As it comes towards the end of the year, with the Covid pandemic still not having an end in sight, I was asked to write a few words regarding the effect of Covid on the City Financial Sector; that is a tough one to answer in a few lines as it is multi-faceted and complex and therefore can only be observational from my point of view. With my eyes to can only be in respect of those areas that I can see – bear in mind too, that I’m predominantly working from home so even the observational comments are restricted!  

A few words though about the people that drive our diverse FS City and, it does feel as if the people are divided into groups, being those with work and those without and then further divided into age categories. I shall explain. Those who are lucky enough to have retained their jobs are actually feeling better off financially – the cost of the commute, the cost of lunches/coffee, clothes, and shoes have all been cut leaving considerably more in the bank account at the end of the month; those without work are undoubtedly in a far worse position with the previous buoyancy in certain sectors of the City being slowed and stifled. The age part comes about as the interactions that we all had in the office environment have disappeared –the junior staff (generally younger) used to be able to feed off the experience via the close proximity to the more mature members of the team; it was easy to listen and contribute to/learn from discussions on certain issues or simply ask questions. Now, it is much harder for them to pick up a phone and ask anything – it takes a true self-starter to do that and it’s not easy. So I fear that a section of that generation is simply not learning and gathering experience and therefore will be less valuable in the future. That is not good for the City as a whole especially as the experienced people are contemplating not returning to offices or, as we are seeing, early retirement.

Offices, now there is another subject. What will the fabric of the City look like in a say the next 15/20 years? A couple of major employers (granted, in Canary Wharf) have publicly announced that home working is the way to go and others are seriously contemplating whether large office blocks with thousands of staff are really the future. It is a question raised at Board meetings as to what the plans are – that tends to then stray into, “what will we do with the building” when a firm knows that only a few dozen key people out of x thousand now need to be in the premises to keep the machines working. Possibly then, some of the blocks will be converted to flats. That of course raises further questions of property values for both commercial and residential property in and around London. 

But if turn to real business flows, and I again suggest that this is a tale of two halves (noting that my comments refer to the financial sector that I exist in, and not any other sectors). Some areas suffered greatly, to begin with, with those trading securities, seeing some horrendous capital impact due to initial value write-offs followed by improved trading commissions as some volatility returned. Other areas are seeing absolutely no effect from Covid and are booming – specific areas of fintech and especially the digital asset/crypto sector. London is seen as the place to be for both of those activities and we have seen two new digital exchanges get full regulatory authorization (one in the equity sector the other in the derivative sector). These two together, I would suggest, are the beginning of the game-changers for the securities/investment sectors and will potentially cause a massive disruption in the way the whole City has worked for the past 200 years. Covid did not give rise to them, but the parallel concept of fewer people/greater tech will certainly give them an advantage as they have the ability to remove people and operations from the “traditional” workflows and replace them with technology that can be located anywhere. Their impact on the major existing participants could be phenomenal in a short period of time and make London the center of the digital world (mind you, plenty of others want the same position, and technology can be moved easily…). 

It can be seen that the drive for this change in the trading of assets and the potential that gives to increase accessibility and distribution of capital is coming not from the large incumbents, but the small start-ups that are driving change. The large firms have woken up to this and we have seen them making strategic statements and, in some cases, strategic investments. Picking around the edges we have a large US firm as custodian of Bitcoin, another announcing the first digital repo trade being executed today (15^th December), and the big custodians having to rethink their model if digital becomes the way forward – and if it does the asset managers will be questioning the costs of administration/custody of their AUM. 

In the more traditional business, technology has played a great part in the thinking of Boards, despite that thinking has been forced upon them. Homeworking, which was an alien concept to a good number of firms, is now controllable and monitored in different ways. Yes, it is creating different ways of working, but it is being seen to work well and potentially decreasing costs (office space) whilst changing but not necessarily increasing operational risks. 

It may be worth a few words on the cryptocurrency sector as well – we have all heard of Bitcoin but it is going mainstream. It started as students playing/trading/buying it (yes, the two most expensive pizzas in the world in today’s prices, were purchased in 2010  ago for 10,000 bitcoin, current value now making the cost of those pizzas £86million) and in recent months, the big institutions are announcing their intentions in this sector. Were you aware that the first new UK Clearing bank in over 250 years was established in 2018 and is crypto-friendlyrypto friendly and the rest of the world watches it closely? What is this to do with Covid’s impact? – really to say that this whole sector is glowing white-hot in the UK, centred in London, and significant brainpower is coming here, as is an investment into these new businesses and that all supports the other financial services sectors that make up the City. Note that two of the world’s largest cryptocurrency firms are now FCA regulated and therefore potentially drawing others to center in London. 

Covid has also focussed the technologists’ minds; there are so many inefficiencies that were taken for granted; machines and the technology that drive them are able to be built and deployed rapidly. We are in the plug and play period for this albeit IT departments in certain firms still haven’t got it. To be able to manage and monitor the rapid homeworking regime that we have adopted since March 2020, firms have demanded and received better quality tech that was previously  available or deliverable. I do see this leap has been aided by Covid as social media/video conferencing tools have driven efficiencies in the tech providers. 

On the more negative side, it is never good that people lose jobs. But, the financial services sector is cyclical and we all have to keep learning and reinventing ourselves. Brexit is  the word that has been used in so many always has strikes fear in anyone being asked or being asked to opine on it. The transitional period ends very soon and as this is written, with an unknown outlook for the City into the EU. This very area has been the topic of so much angst in Boardrooms that Covid has likely not been the main topic of such meetings. Whatever the outcome, Covid coinciding with Brexit has been a double whammy where the effect on the City will not be known for some period of time. I haven’t opined upon the specific areas of the City that have been unduly impacted by Covid, shipping perhaps, but perhaps that be better served in a later piece when Covid and Brexit have passed.

I have drawn very high-level lines between certain specific parts of the City and observed there are two halves in various sectors – I haven’t given you a feeling of what it’s actually like to go back to the office. Again, I can draw that self-same “two halves” parallel – the surreal nature of being able to walk around in London with no traffic (ok, this was a few weeks ago), no fumes, no noise, no people – yet all those small businesses in the City set up to support the offices such as restaurants, shops, bars, etc who may not be there if and when we finally return in numbers. In my view therefore, I think Covid has coincided with Brexit, both of which have provided an opportunity to rethink not only how work is done but also where it is done. With the advancement and greater accessibility of technology overlaying those two issues, are we watching a radical overhaul of the City that can be bigger and better than it was? Who knows, but the opportunity is there!

At the end of 2019, I was asked about how I saw the UK fairing in 2020 post-Brexit and the challenges UK and EU financial services would have in dealing cross border.  The whole industry was trying to prepare itself for the outcome of negotiations and planning as best as possible for business continuity with little guidance from the government on the best course of action due to the unknown outcome of these negotiations.  The biggest blocker for the financial services industry in the future relationship with the EU seemed to be based around British fisherman’s ability to fish without competition in UK waters (this still seems to be the case).

The industry was primarily in protection mode as opposed to looking to innovation at a time when Europe was excelling in the Fintech space, a whole sector born out of the last financial crisis in 2008. 

Fast forward 12 months and the world has become a very different place due to the unforeseen challenges caused by the coronavirus pandemic.  The crisis shifted the protection focus back to an “innovate to survive’ mode, not just for financial services companies but also the companies the industry supported.  There seems to have been a much more collaborative approach and speed of product development over the last 12 months, borne out of necessity that I haven’t seen in my time working in the industry.

I think the industry has been well placed to do just this due to the nature of the fintech industry being one that has dealt with rough waters over the last 12 years during an economic recovery and most importantly being much more tech focused than the industry was after 2008 and able to innovate at a pace not possible prior to that.   

What innovation have we seen?

I see the financial services industry in Europe now sitting on a scale as a mix between financial services and technology.  To show how far we have shifted across that scale you need to look at how you managed your personal money in 2008 and how you manage it now.  Prior to 2008 if you wanted to just check your balance you had three options: Wait for your paper statement, check at an ATM or speak to someone either in the branch or over the phone.  Now it will take a few seconds to check on your phone.  The availability of service is something that is expected now; it’s no coincidence that the companies best placed through the crisis are ones that sit more on the tech side of the scale, providing customers with easy to use, necessary services.  

The UK hospitality sector has been a sector that has been very hard hit, not just because of the lack of customers but also because of the changing rules and the need to adapt, sometimes with just a few days’ notice. Restaurants have been open, shut, open with restrictions, managed a track and trace notification system, shut again, have VAT decreased, open again, been only able to provide takeaways, had to manage an “eat out to help out scheme” and in doing so have needed the processes in place to manage all of these changes before they have even prepared a starter.

The innovation around this space has seen the much-heralded “omnichannel” actually become more mainstream as tech companies have seen the need for the sector to require diversification of sales channels.  When once a terminal would suffice, a restaurant may now need a terminal, an e-commerce solution for takeaways and deliveries, and even an app-based ordering and payments for table service ensuring social distancing.  This innovation in such a short timeframe born out of necessity may well change the way we interact in the hospitality sector moving forward.  

Restaurants are also quite rightly reviewing some of their relationships with the big food delivery companies and the costs associated which will open up conversations with smaller start-up tech companies in this space in a way that was not possible prior to the pandemic.

How will this driving behavior?

Two of the main changes I have seen are the use of remote ordering and QR codes.  While the younger generations have been using both extensively over the last few years, the older generation is now being forced away from the legacy card and terminal solution to an e-commerce centric payment process even in the physical world.  This has now gone mass market as opposed to a niche product in some restaurants like Wahacca who can afford to invest in a bespoke service.  It works for every stakeholder.  A restaurant can turnover tables faster, getting more covers, and can also get an email address during checkout enabling direct marketing options and the customer isn’t waiting around for a waiter, then a bill to be presented, and then the terminal prior to being able to leave.  

So where does this innovation lead behavior?

Innovation in most cases has been led by customer behavior (I know Henry Ford and Steve Jobs will disagree, that why I said most).  The easiest way to pay over the last 20 years has been on a card and the introduction of contactless card payments has made this even easier, but in 2020 there surely has to be a better, more secure way to pay and the pandemic could actually have made the migration a little easier.

The Netherlands has been using a system called iDEAL for years which enables customers to pay directly from their bank account by linking at checkout to their bank, logging in, and pushing the payment as opposed to providing your details to the merchant who then pulls the payment from your account by authorization.  This is a system that has a dominant market position, is cost-effective, and has minimal levels of fraud combined with the more traditional card payment methods.

There similar products in many other countries including Brazil and India while Africa has to lead the way in mobile payments with products like MPESA being the obvious example. 

If the UK and EEA were to take this infrastructure and layer open banking, and mobile payments with the new faster payments and SEPA payment rails there are effective ways to redefine the payment space removing the card payment challenges merchants have with accepting cards (PCI compliance, fraud management, chargebacks, reserves, etc..).

There are new companies like Nuapay offering bank transfer products that are looking to do just that and are being well received in the market especially with higher value payments, but with the Fintech industry being able to utilize technology in the space to the fullest, 2020 could well be the catalyst to a whole new payment landscape in the way 2008 was with lead the charge into tech within the financial services space.