Tackling the climate change headwinds continues to be priority number one on the business agenda and, according to Daniel Hanna, Global Head of Sustainable Finance for the Corporate and Investment Bank, Barclays, “we’re seeing significant momentum in terms of the flow of capital into renewables and new decarbonisation technologies.” Ensuring that we take sufficient steps now to avoid difficulty in the future means businesses must take sustainable action across all facets of their operations.
According to a report by ING Bank, towards the end of 2022, following a historic 18-month dollar bull run, the FX outlook became less clear, with “FX markets in 2023 to be characterised by less trend and more volatility”.
Meera Chandan, Global FX Strategist at J.P. Morgan follows on from this, saying “the confluence of factors that had proved so supportive of the dollar earlier in 2022 has since inverted. Markets are now aggressively pricing Fed easing on the back of growing signs of disinflation, while the outlook for global growth this year is no longer looking as pessimistic as it did earlier in 2022”.
Nevertheless, with continuing economic uncertainty across the globe, navigating the markets has proved especially difficult and once more World Finance has recognised those who have stood out in the forex industry.
A list of the companies awarded in the World Finance Forex awards 2023 can be seen below.
Despite the transition to serving customers digitally during the pandemic not being without its challenges, the banking industry has changed and some of what are being considered ‘new normal’ consumer behaviours and expectations are likely here to stay. However, some of the digital solutions and communications tools deployed as part of this evolution to digital experiences are falling short of providing a seamless experience for customers, resulting in an erosion of trust.
The current cost of living crisis presents opportunities for traditional banks to reimagine the banking model of a ‘one size fits all’ approach and find new ways to perfect it. Fintech brands such as Moneybox and Tink are already taking a fresh approach to some of the tactics deployed by traditional players. Recently Tink and Snoop announced they are teaming up to help UK customers navigate the cost of living crisis through offering its customers money management services.
It’s not too late for financial institutions to reimagine the experience they give customers. Embracing new technologies, developing a better understanding of customer needs and placing a greater emphasis on educating them, will result in trust and greater loyalty.
Setting the right tone
The importance of offering appropriate channels of communication that work for your customers across demographics, thinking styles and usage patterns, is vital for a positive relationship instilled with confidence. Relying on the historical ‘one size fits all’ approach can risk customer longevity. For example, some customers prefer traditional telephone banking because of the human-centric nature of being directly linked to another person in real time. Many banks have invested in upgrading their call centre models, as well as automated messaging services such as chatbots and online FAQs. However, in some cases, we have seen this have an adverse effect, with banks losing human-centricity and being unable to operate consistently across touch points, particularly when it comes to more complicated financial needs.
Banks looking to provide a superior customer experience would do well to follow in the footsteps of First Direct, who have transformed their telephone banking service. Offering a tailored and quick service means customers get reassurance they are speaking to a professional with the capabilities to respond to all manner of financial needs. If the process to reach help is uncomplicated and obstacle-free, customers won’t look to bank elsewhere. To solidify trust and ensure that information is clear, banks could consider recapping the information shared online or discussed over the phone via app, email or text.
Security above all
Around 36 million UK citizens were targeted by scams in 2021, which makes security a big consideration for customers needing to feel high levels of trust in a bank’s approach. Designing security into the digital offering is a great way to make people feel at ease when managing their money online. Examples of enhancement include more progressive disclosure, clear and accessible advice, and sharing educational resources resulting in customers feeling like they are being looked after and proactively protected by their bank.
Customers will, in turn, become wiser about online security threats and learn how their bank operates, instilling greater confidence when moving beyond surface level transactions into more complex financial transactions. Banks need to be clear in their communication with customers, including the exact types of communication they can expect to receive, and how. A simple and definitive ‘we will only contact you via text’ can go a long way to building trust, and decreasing confusion or misunderstanding.
Branch out
Many people still value visiting bricks and mortar branches and receiving an in-person experience despite some shaping products and services around ‘digital-first.’ With many branches having slimmed down their services offered in-store or closed entirely, rethinking how branches operate will be key.
Designing security into the digital offering is a great way to make people feel at ease when managing their money online
Lloyds Bank runs a mobile branch service to help eliminate any disruption to the local community caused by local branches closing. Running on a fortnightly timetable, the mobile branches allow customers to pay bills, deposit cash and cheques, and order foreign currency, among other financial tasks. Understanding what customers still need from an in-person experience, and then reorganising services accordingly is a way of establishing trust and long-term relationships.
Banks should consider turning the branches they do have into financial hubs; central to bringing communities together and providing support and education through seminars or classes. Partnerships with other centres or hubs that act as pillars of the community would also increase loyalty and engagement with banks, while providing extra support.
While financial institutions have responded as best they can digitally to accommodate the ever-changing landscape, digital does not always mean what’s best for the customer. The need now is for banks to move beyond pure digitisation into looking to supplement efficient and automated systems with a greater degree of customer centricity and personalisation.
A complete analysis of how customers interact with the services provided and the cultural context can lead to banks operating proactively, to future-proof tomorrow’s banking experience. By raising the experience bar, they will not only gain trust from customers but ultimately benefit their business too through happier relationships, better supported customers and a chance to build a lifelong relationship.
“We fled when we could. I only took my laptop and a few clothes with me.” Vitaly {the source’s name has been changed}, a 34-year-old Russian software engineer, remembers leaving his home on the outskirts of Moscow with his wife last February as a bad dream. Having found a job at an IT firm in Europe, he does not expect to get back soon. His former employer lost 70 percent of its clientele within a few days of the war in Ukraine starting, a side effect of massive sanctions on Russia.
In a bid to pressure Vladimir Putin to withdraw his troops, most NATO members have taken a wide range of measures, from energy import bans to freezing the country’s foreign currency and gold reserves stored in Western banks. However, it is the brain drain, intensified after the partial mobilisation announced last autumn, that is expected to inflict more lasting damage on the Russian economy, depriving it of skilled workers like Vitaly. “Many of these people are young men fleeing mobilisation. They do not want to take part in the conflict,” says Armand Arton, CEO of Arton Capital, a Canadian consultancy that facilitates second citizenship acquisition.
The firm has seen a rise in the number of Russians seeking to obtain a second passport, a sign that they are out for good. Unlike the affluent businessmen who would previously go down that route, most are professionals aiming to build a life overseas, according to Arton.
Sanctions against rockets
Although economic sanctions have a long history, traced back to ancient Greece, it was mainly after the Second World War that they were utilised to put pressure on rogue states without resorting to military means. Data collected by researchers at Drexel University show that sanctions rose from two in 1949 to 230 in 2019, with the US accounting for nearly half of them. Following the attacks of September 11, 2001, the US unleashed an unprecedented ‘War on Terrorism’ on terrorist organisations and countries such as Iraq, Iran and North Korea, dramatically increasing the use of sanctions. A tacit recognition that they led to humanitarian crises precipitated a gradual move towards more ‘targeted’ sanctions focusing on businessmen, politicians and state-run firms.
Seizing yachts from oligarchs or making it more difficult for them to drive their Ferraris around London is not going to change Russia’s behaviour
The conflict in Ukraine has rekindled the debate on whether sanctions work against authoritarian regimes where public opinion matters little and rulers can use the ‘rally round the flag’ effect to consolidate their power. For some experts, sanctions are mainly a domestic policy tool, often aimed at placating politically powerful minorities, such as the Cuban community in Florida. In some cases, as with the pre-Second World War US fuel embargo against Japan, they have increased tensions. More recently, renewed US sanctions on Iran, following the Trump administration’s withdrawal from an accord on the country’s nuclear programme, had little effect.
However, some point out that it was sanctions that had previously brought Iran to the table. “I spent many years having everybody explain to me that sanctions could never impact Iran’s behaviour. Now the only thing everybody agrees about in regard to Iran is that sanctions worked,” says Daniel Glaser, who helped formulate sanctions against Iran, North Korea, Syria and Russia as former Assistant Secretary for Terrorist Financing and Financial Crimes at the US Treasury, adding: “Over time they create economic problems that even authoritarian governments have to grapple with.” Even a leader whose power is virtually uncontested domestically, like Putin, cannot ignore their long-term impacts. “There is a social compact between the Russian people and their government that they will tolerate whatever the government is up to as long as it delivers on certain things, especially economic wellbeing. He is now putting that compact at grave risk,” says Glaser, currently global head of jurisdictional services at K2 Integrity, a risk advisory firm.
The avalanche of economic sanctions has already taken its toll on the Russian economy. According to Yale University’s sanctions tracker, over 1,000 foreign firms have curtailed operations in the country or pulled out altogether, creating gaps in supply chains and leading to a drop in consumer spending of up to 20 percent. Russia’s non-energy exports have plummeted, while many of its industries have ground to a halt. By May, its car manufacturing industry had slumped by a staggering 97 percent compared to the previous year; it may never recover, according to Konstantin Sonin, a Russian economist who teaches at the University of Chicago. The IMF forecasts that Russia’s economy will contract by 3.4 percent this year.
Some sanctions target billionaires with connections to the Kremlin, the so-called ‘oligarchs.’ However, most analysts believe that such measures make only a symbolic contribution, given Putin’s shrinking circle of advisers. “Seizing yachts from oligarchs or making it more difficult for them to drive their Ferraris around London is not going to change Russia’s behaviour,” Glaser says.
