Week in Review

April 29, 2019

Global Roundup

Top U.S. officials to hold trade talks in China this week. U.S. Trade Representative Robert Lighthizer and Treasury Secretary Steven Mnuchin will travel to Beijing for trade talks beginning on April 30, the White House said in a statement. (HSN)

U.S. and Japan Start Next Round of Accelerated Trade Talks. U.S. and Japanese negotiators had a second round of trade talks in Washington on April 25 as they aim to secure a speedy deal focused on agriculture and vehicles. (Bloomberg)

Argentina is on the brink. On April 24, the cost of insuring against an Argentine debt default surged to its highest level since President Macri took office three-and-half years ago, cementing the country's title as the world's second-riskiest sovereign borrower behind Venezuela. (Financial Times)

India further delays retaliatory tariffs on U.S. products. India has once again delayed the implementation of higher tariffs on some goods imported from the United States to May 15, a government official said on April 26. (Reuters)

Brexit rattles supply chains. U.K. exporters are facing at least another six months of turmoil on top of what has already been more than two years of doubt around their future trading arrangements with the EU and global partners. (Global Trade Review)

Putin, Kim want to break NK nuclear standoff. Russian President Vladimir Putin and North Korean leader Kim Jong Un said on April 25 that they had good talks about their joint efforts to resolve a standoff over Pyongyang’s nuclear program, amid stalled negotiations with the U.S. (Business Mirror)

Alarm sounds for world growth as bellwether economy contracts. South Korea, a bellwether for global trade and technology, cast doubt over hopes for a quick rebound in the world economy by reporting its biggest contraction of gross domestic product in a decade. (Bloomberg)

What effects will tighter U.S. sanctions on Iran’s oil have? With significant risks now looming over global energy markets, the U.S. should be careful not to go too far with oil sanctions. (Council on Foreign Relations)

Here’s what $100-a-barrel oil would do to the global economy. Oil could rally further, potentially pushing the global crude benchmark to $100 a barrel and prompting a global ‘surge’ in inflation and braking economic growth, according to economists at Oxford Economics. (HSN)

Brazil economic growth outlook for 2019 winks to fresh lows. Brazil analysts cut their 2019 growth forecasts to the lowest level ever in a signal of mounting investor pessimism in Latin America’s largest economy. (Bloomberg)

EU and UK Seem to be Missing the Point

Chris Kuehl, Ph.D.

The fight that has dominated European news for the last few years has been that of Brexit. The latest maneuver was a classic case of “kicking the can down the road.” The U.K. will not be forced into a hard exit at the end of this month or even the end of May. They now have until the end of October to have this battle all over again; and unless positions change radically in the next several months, there will have been no real progress or change by the time of that next deadline.

The issues that have been blocking progress are real enough, but they are perhaps not the most important for the future of the U.K. or the EU economy. Both sides have been locked in a fight that is fundamentally regional: what to do about trade between the U.K. and EU, what to do about the border between Ireland and Northern Ireland, and how to handle the position that expatriates will now find themselves in.

In one very important area, the EU and U.K. are both forgetting that they are in a global market and one where the world’s other competitors are more than ready to pounce.

The financial services sector is not one that attracts a lot of sympathy from the politicians in either the U.K. or EU. The fate of bankers evokes little concern, but the reality is that lack of access to the global financial markets will cripple the U.K. and EU equally.

Both sides appear to think they can make minor adjustments and that will be enough to protect their position. The U.K. promises looser regulation and that is a strategy that has very little political support. The EU is devoted to recreating what London once had in the EU but without changing any of the situations that have made it hard for the EU to compete in the past.

Right now, companies in the U.K. only get about a quarter of their funding needs from capital markets as compared to three quarters of the companies in the U.S. and over half in Hong Kong and China as a whole. In order for either the U.K. or EU to really compete with the dominant markets in New York and Hong Kong, there would have to be significant structural changes and reforms.

To begin with, the current pension systems in the U.K. and EU are “pay as you go” and third-party privately funded pension systems are rare and even prohibited in some nations. This robs the region of billions of investor dollars that generally flow to the private funding groups in the U.S. and Asia.

An even bigger issue is that there are 27 separate and distinct capital markets in the EU, and they all have their own rules and regulations. What is permissible in one country is not in another. The welter of different rules and situations makes for an immense paperwork jam and keeps many investors out of select countries altogether. Despite the fact that almost everybody in the EU decries this state of affairs, there has been no unity in terms of how to alter. They all want their own national systems to become the EU norm so that they do not have to make changes.

Another huge issue is that EU rules demand that EU entities only trade with other EU entities, prohibiting the involvement of larger international entities such as major global banks. New York and Hong Kong not only allow this engagement, but they also actively encourage this engagement, which expands the capital pool significantly. The bottom line is that there is little incentive for larger players to engage in either an isolated U.K. or the EU as they continue to pursue a highly protective strategy.

Ready or Not, Faster Payments Will Impact Corporate Operations

PYMNTS.com

Corporate payments still don’t have a clear role in driving the adoption of faster payment technologies and systems in the U.S. The obvious assumption in the business-to-business (B2B) landscape is that faster payments are not only unnecessary, but unwanted, as corporates don’t necessarily need to move money immediately.

Some industry experts are beginning to challenge that notion, though, particularly when it comes to internal cash flows and treasury management processes. Still, others have said that B2B payments should be largely left out of the faster payments conversation.

