A deal announced last year to create the world’s largest advertising firm has been called off after the two firms, French giant Publicis and US leader Omnicom, decided that it was taking too long to complete. There had also been considerable concerns at Publicis that the deal was leaning more in favour of Omnicom, amounting to little more than a takeover.
The spectre of an industry giant worth $35.1bn had concerned rival firms, as well as regulators, over a lack of competition in the struggling advertising market. With revenues down for a number of years, firms have been looking at ways to boost their returns.
In a joint statement released this morning, the two companies said that the slow progress had created uncertainty and ultimately proven problematic for shareholders, employees and clients.
“The challenges that still remained to be overcome, in addition to the slow pace of progress, created a level of uncertainty detrimental to the interests of both groups and their employees, clients and shareholders. We have thus jointly decided to proceed along our independent paths.”
While Publicis CEO Maurice Lévy and Omnicon chief John Wren announced the merger last year with great enthusiasm, the French firm seems to have gone cold on the idea after apparent risks that it would be subsumed by its US partner.
Lévy told France’s BFM channel in an interview yesterday that these concerns had proven a “real barrier” to negotiations, adding, “We never envisaged anything but a merger of equals.”
Reacting enthusiastically to the news of the collapse was WPP chief Sir Martin Sorrell, the leading rival to the two firms. In an email to the Wall Street Journal, Sorrell said it was “a case of eyes bigger than the tummy”. He added, “Two CEOs sitting together for six months without expensive advisers can’t make a deal, especially if they haven’t figured out the details before announcing. It showed.”
Sorrell went onto tell CNBC that the deal was driven by ego, and that both Publicis and Omnicom wanted to do anything to wrestle control of the industry from his firm.
“I think this deal was driven by ego issues and emotional issues, I think both CEOs wanted to try and dislodge WPP from its number one perch and so it was emotional and egotistical. It was also a case of eyes being bigger than your tummy.”
The news that British banking giant Barclays is to cut 19,000 jobs worldwide over the next three years has shocked many observers worried about the effect on the UK job market. However, what was widely expected is the scaling back of Barclays’ investment banking unit – a move that follows a number of other leading global banking firms in stepping back from riskier investment activities in favour of traditional banking services.
The trend over the last five years has seen firms that include UBS and RBS make swinging cuts to their investment divisions in a move to reduce risk and comply with new regulations. UBS announced its first quarter results this week, which vindicated its decision to cut around 4,000 investment banking jobs since the end of 2012. The move has boosted its performance and encouraged investors, with gains of 8.3 percent so far this year.
Areas that banks have been cutting back have focused on fixed income, currencies and commodities. In February, RBS announced it would be cutting its workforce by almost 30,000, with much of the cuts on overseas business and riskier investment banking operations. The dramatic move saw RBS refocus its operations on retail banking, small businesses and larger firms.
[S]ome believe that Barclays may struggle to axe its investment
banking division
Barclays will also create a ‘bad bank’, made up of underperforming operations that it hopes to eventually sell off. This will include £90bn worth of investment banking assets, as well as its entire European retail banking operations. The immediate reaction on the markets, however, showed that investors welcomed the job cuts, with a rise of five percent on the FTSE 100.
CEO Antony Jenkins said that the move was a “bold simplification of Barclays”, while adding that he was confident it would deliver “sustainable, profitable revenue growth.” “We will be a focused international bank, operating only in areas where we have capability, scale and competitive advantage.”
However, some believe that Barclays may struggle to axe its investment banking division, due to it forming such an integral part of the business. London-based Simon Maughan, Head of Research at analysts OTAS Technologies told Bloomberg that UBS had shown how to become profitable while cutting investment banking operations. “UBS has been able to scale back its investment bank and in particular take a knife to FICC activities, because it has a more profitable, higher-rated business at its private bank to fall back upon.
“In contrast, Barclays has become so wedded to the investment bank that it is very difficult to cut back, especially when it is still struggling with problems in the European arm of its retail bank,” he added.
Sky-high inflation and a lack of basic goods are fuelling protests on the streets of Venezuela, despite the country being one of the world’s largest oil producers. According to diplomat Diego Arria, today’s civil unrest is largely the consequence of Hugo Chavez’ broken policies. How can the people of Venezuela overcome his legacy of violence, destruction and corruption?
World Finance: Diego, it’s been 15 years since the opposition has even had a chance to sit down with the government. Wouldn’t you call this a watershed moment?
Diego Arria: This definitely is a very worrisome event. Because in a way the opposition today is much grander and larger than what is represented by the political parties who sat together with Mr Maduro. Actually, the political parties have been overwhelmed and surpassed by the student leaders and the young people of the country. It’s very worrisome because it gives the image that something may come out of this, that is beneficial to the country. It gives the image of a government that is tolerant enough to enter and to engage the opposition; and that’s not the case. At the same time it gave the political parties sort of a legitimacy as representative of the official opposition which is not the case.
World Finance: Is there any sort of a unifying opposition voice? I mean, clearly, there are some groups that believe that there should be more of a movement away from the socialist inspired policy and others who believe there should be a bit of a middle ground.
There is nothing larger, more important than freedom
Diego Arria: What you have today is people who are in the opposition and people who are in the resistance. I believe that the resistance represents much more of the aspirations of the Venezuelan people. It’s very difficult because the main inspiration for the resistance movement is actually to rescue freedom and liberty more than any specific smaller political objective. There is nothing larger, more important than freedom. And that’s precisely what many of us are trying to do.
World Finance: The government claims that these protests are being hatched by external sources, including Washington. What do you make of this assertion?
Diego Arria: The government always claims that we’re working with Empire – they call the United States Empire, they are forgetting that China now has become a bigger empire! No, not at all. The problem is that after 15 years, you cannot assign more responsibility to previous administration and so they have to blame Washington. Even though it’s only thanks to the United States that the only income that we have today for the government is coming from the United States.
World Finance: How politically and economically destabilising have these protests been for Latin America?
Young people realise the future is at stake today, not tomorrow
Diego Arria: Not for Latin America in general but for Venezuela. They are not only happening now, they will continue, they will never be stopped. Why? Because who are the ones who are leading it? The young people. And why? Because young people realise the future is at stake today, not tomorrow. And so they have more a sense of urgency. But I believe that the society is increasingly beginning to join them. Because, after all, they have fathers, mothers, sisters, who are joining them. This will not stop.
World Finance: But even some of their parents believe that Chavez was a saviour for the poor.
Diego Arria: I spoke these days in London in a debate with Mr Ken Livingstone at the House of Commons. There is an external belief that Chavez was crowned by the poor people of Venezuela. No: Chavez was crowned by the middle class people and the rich – the owners of banks in Venezuela – originally for one reason. These people thought it would be easier to manipulate a lieutenant colonel than it would have been to manoeuvre or negotiate with the political parties.
World Finance: Okay, but the country has that one percent as you said, the middle class who has not always sided with the government. I mean, yourself and people who are part of or considered to be part of the opposition are seen as being the wealthy few. What would you say to those who say they don’t speak to the needs of the those at the lower tier of society?
The problem is that even though Chavez died, he is alive. Because what we are suffering today is the consequences of his policies and his actions
Diego Arria: You know the lowest tier of society today… it’s amazing that the man who spoke more of helping the poor than Mr Chavez, is the man who designed the most cruel policies for the poor. Inflation: 60 percent. The mixture of violence, crime, assassination and inflation is an extraordinary and fatal combination for the poorest people, who proportionately have suffered more than anybody else.
But you see we are 30 million people. They voted 50 million people so actually the majority of Venezuelans would like to live better, regardless of whether they are on the Chavez side or not on the Chavez side. The problem is that even though Chavez died, he is alive. Because what we are suffering today is the consequences of his policies and his actions. His legacy is a legacy of violence, destruction and corruption of the country that we have today.
World Finance: You say that this legacy is going to push the country to 65 percent inflation by the end of the year.
Diego Arria: Some banks like Barclays, for example, have come to that: 65 percent. The International Monetary Fund says probably 70 percent. But still, you know, from March last year to March this year, we already have 55 percent inflation. But in full, we have 85 percent. What do you think this does to poor people? I mean: an 80 percent increase! And we have 28 percent scarcity in goods, but we have the biggest oil reserve in the world! And then you cannot find flour, you cannot find coffee, you cannot find milk. This is what happens in Venezuela.
World Finance: Let’s say the opposition party is able to take over control. Do you think we’re going to see this dramatic neoliberal policies and thus, perhaps get out of the situation the country’s in right now?
Diego Arria: The challenge we will have is to recreate a new republic. To change – to actually throw into the bin of history! – the political and economic model that they are using today, which actually resembles more the Cuban system.
We are facing to create actually a new country. Nothing less than a new country, not just change from one government to another. This is a government that has all the public powers: you know, control of the supreme court, the controller, the electoral board, the military, the congress; they have everything. So how do you get out of that?
To get out of that, you really have to change the whole thing. Chavez had many people who loved him. I mean, in a sincere way. But these people increasingly are not anymore… they are not from Maduro’s side. They like the man whom they thought helped them. And he helped many of them, undoubtedly that was the case. But he’s not there anymore. And I believe that Chavez’s legacy was to leave Maduro in place because he didn’t want a successor. And he wanted to make sure that nobody would live up to his size. And that’s what we’re facing today.
World Finance: You have to give him some credit for saying he wants to reform the country. He’s created this three prong economic offensive: forcing an increase in production, eradicating scarcity and controlling speculation. Do you think that’s effective in any way, or is it just window dressing for a larger issue?
All the time people associate Venezuela with the worst regimes in the world: North Korea, Saddam Hussein, Cuba
Diego Arria: It’s just a lie! For example, we have today not only inflation but we’re talking scarcity. We have the most corrupt political system in Venezuelan history! The Central Bank and the Ministry of Finance acknowledge that last year $25bn left the country, unaccountable. We have less foreign investment than anybody else – even less than Haiti. Colombia for example, has six or seven times more foreign investment than us. Why? Because they’re trustful, people have confidence in the country. They know what’s going to happen eventually.