Some hope that exclusion from sports events like Wimbledon and the World Cup may have a stronger impact on a sport-loving nation like Russia. But even that will take time. “Football fans understand that this is a consequence of the war,” says Sonin. “But it’s naive to think that this will lead to a revolution. There is no immediate mechanism that will translate this feeling into action.”
For sanctions to make a difference, two things matter most: unity and purpose. Researchers at Drexel University have found that sanctions have been more effective when they aim to promote democracy and defend human rights, whereas destabilising regimes and ending conflicts have been more elusive goals. Notable successes, such as the boycott of South Africa’s apartheid regime, were achieved through consistent enforcement by a coalition of developed economies.
Although the scale of sanctions on Russia is unprecedented, most developing countries – by some estimates representing up to 87 percent of the world population – have refused to toe the line. A case in point is India, which has increased its energy imports from Russia. This has raised concerns that enforcing sanctions is more difficult in a globalised economy, given the rise of alternative trade and financial routes. The ruble has gained ground, courtesy of rising energy prices and dropping imports, while Russia is still earning up to $1bn a day from its oil and gas exports. Experts fear that Russian firms and banks can keep sidestepping sanctions through various backchannels, including a ‘dark fleet’ of tankers transferring oil and grain, under-the-table deals with non-Western banks and digital currencies. Following the annexation of Crimea in 2014, the Russian government took measures to insulate the country’s banking system. But this policy, says Sonin from the University of Chicago, also affects growth: “There is no way Russia’s economy can grow back to 2021 levels until it opens up to international markets.”
Tacit acknowledgment that sanctions have failed to damage Russia’s economy as much as hoped has led to an increased focus on secondary sanctions on non-Russian firms, aiming to unravel the shady network of banks, lawyers and accountants assisting Russian firms to skip sanctions. Following the invasion, five Turkish banks joined the Mir payment system, Russia’s answer to Visa and Mastercard, only to withdraw in September after pressure from the US and the EU. Monitoring compliance can also be problematic due to lack of data and the complexity of international business networks, according to Farnoush Mirmoeini, co-founder of KYC Hub, a UK firm specialising in automated business verification and AML compliance. “Complex corporate structures and use of relatives and associates in financial transactions cause firms to be unable to detect the beneficiary of these transactions,” Mirmoeini says, adding: “Foreign names that are spelled in many different ways in English also enable sanctioned entities to fly under the radar.”
Next stop, China
Despite the central role of sanctions in the global effort to contain Russia, some fear that they could backfire. Coupled with the pandemic, which highlighted the importance of autarky, sanctions could accelerate deglobalisation, as multinationals ‘onshore’ their global supply chains to prioritise security. The war has also brought Russia and China closer, creating an alliance against the West’s dominance of the global financial system. The two countries aim to develop an alternative to the SWIFT interbank messaging system, while Russian banks have started lending in yuan. The collaboration has reinforced fears that China seeks to undermine the dollar’s role as a global reserve currency. “Current sanctions against Russia most likely reconfirm and accelerate China’s desire to create independent and alternative financial channels to those that currently dominate the global financial system,” says Douglas Rediker, a foreign policy expert at Brookings Institute, a US think tank.
The speed and scale of sanctions serve as a cautionary tale for the Chinese government, which has seen its relationship with the US deteriorate over trade disputes and Taiwan. However, using the same playbook on China would be difficult. “Sanctions on China’s exports would likely result in retaliation through China also stopping specific exports to the US, including that of rare earth elements, critical raw materials and more that would devastate the US and world economy,” says Skyler Chi, a global supply chain expert at the US risk management consultancy Exiger. The Asian superpower holds vast dollar-denominated reserves; getting rid of them would send global markets into a tailspin. But given the precedent of the West closing ranks to protect its interests, China has few alternative options, according to Rediker: “China’s economy is not structured to become a major debtor country ready to launch the renminbi as a challenge to the dollar. So they have to accumulate reserves and they have to keep them somewhere.” If anything, the war has proven that a united West still calls the shots, Rediker says: “That common front is probably the most important lesson they have learned, and it will be difficult for them to find an effective response, as long as that cohesion remains.”
We hear a lot of the technological dangers to our planet – oil, gas, coal, concrete, plastics, the list goes on – but what of the technological solutions? Lithium, an unremarkable silvery grey in appearance and a harsh metallic to the taste, is a part of that conversation. In fact, if we assume that the biggest technological bottle-neck for the all-electric transition is batteries, you could say it’s the most important part of it.
But, as with any precious resource, there are winners and losers. And lithium is so precious in fact that it may just remake the geopolitical landscape – or at least tilt it towards a South American trio (and China).
A ‘new type of petroleum’
Lithium batteries – as opposed to their low-density lead acid counterparts – are the future. Their commercial debut didn’t come until Sony’s CCD-TR1 camcorder in the early 1990s, but now they’re the de facto choice for electric toothbrushes, mobile phones, even your country’s military drones.
In a report last year, the World Bank found that the production of key minerals, including lithium, would need to rise by nearly 500 percent by 2050 to meet the growing demand for critical clean energy technologies. The organisation’s Global Director of Energy and Extractive Industries, Riccardo Puliti, was clear, “ambitious climate action will bring significant demand for minerals.”
Elon Musk himself has called them a “new type of petroleum.” And he would know. The battery of a Tesla Model S uses around 12kg of lithium. Without it, electric vehicles will not account for 60 percent of new car sales by 2030, as he hopes and many others predict. So naturally, demand is high (see Fig 1).
Overall demand for Lithium-ion batteries has exploded from just 0.5 gigawatt-hours in 2010 to around 526 gigawatt hours a decade later. Experts expect it to increase 17-fold come 2030. For just the US alone to go all-electric by 2030, production capacity must grow 200–300 percent. The upward curve in demand is mirrored – perhaps even more dramatically – by its price. In 2021, it was up almost 500 percent on the year. Who then is profiting from lithium?
China rising
To you or me, Tesla is the undisputed poster child of the all-electric transition. It may surprise you to hear then that Chinese companies – and not American behemoths buoyed by the spirit of free enterprise – have made by far the most progress.
Just five companies are responsible for around three-quarters of global lithium production. They operate at every stage of the production line, from resource development, refining and processing, to battery manufacturing and recycling. In fact, of the 200 battery mega-factories in the pipeline up until 2030, 148 will be in China.
As with oil and gas extraction, abundant resources can be a blessing. They can also be a curse
This is no accident. The administration decided at the turn of the millennium, long before almost any other nation, to aggressively pursue the production of electric vehicles and the associated supply chain. The strategy has paid off.
The IEA puts China’s share of global lithium chemical production at 60 percent. It’s an especially impressive feat once you consider that it’s home to only 25 percent of the world’s lithium reserves.
The rest of the world are years, if not decades, away from catching up. That said, the importance of metals like lithium, and to a lesser extent graphite and cobalt, is not lost on governments around the world.
“Governments have realised that there’s going to be a new regime with respect to energy generation and usage, and that is clearly going to revolve around a new class of metals,” said Chris Berry of House Mountain Partners, speaking on a panel at this year’s Fastmarkets Lithium Supply and Raw Materials conference. “I think what governments are realising is the idea that these metals, lithium in particular, are really going to underpin the next generation of how energy is generated.” Not just how, but where.
Whereas petropolitics have long placed the Middle East and the western world, particularly the US, at the centre of its supply-demand dynamics, the current structure of the lithium industry places South America at its heart, with China out in front.
New opportunities, old problems
South America holds around 75 percent of the world’s known reserves, with Argentina, Chile and Bolivia representing the so-called ‘lithium triangle’ of producers. The big three of Argentina, Chile and Bolivia have already discussed the possibility of creating their own OPEC for lithium, a discussion they’re expected to pick up in earnest as the race for raw materials heats up. Though ramping up lithium production is far harder than it sounds.
In Bolivia we’re seeing a revival in resource nationalism. In Chile there are calls to create a state-run lithium mining company. And in Argentina the government has taken a liberal approach with little state involvement, little red tape and low taxes. In Mexico, meanwhile, the government is all too aware of its lithium reserves and this year banned private miners from developing them altogether. The lithium triangle does enjoy certain advantages over the rest of the world.
Namely, that it’s the world’s cheapest source of lithium carbonate to date. Add to that the fact that brine extraction is arguably more sustainable than hard-rock extraction in that it uses fewer harmful chemicals and less energy.
Advantages notwithstanding, a slick, functioning system, the likes of which we’ve seen in China, are a long way off. It’s far from clear that any member of the lithium triangle will be able to quickly ramp up production to ease supply shortages – or that their governments will reap windfall revenues while the high prices last. As it stands, there is no one single approach to lithium production taken by the three. Nor will they be for as long as they’re so divided on politics.
Even with these difficulties, we can say that the rise of electric vehicles and the rocketing demand for lithium-ion batteries has given rise to a distinctly non-Western global power structure. Sure, lithium is only one factor in a web of overlapping and/or competing dynamics. Though it’s clear the above countries will profit.
As Puliti puts it, “these countries stand to benefit from the rise in demand for minerals but also need to manage the material and climate footprints associated with increased mining activities.” Because, as with oil and gas extraction, abundant resources can be a blessing. They can also be a curse.
A resource curse?
