

For one thing, increased competition has seen banks’ market share of the global banking and payments industry reduce from 96% in 2010 to 72% today. Fintechs, challengers, payments companies and big tech have entered the playground and started taking banks’ lunch money, demonstrating a level of innovation and agility that incumbent banks are struggling to keep up with.

And of course, there is Covid-19. We have seen years, if not decades, of change in a matter of months. The crisis has torpedoed traditional and reliable revenue streams such as cross-border payments to accelerate margin pressure, while driving a rapid shift to online banking channels and a massive uplift in digital volumes.

Breaking the shackles

In the context of increased competition and unprecedented digitalisation, the banking industry is waking up to the fact that payments are about adding value, not just processing. There is increasing recognition that capitalising on the potential of emerging payment rails, monetising the standardised datasets unlocked by ISO 20022 and launching new external services are huge opportunities to diversify and retain relevance. The introduction of overlay services such as Request to Pay or the European Payments Initiative are also poised to spur on the move to digital payments.

Decades of inaction on legacy infrastructure, however, is limiting options. Banks across the globe find themselves lumbered with expensive, inflexible and unreliable technology estates. The ability to respond to marketplace innovation, let alone lead it, is constrained by the need to devote massive amounts of cash, time and ever-dwindling internal resource to simply keep the lights on.

It is apparent that doing nothing is no longer an option, but transformation is a nebulous concept. There is no one single way to effectively transform. Different organisations have unique considerations based on their technology, capabilities, resource and culture, and there are various routes to take.

‘Don’t outsource your heart, your soul…and your spinal cord’

One option is to make payments someone else’s problem and outsource them. This can be an appealing proposition to get a seemingly perennial cost centre off the books, particularly in the current climate. But speaking at Sibos, J.P. Morgan CEO Jamie Dimon cautioned against the risk of inadvertently “outsourcing your heart, your soul and your spinal cord.”

Simon Wilson

Simon Wilson

For it is true that payments are the beating heart and soul of an organisation. Payments represent 80% of all interactions, providing critical customer touchpoints, data and service opportunities. As for the spinal cord, not much can happen when mission-critical payment systems go down.

The big problem, as Dimon notes, is that a lot of companies who have outsourced “have no idea what they are doing.”

Banks can find themselves stuck with equally costly, complex and cumbersome alternatives, falling even further behind the innovation curve and losing control in the process. “You end up paying too much money and then you’re beholden to costs that are going up.” But most importantly, “you’re not even doing a better job serving your client.”  Outsourcing a commodity execution service may well be the right strategic approach for some, but you need to ensure you have the other pieces of the payment process running smoothly and that you really are not leaving money on the table or  developing risk longer term by constraining future choice.

Still, the alternative is not necessarily better. Modernisation needs to happen now, so it is not surprising that enthusiasm for years-long, ruinously expensive and inherently risky in-house transformation projects has dimmed somewhat.

Best of both worlds

Yet it is wrong to say that the only choice is buy or build. There is a middle-ground. A collaborative approach to payments transformation that allows banks to move quickly to seize opportunities, while retaining control, significantly reducing costs and adding value.

This begins with banks understanding their starting point, defining a crystal-clear strategic vision for the role that payments play within the organisation and identifying market opportunities. Indeed, as McKinsey notes, “success for banks will depend on thoughtfully assessing capabilities [and] determining the role of payments in market strategies.”

Banks should then consider low-risk and lightweight options for upgrading legacy infrastructure to meet their strategic objectives, while minimising business impact. Payment platforms based on Cloud-native, open source technology promote flexibility, scalability and independence, rather than restrictive and expensive vendor dependencies.

Collaboration also plays a critical role. Finding the right fintech and service provider partners can allow banks to simplify complexity, reduce manual heavy-lifting and lower their cost base, driving efficiencies that enable resource to be focused on delivering for customers. As Dimon explains, “If I can’t build it better than you can, I’m better off just using yours.”

This combination of strategy, enabling technologies and true collaboration provides a foundation for innovation. It can help drive new revenues, further develop existing business lines and, by moving payments from cost to profit centre, help banks thrive rather than survive.

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