In ours, these people expropriate, confiscate. All the time people associate Venezuela with the worst regimes in the world: North Korea, Saddam Hussein, Cuba. We have become a pariah state from many points of view in the international community.
World Finance: So you have no faith that Maduro can govern within a coalition?
Diego Arria: No. I think this government in a terminal stage. I think that the man at the head has already collapsed. He has collapsed before the eyes of most of his followers, before the eyes of the armed forces, before the eyes of the international community. And this regime will not be able to recuperate. There is no revolution when you don’t have the students and the workers. And they don’t have them.
World Finance: If it’s inevitable the government’s going to crumble, who’s going to bring it down?
The worst enemies that this regime have are the man at the head of state and his main accomplices in the region
Diego Arria: Who’s going to bring it down? Themselves! The worst enemies that this regime have are the man at the head of state and his main accomplices in the region. They are the worst enemies of the system. I am trusting that they will be very efficient at bringing down their own system.
World Finance: Is that all it is? It’s just going to be the people at the top? Of course there has to be some sort of external player.
Diego Arria: But why would that happen? It happens when you have failed economic policies. When you fail to provide food for the people. For example they were giving it away, actually: they subsidised so much foodstuff, they almost gave it away.
What happened, they don’t have now the money to do it. So they were every time appeasing fewer people than they can rent. I should say, they have tried to rent people! They don’t want people to be free, really. They don’t want them to have free reign.
World Finance: Latin American neighbours are calling for some sort of a change at this point. How effective is that going to be in bringing about what you’ve been discussing?
Diego Arria: The oil – which should be a blessing for us – sometimes becomes a terrible thing for us. Because with oil Venezuela has forced, or tempted, many countries in the region to be accomplices.
Colombia has been since Santos has been in. Brazil has been the biggest accomplice of Venezuela. So they accommodate them. The only country in the whole region that has expressed real concern for Venezuela was Panama – one of the smallest countries in the region. The rest? No! Because they sell to us. We import everything. I told you at the beginning: the only income that we have in cash is from the US. And we only export to them half of what we used to export 14 years ago. Why? Because they keep talking against Empire.
If the Empire were to say “Well we won’t buy any more from you,” you know, “We’ll buy from someone else,” the regime will collapse in minutes.
World Finance: But there are international players who are now saying there needs to be some sort of a change, a shake-up at the top.
Diego Arria: Yeah, they don’t want a shake-up at the top. They say “both parties” should become… “both parties”. You know, that’s an immoral equalisation of the parties. There’s only one party: the regime. They have the armed forces, they have all their thugs armed, they have the money. And then you have the other people and the students; you cannot compare them.
So like you said: it’s lip service. They are forced to say, you know, that they are the good guys in the region, that they’re concerned for the Venezuelan people. But they have been defending the regime actually for many years. And I don’t see any change in sight.
World Finance: Outside of Latin America, who should be getting involved?
Diego Arria: The EU are very concerned about Ukraine, for example. And rightly so. But Ukraine has specific issues for Europe. The borders of Europe are very important with Ukraine. Russia. And the gas. So actually Ukraine has covered up what’s happening in my own country. Because they pull attention to the event. I understand.
So even when we begin to have victims, they cannot compete with these international events. For example, sanctions. Sanctions not to the country; sanctions to leaders of the regime. The US started what they call the ‘kingpin’ list, which the US Treasury keeps. Which is either people linked to drug trafficking, arms trafficking. The European Union could start considering this kind of thing to individuals. Not against the country.
World Finance: What do you think is going to happen? Do you think there is actually going to be some movement?
There’s a policy code of responsibility to protect, which is to anticipate and prevent. We are at precisely that stage, when the world should take a closer look at my country
Diego Arria: I’ll tell you something. It’s very painful to me to talk about this, because for many years I also was the Minister for Information for my country, in the Ministry of Tourism. And I only spoke about the beauties and advantage of my people. Then I went to the Security Council of the United Nations, representing my own country. And what they would do to promote liberty, to try to save people in Bosnia, in Somalia, in Rwanda. I never thought that one day I would have to go abroad all over the world, to ask to put some attention to our own problems.
And I understand the international community waits until they kill 200,000 Bosnians, and rape 20,000 women, or kill half a million people in Rwanda. Or two million in Congo. And then intervene. So they see us as a minor issue. But there is a responsibility. There’s a policy code of responsibility to protect, which is to anticipate and prevent. We are at precisely that stage, when the world should take a closer look at my country. It is potentially very important for the stability of the whole region.
World Finance: Okay, well thank you so much for joining us today ambassador.
The Food and Agriculture Organisation of the United Nations (FAO) estimates that over $80bn per year will be needed if the world’s growing population is to feed itself adequately by 2050, when it is set to reach nine billion. In some areas, this need will be felt more profoundly than in others – not least of which in Africa, where a number of nations are experiencing faster-than-average population growth. That growth, allied with the fact that many African countries have underdeveloped agricultural infrastructures – even following past attempts to reform them – suggests that, without the proper investment, there may be tough times ahead.
But the importance of agriculture in Africa doesn’t stop at the basic need for sustenance (which is obviously the primary concern) – it also forms the basis of a great many economies in the region. For instance, according to the CIA World Factbook, Zambia is the 13th-fastest growing country in the world in terms of population, but World Bank figures suggest it is also one of the poorest – in 2010, 74.5 percent of the population earned less than $1.25 a day (2005 prices).
Over 80 percent of the working population is employed in agriculture. The GDPs of Sub-Saharan nations like Zambia have always had a strong correlation to the agriculture industry because of the degree to which that industry dominates their economies. So by investing in agriculture, foreign nations and companies have it in their power to help lift Africa out of both poverty and starvation. Surely there can be no more pressing concern than that.
Strength in unity The African Union (AU) – an organisation established in 1999 to help guide Africa to prosperity – has declared 2014 the ‘year of agriculture’ in Africa, highlighting the 10-year anniversary of the Comprehensive Africa Agriculture Development Programme (CAADP). The CAADP’s intention – originally stated in 2003 – is for agriculture growth rates across Africa to reach six percent by 2015. It’s an ambitious target, and one that some nations have already reached. Ironically enough, Zambia, which appears to be in the direst of straits, is one of the nations that has surpassed the target – suggesting that the government is doing what it can to spur growth in the sector.
Which is all well and good, but African nations need to work together, and with foreign investors, to really lift the sector out of its current underdeveloped state. Much of the potential wealth of Africa’s farming industry lies with smallholder farmers – local people running farms on a fairly small scale, to feed either themselves and their families, or perhaps a small local community.
Figures for foreign investment flows show Africa lagging worryingly behind Asia and Latin America, despite the fact that all three areas began at a roughly similar level
Smallholder farmers tend to be underequipped compared to commercial-scale farmers, understandably, and often aren’t run as businesses in any sense of the word – subsistence being the primary goal. They may be small in scale individually, but collectively smallholdings make up huge percentages of the agricultural output in a lot of African countries, even if that output is perhaps not the most efficient way of tapping into the land’s potential.
According to This is Africa, smallholder farmers provide up to 80 percent of the food produced in Sub-Saharan Africa – the question is how to tap into that resource base in a way that allows countries to grow and make profit. Speaking to This is Africa, Larry Attipoe, a value chain specialist at SNV Netherlands, suggested that non-governmental organisations (NGOs) could be the key: “NGOs are well placed to try out new approaches and experiment and when their initiatives work they can be taken up by the private sector.”
Whatever method is ultimately used to fold smallholders into the evolving food production chain in Africa, it must keep them in the chain and not steamroll them with outside investment. The latter should be a boost, but not the sole driver of change. It isn’t good enough for foreign companies (or indeed the large corporations based in Africa itself) and governments to simply ‘land grab’ Africa’s agriculture sector – the sector is so crucial to the local workforces that to get in the way of its employees would fail to address the fundamental issues.
As well as backing smallholders and integrating them with big business, Africa also needs more large-scale farms. Harvesting crops on a large scale brings down the cost of food, which would help the continent’s poorest communities. But in order to do that, infrastructure must be improved to allow for the safe and speedy transport of goods. Although Africa has abundant arable land and a large number of farm labourers, it doesn’t have the transport links to wider markets that it needs to expand the sector. Roads, ports, railways and the like are in many cases not up to the standards required to provide for the mass transportation of goods.
There have been failed attempts to rejuvenate the African agriculture sector in the past, where short-term (or short-sighted) solutions failed to produce the kind of lasting change that was required. The AU is clearly hoping that 2014 will mark the point when a well thought out and long-term plan was set in motion. Decisions taken now will affect generations of Africans, after all.
Feeding an investment landscape The wariness of foreign investors to approach African agriculture is something of a catch-22 situation: the infrastructure isn’t good, so immediate profits will be limited, but without investment, the infrastructure will struggle to improve. This is part of the purpose of the CAADP – to encourage African governments to invest in their own agriculture sectors in order to bring them to a point where foreign businesses will see them as attractive investment prospects.
Figures for foreign investment flows show Africa lagging worryingly behind Asia and Latin America (see Fig. 1), despite the fact that all three areas began at a roughly similar level. Much of the foreign direct investment in Africa, which is already low, is aimed at industries other than agriculture, too, leaving growth in the hands of governments and the private sector. That wouldn’t be such a problem if governments didn’t have equally pressing sectors such as healthcare and education to worry about. Under the CAADP agreement, African governments pledged to spend 10 percent of their national budgets on agriculture – a figure that hasn’t always been met.
Equity financing from abroad seems to be on the rise in the African agriculture sector – a fairly recent development that could help things improve – and the prevalence of bank investment and private funds is also increasing. At present, any new ways of bringing capital into a severely undernourished sector – provided they are considerate of the countries they operate in – are welcome; corporations buying up plots of land in Africa on the cheap and sitting on them until they decide what to do with them, is not.