The concentration of resources does mean that any localised physical or political turmoil will disproportionately impact the global availability of minerals, and in turn prices. But the environmental implications – and those for people living locally – hint at the harmful effects global demand could inflict on ordinary people. According to the IEA, “more than half of today’s lithium production is in areas with high water stress. Several major producing regions such as Australia, China and Africa are also subject to extreme heat or flooding, which pose greater challenges in ensuring reliable and sustainable supplies.”
This matters, because lithium extraction, and particularly the method most commonly used in the lithium triangle, requires masses of water. Bolivia’s San Cristóbal mine reportedly uses 50,000 litres of water a day, and lithium mining companies in Chile have been accused of depleting vital water supplies. Worse still, lack of reliable reporting on the issue means that the actual amount of water used is proving difficult to track.
One report by the non-profit BePe (Bienaventuradors de Pobres) also identifies water as a big concern for lithium mining operations. It claims that not enough research has been done on the potential contamination of water and “activity must be stopped until studies are available to reliably determine the magnitude of the damage.” Another report by Friends of the Earth says, “as demand for lithium rises, the mining impacts are increasingly affecting communities where this harmful extraction takes place, jeopardising their access to water.”
What we have here is a situation familiar to many countries competing in the energy market. One where, on the one hand, rocketing demand has supply-rich countries staring down a potential fortune. Though it’s also one where overenthusiastic production could threaten people living in those same countries, be it through pollution, environmental destruction or displacement.
The outlook for lithium production then is…complicated. Healthy demand and high prices bode well for a trio of countries that haven’t held much influence in global energy decisions. Clearly, China is leading on production in 2022, but who will control the future? And perhaps more importantly, at what cost?
In Fontainebleau the hammer fell at the Osenat auction house in October 2022, denoting the end of a bidding war that resulted in a Tianqiuping-style porcelain vase selling for a little over €9m. This would not have been controversial, except that the expert had valued it at €1,500–€2,000 and so it had achieved roughly 4,000 times its estimate.
The consequences of what auction house president, Jean-Pierre Osenat, called “a serious mistake” by the expert resulted in their employment being immediately terminated. At first glance, this seems a little harsh given that there is scant evidence to refute their assessment save for the frenzy of interest from 300 mostly Chinese bidders. But, the market determines the value of a commodity and this hard lesson is taught daily to many millions of traders who take it upon themselves to decide what the price ought to be and get it wrong.
Where we have a group with the power to move the market as the bidders do in the above example, the poor expert is not much different than the average retail trader, poring over charts and news and trying to figure out market sentiment ahead of time. All they have to go on is what happened in the past. The auction house serves as a sort of full-service broker offering advice and making a profit on the commission. While they had a day that broke records in this regard, the reputational damage of being this wrong in their respective market is a bitter pill to swallow. They are supposed to know exactly where the market is at and if they don’t, who is to trust them? Asking them to put a price on anything is like rolling the dice. So how does the next expert price a similar vase from the Republic period? It’s not a job any market economist would want. All he knows is that some of them sell for €2,000 and some of them sell for €9m.
Pricing in subjectivity
The value we place on art is highly subjective, while the markets teach us that we should shoot for objectivity. Tell that to the auction bidders or indeed, the lady who has just learned her vase has sold for 4,000 times the asking price. And yet these factors must remain the same no matter what is being sold.
The market is made up of people, and our personalities, our emotional traits and character flaws inherently dictate our actions
But we mustn’t forget that the market is made up of people, and our personalities, our emotional traits and character flaws inherently dictate our actions. When we understand this, we understand that a candlestick chart doesn’t simply record price movement over time; it also charts us over time. We don’t need to look very hard for concrete examples of this.
During the 2020 run on gold, we see fearful investors rushing towards what is regarded as a safe haven, as a second wave of coronavirus bore ominously down upon the world. Russia’s invasion of Ukraine in February 2022 prompted a spike in oil and gas prices, just as the pandemic two years ago had seen oil demand collapse as lockdowns brought the world to a standstill.
Following the recent mini-budget announced in the UK, the pound fell to a record low against the dollar, the FTSE 100 fell over 200 points, and food price inflation surged along with UK government bonds. We use phrases such as ‘the market was spooked’ or ‘market elation’ to explain why the markets move, which is as psychologically interesting as using bears and bulls to describe markets that are falling or rising, respectively.
In the financial markets there are three types of analysis. Technical and fundamental are pretty cut and dry, but it’s sentiment where I think most of us struggle, because how do we accurately discern how a group of people are feeling at any given moment? It falls back on gut instinct and what is that? An opinion we’ve formed over time. Call it experience. And it’s tricky, because by grossly misreading market sentiment, traders of all stripes can be wiped out.
The conscious element involved not just in a single trade but also in all the human links that make up the market cannot be underestimated. We rarely stop to consider exactly how one feels about gold, or oil, or the macroeconomic effects that a very real crisis might have on either. If we can accurately guess even in basic terms the motivating factors, then we can trade and invest with some degree of confidence.
As the auction house expert discovered, you underestimate the market forces at your own peril. Wrapped up in that small ornamental vase is hundreds of years of culture, it has become an emblem, representative of something far greater, it is meaning that cannot be put into words, something that renders price almost irrelevant. And the markets can seem a little like this sometimes, boundless and immeasurable, but something that is ultimately a reflection of us. So I suppose the only question left to ask is: what’s the vase worth to you?
When Concorde was taken out of service in 2003, it looked like the end for three-hour hops between London and New York. Deafening sonic booms, prohibitive prices and safety concerns – fuelled by the crash in France in July 2000 – spelt the end for this headline-dominating venture, leaving many to question whether supersonic aircraft would ever take off again. But recent endeavours by the likes of Boom Supersonic, Spike Aerospace, Exosonic and Hermeus are putting the possibility of supersonic back in the spotlight – and several major airlines are getting in on the game.
In August, American Airlines announced it had placed a pre-order for 20 Overture jets from Boom, with an option to buy 40 more. Last year, United Airlines pledged to buy 15 of them, and in 2017, Japan Airlines put in a pre-order for another 20 with an initial investment of $10m.
Boom says the jets, expected to be produced in 2025 and flying by 2029, would have capacity for 80 passengers across more than 600 routes, cutting journey times to as little as half of their subsonic equivalents.
It’s not only private companies getting involved; through its Quesst programme, NASA is working on the X-59, a supersonic aircraft designed to make the notorious ‘boom’ quieter in order to avoid the pitfalls of Concorde (which was only allowed to reach supersonic speeds over the ocean).
The jet is due to fly over a handful of residential communities in the US in 2024 in order to gauge on the ground response to the sound; data will then be presented to the International Civil Aviation Organisation in a bid to get noise regulations changed. If it’s successful, that could mean opening up hundreds of new airline routes to supersonic flight.
The supersonic supporters
Those on the side of supersonic believe it could transform the way we travel in a matter of years. Boom says it could get passengers from New York to London in 3.5 hours, Tokyo to Seattle in 4.5 hours and Miami to London in less than five. Spike – which is developing an 18-passenger corporate jet that could be ready by 2028 – is said to be working on upping the speed even further, with the aim of whisking travellers between London and New York in as little as 90 minutes.
They’re also promising sustainability; Spike is aiming for net zero carbon by 2040, while Boom is targeting net zero by 2025 and claims Overture will “run on 100 percent sustainable aviation fuel, making it the first new commercial airplane capable of using 100 percent SAF.”
Both companies are also working on lowering the boom through various technologies; Boom says its jets will feature noise-reducing features including “engine updates – without afterburners – and an automated noise reduction system” to ensure take-off is no louder than subsonic planes, while Exosonic – which is working on a 70-passenger aircraft with VIP suites – claims its sound will be quieter than that of everyday traffic.
Perhaps most crucially, Boom says its prices will be relatively affordable. “Concorde was plagued with high operating costs, leading to cost-prohibitive fares and trouble filling the plane,” said a spokesperson for Boom. “We are working to make Overture profitable for airlines to fly at fares comparable to today’s business class fares, opening up supersonic travel to a much larger pool of passengers.”
Battling the headwinds
But while the proponents are painting a rosy picture, not everyone is so convinced. Among the sceptics is Bruce McClelland, Senior Consulting Analyst at Teal Group. “The problems are both economic and political,” he says. “The faster an aeroplane flies – especially supersonically – it encounters an exponential increase in drag. That requires a lot more engine thrust, which requires a lot more fuel. Concorde needed as much as eight times more fuel to move one passenger from New York to London compared to a Boeing 747, so that’s expensive.”
“There’s also the cost of developing, building and testing a plane,” McClelland says. “Development of modern jetliners runs into the multiple billions of dollars. I don’t see there being sufficient demand for a large production run, so it’s going to have to be priced pretty high. Given the physical limits, I don’t see a way to overcome this.” Prohibitively high costs were among the reasons both the US and Soviet Union developed but then abandoned their quest for supersonic flight. The only successful endeavour was Concorde, and that was funded by the British and French governments.
“Boeing was developing its own supersonic aircraft back in the 1960s, and it dropped out when it saw that the US government wasn’t going to support it,” says Kevin Michaels, Managing Director of AeroDynamic Advisory. “There are only two airlines that used Concorde – BA and Air France – and it never made money for the manufacturers that produced it,” he says. “If the manufacturer can’t make money producing it, then it’s not going to be a viable market in the long run. The economics of being part of an airline are what ends up killing you, and that was one of the biggest lessons from Concorde.”
