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One of the recurring themes coming out of the International Trade and Forfaiting Association’s (ITFA) 48th Annual International Trade and Forfaiting Conference in Porto is the growing need for businesses to successfully analyse and make difficult decisions.
To help examine the market context behind these difficult decisions and look into some strategies for dealing with uncertainty, Trade Finance Global’s (TFG’s) Deepesh Patel sat down with Natasha Condon, global head of core trade within payments at J.P. Morgan.
Recent challenges in the market
The Russia-Ukraine conflict has had a considerable impact on risk levels in the broader marketplace and this has proceeded to have knock-on effects on other areas like commodities.
During the early days of the COVID-19 pandemic, the market experienced a phenomenon where there were perfectly healthy companies that suddenly found themselves in a precarious financial position as a result of the massive demands.
Now, with the energy shock, we are seeing similar things happening to some of the highest-rated and most valuable companies in the world.
These companies are considered ‘healthy’ based on standard metrics––such as credit risk or financial risk––but are suffering considerably as a result of the margin crunch.
The real test for the resiliency of energy markets, however, will be the coming colder winter months in the northern hemisphere.
Strategies for dealing with uncertainty
In order to weather the coming storm, banks need to remain involved; the health of the broader economy relies on them remaining involved in different sectors and markets.
They also need to be agile and prepared to adapt to rapidly changing situations in the market.
According to Condon, there appears to be much more collaboration happening between banks in this environment.
For many banks, particularly those that are facing liquidity constraints as a result of foreign currency exchange fluctuation, cooperation is becoming increasingly necessary.
A bank may have the credit lines, for example, but not have––or may not be willing to mobilise––the dollars needed for a particular transaction.
In a situation such as this, by partnering with other banks that may be in the inverse situation, institutions are able to make more capacity available to their clients.
Digital transformation at financial institutions
Much like every other aspect of economics, the decision for banks to invest in fintech solutions is faced with a fundamental scarcity problem––there is always less money available than needed to invest, in addition to prioritisation of investment challenges.
According to Condon, the perception of banks’ prioritisation processes and decisions regarding fintech investment significantly differs from the actualities of the situation.
In her view, banks have three fundamental priorities when it comes to investing in technology solutions:
1. Regulatory compliance.
First and foremost, the solution needs to meet regulatory and compliance requirements and provide a high-security service in every country they operate.
Naturally, this continually adds more complexity as the number of operating countries, and thus the number of regulators, increases.
This is especially true given that regulators around the world are under increasing pressure to become more stringent regarding areas like anti-money laundering (AML) and know your customer (KYC) regulations.
2. Serving new clients
According to Condon, the second priority is using new technology to drive growth and serve new clients.
3. Increased efficiency
Right now, there is a battle for talent as highly experienced industry veterans are on the cusp of retirement, leaving vast talent voids that will need to be addressed.
Banks are prioritising the search for digital solutions that will help compensate for the loss of those highly skilled employees.
However, most fintech organisations that banks interact with tend to tailor their pitches around ideas that will benefit the industry with well-designed and elegant solutions.