Because of the increase in population size, and the profound effect it is likely to have in Africa, it’s important that the relevant infrastructure is put in place as soon as possible – not just for the continuation of a thriving agriculture sector, but also because research conducted by the World Bank suggests that, after rising to a peak in the coming decades, the number of people entering the rural labour market in Sub-Saharan Africa will actually begin to diminish.
Indeed, although the numbers of agricultural workers in Africa is large, as a percentage of the overall workforce the numbers have been on a downward trend for a long time (see Fig. 2). Urban labour markets, and tertiary services, will likely take the place of farm labour. In the long-term, this will probably be a positive thing for Africa, provided it can get its agriculture sector in order. If the number of people entering the agriculture sector is to shrink, then African nations must ensure that the right structures are in place to be able to cope. After all, the number of farmers may well decrease, but the number of mouths to feed is certain to go the opposite way.
If the agriculture sector can reform and reach a point at which it can govern and look after itself – while sustaining growth – then the other burgeoning sectors of Sub-Saharan Africa (such as energy and natural resources) can be allowed to develop. Once the problem of infrastructure is solved, then investment will pick up and the continent should be able to build up a head of steam – hopefully sending it into a positive spiral of regeneration and growth for decades to come. Africa has been waiting for its agricultural revolution for a long time – perhaps now the need is pressing enough for the right people to make it happen.
Where once global economic growth was dictated by labour, the wake of the digital revolution has cemented technology as perhaps the single-most important factor today in spurring social and economic growth. Technology has come to form a considerable – and so often essential – part of our everyday lives, and whether it be communication, travel or healthcare, has served to reconfigure the fundamental grounds on which individuals, businesses and even economies rely.
Technology now constitutes a critical component of every major industry across the globe, not least in financial services, where it has come to play a part in just about every department, from banking and security, to outsourcing and CRM. What’s more, as the sector enters into a post-crisis era, participating firms need now necessarily protect against the missteps that ultimately led to their downfall, and later served to breed mistrust among the masses.
Put simply, the financial services sector is only now emerging from what many believe to be a dark spell, and is beginning to take on a new responsible shape, instrumented in large part by the benefits that come with technological change. One of the most newsworthy developments in technology of late is that with regards to security and privacy.
Technology today has now become so deeply intertwined with our day-to-day lives that our online activities in many instances leave an identifiable footprint, which can in turn be converted by businesses to gain valuable market share. Although big data has been much discussed by those in financial services for some time now, the phenomenon has only recently come to be seen as one of the central pillars on which success in the industry depends.
Implementing big changes Consumer behaviour is something that companies across the globe are at pains to unearth, and with the advent of big data management has come an incredibly effective means of doing so. With the phenomenon, however, has come a raft of additional regulatory and security measures that have to challenge firms now more so than ever before, whether it is logistically or financially.
Though big data can at times seem an unwieldy resource to manage, an emboldened understanding of consumer behaviour is undeniably important to an industry seeking to rid of its irresponsible reputation and boost client centricity. One of the biggest facets of financial management to have transformed of late is that with regards to fraud detection and prevention.
Where once anomalies would exist and go altogether unchecked by those in charge, big data analysis allows firms to keep a close eye on the smallest and most complex of details in a much more manageable way. Therefore, with greater oversight comes greater accountability, and so, more trust from those who might otherwise remain disillusioned customers.
Whereas previously the vast majority of financial firms offered a standard portfolio of products and services, advances in big data mean that today bespoke offerings are making their way into the mainstream more so than ever before. Owing to emboldened data management capabilities, financial firms can accurately identify and target a very specific group of consumers based on a data-driven analysis of the market.
Another big data-driven development – though one that is less widely practised – is that concerning predictive analytics technologies. Although the technology is little understood, and something very few companies have the infrastructure and specialist skills to support, it is a phenomenon that looks to gather momentum in the years ahead.
The ease by which customers can switch banks today alongside the increased element of competition brought about by the crash demands that financial firms improve upon their client specific products and services if they are to thrive. In order to not only attract but retain customers today, those in financial services must utilise technology in whatever way they can to make products and services at once specialised, efficient and accessible. This personalisation of products and services is one of the biggest paradigm shifts of recent years, and has been made possible to design and implement due to technological gains.
Smaller players on the frontline Another buzzword to have accompanied rapid technological innovation of late is efficiency, which has prompted all manner of companies to clamour on board the bandwagon, and invest more in technology than ever before. As a consequence, companies in financial services are investing considerably greater resources in IT, knowing it to be the department that could well serve to set them apart from their closest competitors.
Technological improvements have even made it viable for much smaller, technologically savvy companies to re-engineer basic financial services and compete on an equal footing to those with considerably more staff. In the years ahead, expect a greater number of lesser-known firms to rise up rapidly through the ranks over the coming years as the barriers to setting up are reduced predominantly to technological ones.
Another state-of-affairs that is growing increasingly common is outsourcing, which is driven further in the IT sector. With IT requirements becoming far more complex, many companies are finding it much easier to quite simply leave the work in the hands of experienced third parties.
What’s more, setting up sophisticated IT infrastructure is incredibly costly, and in the case of most SME’s entirely unfeasible, which means that in-house IT departments in financial services are often the preserve of larger, global firms. As is the case with various industries apart from financial services, non-core processes are being outsourced to far more experienced and cost-effective third parties in an effort to cut unnecessary costs and boost efficiencies.
Perhaps the most decisive development of the past half-decade with respect to the global economy is that of emerging market growth, and the financial services industry as a whole has done its utmost to capitalise on the many opportunities that have become clear. With the rise of the smartphone has come a whole new market for financial firms to tap, with a market that depends not on a conventional branch network but a reliable, though no less extensive mobile or online alternative.
Although online and mobile banking has existed for some time now, many of the opportunities to be had in emerging markets are still for the taking, as global players come to these new locations as newcomers and attempt to win over valuable market share. Put simply, the principal benefit of improved internet and mobile banking is for accessibility. Where once the banking population in so many developing nations was meagre in population percentage terms, the rate has exploded as the industry has departed from bricks and mortar and migrated instead to the net.
Elsewhere in developed markets, internet banking is nothing short of a mainstay of any respectable financial firm, with companies battling instead to ensure their online solutions are made as convenient, secure and customisable as possible. Not excluded to simple banking products and services, however, online offerings today extend to various fields, interactive investment portfolios among them, as technology continues to reshape the very nature of the financial services industry.
Far from contained to banking, technological improvements have given rise to entirely new business propositions, including being peer-to-peer lending and crowdsourcing, which together look to redefine the financial landscape in itself.
To celebrate the most notable technological achievements of these past 12 months, World Finance pays tribute to the firms we feel have spearheaded the most impressive advances in financial services. Whether it be with regards to back office solutions, banking systems, outsourcing or network infrastructure, the World Finance Technology Awards 2014 offer an insight into those we believe to be leading path-breaking technological gains.
It’s of grave concern to some that the world’s largest trading market is for the most part unregulated. Boasting a turnover of $5.35trn a day at last count, the forex market has been allowed to charge on largely unchecked since its ancient beginnings. However, the extent of fraud uncovered in these past few years has called into question the system’s long-supposed integrity.
The sheer size of the market has led many to believe that the prospect of rate fixing is entirely out of the question, though recent forex probes have served to illustrate quite the opposite. The on-going investigations into the Libor scandal, for one, have pushed the prospect of benchmark rigging to the fore, and brought to light the extent by which traders have been allowed to manipulate the system without consequence.
The realisation has jolted regulatory authorities into action, and prompted many to work towards ridding the system of its shortcomings, whether they are a lack of transparency, oversight or clarity. Nonetheless, the fact remains that the forex market is an incredibly difficult market to regulate, owing to its size and complexity, and instead targeted reforms appear to be the best course of action for the time being.
“I think just regulating the market and saying ‘you shouldn’t do this’ is very difficult, because financial markets are by their very nature large and opaque. The foreign exchange market is by definition an international global market,” says Mark Taylor, Dean of Warwick Business School and former foreign exchange trader. “So, very very hard to regulate, because the markets will tend to find ways of circumventing that regulation.”
“[F]inancial markets are by their very nature large
and opaque”
That being said, investigations are growing in size and stature, with more than a dozen regulators across four continents currently looking into suspect trader activities at some 15 or so banks. As a result, 11 firms have been made to dismiss, or at the very least place on leave, over 30 employees, and no doubt these numbers will continue to climb for as long as investigations carry on with quite the same level of enthusiasm.
By far the most prominent form of misconduct is that with regards to benchmark fixing, which was made famous most notably in the wake of the Libor scandal. Since then, regulatory authorities have made it their utmost priority to set about reforming the benchmark-setting process, for fear of investors growing increasingly averse to benchmark rates the more they are subjected to manipulation.
Benchmark principles In an effort to restore waning confidence in financial benchmarks, The European Securities and Market Authority (ESMA) along with the European Banking Authority (EBA) have together penned a report entitled Principles for Benchmark-Setting Processes in the EU. “The final principles now give clarity to benchmark providers and users in the EU about what is expected of them when engaged in this critical market activity,” said ESMA Chair Steven Maijoor of the work. “These Principles reflect the wider work being carried out on benchmarks and their immediate adoption will help restore confidence in financial benchmarks and prepare the way for future legislative change.”
The document quite simply sets out a framework by which data submission, administration, calculation, publication, and continuity can all be decided upon, with the end goal being to instil greater confidence in financial markets and restore integrity to financial benchmarks. While the proposals amount to relatively simple governance, supervisory and transparency-related provisions, the recommendations represent a significant leap forward for the largely unregulated market.