There’s also a very large question mark over who would produce the engine. In September, Rolls-Royce announced it was pulling out of its partnership with Boom, declaring in a statement that the commercial aviation supersonic market was “not currently a priority.”
General Electric, Safran and Honeywell Aerospace have since all stated they wouldn’t be producing the engine. “That left only Pratt & Whitney, and they said it’s not core to them and their brand and they’re focusing on other projects,” says Michaels. “Engines take years and years and years of development, and a brand new one costs billions of dollars. These five companies are the only companies that have a remote chance of pulling this off technologically – so as it stands, Boom doesn’t have an engine.”
Eco-issues
Even if Boom does find an engine, there are likely to be further headwinds. Whether the issue of the sonic noise can be overcome remains to be seen – and NASA’s project likely wouldn’t be ready in time for Boom’s supposed take-off in 2029.
Current supersonic jets are limited on the distances they can fly without needing to refuel
There’s also the issue of consumer demand. Current supersonic jets are limited on the distances they can fly without needing to refuel, writing off flights across the Pacific that might have gotten consumer uptake. And, perhaps most crucially right now, many have questioned the sustainability claims – including how viable using 100 percent sustainable aviation fuel will be when stocks are still limited. “The claim that Boom’s flights will be offset by using only sustainable aviation fuel strikes me as stretching credibility,” says McClelland. “The only way that works is if the producer of a supersonic aircraft has its own source for SAF. Otherwise, operators will be forced to queue up with everyone else and take whatever they can get their hands on, most of which will probably be plain jet fuel. SAF right now is more expensive than regular jet fuel, so it just adds to the operating costs. Right now, known SAF production represents only a small fraction of a percent of the total worldwide demand for jet fuel, and the most optimistic scenario I’ve seen is that this might ramp up to 30 percent by 2050.”
At a time when consumers are becoming ever-more conscious of their environmental footprint, it’s not hard to imagine the backlash against the likes of United and American Airlines if they direct their limited SAF supply into supersonic flight – especially if, like Concorde, the jets end up consuming several times more fuel per passenger than a standard aircraft.
Lessons from Aerion
These difficulties are all too familiar for Aerion Supersonic – the business jet giant that collapsed last year. Founded in 2004 by a group of industry experts, the company was developing a $120m supersonic aircraft initially due to fly in 2029 – and it was widely considered the most viable option in the supersonic world. But it never succeeded in building an aircraft and ended up filing for bankruptcy after 17 years of trying, citing “difficulties in raising capital to achieve the next steps in the manufacture and regulatory approval of the company’s supersonic aircraft.”
“Aerion was very highly thought of in the industry,” says Michaels. “It was aimed at business aviation and charter companies rather than commercial flight, so there was a much smaller capacity. It had a really interesting design, they were extremely well-funded, and they had some of the big OEM manufacturers on board. Then one day last year, they announced chapter 11 bankruptcy, and it was over. There’s only been one successful entrant into the jetliner business globally, and that’s Embraer in Brazil,” Michaels says. “Everyone else has failed – it has the biggest entry barriers imaginable. Like nuclear reactor type entry barriers, and it’s incredibly tough. Combine that with the fact you have to overcome the other limiters for supersonic flight – the boom, the environment and the concern about carbon emissions – and these are just enormous headwinds.”
Future possibilities
None of this is to say it’s the end for supersonic altogether, of course. But the obstacles suggest that if it does ever take off again, we’re more likely to see success in the business aviation market rather than with large-scale commercial planes.
That’s at least the opinion of Michaels. “Demand for supersonic travel is there, but it’s very niche,” he says. “It doesn’t lend itself to commercial airlines. It lends itself to lower capacities, and ultra-high-net-worth individuals. So is it something that’s going to revolutionise the airline industry as we know it? I don’t think so.”
Of course, if NASA’s project is successful, sustainable aviation fuel becomes more readily available, operational costs can somehow be lowered and supersonic jets can cover longer distances, there’s still hope that we could one day be whizzing around the world in a few hours, and semi-sustainably too. But getting there by 2029 seems like more of a marketing stunt for the likes of United and American Airlines than anything else – and, sadly, we might have to wait a little longer before we’re hopping over to Australia in half a day.
During the summer-long Conservative leadership election, many in the City were surprised to hear the successful candidate, the now replaced Liz Truss, talk about the need to reform Solvency II, the decade-old rules inherited from the European Union governing the matching of liabilities and investments of insurance companies. For the then Prime Minister these were symptomatic of the restrictive EU rules that are holding back the UK economy.
This view is shared widely across the sector, with the Association of British Insurers estimating that up to £95bn could be liberated from insurers’ funds to invest in infrastructure and the green recovery if the Solvency II rules are relaxed, especially giving more credit for less liquid long-term assets when matching assets with liabilities. The potential reforms go much further than just a re-jig of the solvency rules for insurers – it is a topic of heated debate in the EU too, where industry and regulators are at loggerheads over similar proposals to relax the current regime.
The role of financial regulators in the UK is also under intense scrutiny. The financial services sector has been pressing for several years for regulators – the Bank of England, the Prudential Regulation Authority and the Financial Conduct Authority – to be given a duty to promote the competitiveness of the sector. This means many different things depending on who you speak to. Most see it as a need to promote the sector against foreign competition, others as a duty to ensure competition within the market, especially by encouraging innovation in areas such as cryptocurrencies. These pleas were already finding a sympathetic ear in government before the abrupt departure of Boris Johnson.
Regulatory reform
The Financial Services and Markets Bill – a wide-ranging package of reforms – published in July contained a commitment to make promoting competitiveness a secondary objective of UK regulators, behind their primary objectives of financial stability and consumer protection. The Chancellor of the Exchequer at the time, Nadhim Zahawi, told a high-level City audience at the traditional Mansion House banquet that this was the right approach.
“We will give the FCA and PRA a new, secondary objective: to facilitate growth and competitiveness. I know that some people will say that making this a secondary objective, doesn’t go far enough. Others will say that having it as an objective at all, goes too far,” Zahawi said.
He argued that this “balanced approach” was the best solution. “But, by making it secondary, we’re giving the regulators an unambiguous hierarchy of objective with financial stability and consumer protection, prioritised,” he continued.
UK Finance, which represents a large part of the banking and finance sector, backed his approach: “We strongly welcome the new secondary objective for competitiveness and growth that the Bill assigns to the FCA and the Prudential Regulation Authority. This will demonstrate that the UK is open for business and will give firms the confidence to invest for the future. A thriving, internationally competitive financial services sector provides hundreds of thousands of high-quality, well-paid jobs, lends to help businesses grow and contributes tax revenue for the public services on which we all rely.”
However, some in the City are now hoping the government will go further and believe the new Chancellor, currently Jeremy Hunt after Kwasi Kwarteng’s brief stint, can be persuaded to make this a primary objective of the regulators. The promise in Kwarteng’s UK growth plan that “the government will bring forward an ambitious deregulatory package to unleash the potential of the UK FS Sector,” has encouraged this view. This was not dampened when the sector lobbied the new Treasury ministers at the recent Conservative Party conference, according to Graeme Trudgill, executive director of the British Insurance Brokers’ Association.
Ministers “appeared to accept our point that the new growth and competitiveness objective on the regulator needs to have more teeth and would be better suited as a ‘primary’ or ‘operational’ objective, not a ‘secondary’ one, which makes it effectively tertiary to their operations,” says Trudgill.
With the new Chancellor still supporting most of the headline supply side reforms, such as the low regulation enterprise zones, the sector is optimistic that the competitiveness objective will remain, although it is still seeking clarity on how the balance will be struck between promoting domestic and international competitiveness.
Separating bank and state
This will not be the only contentious issue the new Bill will raise. There has already been debate around the extent to which regulators can be held accountable to the government. This started with some sabre-rattling about limiting the Bank of England’s independence. While this threat seems to have slipped away, the extent to which the activities of the two main regulators – the PRA and FCA – should be subject to government scrutiny has not.
In the run-up to the publication of the Financial Services & Markets Bill, there was speculation that it would include powers for the Treasury to ‘call in’ decisions of the regulators that it wanted to review. In the end, it was left out but it is by no means clear that this debate is over, as Hunt may be tempted to grant such powers if he feels regulators are not fully on board with his agenda.
This would re-open the debate about the bank’s independence as the key regulators all operate under its remit, warns Professor Sarah Hall from the University of Nottingham: “There is a risk that should ministers be permitted to call in regulatory decisions made by the Bank of England, the position of the bank as an arm’s length regulator would be undermined.
This move risks re-politicising regulation which, in turn, could undermine the attractiveness of the UK as a location for financial services.” There has been talk of even wider changes. During her leadership campaign, Truss floated the idea of sweeping up Prudential Regulation Authority, the Financial Conduct Authority and the Payment Systems Regulator into a single new mega-regulator. Nothing has been said yet to discourage speculation that this is a serious proposition.
What goes around
We have been here before. Not once, but many times as it seems the life span of a financial services regulator nowadays is little more than a decade. The current arrangement with the PRA and FCA as the two lead regulators was only implemented in 2013 after the global financial crisis and the decision to break up the Financial Services Authority – a single regulator. The FSA itself was created in 1997 when the new Labour government decided to reform the fragmented system it inherited. Before that there was the Securities & Investments Board, the Personal Investment Authority and a plethora of other regulatory bodies.
Those who have seen many of these changes from the inside caution against creating another mega-regulator. Mick McAteer, co-director of the Financial Inclusion Centre and a former non-executive director of the FSA, who sat on the committee that oversaw the transition to the current regime, says it would be a retrograde step. “The break-up made sense. It was an impossible task for the FSA to cover everything. It really did make sense to split it up,” McAteer said. He warns that throwing those reforms into reverse now would have “a destabilising effect that would be considerable.”
The EU on bonfire watch
Brexit is one of the key drivers behind the broader supply side reforms, with the government promising a ‘bonfire’ of unwanted EU regulations. This has not gone unnoticed in the European Union. Pan-European regulator The European Insurance and Occupational Pensions Authority (EIOPA) moved with unusual speed and, at the end of July when the Bill was published, issued a consultation paper of its own on the use of governance arrangements in third countries, which is the status the UK now enjoys in relation to the EU.
There has already been debate around the extent to which regulators can be held accountable to the government
EIOPA says it is seeking views on “how to enhance the supervision and monitoring of insurance undertakings’ and intermediaries’ compliance with relevant EU legislation concerning governance arrangements in third countries.” Brexit is top of the list of the reasons why it has launched this consultation, which runs until the end of October: “These issues were initially identified in the context of the discussion on the risks arising from the UK withdrawal from the EU”, says the consultative paper.
And it does not mince its words when it highlights the potential risks it sees if third countries drift too far out of alignment with EU regulations: “These governance arrangements may impair risk management and effective decision making, and have the potential to pose financial, operational and reputational risk and ultimately impair policyholder protection.” What is not clear from the consultative paper is the potential responses EIOPA might adopt if it feels any third country steps too far away from its requirements and whether this could extend beyond the insurance and pensions markets it regulates.
A chance for change
The government will also have to win over the regulators themselves as Sam Woods, Deputy Governor for Prudential Regulation and CEO of the PRA made clear at a recent Bank of England webinar. “Brexit gives us an opportunity to rewrite the insurance regulations we inherited from the EU – and in doing so help drive further investment in the economy. But we need to be clear that this is not a free lunch. If changes simply loosen regulations which were over-cooked by the EU, without tackling other areas where regulations are too weak, then we are putting policyholders at risk”, said Woods.
He made it very clear that the PRA was in no mood to take risks with regulation just to satisfy the impatience of pro-Brexit ministers. “Following Brexit we have a once-in-a-generation opportunity to re-shape insurance regulation to work better for the UK. We can do this while loosening parts of the regime which were over-calibrated by the EU and making it easier for insurers to invest in a wider range of assets, but we also need to strengthen it … in order to avoid risks to the millions of current and future pensioners who rely on insurers for their retirement income. The combined effect of these changes should support the government’s objectives for competitiveness, growth and investment in the economy.”
The turmoil on the financial markets following Kwarteng’s ill-fated September 23 mini-budget, which forced the Bank of England to step in to stabilise bond markets because of the threat to pension funds, will reinforce the Bank’s determination not to be forced into what it sees as risky regulatory changes.
Reform is in the air but it is by no means clear how it will conclude.
Despite postal services being essential for bridging the gaps between individuals, organisations, and governments around the world, the sector is currently facing its biggest obstacles yet: climate change and digital disruption. The sector, which possesses all the qualifications needed to tackle these challenges, needs to innovate, and become more sustainable to ensure it continues to compete and boost the world economy. The pandemic, the geopolitical instability caused by the war between Russia and Ukraine and soaring energy prices are causing companies to re-evaluate their existing corporate strategies and adopt more innovative, sustainable, and resilient business models.
To address the current crises and anticipate future ones, at Poste Italiane, we believe the postal sector needs a ‘green transition,’ where it implements strategies that emphasise digitalisation and follow a ‘platform’ model. This could involve a move towards a more inclusive business, where companies provide services and products capable of responding to the needs and interests of citizens everywhere. It is imperative to the success of this approach that companies combine their business plans with ambitious ESG goals. Both will add value and produce positive economic, environmental, and socially beneficial outcomes.
The green transition
As part of the journey towards the green transition, we need to integrate environmental concerns into company strategy and set clear objectives. The postal service relies heavily on shipping, which is carbon intensive. Around 940 million tonnes of CO2 are emitted by shipping each year, which accounts for approximately three percent of global greenhouse gas (GHG) emissions. Without intervention, the European Commission predicts that within a few decades, shipping might account for 10–13 percent of world emissions.
In addition, according to the World Economic Forum, the energy shift in the shipping sector has created an investment opportunity of $1trn–$1.4trn. In this regard, in line with the Paris Agreement, the recent 2021 Glasgow Climate Pact, and the European Green Deal, Poste Italiane has published an ambitious roadmap, aiming to achieve a 30 percent reduction in total CO2 emissions by 2025 and carbon neutrality by 2030.
A responsible and resilient model
There are numerous responsible and resilient initiatives that the postal sector can adopt to minimise their environmental impact and energy consumption. Companies should commit to a corporate fleet renewal plan, a path that envisions the complete replacement of the entire vehicle fleet with next-generation electric, hybrid and endothermic low-emission models. Poste Italiane, for example, aims to replace the entire corporate fleet with 27,800 next-generation green vehicles with reduced environmental impact, achieving a 40 percent reduction in emissions.
Green initiatives don’t need to be drastic to make a significant difference. An open goal for reducing emissions would be to ensure that the electricity powering company real estate comes from 100 percent renewable sources. Poste Italiane is coordinating more than 90 energy efficiency projects across Italy, including the use of photovoltaic panels on its own buildings throughout the country, which will not only have a noticeable impact on our carbon emissions, but reduce our long-term business expenses through a cheaper, sustainable energy supply.
One thing is certain: the postal sector is being positively disrupted by technological innovation, which is driving major growth in the market. Postal services need to accelerate the digitalisation of their products in order to remain competitive in an increasingly crowded market. With a history going back more than 150 years, Poste Italiane deftly brings traditional postal services to the cutting edge of digitalisation, through innovation and partnerships in the financial and insurance services as well as mobile communications.
According to the International Post Corporation (IPC), over 50 percent of users are willing to accept slower deliveries for less polluting alternatives, as consumers become increasingly aware of the environmental impact of delivery. According to the Green Postal Day, in response to the growing consumer demand for solutions with a low environmental impact, post offices are collectively aiming for a minimum of 50 percent of their fleet to be powered by alternative fuel vehicles (compared to 22 percent in 2020). In addition, post offices have reduced their yearly carbon emissions by over 30 percent as well as their electricity use by 30 percent
Artificial intelligence is changing the dynamics of businesses and the banking system is no exception. From mobile banking to customised customer service, the role of AI technology is transformational. The hassle of standing for long hours to get banking services is slowly becoming a thing of the past for retail consumers. Consumers’ desire to reach banking services from the comfort of their homes has increased the demand for mobile banking. A recent study by Insider Intelligence showed that more than 45 percent of respondents considered mobile banking among the top three features that influence their selection of financial institutions.
The Big Tech billionaires of the world including Mark Zuckerberg, Elon Musk, and Bill Gates have given life to AI. They are using AI tools and apps in determining consumer preferences and are now influencing other businesses to adopt AI-based technologies. Consequently, banks are investing heavily in AI and predictive analytics to make better decisions and provide customised services.
Even banks that have been reluctant to use AI technology in their processes are using AI chatbots to handle customer queries. As predicted by Elon Musk, “there certainly will be job disruption because what is going to happen is robots will be able to do everything better than us.”
Risk management
Money laundering is an emerging issue for banks because these institutions, in most cases, are unintentionally facilitating such processes. The Financial Action Task Force (FATF) considers money laundering an international issue and stresses the importance of global cooperation. A study conducted by The United Nations Office on Drugs and Crime (UNODC) also highlighted this, stating that nearly 3.6 percent of global GDP, which is equal to $1.6trn, is being laundered each year. A recent report by Zippia showed that the US is dealing with money laundering worth $300bn each year. These figures are alarming for the banks and it is crucial that action is taken when the recessionary pressures on global economies are approaching 2008 levels.
Leading banks are using real-time AI risk management technologies to determine customer behaviours and transaction patterns to combat terrorist financing and money laundering. It closely monitors high-risk accounts by matching a customer’s expected monthly turnover with their actual monthly transactions to raise red flags. This ultimately assists banks in implementing controls to safeguard against losses, fraud and in turn enhances ROI for their consumers.
However, it is worth noting that implementing AI technologies is not the end of the story. AI processes will need optimised frameworks and hardware accelerators to manage AI assignments. Furthermore, financial institutions also need to prepare processes and effectively communicate them with staff to achieve their AI goals rapidly. “Artificial Intelligence technology invariably needs human beings,” says Simon Carter, Head of Deutsche Bank’s Data Innovation Group.
And, as pointed out by Deloitte’s survey, organisations that can communicate a bold vision with an AI strategy are approximately 1.7 times more likely to achieve high outcomes as compared to enterprises that do not. Thus, by using big and complex data sets, banks can create risk frameworks that can provide precise and timely analysis.
Consumer behaviour and AI
Banks offer services and products integrated with AI to customers based on their preferences and searches. One of the best features of AI in banks is its ability to learn. It matures and becomes more intelligent over time. Standard Chartered is using machine learning that helps the bank to decode complex data compilations and slim down the related information.
Banks are using these data analytics to develop their marketing strategies. “Ensuring transparency and explainability in AI-based decision-making is not just a competitive advantage for us, but also the right thing to do by our client,” says Standard Chartered’s Retail Banking Group Head, Vishu Ramachandran. In this way, they are identifying consumers’ preferences and offering targeted products and services, which has helped it to decrease costs and increase productivity.
However, data breaches are a continuing concern for banks that are using AI technology in their processes. Every bank records a large number of transactions daily. The collection of data is a never-ending task, one which raises considerable security issues. A recent data breach in Flagstar Bank, one of the largest banks in the US, has put its 1.5 million customers at risk.
Of course data protection remains a challenge for banks, but they cannot ignore the significance of AI in modern banking. Implementing robust data protection protocols is necessary to counter such threats. On the other hand, banking institutions need to lay the groundwork to support AI teams who can promise efficiency, consumer satisfaction, and improved ROI.
AI offers tantalising opportunities and modern banking must include accessible, secure, and consumer-driven data centres to accelerate data collection and analytics.
Charles Goodhart has seen it all: recessions, stagflation and boom years. In his book, The Great Demographic Reversal: Ageing Societies, Waning Inequality, and an Inflation Revival, co-authored with Manoj Pradhan, the former Bank of England adviser predicted the revival of a beast long thought dead by most economists: high inflation. It was cheap Chinese and Eastern European workers who kept inflation rates low over the last decades, rather than central bank policies, Goodhart argues, but the tide has now turned. Ageing populations will bring about higher inflation and interest rates, but also less inequality, he argues in an exclusive interview with World Finance’s Alex Katsomitros, while explaining how we can deal with climate change and musing over what central bankers and sheep have in common.
What prompted you to write the book?
When Manoj and I were working at Morgan Stanley, we were asking ourselves why inflation was running below target, despite the expansionary policies of central banks. We came round to the view that there was an underlying trend, caused by the weakness of labour markets and the sluggishness of wages. We put that down to demography and globalisation, notably the arrival of China and Eastern Europe into the world’s trading system.
As you predicted, inflation and interest rates have increased. Do you feel vindicated by recent events?
Yes and no. Mainstream economists still believe that current inflation is temporary. Central banks forecast that we will return to inflationary targets in two or three years, and interest rates will come down. We believe that COVID-19 was a trigger for a change to a more inflationary period from now to 2050.
Some put the blame on the war in Ukraine for rising inflation, others focus on the pandemic. What is your take?
We wrote the book in 2019. We thought that the momentum of weak labour and reduced trade union membership would carry on, although we also believed that demography and deglobalisation would change this. But we didn’t know when the shift would take place. COVID-19 and the war brought this change forward. What remains to be seen is whether inflationary pressures will persist when these temporary developments disappear.
The economist Michael Pettis recently told World Finance that China can only sustain current growth levels by increasing the household share of GDP and reducing government consumption. Do you think they can reform their economy?
They will have to. They are trying to move up the value chain by shifting from low-tech to high-tech products, and they will have to increase internal consumption. The rift with the US, which will not go away, means that the growth rate of exports will decline. Aggregate growth rates have been between six and eight percent in real terms, and with a declining workforce, they will be lucky if they have 2.5 percent growth. If your workforce is falling by 1.5 percent annually, you are lucky to have aggregate growth of 2.5 percent. That means that your productivity per worker rises by four percent, which is huge.
You argue that inflation will rise due to a shortage of workers. However, there’s still a big pool of cheap workers globally. In the book you discuss India and Africa, but what about Vietnam, Indonesia and Pakistan?
In Vietnam and Indonesia birth rates have already started declining. The areas where high birth rates remain are Africa, certain Muslim countries and perhaps India, although it is falling there too. The problem is how to use this workforce.
One possibility is massive migration, but this is politically unpopular, as we saw with the election of the far right in Italy. So if that is not an option, you have to take manufacturing to those countries. To do that, you need political stability, administrative competence and a well-educated workforce. It is possible and desirable that Africa may have these, plus a degree of unification, so perhaps Africa and parts of South Asia could become the next China. But it hasn’t happened yet.
What about automation?
We need all the robots we can get. As the proportion of the old increases, we will have more incapacitated people. The problem is not age itself, but incapacitating illnesses like Alzheimer’s, dementia, Parkinson’s, arthritis. Those suffering from these diseases cannot carry out ordinary activities. They need supportive care and human sympathy. Robots are not sufficient. They could help to get people into a wheelchair, but we need people.
Many youngsters believe that the postwar generation is enjoying undeserved privileges. Is this anger justified?
To some extent, yes. We, the old, have support in the form of care, medicine, NHS, and pensions, paid by the working-age population. There are relatively few of us and many younger people, which means they can support this fiscal generosity. But when they grow old, there will be fewer workers to support them. If the future old have the same level of benefits and retirement age, there will be a higher tax burden on younger generations and they will not like that. Tax rates will have to go up or support to the old go down. One reason why this has happened is that the old vote at higher proportions than the young. If the young voted for lower taxes and fewer benefits to the old, they would get somewhere, but the proportion of voting 20-year-olds is much lower than that of 60-year-olds.
Economists who espouse modern monetary theory believe that deficits and debts don’t matter. What do you think?
They say that deficits and debt are not so much a problem, but inflation is. Taxation will have to be raised to control inflation, if this goes out of hand. The problem is that rising deficits lead to unsustainable fiscal problems, which tend to cause inflationary pressure and require higher taxation.
Another issue you discuss in the book is central bank independence. Why do you think it is in danger?
The difficulties facing the UK recently {the week after the since U-turned mini-budget was announced} are instructive. The underlying problem is that we cannot bring back inflation to target without the fiscal position becoming more sustainable. If you try to deal with inflation solely by raising interest rates, you get two effects.
First, that reduces demand and output growth and increases unemployment, which brings a recession with rising expenditures on unemployment benefits and lower taxes. Higher interest rates also increase public debt immediately, particularly because of quantitative easing, which has effectively substituted long-dated government debt for overnight government debt. So with higher interest rates, you are making the government’s fiscal position worse.
And if people start thinking that public debt becomes unsustainable, they flee the government bond market, as happened in the UK. If the government bond market starts to collapse, the only thing that can be done, which the Bank of England did, is reverse course and go back to quantitative easing, which brings more inflation. You cannot defeat inflation in the long term, unless fiscal and monetary policies are sufficiently restrictive to make the public debt position seem sustainable. When you get policies such as those Truss and Kwarteng tried introducing, it is clearly not there.
You argue that labour will gain the upper hand due to a shortage of workers. Does that mean that we will see less populism?
It is very likely. I hesitate to make political forecasts, but I believe we will see less inequality. The massive increase in the availability of labour, particularly due to offshoring to China, will be reversed. In many countries, particularly the US, there has been little real income growth for unskilled workers. We now see a reversal, and with interest rates going up, we will see a decline in asset prices. Because of the shortage of workers, the unskilled will see relative growth in real wages and those with capital will do less well, so inequality within countries will decline.
Another issue that looms large over monetary policy is climate change. Is there some kind of balance between the economy and the environment?
Where I think there should be a balance is on how we pay the expensive effects of carbon usage reduction. Economists think that we should adopt a carbon usage tax. However, such a tax would make the carbon-intensive segments of industry, like steel and cement, very uncompetitive compared to countries where there is no such tax. Opposition from industries subject to heavy taxation would be sufficient to stop it. Also the net-zero activists do not support carbon taxes. I don’t know how they think we will finance the extra expenditures needed to move towards renewables.
In the book you approach an economic issue through a non-economic lens: demographics. Many people believe that economics has lost its way, that it’s too mathematical and just out of touch.
I am with the latter, as I am more of an economic historian rather than a pure economist. Our book has two defining features. The first is that macroeconomists tend to focus on their own country, which is too narrow. We have two chapters on Asian countries, Japan and China, but no chapter on the US, Europe or the UK, because we think that the rise of China has been the most important feature of the last 30 years. The second difference is that they focus on demand-side policies, whereas we focus on supply.
You own a sheep farm in Devon. Has farming taught you anything about economics?
Sometimes I make this analogy: central bankers and economists in some ways are like sheep. They tend to flock together. If you are in a position of power where what you do has important effects on everyone, you like being able to defend and protect yourself by saying ‘well, I am doing exactly what everyone else thinks is right.’ They have a flock mentality.
Europe is bracing itself for a long, cold winter. Blackouts, gas shortages and unheated homes could well become a reality for millions across the continent in the months to come, as the ongoing energy crisis continues to escalate. Already grappling with skyrocketing bills, many families are fearful of what the winter will bring, while thousands of small businesses may be forced to close if they can’t keep up their energy payments.
By January, experts warn that two-thirds of UK households could be pushed into fuel poverty, with sustained higher prices set to impact families at all levels of the income spectrum. Despite a package of planned government interventions, the outlook appears bleak. The energy crisis – exacerbated by the ongoing conflict in Ukraine – shows no signs of abating as we head into the coldest months of the year. In the worst case scenario, the UK’s National Grid has cautioned that families could face daily three-hour blackouts, bringing back memories of the power cuts that plagued Britain in the early 1970s.