The U.S. remains in its early days of faster and real-time payments adoption, so neither of these two schools of thought have been proven correct. However, regardless of how corporates adopt faster payment technologies, many experts agree that the acceleration of payments in the country will have profound effects on the broader financial services space, and those changes are likely to impact how companies manage money and operate in a new ecosystem of payments innovation.

Bill Schoch, WesPay president and CEO, and inaugural chair of the Center for Payments, said the emergence of faster payments in the U.S. reflects a larger shift in the market—one that could certainly have profound implications for business payments.

“We are seeing, what I think is, an unprecedented amount of change that is being proposed and introduced in terms of [payment] operations,” he told PYMNTS in a recent interview, emphasizing that his remarks are his personal viewpoints, and not those of WesPay or the Center for Payments. That change, he continued, is largely why WesPay and 10 other payment associations formed the Center for Payments, an initiative aimed at providing the payments ecosystem with market intelligence and guidance as innovation continues to disrupt the market.

The Center intends to guide its collective financial institution (FI) and corporate members, represented by the associations, in addressing key challenges in today’s market. Those challenges include the costs of investing in and deploying faster payment systems, understanding and meeting the demand for these technologies, and navigating a shifting operational model of payments.

When it comes to faster payment systems, fundamental industry shifts are emerging that will affect the way corporates manage funds and transact—regardless of their actual adoption of real-time and faster payment capabilities.

Schoch pointed to that operational model as a key example.

“We’re starting to look at solutions that have significantly different modes of operations,” he said. “Our [payment] systems are looking at 24/7/365 solutions. These present a really significant change, and, in some cases, disruption to the way FIs are processing payments today.”

They could also disrupt the way corporates are able to operate, as well as how treasurers and financial chiefs adjust to an always-on, always-available payments infrastructure.

Other operational changes emerging from faster payment initiatives include the focus on individual payment processing, which could be a significant disruption for corporates that historically operate on a batch-processing strategy.

“What we’re seeing evolve [with] faster [payment] systems, especially with RTP by The Clearing House or RTGS that is proposed by the Federal Reserve, is that these systems are handling each individual payment on its own,” said Schoch. “The question that I have is, ‘How are we going to bridge this batch-operating environment in which many businesses are operating today into a single-payment, on-demand conversation that is the model of the new [payment] systems we’re seeing?'”

This focus on faster, single-payment processes has also introduced shifts in payment security and fraud mitigation efforts, which are likely to make a mark on corporate payment strategies moving forward. Since these transactions are irrevocable, pre-transaction authorization and Know Your Customer (KYC) checks are even more essential in the risk mitigation process.

Schoch said the payment associations’ members are being encouraged to focus on that pre-payment initiation process to ensure that those initiating payments are actually authorized to do so, and that adequate compliance and customer checks occur to proactively address the risk of fraud and non-compliance. For businesses, this would similarly represent a significant change in operations when transactions occur.

FIs have return on investment (ROI) at the center of their faster payment strategies. Adoption and implementation will rely significantly on market demand. Indeed, it’s not B2B payments, but peer-to-peer (P2P) transactions that drive FIs’ investments in faster payment technologies today, said Schoch.

However, even with limited adoption of faster payment capabilities in the B2B market, the broader industry changes resulting from faster payment initiatives are sure to affect the way corporates transact. According to Schoch, corporate adoption of faster payments is likely to occur in a segmented way: There may be a need for companies to embrace real-time payment capabilities in the business-to-consumer (B2C) disbursement segment, for instance, while real-time payroll is also a potential use case for faster payments functionality in the corporate sphere.

The Center for Payments wants to help FIs and corporates understand where those opportunities exist, and assess whether investments in those opportunities would be profitable. FIs and corporates must also be able to compare where their industry peers are in terms of their own investments and adoption, making market intelligence an important part of progress in this space, Schoch said.

While it remains to be seen whether B2B payments will become a driver of investment and implementation for faster payments functionality, Schoch believes the corporate payments landscape will, nonetheless, see significant impacts from the nation’s progress toward payments acceleration — so FIs and corporates must be ready.

Reprinted with permission from PYMNTS.com.

What China’s Belt and Road Initiative Means for Companies in Asia

The investment and infrastructure development opportunities generated by China’s multibillion-dollar Belt and Road Initiative (BRI) are not without risk, according to new research from Aon, risk solution provider.

Aon’s 2019 Risk Maps, developed in partnership with Continuum Economics and The Risk Advisory Group, show that businesses looking to take part in BRI need to be aware of both the risks and opportunities associated with the project.

Key findings include:

• The Asia Development Bank estimates the infrastructure gap across 25 developing Asian economies amounts to USD 469 billion annually, meaning significant opportunities for development.
• Businesses in East Asia and the Pacific currently take an average of 100 days to import/export, in stark comparison to the 10-15 days taken by firms operating in G7 countries. The BRI could help to drive down the time taken to do business.
• The regulatory and institutional framework of many countries within the proposed BRI exposes investors to potentially significant risks, including sovereign nonpayment, supply chain disruption and political interference.

The report also emphasizes that government decisions have the potential to impact both regional trade and development. Businesses investing across borders should closely monitor the political situation in the host countries in which they are transacting and consider their insurance coverages in response to changing exposures and the potential for volatility caused by politically motivated decisions.

A positive will be the ripple effect from the infrastructure investment, particularly in the emerging economies of Southeast Asia and Africa, because AON expects to see a rise in the companies investing across the supply chain, including manufacturing hubs being established in free trade zones.  These companies will be turning to credit solutions to secure risk, support finance and accelerate growth.

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations