Previewing post-Pandemic Finance (#18)

Previewing post-Pandemic Finance,
w/ David GALBRAITH, Thierry ZOIS, Martin McCANN

We have another special episode for you on how post-pandemic finance would look like. We are bringing back two of our favorite guests: David Galbraith — Partner at AnthemisMartin McCann— CEO of Trade Ledger; and a new guest Thierry Zois — VC at Finch Capital.

Full podcast transcript:

 

[00:02:02.17] Ben: Dave, welcome back to the Structural Shifts podcast. You’re a deep thinker anyway, and I can imagine that since you’ve been in isolation, since your role is to look at future investment opportunities, you’ve been thinking about the pandemic and the post-pandemic world a lot. So, we wanted to pick your brain and have you share some of your thinking. What’s the right place to start? As we look at the post-pandemic world, what’s the right prism through which to look at future opportunities?

the landscape of everything has changed and therefore there are new products and new opportunities. There’s a switch toward adaptability, but it doesn’t mean that all the insurance changes. It just means that the market for insurance has increased.

David: So, I think there might be lots of them. People were worried about automation and losing jobs and we’re now seeing a bunch of very underpaid people, like delivery workers or nurses, suddenly becoming proven to be utterly critical. So, I think you will see the relative importance of the premium pay for social proximity i.e. human caring professionals. So, then this will be part of the backlash — the value of human interaction will be at a premium. And so, how that plays out online in terms of online investment is that ordinary social media has remained largely flat but real-time social media — and that includes things like Peloton, and that includes Houseparty, and that includes people doing concerts live, that includes virtual busking by musicians — has increased by up to 75% because people will crave real-time experiences. And I think we’ll look back at this period when people were watching Netflix programs on their own, asynchronously, when no one else was watching the same thing and realize there’s been quite a lonely period of media, and so, I think that is something that’s highly investible in the future, is real-time shared experience.

Part of this whole acceleration of change that’s happening now, is that people can make decisions and not have to do six months of PowerPoint presentations to the rest of the company to make a decision to actually say, “We’re going to switch to Zoom video.” They can decide overnight — we’re doing this and this is the way it is. — David Galbraith

[00:10:43.03] Ben: Yeah, and I think one of the things that’s interesting is it introduces social network effects into businesses that we never thought had them, like Netflix. Netflix was a business that had some sort of data network effects in the sense that if they understood you better, they could make better recommendations, but had very few other network effects. But if we think that it really matters to watch Netflix at the same time as your friends and comment on it, then it brings a whole new level of value to it, a new level of locking in.

the number of people going to visit a doctor is suddenly going to reduce because doctors shouldn’t be exposed to lots of sick people at the moment — it’s actually dangerous for them — and so, telemedicine will increase massively at the general practitioner level, for that first interaction with healthcare services. A lot of that will go online. — David Galbraith

[00:14:15.25] Ben: So do you see more B2B than B2C opportunities then, in all those B2B FinTech companies that can help the incumbents to become more efficient and deliver a better digital experience — that might be where a lot of the action is?

The delivery of electricity is going to look more internet-like than it currently does. — David Galbraith

David: So, obviously, this is one of these areas where it requires expert knowledge to look at pure healthcare services. But, if you were to look at the business of healthcare or the structural changes it took, you can have a view and one of the possible views is that it decentralizes. There are two aspects of healthcare that might change. One is, the number of people going to visit a doctor is suddenly going to reduce because doctors shouldn’t be exposed to lots of sick people at the moment — it’s actually dangerous for them — and so, telemedicine will increase massively at the general practitioner level, for that first interaction with healthcare services. A lot of that will go online. And that sounds trivial, but I recently, during this process, went to the pharmacy to get a Ventolin inhaler for hay fever. I was told that I had to phone the emergency services because they wouldn’t fill the prescription and the emergency services in France told me that I had to see a doctor in person and when I told them I would just go on the internet, they said that wasn’t possible, but when I hung up the phone and I did go on the internet, within 15 minutes, I had the prescription and went back and filled it. So it helps the healthcare service to accelerate these changes, to decentralize.

the markets are irrational at the moment, not because things are going to be terrible or things are going to bounce back; it’s because we don’t know and therefore that isn’t priced in. — David Galbraith

[00:19:43.08] Ben: I just want to revisit something you said at the start, which is, there’s no consensus among experts about what this means or what the right response necessarily is. So, as you said, people have been making a big cause of shutting down the economy. I suppose implicit, in all the actions that have taken place so far is there’s a binary choice between human life on the one side and the economy on the other. I think the Italians have, in a way, set the precedent by standing up and saying, “We’ll put human life ahead of the economy.” But it’s not as black and white, is it? I just wondered if you had thoughts about the morality of the response we’ve seen so far in terms of shutting down the economy?