As political leaders across Europe look to deal with the immediate impacts of the crisis, it is becoming increasingly clear that there will be long-term ramifications from the events of the past year. The crisis has, in many ways, changed the continent’s energy landscape forever. Despite recent commitments to phasing out fossil fuels – including most notably at last year’s COP26 conference – Europe remains largely dependent on imported oil and gas. Russia, the largest supplier of natural gas and petroleum oils to the EU, has cut its exports of gas to Europe by 88 percent over the past year. Against this backdrop, energy security has suddenly rocketed up the political agenda.
After years of scepticism and apprehension, countries around the world are now reassessing their position on nuclear power – persuaded by its potential to provide an efficient and reliable domestic source of energy in the long term. Not everyone is convinced, however, with the catastrophic disasters in Chernobyl and Fukushima looming large in the public consciousness.
But with the Russia-Ukraine war exposing fundamental weaknesses in Europe’s energy supplies, is the tide set to turn on nuclear power?
Firing up
Few issues are guaranteed to generate as polarised a debate as the question of nuclear power. For those in favour of nuclear investment, it represents a clean and efficient form of energy, with a smaller carbon footprint than both solar and geothermal alternatives. Its opponents, meanwhile, argue that the risks simply outweigh the benefits: over 30 serious nuclear incidents have occurred at nuclear plants around the world since the early 1950s, with Japan’s 2011 Fukushima disaster stoking significant fears over safety.
Now, a decade on from the Fukushima accident, public reservations on nuclear power look unlikely to deter its expansion. For the first time since the 2011 disaster, the International Atomic Energy Agency (IAEA) has raised its projections for annual nuclear electricity generation, reflecting a significant shift on nuclear policy around the globe. Japan is unexpectedly at the very forefront of this nuclear revival, with Prime Minister Fumio Kishida announcing plans to restart a number of the country’s idled nuclear plants, and setting intentions to develop next-generation nuclear reactors.
Europe economies are following suit, with even staunch nuclear sceptics beginning to revise their policy position. Germany, which firmly turned away from nuclear following the Fukushima disaster in 2011, is now rethinking its approach, with plans to postpone the closure of its remaining nuclear plants. The country’s last three nuclear power stations were due to be permanently switched off in December, as part of plans to completely phase out nuclear energy by the end of 2022. Two of the three plants will now remain operational until at least mid-April, in order to provide an ‘emergency reserve’ this winter as the energy crisis rumbles on. While the German chancellor Olaf Scholz has insisted that he remains committed to the country’s nuclear phase-out, the decision to extend the lifespan of its last power stations marks a significant U-turn for the nuclear-adverse nation. It’s a similar story across the border in Belgium. The nation had previously committed to abandoning nuclear power entirely by 2025, but has since decided to extend the lives of its two newest reactors by at least another 10 years. Reversing a decision made in December 2021 to shut the plants, the extension will keep nuclear as a key component of the Belgian energy mix for years to come.
Britain, meanwhile, is taking inspiration from its pro-nuclear neighbour across the Channel. In September, outgoing Prime Minister Boris Johnson pledged £700m for the construction of the new Sizewell C power station in Suffolk, committing to nuclear as one of the final acts of his premiership. Calling on his successor to “go nuclear and go large,” Johnson’s million-pound pledge sent a clear message that nuclear power will undoubtedly be at the heart of the UK’s future energy strategy.
Too little, too late?
While there certainly appears to be renewed enthusiasm for nuclear energy – both in Europe and further afield – this recent change in direction may do little to resolve the current energy crisis. Keeping soon-to-close power stations on standby may be a reassuring back-up plan for countries facing energy shortages over the winter, but the strategy won’t create energy independence overnight.
One of the strongest arguments for investing in nuclear power is that it grants nations greater energy security and independence – with France standing out as an obvious success story. Deriving almost 70 percent of its electricity from nuclear power (see Fig 1), France boasts an energy independence rating of 53.4 percent – one of the highest rates in the EU. While this level of autonomy means that the nation is less exposed to Russian cuts to gas supplies, replicating the French model is not easily achieved.
Nuclear power stations are famously time-intensive to build, with the average construction time for reactors coming in at just under 10 years. Compared with renewable alternatives, nuclear power plants are also much more costly to both build and operate – and then there are the additional expenses of decommissioning and waste disposal to consider. For any country wanting to follow in France’s nuclear footprints, they will need to be prepared for high costs and slow progress.
It’s clear that nuclear isn’t a short-term solution. The immediacy of the current crisis requires swift action to keep bills down and keep lights on, and nuclear is anything but swift. Investing in nuclear power won’t solve this winter’s energy crisis – but it could stop the next crisis from hitting as hard. With the energy landscape so dramatically transformed by the events of the past year, energy security is understandably a long-term priority for the EU, and nuclear power could prove crucial to achieving this goal.
Finding balance
If the recent energy crisis has sparked a renewed interest in nuclear power worldwide, it has also exposed the dangers of nuclear over-reliance. Nuclear-dependent France is facing its very own energy predicament while the rest of Europe grapples with cuts to Russian gas supplies. This year, 57 percent of the country’s nuclear reactors have been shut down due to corrosion problems, technical issues and long-overdue maintenance works – with repairs outstanding from the multiple COVID-19 lockdowns. With so many plants offline, French power output has fallen to a 30-year low, making the country a net importer of energy for the first time since records began a decade ago.
After years of scepticism and apprehension, countries around the world are now reassessing their position on nuclear power
France’s recent nuclear strife illustrates the importance of creating and maintaining a diverse energy mix. Over-reliance on a single form of energy – whether that be domestic nuclear power or imported natural gas – can only leave a country exposed when unexpected setbacks occur. A hybrid energy system, combining cutting-edge renewables with nuclear power, may just be the future of the European energy landscape.
Achieving the ambitious targets established in the landmark Paris Agreement on climate change will require a dramatic transformation of the global energy system, and a pivot towards carbon-zero sources. Whether nuclear power can be classed as truly ‘clean’ remains hotly debated, given that each reactor generates not-insignificant quantities of long-lasting radioactive waste. However, it is true that it remains an efficient and reliable source of carbon-free electricity – and one that isn’t affected by meteorological fluctuations, as is the case with solar and wind power.
While 100 percent renewable energy may be the ultimate goal for climate-conscious countries around the world, a hybrid approach may be more readily achievable in the near term. Already, major economies such as Sweden have been able to completely decarbonise their power grids through a blended use of nuclear, hydropower and other renewables, demonstrating the potential of a hybrid system.
Nuclear isn’t a magical cure-all for the challenges of fossil fuel dependence and energy insecurity, but it could provide some welcome relief in the years to come. Long-sidelined and still met with opposition from many, nuclear’s new resurgence may not be popular but it may prove necessary – if Europe wishes to make this energy crisis its last.
An All Party Parliamentary Group (APPG) has recently said the UK should widen its open banking model to speed up the growth of fintech as part of a broader evolution in financial services. The APPG has called on the UK government to start a new ‘big bang,’ imitating the deregulation of the financial markets in the 1980s. The group has said that by eliminating the shackles from fintechs, the government can make strides in levelling up the country by reducing economic imbalances between different parts.
Meanwhile, in the US, a new report from the cloud-based digital banking provider Alkami Technology, a leading cloud-based digital solutions provider for banks and credit unions, highlighted five trends banks and credit unions should be aware of during their digital evolution. One of them regards the possibility of partnerships with fintech companies, which may be the easiest and cheapest way to complete the digital journey.
This report showed that 73 percent of the population trusts financial institutions with their personal information, but fintech is not far behind, with 63 percent saying they trust the companies with their data. Around 50 percent of banks and 40 percent of credit unions have partnered with a fintech company within the past three years due to competitive pressure.
Sanat Rao, CEO of Infosys Finacle, a global banking software and platforms business, considers the digital journey as a way to create and deliver value to customers. “Digitisation enables banks to acquire more customers, build better products and services faster and at lower cost, manage risks well, and run operations efficiently. In other words, it’s the key to sustaining the business,” he said.
In the age of ecosystem-driven banking, a partnership is the natural order of things
Rao explained that over time, banks have realised that collaborating – rather than competing – with fintech usually creates value and synergy for both. While banks are looking to embed their services in the primary journeys of other providers, fintech will enable this transition, for instance, by helping banks to evolve marketplaces or insert their offerings in different consumer journeys.
“As long as the partnership is a net positive and not a zero-sum game, the price the partners have to pay is irrelevant. And there is so much room for growth and untapped opportunity that most partnerships end up increasing value for everyone. In the age of ecosystem-driven banking, a partnership is the natural order of things,” he said.
Rao claimed that every bank would work with several partners across the value chain to create and deliver products in ecosystem banking. While many partnerships will have no conflict of interest, in distribution partnerships, however, some conflicts may arise. “For example, if customers use Google Pay to open deposit accounts, banks will lose that part of the engagement. Banks need to ask whether they can deliver greater value to customers via these partnerships than by serving them independently. If the answer is yes, that is how the industry will go. Then the only option for banks is to stay in those partnerships, even if it means becoming embedded in other product journeys because that is what customers will want,” he added.
