COVID-19 and the Disruption of Transaction Banking

Treasury and Trade Solutions

The financial impact of technological disruption needs no

introduction. One of the more stark examples is the per cent

market cap of tech constituents in the top 20 companies of

the S&P 500. It rose from around 6% to more than 50% in

past 25 years. In a 2017 scan, it was found that approximately

70% of S&P 500 companies discussed disruptive technologies

in earning calls or filings. Media, travel, some parts of retail

and telecoms were deemed to be have either been disrupted

or in advanced stages of disruption, with banking and finance

also firmly in the spotlight. Incumbents in more “physical”

industries, including logistics, aviation, healthcare and

real estate were deemed to have been at an experimental

stage of disruption and had some years to go before facing

significant digital disruption.

The COVID-19 pandemic is challenging sectors that have

experienced relatively low levels of digital disruption such

as aviation, automotive, oil and gas, shipping, logistics and

consumer goods and testing the robustness of the banking

sector’s own digital transformation efforts of the past

decade or so.

During these disruptive times, measured as some of the

most uncertain by the CBOE Volatility Index (VIX), companies

have sought uninterrupted access to banking services,

better visibility and control of liquidity, incremental funding

of working capital, bespoke risk management solutions and

unprecedented access to insights and advice.

Relevance is everything

The deepest global recession of our lifetime is upon us and

precipitating a forensic examination of the relevance of

existing digitisation efforts across sectors. The extent to

which companies recover from COVID-19 and find their

new normal will vary greatly by sector, with those affected

by consumer attitudes toward social distancing like

restaurants, leisure travel and offline entertainment the

first to be affected and likely the last to recover.

Disruption in the banking sector has long past its

experimental point, following a period of turmoil

characterised by high amounts of venture capital pouring

into fintechs, approximately USD16 billion in the five years

up to 2016, and new players rapidly entering the financial

intermediation space but still some way off what one might

describe as disrupted by comparison to the retail and media

sectors. Customised, convenient and digital alternatives

have forced the banking sector to respond to clients’

heightened expectations.

Peter Crawley

UK and Europe Head

Treasury and Trade Solutions, Citi

peter.crawley@citi.com

A look at the disruption of transaction banking and the COVID-19 new normal 2

Speed and simplicity

There will be a new sense of urgency informed

by the blistering pace at which change has

occurred throughout the crisis. Facilitating

a payment from payer to payee instantly,

receiving a transparent online FX rate at point

of sale and opening a bank account digitally

are no longer new innovations.

Scale

Whether it’s digital access, remote flexibility,

new ways of communicating, helping clients

to pay or relocating employees during the

crisis, solutions need to be cyber-resilient,

secure and scalable.

Agility

Traditional clients will pivot to new direct-to-

consumer sales models at an even greater pace

than pre-crisis and this means establishing

partnerships with alternate payment providers

and providing their underlying customers with

flexible payment and financing arrangements.

Price and value

Worldwide IT spend growth is correlated with

GDP growth and it declined in the last two

recessions. Corporate profitability is under

pressure too. Investing to transform a business

model in a resource-constrained environment will

mean a sharp focus on how banking solutions

help drive down costs or increase sales.

Transparency

Following a significant decline in cross-border

activity, the demand for more transparency

on a previously sub-par cross-border payment

experience, already somewhat addressed

through SWIFT GPI, may be trumped by the

need to provide enhanced visibility over

complex, long and global supply chains.

Certainty and risk management

Companies require access to relevant real-time

tools and insights that help them assess risks

or opportunities and make better decisions.

In the same way that multinational corporations are assessing the post-COVID-19 changes to their clients’ expectations and

adjusting their priorities accordingly, so are financial institutions. The following six factors that have historically driven

digitalisation may serve as useful means of self-evaluation, against which decisions on how to re-prioritize, to serve clients

better, can be made.

A look at the disruption of transaction banking and the COVID-19 new normal 3

At the risk of over-simplifying, one might conclude that

solutions enhancing agility, transparency, decision-making

and risk management would move to the forefront in a

COVID-19 new normal digital world. Scale is a given, speed

is expected (even considered normal) and value will be

measured by the contribution that can be made toward one’s

clients’ transformation effort.

Prevalent themes

Through a quick glance at the COVID-19 policy measures

taken across the EU – more than 800 so far – it’s clear that

the immediate economic focus – overwhelmingly fiscal

and micro-prudential in nature – is to protect jobs, avert

bankruptcies, ensure liquidity and provide relief to the real

economy. But there will come a new normal. As such, some

of the following themes are likely to prevail for transaction

bankers and participants of financial intermediation as

companies shift their focus from crisis management to

responding to their new reality:

• As governments consider policy proposals to support

access to finance for SMEs while balancing the protection

of public funds, there will be a need for creative “facilitated

disbursement” solutions.

• Restructuring of sales will change how companies engage

with their traditional clients, retool for remote sales,

accelerate e-commerce as a route-to-market and create

flexible payment arrangements.

• There will be a heightened focus on operational resilience,

which may include a review and accelerated digitalisation

of primary (logistics, operations) and support activities

(further advances in the supply chain management

function) in the value chain. Data will be ingested and

used in new ways.

• Central banks and regulators are likely to increase their

efforts to eradicate physical cash, intensify their diligence

over global stablecoins and assess appropriate timing

to launch their own central bank digital currencies. The

timeline for a live deployment has been radically reduced.

• Digital signature adoption will accelerate with wider

application across bank product documentation types.

• Banks and fintechs have evolved their relationships: from

one of threat-incumbent to partner-collaborator and, as

observed during this crisis, to co-creator. Whether it’s

finding ways to accelerate payments to small businesses

expecting to receive cash grants in the future or its

complex trade surveillance typologies linked to COVID-19,

banks and fintechs will be stronger together.

History has taught us…

While history isn’t necessarily a predictor of the future,

each of the crises since the start of the new millennium do

offer useful lessons, if not checkpoints on our self-assured

hubris, as we contemplate medium term responses to

COVID-19. For instance, the bursting of the dot-com bubble

in 2002 taught us that we need to be grounded when it

comes to futuristic concepts. The subprime financial crisis

of 2008 taught us about the high risk of new untried credit

instruments and the importance of regulation. The flash

crash of 2010 taught us that technology is a double-edged

sword and when things go awry, reaction speeds can be

accelerated. And the Greek debt crisis of 2011 taught us

that it’s tough to make adjustments during a recession.

On the one hand, we are at risk of exaggerating our fears

and making misguided choices; on the other, we know from

previous crises that we must be futuristically grounded, that

technology can be a double-edged sword and that it will take

courage to adjust during the current economic climate.

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