we have seen in the market that a lot of corporate VC pulled out on investments due to the whole uncertainty. — Thierry Zois

[00:25:01.11] Ben: Thierry, what we wanted to discuss was the report that you put out a few weeks back, which is entitled “The Future of Disruptive and Enabling Financial Technology post CV-19”. We’ll share the link to it for the listeners, but in essence, it’s a 26-slide presentation, jam-packed with interesting data predicting what might be some of the near and medium-term impacts of COVID-19. One conclusion that seems to jump out from the report is that there’s this clear dichotomy between consumer-facing FinTech companies that face lower volume, shrinking assets, etc. and the B2B FinTech companies whose technology is now in really strong demand because financial services see that they basically have little choice but to become more digital more quickly. Would you say that’s fair, that that’s this overarching conclusion?

We also expect that the road to IPO is going to be so much more difficult. It’s going to be really tough for companies to go all the way down that road, given that there is not, anymore, this hungriness as there used to be in terms of capital providers — Thierry Zois

Thierry: Now, if we look on the B2B side, I think it’s a very hard time if you’re planning on signing on new clients. The main reason is because they’re very old-fashioned type of sales and very long, so there are a lot of procedures in place and a lot of face-to-face is actually quite necessary, in order to build a certain trust; given that it is such a big animal, they really want to make sure that any technology or any person that they onboard is the right technology for them and the right cultural fit, so to speak. Therefore, in the current crisis, to sign up new clients at the moment is quite difficult, I must say. However, everybody’s working from home, like you and me, and also the ones that work at the incumbents, they work from home. And well, they will be working on existing portfolios or existing openings that they still have. If you had started already your sales a couple of months back, then the likelihood that you will close them is still quite high — it just obviously will delay a bit, but the funnel will come to it.


I’m not sure that the pandemic is the only driver in the change of global trade. I think there’s been a shift in the ethos of global trade now for a couple of years. — Martin McCann

[00:45:22.03] Ben: Martin, I just wanted to start by talking about trade finance. I think one of the things that the pandemic has demonstrated to us is that our supply chains are probably much more fragile than we thought. And, for example, I think something like 80% of PPE comes from China. And so, what a lot of people are saying is that this is going to lead to acceleration and reshoring of production. Do you agree with that statement? And if so, how will that affect global trade finance?

cost should not be the only factor in determining how you structure a supply chain. So, the security of supply chains is actually becoming front and center in the way that supply chains are being designed, and that’s most definitely going to change a lot of trade in the next one to five years. But also, the lack of transparency has come front and center as well — Martin McCann

Martin: I think what this pandemic has done is two things — which build on that emerging trend — and you can see it in the numbers. It’s shown that cost should not be the only factor in determining how you structure a supply chain. So, the security of supply chains is actually becoming front and center in the way that supply chains are being designed, and that’s most definitely going to change a lot of trade in the next one to five years. But also, the lack of transparency has come front and center as well. The fact of the matter is, most people didn’t know that most PP equipment came from China. Most people who buy PP equipment didn’t know that it came from China. They’re just buying equipment without any visibility into the further reaches of the supply chain. But I’d say this is something that has been happening for a while. If you look at the numbers in terms of trade, effectively, at the highest level, trade looks like it stalled in terms of growth, but when you unpack that look within it, actually, it’s not really stalled in terms of growth; the way that we track trade is really aligned to physical logistics chains, where actually, what’s happening is a rebalancing of global trade as the economy moves on to a new phase globally. So, with more and more of the former low-cost production countries not consuming more of those goods — that’s not showing up in the trade figures, obviously — they are now producing a lot more services-based exports than they were previously.

there’s actually a very, very rapid rise in global services export across borders, which is very, very hard to track by traditional methods and there’s less of a focus on the traditional logistics networks, which tracked physical trade previously. The main change that we’re going to see from this pandemic is there’ll be more of an insistence that supply chains are visible all the way through. So, I think what we’re seeing is just a natural evolution of trade. — Martin McCann

Martin: So, there’s actually a very, very rapid rise in global services export across borders, which is very, very hard to track by traditional methods and there’s less of a focus on the traditional logistics networks, which tracked physical trade previously. So, I think what we’re seeing is just a natural evolution of trade. I think trade volumes include services as well — more complex services particularly — and the gig economy is definitely increasing, just not easily trackable. And for me, the main change that we’re going to see from this pandemic is there’ll be more of an insistence that supply chains are visible all the way through, and that there’ll be proactive decisions made as to what products need to have more strategic owners in terms of understanding the complexity, globally, of how to get the final products shipped, versus things which are much more of a commodity where it doesn’t really matter whether or not they’re disrupted.

It’s mind-boggling to think that in 2020 — we’re talking about 15 years after the advent of the Internet — we’re still using the same documents and finance mechanisms as have been around for hundreds of years. So, I think what we’re about to see is a rapid product innovation cycle for trade finance, which is more suited to clients who’ve got less tangible assets, and to more of a gig and services driven economy where those services are being delivered across borders. — Martin McCann

Martin: Yes. So services finance is slightly different in two respects. One is the term for which you need financing for is probably shorter because it has more to do with the payment terms of your contracts. Whereas with physical trade, it has to do with, the manufacturer and the shipping generally are the longest period of the credit terms which are required. It also means that the types of products are different, whereas when you’re looking at physical logistics, you have goods or components of goods, physical goods, which can be taken as security or at least assignment of those goods and the control of those goods can be used as a securitization mechanism. Whereas with services that’s not really the case. What you need to do is really look at the class of open-account trade finance products, really looking at the inflows and outflows from the companies that you’re providing credit to, and looking the less tangible assets that are available for securitization, mainly things like receivables, and looking at the other creditworthiness factors of those companies, as opposed to the physical goods required for securitization in more traditional trade.

demand will always determine the shape of the market and in times of stress, you need to see rapid innovation in order to meet the changing demands of the marketplace — and if you don’t see that, you’re going to ultimately see a decline in your business and you’re going to see yourself replaced by nimbler, faster-moving, more digital innovation propositions. — Martin McCann

Martin: So, I use the UK example again: it’s 80% guaranteed, so the government’s taking 80% of the risk and the bank’s taking 20%. The bank is still going to do the same credit assessment as it always does, not 20% of the risk. The problem of technology is quite interesting. What we’re hearing from all of the banks that we talk to is consistent — none of the banks actually have the ability to do straight-through processing on applications for SMEs. All of the banks have paper in the system. In fact, we know of a bank — our own bank — who told us that they can’t put an overdraft facility in place which we’d agreed before the crisis because of a lockdown on one of their operations centers overseas, which means that nobody can go into the office and print out a physical piece of paper required to approve the overdraft. And that’s sort of symptomatic of where the banks are. I mean, they’ve moved from legacy systems, they’re moving at pace, but they’re not able to respond in a matter of weeks in order to deal with this unprecedented demand of credit applications.

I think there’s just going to be extreme pain by the SME sector, despite the goodwill and all the effort by the governments because they just don’t know how to deal with these problems and they’re using peacetime governance processes to try and deal with wartime situation. — Martin McCann

Martin: Whereas, if you look at new cloud-based infrastructure, it can actually respond. So, the consistent feedback that we’re getting is that overall, the banks don’t have the workflow orchestration and automation capabilities; they don’t have standard technical capabilities and automation capabilities such as centralized task management, role-based user management on all of their systems so that across different teams, people can see when stuff needs to be passed off. There’s not a dropping of the applications between relationship managers and credit managers and documentation. There’s no standard way of actually triaging documents and information through the entire system — stuff needs to be printed off from one system and then re-entered in another system, then documents need to be taken from one place and stored in a central place and then accessed from somewhere else. And in the meantime, they’re going back to the customer and asking them for the same information multiple times in many cases or asking them for information, which they’re not being precise about the requests and getting the information in a format which doesn’t suit the processing of the application automatically. So, these are the capabilities, which, you know, they’re not rocket science, but these are the capabilities the banks don’t have, because of the legacy of how the systems have grown up.

There are going to be winners and losers, just as in every other business situation. The winners are going to be the people who actually realize what the new reality is going to look like — it’s fully digital when you talk about lending, there is no paper, there’s no relationship bias — and if you don’t use this scenario, as a way to accelerate your adoption to fully digital lending processes based on new modern infrastructure and technology, you’re going to be one of the losers. It’s that simple. — Martin McCann

Martin: A couple of points around the FinTech sector. I mean one is, the FinTech sector is unusual. It falls outside the funding schemes of most governments because it’s high-growth and massively loss-making. So it’s not a good credit risk if you just look at the numbers and the inflows and the outflows. So, it hasn’t been addressed, for the most part, by the schemes that are already in place. So you need to have a separate scheme to deal with FinTech. I do think that there needs to be a role for FinTech to solve the problem. What I talk about is the national interest to create that distribution infrastructure capability. But how do you do it without choosing winners and losers? So, I think there’s been wide criticism of how governments tried to do that before and one example I’ll use is the British Competition Remedies Fund set up in the UK last year, where 450 million was distributed because it was deemed to be illegal stated to the RBS during 2008. This was set up as an independent body, which in theory sounds like a good thing, but practically what happened was, the BCR basically made winners out of thin air, and massively disadvantaged the rest of the industry, and the process was done in a very, very unusual way, which has been open to massive amounts of criticism. And today, 100 million of that has already been returned. But now that 100 million is sitting there, it’s like, well, there’s a pot of money, which could be distributed much more quickly to help FinTechs that can provide part of the solution, but there’s no mechanism in place for government or this independent body to actually do that.

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