The ESMA and EBA, however, are far from the only regulators to have taken note of benchmark fixes, with the Financial Stability Board (FSB) having also put forward reforms for consideration. “The cases of attempted market manipulation and false reporting of global reference rates, together with the post-crisis decline in liquidity in interbank unsecured deposit markets, have undermined confidence in the reliability and robustness of existing interbank benchmark interest rates,” wrote the FSB in its report to G20 finance ministers and central bank governors late last year.
The FSB, which brings together leading financial authorities, institutions, regulators, supervisors and committees of central bank experts, was tasked by the G20 to ensure national and regional authorities take a coordinated approach when arriving at financial benchmarks. In response, the group has established an Official Steering Group (OSSG) of regulators and central banks whose role it is to guide the process of deciding a reference rate.
“The official sector has an essential role to play in ensuring that widely used benchmarks are held to appropriate standards of governance, transparency and reliability,” says the FSB. “As part of its wider role, the FSB will promote adoption and good practices in relation to benchmark setting and the use of benchmarks.”
Front running the 4pm fix Ambitious efforts to reform the benchmark setting process, however formidable, so far appear to have failed in bringing the process of rate rigging to a complete standstill, and instances of exploitation seem only to be growing. The latest rate to be proposed by regulators as a likely problem case is the WM/Reuters “fix”, otherwise known as the London fix. The benchmark rate, put simply, is ascertained from a snapshot taken of forex market movements 30 seconds prior to and 30 seconds after 4pm, and is so often used as the go-to rate for institutional clients conducting trades.
Many have speculated, as they have been doing for well over a year now, that bank traders are colluding to artificially affect the London fix and turn a healthy profit for themselves. “You can put through, you know a big trade, a couple of billion dollars, 20 seconds before 4pm. That in itself is not illegal. If somebody said, why did you put through that big trade, they could say, well it’s not illegal to trade, obviously! But what is illegal is colluding,” says Taylor. “If there is evidence that banks got together, senior traders from some of the big banks got together and said you know, I’m going to put through this billion dollar trade, dollar-sterling, I’m going to buy dollars against sterling 10 seconds before 4pm. Why don’t you do the same thing, and we can both together affect the market rate?”
“[I]t’s not really so much regulating the market that’s important. It’s actually taking away the incentives for people to cheat in that market”
Bumping the rate up by as little as a fraction can have huge ramifications for those involved, especially when the trades can so often amount to billions of dollars. What’s more, the underlying reasons for the scandal are very similar to that of Libor, at least in theory, and should serve to reinforce the importance of reform if the industry is to avert scandal of a similar sort in the years to come.
While the WM/Reuters rate has been subjected to minor changes over the past two decades, the overhaul that looks soon to come promises to change the system’s methodology on a fundamental basis. Whether it be expanding the period of analysis or boosting transparency, the reforms will no doubt represent the most important response to the rate rigging scandal yet.
“As a former foreign exchange trader myself, it is part of the folklore of the market that traders do try to affect the reference rate,” reveals Taylor. “To my mind it’s not really so much regulating the market that’s important. It’s actually taking away the incentives for people to cheat in that market.” Considering this to be the case, it may well prove that taking a brief snapshot of the market – as is standard practice today – might not be the best course of action when arriving at a reference rate.
Although concerted efforts to overhaul benchmark rates are still very much in their infancy, this is not to say that the implications will be anything short of colossal once they come into being. It’s perhaps too much of a leap at this stage for authorities to introduce a raft of regulations, considering the market’s sheer size and complexity, however, a crackdown on benchmark rates should serve to restore integrity to the some-would-say disgraced market.
If financial benchmarks are to again gain favour, benchmark administrators must take pains to abide by an agreed upon set of principles when arriving at a rate. Only then will the industry rid of its muddied reputation and become known not as a haven for scandal, but a market that once again can be trusted.
When the global financial crisis struck in 2008, many of the world’s most recognisable financial institutions either went out of business or faced staggering losses that they are only just emerging from.
In the years preceding the crisis the leaders of these firms were widely hailed for their shrewd management. Their reputations, however, have since been tarnished so considerably that many have either retired, or even gone into hiding. World Finance takes a look at what happened to some of yesterday’s top bankers.
1. Dick Fuld, CEO, Lehman Brothers
Perhaps the most high profile casualty of the financial crisis, Dick Fuld oversaw the collapse of Lehman Brothers. He is now seen by some as the face of the crisis, due to his aggressive risk attitude. Fuld remained out of the spotlight since Lehman’s collapse –at one point he became extremely difficult to track down – before briefly taking a seat on the board of New York brokerage and investment banking firm Legend Securities.
2. Fred Goodwin, CEO, RBS
Presiding over the worst of the UK’s banking failures, such was Fred Goodwin’s fall from grace that after he retired from RBS in January 2009 – shortly before it announced a record loss of £24.1bn – he even had his knighthood for “services to banking” rescinded, an act almost unprecedented. His reputation has been further tarnished by the size of the pension he was awarded after retirement, at the height of the financial crisis.
3. Angelo Mozilo, CEO, Countrywide Financial
Not as high profile as the others, but Countrywide’s former CEO Angelo Mozilo is possibly the only person that got remotely close to being prosecuted for his activities during the financial crisis. Accused of large-scale selling millions of dollars worth of personal stock while publicly encouraging shareholders to buy back stocks to bolter the share price. He settled with the SEC for $67.5m and was banned from serving as a company director, after retiring.
4. Stanley O’Neal, CEO, Merrill Lynch
Former CEO and Chairman of Merrill Lynch, Stanley O’Neal’s numerous leadership roles at the firm before his appointment in 2003 should perhaps have prepared him for the emerging crisis. However, the crumbling performance of Merrill Lynch under his watch led to his removal in 2007, and the company’s fire sale to Bank of America the following year. Perhaps learning from his failures, he now sits on the board of aluminium producer Alcoa.
5. James Cayne, CEO, Bear Stearns
The architect of the collapse of Bear Stearns, former CEO James Cayne had run the firm since 1993. Cited as one of the worst US CEOs of all time by a number of news outlets, Cayne had a stake in the company worth $1bn, which he proceeded to mostly lose during the 2008 collapse. He sold his stake for just $61m and retired. He was also known for his alleged drug use, being described by former Bear Stearns chairman Alan C Greenberg as a “dope-smoking megalomaniac”.
Singapore has joined the ranks of countries which have signed a tax deal with the US, requiring banks, wealth managers and other financial institutions to report information on bank accounts held by US citizens to the US tax authorities. The newly signed FATCA deal is part of the US’ recent years’ efforts to clamp down on tax evasion.
Authorities in the US and Europe have called on offshore financial centres such as Singapore or the Bahamas to be more transparent when it comes to financial affairs. What’s more, Singaporean authorities have been battling to prevent illicit funds from flowing into the country, as its status as one of the world’s fastest-growing wealth management centres grows.
[P]redictions suggest that Singapore will eventually overtake Switzerland as the world’s largest private banking and wealth management hub
The fight against tax evasion has been playing out as rising global wealth has prompted increasing inflows into financial centres like Switzerland and Hong Kong from high net worth individuals. According to the Capgemini and RBC Global Wealth Report, Asia is expected to become the world’s largest market by value for people with investable assets of $1m or above, by 2015.
What’s more, predictions suggest that Singapore will eventually overtake Switzerland as the world’s largest private banking and wealth management hub. The tax information-sharing agreement will allow Singaporean firms to report US account-holder information to their local tax authority, which will forward it to the US Internal Revenue Service. The deal, a Model 1 IGA, will be finalised by the end of 2014 and also stipulates that the US government can impose a 30 percent withholding tax on certain US gross payments made to non-compliant foreign financial institutions.
So far, more than 30 IGAs have been signed, and an additional 30 agreements are currently waiting to be signed and finalised, including deals with key jurisdictions such as Luxembourg, Jersey and the Cayman Islands, according to the Treasury Department’s website.
Notably, wealth management hubs Bermuda and Switzerland have agreed to Model 2 IGAs, which entails reporting directly to the IRS rather than through a local tax authority. Switzerland has been particularly under fire from US tax authorities due to its long-standing tradition for banking secrecy – a phenomenon that is increasingly threatened as the international agreements on FATCA continue.
As hints of a global recovery begin to take hold, Argentina remains out of sync. The country continues to report declining exports in several key industries (see Fig. 1). With the IMF predicting that the exports will peak at 6.5 percent year-on-year growth in 2015, and then slip back to below 2013’s level of 5.7 percent growth, economists are once again highlighting the fragility of Argentina’s economy.
They are also calling into question the Kirchner government’s policymaking, and some of the decisions it has made regarding the country’s economy. Simply put, Argentina’s economy is all over the place: a wild frenzy of massive upswings and dramatic declines – a pattern that has repeated itself for much of the past century.
Persistent problems Every week more pressure is piled on Cristina Fernández de Kirchner and her administration, which once again finds its country on the brink of economic disaster. Inflation is on the verge of spiralling out of control – in February the government admitted that it was increasing at a blistering 3.7 percent a month, leading to soaring food prices and putting the country’s most vulnerable at risk.
In Scotiabank’s most recent Latin America regional outlook report, Pablo Bréard writes that “Argentina is flirting with a very high inflation scenario… with adverse consequences for price stability.”
Argentina’s economic history – key moments
1880: Through French and British investment, Argentina begins a period of economic expansion mainly driven by exports. Over the next 15 years, the country’s GDP grows by about eight percent every year.
1905: Argentina has a comparable GDP to France and Germany, although wealth is much less evenly distributed.
1946: Juan Perón is elected as President. A protectionist agenda makes Argentinean industry uncompetitive and the country is largely cut off from the international market.
1955: After economic stagnation, Perón is ousted in a coup. The government battles to control spiralling inflation caused by wage rises for much of the decade.
1975: Industrial output plummets and within a few years Argentina’s level of industrialisation is similar to its level in the 1940s. The country is in a deep depression until 1990.
1999: A recession between 1999 and 2002 is one of the biggest disasters in the country’s history. In 2001, the country defaults on its debt.
2003: Export taxes are raised until they contribute 11 percent of the country’s tax receipts. The economy begins to grow by approximately six percent a year up to 2009.
2014: Fresh economic worries hit the country as inflation rises and exports decline. Argentina’s government tries to recover foreign currency reserves as trust in the peso dwindles.
The spike in prices has also devalued the Argentinean peso. Moody’s Investors Service is predicting that the government will devalue the currency by as much as 50 percent by the end of 2014 in an attempt to curb the rapid draining of Argentina’s central bank’s dollar reserves. US dollars are being massively traded on the country’s black market because of their security. Some Argentines will pay almost 50 percent more than official prices, because of government restrictions, to buy dollars on the black market because of lack of trust in the peso.
Many older citizens will draw similarities to recent crises in 1981, 1989 and the major economic depression and debt default between 1998 and 2002. Argentina’s debt default in 2001 was so pronounced it effectively locked the country out of international capital markets, so the country has had to become more reliant on other sources of income.
Social unrest is also compounding the problems. Recent protests and strikes have rocked the country, mainly led by the country’s disillusioned farming and labouring population, who are looking for wage increases. Although the country enjoyed a period of growth in the last decade, some see increasingly protectionist policies as draconian and damaging. Recently, Kirchner dismissed this idea, saying that “the state is more efficient, or at least as efficient, as the private sector when it comes to managing the economy.”
Speaking to World Finance, Juan Barboza, Itaú Unibanco’s economist for Argentina, said that government measures were along the right lines but progress was being harmed by the political and social uncertainty. “Everything is in the right direction, but we see that, unfortunately, all these measures are taking place in a context in which the level of confidence in society and the capacity of government to implement the policy is weak… that could add a certain degree of uncertainty about the confidence [in the government] about what they are doing. But the fact is that so far the government is surprising [people] every day with a new measure in the right direction.”
Barboza, former principal reserve manager of Argentina’s central bank, also stressed the delicacy of Argentina’s position, adding that “this will be a harsh year for Argentina… the depreciation of the peso, the rise in interest rates and falling real wages will hurt the economy. For next year we expect that the situation will stabilise. The situation will not be one of economic recovery for the country; we expect zero growth for next year.”
Trading woes In recent years, four of Argentina’s most in-demand goods have been in decline. Grain, textile and auto exports have all recorded poor figures. Even beef, one of Argentina’s most beloved and traditional foods, has found itself subject to reduced production. High taxes and government interference has made beef a less desirable export. Domestic consumption of the product has decreased thanks to the rising cost of food.
When the government found itself at loggerheads with farmers in 2008 after the imposition of an export tax, it refused to back down. This, combined with the fact that increasing tracts of cattle producing land are being dedicated to the production of soy, paints a stark picture for Argentina’s struggling beef trade. Most of the soy goes to China where, ironically, it is used to feed cattle.
Across the board Argentina’s traditionally strong agricultural industry – 50 percent of the country’s exports in 2013 – finds itself curbed by the government. The government’s demands are simple: it wants to take its share of the agricultural industry’s profits to replenish the depleted foreign currency reserves that it requires so desperately to pay its debts.
Argentina’s automobile production has also been affected. Although local sales have increased, a recent industry report shows that last year exports fell 6.5 percent. Many blame this on the slowdown of the Brazilian economy. Brazil is by far Argentina’s largest trade partner, accounting for a fifth of all exports. Declining demand for Argentinean products in Brazil, coupled with the uncompetitive peso, have all been factors in the decline.
What this shows is that Argentina is extremely vulnerable to the global trade market. An overreliance on certain countries for trade – in the first half of the 20th century, Britain; in the second half, the US – and a relatively undiversified trade portfolio compound its susceptible position.
In a recent trade forecast report, HSBC Global Connections said that slower economic growth will “hold trade back for the next few years, with exports and imports expected to remain subdued. Trade will not improve significantly in 2014.” The report also said that muted global demand would hurt short-term export prospects for the country. This, coupled with a relatively exclusive group of major trade partners, dramatically contributes to the slowed increase in export volume the country is seeing (see Fig. 2).
Divisive policy Protectionist policy and a small pool of countries who import from Argentina are damaging the country’s potential for growth. Argentina has vast natural resources, many of which remain untapped or underinvested. Mining’s share of GDP has risen from just two percent in 1980 to four percent today. A spate of recent nationalisations, however, has made investing in the country a tough prospect.
In 2012, the Argentinean government expropriated major Spanish oil producer Repsol’s YPF unit, an arm the company bought from Argentina in 1999, on the grounds that the company did not invest enough money into developing YPF’s energy operations. This damaged relations between Madrid and Buenos Aires, and sent a warning to would-be investors about the Kirchner administration’s proclivities towards nationalisation.
Any reputation hit that damages investment prospects is a big blow for the country, as recent surveys suggest that Argentina’s so-called Vaca Muerta, or Dead Cow – that is, shale deposits – could be a big source of income for the country. If estimates are correct, the deposits would make Argentina the world’s fourth-largest producer of shale oil.
Argentina exports
$5.8bn
Jan 2008
$5.2bn
Jan 2014
The country’s shale gas deposits are believed to be the world’s third largest, behind China and the US. Although YPF have recently signed agreements with various companies to exploit the potential resources of Vaca Muerta, it remains unclear as yet whether the large reserves will be tapped fully. Government mismanagement, once again, could be diverting Argentina from long-term wealth in favour of short-term political gain.
The man behind most of the policymaking is Alex Kicillof, Argentina’s new Economy Minister. Many call Kicillof, who was a professor at Universidad de Buenos Aires, the most important political figure in Argentina. His swearing in ceremony in November 2013 marked a meteoric rise to power and if his initial declarations are anything to go by, Argentina can expect more of the same protectionist initiatives in an attempt to stimulate growth. Some suspect that it was Kicillof who orchestrated the renationalisation of YPF and the recent settlement between the Argentinean government and Repsol.
Many people believe Argentina’s complex political situation, both in modern times and historically, is the root of the problem. At the beginning of the 20th century, Argentina was one of the world’s most up-and-coming economies, but what some see as one hundred years of political failure has left the country in dire straits. A series of military coups have pockmarked the country’s recent history.
From 1974 to 1990, the country suffered a deep depression. Although the past decade has seen solid growth for the Argentinean economy, the depression of 2001 and the renegotiation of government bonds in 2005 underline the country’s wobbly economy.
Historically, Argentina’s governments have favoured short-term economic policies, instead of laying down a long-term economic plan for the country’s growth. The best example of this was the rapid financial liberalisation enacted during the 1976-83 ‘National Reorganisation Process’.
Argentina’s economy is all over the place: a wild frenzy of massive upswings and dramatic declines – a pattern that has repeated itself for much of the
past century
The military junta borrowed money from abroad for public works and welfare. High interest rates and an over-valued exchange rate sought to control inflation, which hurt Argentinean exports and industrial production. Some may draw comparisons to today’s situation, in which Argentina’s poorest are on the brink of real suffering as inflation continues to ramp up.
Argentina’s nebulous political situation is one that some claim informs bad decisions about the country’s economy – in particular trade policy. Kirchner’s government has sought to maintain a trade surplus at any cost in recent years. Mostly its strategy involves tariffs on importers, who are only allowed to export goods for the price they import them.
Unfortunately, this naturally leads to middleman behaviour, where a third party can profit from both sides of the arrangement at the expense of the exporter and the Argentinean Government. As a member of Mercosur, the South American economic and political agreement supposed to promote free trade, Argentina cannot directly impose tariffs on imports.
Instead, the country continues to broaden the amount of products that require licenses to import. This tightens the government’s grip on what comes in and out of the country and pulls the country further away from free trade.
Under pressure There are signs that the Kirchner administration may be relenting a little under the political pressure; pressure that is increasingly coming from abroad. What remains to be seen is how much political power the government will manage to retain after erratic policies and declining popularity. A recent poll suggested Kirchner has an approval rating of just 27 percent – a massive drop from last year’s figure of 44 percent.
The potential is still there for Argentina to put in place real measures that will future-proof the economy. What economists are now calling the ‘Argentine paradox’ – decline despite so much potential – will no doubt go down as one of history’s strangest economic stories.
Juan Barboza feels confident about the future, however: “The other parties have a different mood; they have a different approach to the market. In other words, all the potential presidential candidates are definitely more market friendly… I do not expect Argentina will take a step backwards in the future with its economic policy.”
If real changes are made in Buenos Aires, with a government receptive to the free market, it can become a story of hope and the country can prosper. The history of the country’s economic management has the rare distinction of being completely unique. After all, as economist Simon Kuznets once said, “There are four types of countries: developed, underdeveloped, Japan, and Argentina.”
Can British banks survive another financial crisis? It’s the question everyone’s asking, and the Bank of England aims to answer with its next set of stress tests. James Barty, Strategy Director of the British Bankers’ Association, talks to World Finance about what the implications of the tests might be, how they compare to EU tests, and what impact they might have on the lending market.
World Finance: Well James, surely these tests are merely for show to gain confidence in the market?
James Barty: These are very real tests, the extent of the economic shocks that are implied in the Bank of England’s tests are such that they’re definitely not for show. To have unemployment going up to 12 percent, to have the housing market drop by 35 percent, to have the worst GDP performance over 10 years, and over 100 years, well they’re pretty significant shocks, so if the banks can survive those kind of shocks intact, then I think they can pretty much survive anything.
World Finance: Why then just target the eight largest banks and building societies, why not industry wide?
James Barty: They’re the ones that we should be concerned about if they become vulnerable, and secondly there’s an element of, you want to focus on the banks that have got the resources to be able to produce this.
These are very real tests…they’re definitely not for show
World Finance: What sort of scenarios are depicted in the tests and how will they gauge the banks’ ability to cope?
James Barty: Well we’re looking at a pretty extreme scenario, 35 percent drop in house prices, 30 percent drop in commercial real estate, unemployment back to a level we’ve not seen in 30 years, GDP growth to a point we’ve not seen in 100 years, it’s almost a one in a hundred year stress test is the way I’d look at it. So we’re asking the banks to say, can you withstand a very, very extreme economic scenario?
World Finance: So that’s really a worst-case scenario?
James Barty: Yes, and I think the Bank of England would say this is a kind of scenario which we very much hope doesn’t happen, it’s very much in the tail of any type of scenario we could imagine, but we want to be sure that the banks a) can survive it, and also to see how the banks would perform in such scenarios. For the Bank of England, part of what they’re going to be looking for is, what does it actually reveal about the state of the banks’ positions and the state of the banks’ books.
World Finance: Stress tests have been demanded by the media and politicians since the 2008 crisis, but they were found to be too lenient. For example, Ireland’s banks passed the tests and then ran out of capital. So will these new tests be more stringent?
James Barty: I think these tests are much more stringent, and I certainly think the Bank of England has learnt some of those lessons and said, actually, we want to put in place a scenario here which is really going to stress the banks and really understand how much capacity they’ve got for absorbing these type of losses. And even the European Banking Association stress test, which is less extreme than the Bank of England’s is starting to look like a much more serious stress test than perhaps some of those early ones were.
World Finance: So what was wrong with the earlier tests?
James Barty: Part of the problem with the early stress tests is you were trying to stress test something in the middle of a financial crisis, and no one quite knew what the next domino to fall in the financial crisis was. Whereas here what we’re saying is, we’ve learned the lessons of the financial crisis, we know that some of the things that can happen can be really quite extreme, so let’s build a scenario which is going to properly stress the banks, and we’re now in a scenario where we’re five, six years post the financial crisis, the banks are beginning to rebuild themselves, so if we apply that type of stress test, we can really find out how much progress they’ve made.
World Finance: How do these tests compare to the EU tests?
James Barty: The UK has got a bigger housing market, we’re more exposed to variable rates of interest, therefore more vulnerable to this kind of correction, and I think they felt that they should go for a slightly more extreme stress test on that basis. So it’s more aggressive and I think there’s reasonable ground for saying actually, yes, you should be more aggressive.
I think these tests are much more stringent
World Finance: The Royal Bank of Scotland is still recovering after its bail out, so surely this will not show the most accurate of results?
James Barty: All the banks are in various stages of recovery from the financial crisis, and what you’re trying to do in this situation is say, how much better have they got? How much more resolute are the banks now? So I don’t think it matters whether you’ve just recovered from the crisis or whether you’ve pretty much finished that recovery from the crisis, it’s a question of how can you withstand these shocks now, and the regulators will be looking at all the banks and just saying, well actually, where are you? What more do you need to do? Let’s have a discussion about where you need to go in terms of continuing to build your capital and continuing to become a safer bank.
World Finance: Well then, do you think this could potentially spell the end for banks that are currently not performing well?
James Barty: I don’t think what the Bank of England or the European Banks Association are trying to do is to say, well this is the end for any particular bank. What they’re trying to say is, a particular banks might do slightly less well than another bank, then they’re going to sit down with them and say, right, given the outcome of this stress test, how are you going to proceed to continue to improve yourself?
World Finance: Well these tests come amid concerns of rising house prices and a London super-bubble, so how will this affect the lending market?
James Barty: Well what the Bank of England is, in part, doing with these stress tests is saying to the banks, look, this is what we’re concerned about, this what we think that you should be focused on, and certainly in terms of the house price declines we’re looking at in the UK they’re quite extreme, and also the Bank of England is assuming that the bigger house price declines will be in areas like the south east and London which have had the bigger house price rises. So in a way it’s saying to the banks, be aware that when you’re lending into these markets, we are going to stress your books so you need to be more careful about how you lend into the more extended parts of the market.
World Finance: Well a lot has been done to bring back confidence in the UK banking sector, so how do you think banks will cope with these stress tests?
James Barty: If I look at what some of the banks’ analysts who’ve written on these tests have said, generally they think the banks will come through ok. Some might well be asked by the Bank of England to continue to progress to build more capital. But I think we’ve made an enormous amount of progress in the last five or six years, and the banks are in a much much better position to withstand a stress test like this today than they would have been pre-crisis, that’s for certain.
[G]enerally they think the banks will come through ok
World Finance: The US already conducts similar tests and as a result the Bank of America was forced to retake the test, because it uncovered a banking error that dated back to 2007. So do you think this could uncover some skeletons in the UK banks?
James Barty: The answer to whether you uncover skeletons or not is a big unknown. The Bank of England made it absolutely clear that part of the reason for these stress tests is to try and work out, what are the potential vulnerabilities in any of the individual banks, how they might cope with them, and then to work with the banks to make sure that you address any problems you actually identify.
World Finance: Well finally, stress tests do of course differ between America, the EU and the UK. So where do you stand on universal stress tests, the same for everyone?
James Barty: There are some arguments in favour of a certain degree of universality in some of the tests, and if you look at what the Bank of England and EBA have done, the Bank of England have really extended an EBA test, and some of the UK banks will be doing the EBA tests as well. The best solution, which is you have a general shock to markets which you assume across the regulators and then you say, well actually, how might this differ for my local market, which is what the Bank of England’s done, and I think that’s the right kind of compromise.
In today’s data-driven world, companies are under increasing pressure to unlock the insights from their data and create an ‘intelligent enterprise’ – and chief financial officers are in a prime position to do it.
Most modern CFOs have been involved in a wide range of finance-centric initiatives, including shared services, outsourcing, process improvement and process automation. But as financial organisations strive to add more strategic value to their operations, their focus needs to expand to business partnering.
We believe the CFO is becoming the primary funnel for an organisation’s crucial data
How can CFOs provide meaningful analysis to help business units, product managers and other general and administrative expense areas make decisions that are based more on the right information and less on gut instinct?
CFOs have access to a veritable goldmine of information, such as data from enterprise resource planning (ERP) systems, management reporting tools and line-of-business applications. With the right data management and analytics, CFOs are uniquely suited to identify value across an enterprise, providing insights to improve performance, manage risk and drive competitive advantage. Enter the new knowledge executive in the ‘C-suite’.
Turning data into value
According to an IBM study of CFOs, those who embraced business analytics over a five-year period showed an average 20-fold increase in earnings before interest, taxes, depreciation and amortisation (EBITDA), a 49 percent increase in revenue and a 30 percent higher return on investment capital.
What does this portend for the CFO? We believe the CFO is becoming the primary funnel for an organisation’s crucial data. As the new knowledge leader, the CFO can leverage business analytics to connect operational and financial performance.
In manufacturing, for example, the management of plant utilisation, capacity and backlog is paramount to operational success. However, these priorities also have direct ties to revenue forecasts, and the CFO is in a great position to harness this business intelligence and accelerate overall business performance.
The big picture
To thrive in today’s ultra-competitive global economy, CFOs must evolve beyond the finance function, using data to see the bigger picture, while helping their organisations make fact-based decisions and create better processes.
Companies have reported, as a result of data analytics:
+30%
Return on invested capital
+20%
Improvement in working capital
-20%
Inventory carrying cost
-13%
Spend
+5%
Return on assets
With historical, current and predictive analytics, the CFO can develop more accurate forecasts and orchestrate clearer, more compelling paths to value – by partnering with the business units to improve strategy, operations, information technology, supply chain, sales and marketing.
In inventory and warehouse management, for example, some financial executives are using analytics to enable their organisations to better fulfil customer demand while reducing the cost of inventory and maintenance. Others are using analytics to improve functional collaboration among sales, operation and planning, and, as a result, are seeing up to a four percent improvement in return on assets versus competitors.
In supplier management, as another example, some financial executives are analysing data to identify ways to reduce spend through volume discounts and pricing control. In sales and marketing, companies are using data analytics to improve responsiveness to customers, based on a greater understanding of their needs and satisfaction with products and services.
It comes down to managing corporate data as a differentiating asset – by integrating ERP (enterprise resource planning) systems, operational data stores, data warehouses and appliances, reporting systems, analytic engines and more. And it’s up to the CFO, as the new steward of the information asset, to demand the right data at the right time – and then translate it into growth, cost savings, and other significant financial and operational benefits.
What are the best opportunities for new markets? Where is the best use of capital investment? What products and services should a company expand or phase out? How can operations be optimised? How can business units more effectively deploy capital?
To answer these kinds of questions, CFOs can help harness an organisation’s data in a programme that includes analytics, executive dashboards, benchmarking, reporting, leading practices and intimate knowledge of the business strategy. When treated as a key competency, with discipline around people, processes and technology, this kind of business intelligence can influence decisions in areas such as product profitability, customer profitability, emerging markets, commodity analysis and acquisition analysis.
Intelligence through technology
To build an intelligent enterprise, many CFOs need to improve their companies’ information systems – by making better use of current technologies, adopting new ones and consolidating disparate systems.
Indeed, business expansion and the development of new service lines are top strategic priorities for many companies, but some are in the mere developmental stages of translating data into usable information – usually because of inferior technology. Other companies, striving to improve the value of financial planning and analysis, are realising that their current enterprise information systems are duplicative and overcomplicated.
Many times, management can’t access the financial and performance information they need to make decisions, and finance functions simply don’t have the ability to proactively analyse information before it’s stale or out-of-date.
In response, some finance organisations are exploring cloud solutions to implement these changes more quickly or cost-effectively than with traditional on-premises systems. Others see an increasingly urgent need to embrace mobile technology, making financial and operational information available to business partners whenever and wherever they need it – so they can react quickly, change direction and create competitive advantage.
Today’s CFO understands how to meet the information needs of all stakeholders – bridging the gap between knowledge needed and knowledge in hand – by providing a platform for intelligent and informed decision-making
Successful CFOs must be nimble as they strive to keep pace with technology, while continuing to balance costs with potential returns. Indeed, tomorrow’s competitive position will be driven in part by a company’s ability to identify and manage the complex information inside and outside its walls – the success of which depends on robust analytics and new technology that decision-makers can use to turn information into insights.
Even though it will be challenging to find the right technology, oversee the implementation and fully leverage its potential, savvy CFOs see these planned changes as an imperative, not a luxury. And the payoff will come in the form of a more intelligent finance organisation that drives the business.
Indeed, according to a KPMG survey of senior finance executives from companies with more than $1bn in annual revenue, the right technology is helping them improve profitability by 25-50 percent, while reducing costs by nearly 13 percent.
Paul Farr, Executive Vice President and CFO of utility holding company PPL Corp., characterises the imperative well: “We don’t ever want to be in a position where the system environment, or the financial information environment, in any way creates a barrier to continued strategic decision-making that would somehow limit the growth of the organisation or prevent us from taking advantage of opportunities as they come up over time.”
The evolution of the CFO can be a significant journey. In fact, in a KPMG study of executives worldwide, 94 percent said complexity is their greatest challenge, and information management ranked as one of the top two reasons why. However, 84 percent of respondents said that information management is also a key way to manage complexity.
Driver for change
To create a new intelligent business model, CFOs will need to see analytics not just as a series of reports with different views, but as a core competency, with a clear line of sight between business objectives and the information and insight needed for sound business decisions. CFOs will need to view business intelligence in hierarchies, insist on clear metadata ownership and management, and turn their organisations into masters of analytic tools.
Many companies are at a critical convergence of old and new technology, striving to make the best use of their historical investments while improving capability. At the same time, many companies are simply not confident in their data.
That’s why it’s critical to understand the root causes of the data issues and develop a strategy for creating an intelligent enterprise. This strategy should include a holistic view of stakeholders’ needs, coupled with a methodical, end-to-end process for transforming data into a valuable asset. And, as with any change programme, organisations need to ensure they have assessed their risk and readiness, while considering how best to manage stakeholders.
The good news is that the evolving CFO is better suited than ever to step up to these challenges. Today’s CFO understands how to meet the information needs of all stakeholders – bridging the gap between knowledge needed and knowledge in hand – by providing a platform for intelligent and informed decision-making. The CFO also knows how to integrate data and technology with key performance indicators, enabling many views of the same trusted data so that stakeholders across the enterprise can access relevant, timely information.
And with access to transactional data that tracks performance throughout the organisation, today’s CFO has the key to unlock significant business insights and become a strategic information leader. By taking charge of data governance and business analytics, CFOs are in a prime position to transform their organisations into data-driven intelligent enterprises.
Famed for her glamorous style and easy charm, at home on a chat show as she is in the boardroom, Christine Lagarde was welcomed as the new boss of the International Monetary Fund (IMF) in 2011 by those that were sick of stuffy economists with – allegedly – wandering hands.
In reality, anyone that replaced the scandal-hit Dominique Strauss-Kahn was going to be seen as a breath of fresh air and by comparison as squeaky clean as is possible. However, despite her credentials, Lagarde’s tenure as IMF chief has seen a number of scandals that has led to some questioning whether she is as saintly as many had previously assumed.
Born into a family of Parisian academics, Lagarde’s early life was spent in Le Havre, before she gained a scholarship in 1973 to the Holton-Arms School in the US. It was there that she gained her first experience of the political world that she would have to manoeuvre later on in life, as she spent time as an intern for US Senator William Cohen. Upon graduating from the Paris West University Nanterre La Defense with a Master’s in English and law, she would go on to return to the US at Chicago law firm Baker & Mackenzie.
Part of her responsibility at the firm was to handle antitrust and labour disputes, and such was her success that she was made partner and head of its European division six years after joining. By 1999 she was appointed the firms first ever woman chairman.
France’s first lady of finance In 2005 she entered into politics as France’s Trade Minister under the then President Jacques Chirac, where she focused her attention on pushing the country’s products into new markets. She would remain in government after the 2007 election of right-wing President Nicholas Sarkozy, briefly serving as Minister for Agriculture before being appointed France’s first ever-female Finance Minister.
Lagarde’s tenure as IMF chief has seen a number of scandals that has led to some questioning whether she is as saintly as many had previously assumed
Her four years in charge were deemed hugely successful by some, as she boosted the country’s export levels to their highest level, leading to her being voted Europe’s best finance minister in 2009 by the FT. Frequently touring television studios and global summits, lecturing the banking industry on how they had got things so wrong, Lagarde was seen as one of the few finance ministers to come through the financial crisis with their reputations intact.
However, her time in charge was not without incident. In 2010, she sent a list of nearly 2,000 Greek customers that had undeclared accounts at the Swiss branch of HSBC to Greek authorities. It was intended to help Greece’s government to crack down on tax evasion from some of its wealthier citizens, but fell into the hands of journalist Kostas Vaxevanis two years later, who would then publish the list as no action had been taken against those on it.
He was then arrested for breaching privacy laws, although later acquitted. While it has not been suggested that Lagarde was at fault in the scandal, it seems somewhat inappropriate for the Finance Minister of France to be meddling in the affairs of Greek citizens with bank accounts in Switzerland.
The position of Managing Director of the IMF is the pinnacle of global economics, carrying great sway and huge prestige. The role is supposed to be one that unites the financial leaders of the world, guiding economies that are struggling and advising on future policy. Typically a European has held the position, whereas the chief of the World Bank has been from the US. However, BRIC nations have petitioned for a more representative choice of leader, something that was promptly ignored on the appointment of Lagarde.
When the Strauss-Kahn scandal erupted in 2011, Lagarde was quick to announce her candidacy as his replacement. A popular candidate, she received the support of many governments from across the world, including those from the US, UK, India, China and Germany. However, some were concerned about her being yet another candidate from France – five of the 11 previous IMF chiefs have been French, serving for 27 years out of the last 34. In particular, representatives of emerging economies in Asia and Latin America felt that it was perhaps time for someone from outside of Europe to get the job.
Dominique Strauss-Kahn is seen leaving a Criminal Court after a status hearing on the sexual assault charges against him in New York City
Even so, Lagarde’s high profile and seeming popularity proved too persuasive. At the end of June, a month after announcing her candidacy, she was voted in as the new managing director of the IMF, beginning what will be an initial five-year term. Despite the disgruntled reaction from many outside of Europe, the decision was met with warmth from other leading financial policymakers. Timothy Geithner, the former US Secretary of the Treasury, for example, described Lagarde in glowing terms. “Her lightning-quick wit, genuine warmth and ability to bridge divides while remaining fiercely loyal to French interests have been a source of admiration.”
However, despite the enthusiasm with which her appointment was greeted, Lagarde’s tenure has not been plain sailing. Scandals dating back to her time as French Finance Minister were revealed that put her previous dealings under the spotlight and led to suspicions that she had done political favours for a particularly dubious character.
Very dubious friends Bernard Tapie is a high profile French businessman that has been in the pubic eye for all the wrong reasons for over two decades. Accused of match fixing during his time as owner of French football giant Olympique de Marseille in 1993, Tapie was subsequently sent to prison for corruption and intimidating witnesses. His sentence resulted in him spending six months behind bars.
However, despite his brushes with the law in the 1990s, Tapie didn’t stop courting controversy, which ultimately led to Lagarde’s troubles. Even though he had previously served as a minister in a socialist government, Tapie heavily backed Sarkozy’s right-wing Union for a Popular Movement (UMP) party at the 2007 election.
The news raised many eyebrows, with people speculating why some who had been so ideologically to the left of the political spectrum would choose to support such a pro-business candidate. It turned out that Tapie’s real motive had been solving a number of tax issues he was facing, which Sarkozy – and importantly Lagarde – had allegedly offered to resolve upon their election.
Tapie was involved in a long-running financial dispute with French bank Credit Lyonnais over the sale of sports manufacturer Adidas in 1993. He argued that he had been defrauded by the bank, who had gone behind his back to sell the firm, having agreed a separately high price with eventual buyer Robert Louis Dreyfuss. In 2007, Lagarde stepped in, ordering that the case be assigned to a special arbitration panel, which would later rule in Tapie’s favour, netting him €403m in damages.
The controversy over Lagarde’s role has dogged her ever since. It was seen as an inappropriate interference by the then Finance Minister on behalf of a man that had recently helped put her party in power. Just a few months after being appointed IMF chief, she was placed under investigation by a French court over the affair, with claims that she had abused her position of power as Finance Minister to help secure a huge state settlement for Tapie, who was a friend of President Sarkozy.
In May 2013, prosecutors at the Court of Justice of the Republic grilled Lagarde for two days over the scandal. Two days later, police raided her house, as they sought to find incriminating evidence, however she was then dubbed by the court an “assisted witness”, meaning that she was not under any investigation. Despite this, rumours continue to swirl about her involvement, with her former aide and current France Telecom CEO Stephane Richard saying she was fully aware of the situation when approving the arbitration that favoured Tapie.
Christine Lagarde is surrounded by the media as she leaves a weekly cabinet meeting in France after being announced as the new managing director of the IMF
In another twist towards the end of March, Lagarde was summoned by French prosecutors to give further evidence over the case, alongside Richard. She has still maintained her status as an ‘assisted witness’, meaning she isn’t suspected of any wrongdoing. However, the fact that Richard is under formal caution and that the case has not been settled means the controversy around her will rumble on longer.
Do as I say, not as I do Another unfortunate event was to hit Lagarde in 2012, significantly damaging her credibility. Having lectured wealthy businessmen over avoiding paying their taxes, as well as governments for not doing enough to capture them, Lagarde was revealed to be somewhat of a hypocrite.
In an interview with TheGuardian newspaper that year, Lagarde said that Greek citizens – at the time under serious pressure brought on by the eurozone crisis – should not expect any sympathy for the difficulties they were facing, that it was payback time, and there were people facing greater difficulties in the world. “I think more of the little kids from a school in a little village in Niger who get teaching two hours a day, sharing one chair for three of them, and who are very keen to get an education. I have them in my mind all the time. Because I think they need even more help than the people in Athens.”
She added, “As far as Athens is concerned, I also think about all those people who are trying to escape tax all the time. All these people in Greece who are trying to escape tax.” She went onto say that she saw little difference between Greeks avoiding paying taxes and those facing cuts in public services, and they should collectively “help themselves” by paying their taxes.
However, it was quickly revealed that while she was happy to tell others they should be expected to pay their way, she was herself enjoying a tax-free existence. Her almost $500,000 a year salary at the IMF is exempt from taxes as she is an official at an international institution. It is a startling piece of hypocrisy, especially as she is paid more than even President Barack Obama, and he pays taxes on his salary. While she is not alone in enjoying these benefits – World Bank and UN employees also enjoy them – it is pretty rich of her to be lecturing others on paying their taxes when she herself doesn’t.
While it is almost impossible to find a leading political or business figure that doesn’t have unfortunate episodes in the past, Lagarde seems to have escaped the sort of scrutiny that many of her predecessors have faced. Perhaps it is because of her easy charm and charisma – as well as shocking nature of her predecessors’ downfall – that has allowed Lagarde to continue in her role relatively unscathed by these scandals. However, anyone that is putting themselves forward as the head of the world’s most respected financial authority should expect far greater scrutiny than she has seen.
General Motors (GM) is back on familiar turf as the fight against owners of recalled cars is about to be unleashed in the Manhattan bankruptcy court which helped secure the governmental financing of the automaker’s turnaround five years ago.
GM is facing 59 lawsuits by car owners demanding as much as $10bn in damages for recalled vehicles with faulty ignition switches, which can shut off engines while driving and prevent airbags from inflating. In total, lawyers from more than 100 firms are preparing class-action lawsuits on GM’s recall of the 2.6 million defective cars, which have been linked to 13 deaths in the US.
[T]his could be the start of a lengthy and fraught process for GM
The carmaker has already petitioned US Bankruptcy Judge Robert Gerber to tell the owners that damages stemming from before the company’s collapse are barred under his rulings in 2009. The so-called bankruptcy shield was a pre-emptive move aimed at staving off dozens of lawsuits from customers claiming they lost out following the recall.
Now, Judge Gerber has asked the lawyers involved to come up with proposals for how the case should proceed.
Legal experts have told media such as TheNew York Times and Reuters, that they believe the shield is virtually ironclad and that Gerber would be unlikely to lift the protection against bankruptcy.
However, there are indications that GM could have their work cut out for them. Objections have poured in from plaintiffs across the country, alleging that GM committed fraud during the old bankruptcy proceedings by not disclosing the potential liabilities from the faulty switch. This is a particularly poignant point after evidence has emerged that some GM employees were aware of problems with the switch more than a decade before the recall.
If fraud is proven, it could seriously improve the plaintiffs’ case by potentially lifting the bankruptcy shield. Still, GM is asking for a clear-cut ruling declaring that it did not intentionally hide anything from the court in 2009.
According to a statement from Judge Gerber, today’s bankruptcy court proceeding is a procedural conference where “no substantive matters will be decided, nor will evidence be taken”. Nevertheless, this could be the start of a lengthy and fraught process for GM.
In its long history, the taxi industry has had to contend with many rapid developments. The transition from horse-drawn carriages to petrol-powered machines challenged the industry. So too did the advent of the now-widely adopted computer aided dispatch system in the 1980s – a system that itemises jobs and gives them to drivers, all while making a traditionally paper-based business easier to handle and more readily accountable. These events have shaped and challenged companies and drivers, but now mobile app development is taking the industry by storm and could change the business dynamic.
In the past two years, mobile applications have become a priority for taxi companies. There is now a palpable need for taxi companies to have a mobile app, and a good one at that. The more features, the better, and with aesthetics straight from Silicon Valley, this is an industry that is rapidly modernising; some say without regard to the damage it is doing to itself in the process.
The basic functionality of the apps is quite simple. Working on a peer-to-peer system, the app displays a live map of the location and with a touch of a button, will forward the customer’s request for pick-up to the nearest driver. All of this is displayed in real time, eliminating the mystery of when the taxi is going to arrive. The apps will give a price estimate and often accept credit cards, although the option of paying by cash is still available. An element of complication is added by an option – already present in some apps – for the customer to add a flat bid on top of the cost of the route to prioritise their job above others. This can punish the customer without access to the apps, who is left waiting on the street because a driver has elected to take a more promising fare.
Forced innovation Such is the extent of this problem in Beijing and Shanghai, where heavy traffic already makes it difficult to hail a taxi, that city governments have elected to ban usage of the apps during rush hour and at other peak times. Customers who did not use the apps found themselves unable to hail a taxi because drivers would only accept the more lucrative jobs that the software offers them. Studies by internet data firm iResearch have shown the taxi app industry boom has particularly taken hold in China, where $43m was invested in the last two years. The main competitors in the Chinese markets are backed by giant internet firms Tencent and Alibaba. The companies have been spurring on the trend by offering rewards to both passengers and drivers for using the service. Supporters of the service in China argue that it will force the industry, which has been monopolised by the state for decades, to innovate.
[Hailo] recently reported it had completed five million jobs and had 14,000 drivers in London
Transport Minister Yang Chauntang spoke at the National People’s Congress about the taxi app industry, and appeared to show hitherto unseen support for the new technology. He said the government would “support and help to develop the taxi apps [and] instructional policy will be issued”. It is still unclear whether Beijing intends to make the apps market-regulated or government-regulated, however. Despite the growing political backdrop and the clampdown, the financial benefits of the apps have proven too appealing for some companies, who are still operating with them. Shanghai-based news portal EastDay reported that just days after the ban, companies still continued to use them during peak times. In China, illegal car rental service operators can be fined up to CNY 50,000 ($8,220).
This is a problem for the app developers, who will certainly strive to replicate their successes in the West in countries like China and India, but adoption there may be slower thanks to the more stringent government regulation.
The decision to clamp down on app usage is certainly bold, but the desire for regulation is not entirely unprecedented. In September last year, California became the first US state to regulate ride-sharing and taxi apps by requiring the companies that make them to have permits, insurance and, most critically, be responsible for the training and conduct of the drivers.
Driving business The most controversial issue surrounding the apps, however, is their business model. Drivers can sign up to be part of an app’s services on the side while still working for another company. This means the technology is, in effect, superseding the need for the traditional dispatch company and the phone operators who manage incoming calls. Furthermore, the companies who develop the apps take a slice of the driver’s profits, both in what they charge for them to subscribe to the service and also a flat percentage from every completed job. For an industry that is traditionally based around drivers owning their own cars, paying a flat weekly rate to a dispatch office to be given jobs, and then keeping all the money from the jobs they complete in that week, many see the apps’ pricing model as unfair to the driver.
Many are also concerned that this model erodes the traditional, strong brand model the industry has been using for years. A good amount of taxi companies draw a large portion of their business from established trust and a strong identity in their local area. If customers using the apps regularly are picked up by drivers from a variety of different companies, some say they may be falsely led into believing that these companies have partnered with the app developer. For the smaller companies, this presents a big problem, as a decline in calls to a dispatch office could lead drivers to move elsewhere. The only way for smaller companies to compete is to develop their own app that keeps their brand intact and market it in their local area, but this does not abate the emerging trend towards a more decentralised model in the industry. This is a trend that puts at risk the companies that participate in it, and thus underlines why some see rampant app development as harmful; indeed, even reckless.
Hailo, the London-based developer of one taxi app, is seen as one of the market leaders and is available in 16 cities including New York, Toronto and Barcelona. Its service epitomises the rapid growth mobile commerce has enjoyed in the last few years. In an interview with The Telegraph, Hailo Founder and CEO Jay Bregman said that he believed apps like Hailo were the future, “we… know that this is how mobile commerce is going to realise its vision.” With three million downloads, the company is growing rapidly. If apps like Hailo have an obvious hook for customers, why are so many drivers signing up and casting aside the traditional dispatch model around which their industry is based?
The answer is relatively straightforward. Imagine a taxi driver in a company of 200 – not an unreasonable estimate for a medium sized dispatch office to handle. Every job the driver receives is allocated among 200 people based on a variety of factors, but normally it is given to whichever driver is closest to the pick-up, to minimise wait time for the customers. But now imagine the driver signs up to a mobile app with only a few of their colleagues and perhaps some drivers from other companies. Now he is one amongst 50, not 200, and even the prospect of a part of the transaction going to the app’s developer is not enough to dissuade them. In effect, apps allow drivers to jump the queue for jobs, at the expense of the drivers getting jobs by radio, or picking up customers in the street, who may not have the benefit of the app to inform them about who they are picking up.
Increased flexibility Despite this, some drivers praise the apps for the flexibility they offer, and that they do not mind the extra charges the developers impose. One of Hailo’s founders, former black cab driver Russell Hall, told the BBC in 2013 that he foresaw the new model being extremely successful: “I’ve always believed it’s what’s been missing in any city in the world. What we’ve created in London will go to any city.” His prediction seems to hold weight, as more cities and more companies continue to support the growing trend. The company recently reported it had completed five million jobs and had 14,000 drivers in London – both significant milestones that show the potential strength of the taxi app industry.
While the future of the taxi industry is still uncertain, the argument surrounding mobile apps is polarising drivers and customers alike. Early contenders have been widely accepted in the cities where they are available, and have been financially successful. As a more comprehensive rollout of the apps begins, surely the app businesses will go from strength to strength. What remains to be seen is just how governments will react to the apps, and the decisions they make will have an effect on how quickly coverage grows. Despite this, supporters who claim that rapid innovation will continue to take place may just be right, making this new technology the latest radical advance in the industry.