Silvia Davi, chief marketing officer of the fintech firm Symbiont, with its headquarters in New York, believes that the digital journey consists of moving from inefficient ‘paper’ or manual processes to benefit from the tools that digitised solutions bring to the table, such as smart contracts. “Via this technology, for example, we are enabling market participants globally to automate the reconciliation process, and there are multiple solutions that can be built on top of these high-quality data sources,” she said.
Davi highlighted that while in the short term there is a time and budget commitment – with inaction way more expensive in the long run – the long-term consequences are immensely positive, driven by the immutability, transparency, and apparent efficiencies that will result from utilising distributed ledger technologies.
“There may be some growing pains and tweaks needed to optimise the benefits of these relationships. From our experience, driven by our desire to constantly evolve and introduce new technology releases, we are committed to that process, and the banking sector is as well,” she added.
Working through conflicts
Likewise, Carol Hamilton, senior vice president of Provenir, a global leader in AI-powered risk decisioning software, sees the digital journey as “a non-stop set of continuous interactions between an organisation and their customers.” It starts from that first moment of contact, either a customer browsing a website online or applying for a product on a mobile device. Financial services providers want to maximise every digital interaction along the journey. To do that, they need to up their game for consumers who demand that digital interactions be quick and informative. This is why such organisations are utilising more data and more sophisticated technology to understand better who they’re doing business with and use that intelligence to optimise every component along the way.
“Embracing digital is very powerful; however, some organisations digitise processes on paper or legacy technology and move to more updated online systems. But true digital transformation shifts how that company is thinking and how it is interacting with customers to meet their needs for a more engaging and memorable digital banking experience,” she said. Nevertheless, Hamilton does not deny that there are a few other disadvantages of moving to complete digital transformation, especially as it gets even more intelligent.
“We are at a solid place in the industry where even organisations who weren’t historically operating in financial services can offer intelligent financing products through an app or other digital interactions. Successful digital transformation offers more intelligent products and services to the end customer. These are more valuable to that end customer and thus the organisation offering them,” she added.
Hamilton explained that to compete in such a busy market, the profile and needs of a customer need to be identified more quickly than ever, and data-driven actions need to follow in order to be successful. “For most customers, this is about embracing speed and optimised communication and products. For the minority, data-driven actions at speed also ensure the organisation is protected,” Hamilton said.
Also, in contrast with what Sanat Rao stated, she does not exclude a conflict of interest between the two businesses, highlighting that as traditional banks diversify, fintechs could soon do the same. “Data could be commoditised. It’s always about finding out that next layer of value and staying ahead to meet customer expectations. There will always be conflicts – it’s all about working through them,” she suggested.
However, there are plenty of options to accelerate this digital transformation. As Hamilton suggested, one of them is diversifying the business, for example, leading banks launching neobanks and targeting different parts of the market while diversifying their portfolio. Open banking has also been a groundbreaking development in the financial market. Regulation will also play a role in accelerating or decelerating digital transformation.
Adapt or die
Eric Bierry, CEO of the French fintech Sopra Banking Software, said that the digital journey is about more than meeting consumers’ changing expectations; it is also a reaction to shifting business models and industry regulations. “To take full advantage of these new business models, banks need to work with fintechs and avoid the mistake of trying to become them. This means providing fintechs with access to the core competencies that are part of banks’ DNA, like licensing, lending and security, freeing them up to focus on innovation and consumer experience. The result is a relationship where both parties can bring their strongest capabilities to consumers,” said Bierry.
He pointed out that banks are unequivocal about their decision to enter the digital ecosystem, and those unwilling to transform digitally will face extinction. “Fintechs are increasingly becoming the main point of contact for end-customers, from lending money to opening bank accounts and making payments. Banks will eventually be disintermediated from the value chain without digital infrastructures to enable partnerships with these companies. For banks that do leap to participate in the digital ecosystem, partnership opportunities in any industry, not just finance, are endless. Supporting fintechs and neobanks is the first and most obvious stop. Still, by offering their lending, security and compliance services to an auto manufacturer, banks can bring financing directly to consumers in any industry and cement their position in the industry for years to come,” Bierry added.
Undoubtedly, every bank in the world is working to transform. However, according to the Innovation in Retail Banking 2021 survey conducted by Infosys Finacle alongside Qorus, a non-profit organisation in the financial services industry, 14 percent of respondents said that their organisations had deployed digital transformation at scale and delivered as expected.
Sanat Rao explained that this result does not mean that other banks are not trying, but the reason for this low number is the constantly advancing goalpost of digital transformation (see Fig 1). “While banks are moving ahead, so is the transformation horizon, making it seem like banks aren’t going the distance. But that is not true,” he concluded.
Many millions of people around the world watched at least some of the Queen’s funeral, with figures from the Broadcasters’ Audience Research Board (BARB) estimating over 26 million BBC viewers across the service in the UK alone. The global and streaming audiences would have been many times this amount. The eyes of the world were firmly fixed on the UK in what is thought to have been the biggest television event in history, but once the grandeur and ceremony were concluded, the headlines reverted to ever more desperate reports of fuel poverty, political crisis and economic woe. Summer was officially over and with the incoming chill of the weather, reality soon started to bite.
Almost all the mainstream UK media was sympathetic towards the royal family in the lead-up to the dazzling solemnity that was the state funeral. Regardless of political stripe, any one of us who has lost someone can recognise the pain of going through the motions while stunned with your own grief.
Brexit, Covid, and now the cost of living have all led the left and right to point fingers at each other, and meanwhile the climate is in literal meltdown
But far fewer of us will inherit vast wealth, property, and privilege as a result, and perhaps that’s where the sympathy runs out. The royal family’s finances are as complex as its relationship with the public, and opinions and estimations around these vary wildly. Whether or not you believe that ultimately they contribute more to the economy than they take out, now the country is back to humdrum, can the royals realistically expect to feel genuinely relevant, cushioned as they are from the financial woes facing the average citizen?
Within a week of the Queen’s funeral, the reshuffled Conservative government announced a raft of financial measures in a much-maligned ‘mini budget’ that included the intention to abolish the additional rate of income tax, disproportionately benefitting the highest earners. This in turn sparked days of fierce debate, with then PM Liz Truss and her then Chancellor Kwasi Kwarteng being called to defend the move everywhere from local radio to the Tory party conference.
The plan was eventually dropped just 10 days later, but not before close to 1,000 mortgage products had been withdrawn from the market, and international stock markets had been well and truly spooked.
Disunited Kingdom
At times like these it is hard for households to bear the financial strain of matters that are outside of their control. Spiralling prices of gas and electricity, the geopolitical instability caused by Russia’s war in Ukraine, and global climate breakdown all provide an overarching context that any government would find challenging to thrive in, but when such rash political moves as Kwarteng’s mini budget feel like a choice to make things harder for most, it adds insult to injury and sends a very clear message about Britain’s crumbling sense of unity. In the meantime, the new coin featuring Charles III’s face was unveiled, but otherwise, all was quiet from the palace, even beyond its extended period of private mourning.
Whether you lean in favour of the royal family or not, it is important to acknowledge the magnitude of the Queen’s passing. She was a constant, for good or ill, in a country that feels increasingly polarised with every passing crisis. Brexit, Covid, and now the cost of living have all led the left and right to point fingers at each other, and meanwhile the climate is in literal meltdown. At times like these, no wonder almost half the UK population tuned in to bid farewell to one of the world’s longest serving figureheads, and yes, perhaps for a little distraction as well. Like it or not, we will all remember where we were when we heard the news, however we felt upon hearing it.
The well-worn argument of the royal family being good for UK tourism (not to mention the media) may not hold much water if Charles III does as he is rumoured to want to do and slims down the operation, reducing the number of senior working royals who enthral the visitors and capture the imagination. Although no longer able to lean on parliament the way he has purportedly done while heir to the throne, it is well known that King Charles is extremely concerned about climate change.
Perhaps he could be the figurehead that presses forward with Britain’s environmental imperative. There’s something we can surely all unite behind.
In 1997, so the story goes, Reed Hastings spent the best $40 of his life. At the time, he was frustrated. He had just returned a rented copy of Apollo 13 six weeks late and was slapped with a huge late fee. Why, he wondered, could the price of renting films not be more like a gym membership, where you pay a flat price to work out as much or as little as you want? At the time, DVDs were a new but untapped technology poised to explode in the US market. Not only were they a burgeoning market, but they were also perfectly sized for slipping into post boxes. Off the back of his fine, Boston-born Hastings dreamt up a business model for mail order movies. With one start-up already under his belt, he would go on to found DVD-by-post turned streaming behemoth Netflix within the year.
Twenty-five years on, Hastings’ origin story has become legend in the world of business. However much truth is in it, his success is undeniable. Netflix, which turned over nearly $30bn in 2021, has gone from plucky, cult-status start-up to Silicon Valley veteran. Hastings steered the ship through periods of choppy waters, but with questions over just how long he will remain at the helm and where he will take Netflix in the so-called ‘streaming wars,’ World Finance looks back on his legacy.
Don’t listen to the sceptics
While Netflix would be Hastings’ big lightbulb moment, it wasn’t his first spark of brilliance in the business world. After earning a mathematics degree from Bowdoin College – he “found the abstractions beautiful and engaging,” he later told The New York Times – Hastings went on to earn a master’s degree from Stanford in computer science. By 1991, at the age of 31, he had co-founded his first business, Pure Software, with Raymond Peck and Mark Box.
The business, which originally offered a debugging tool for engineers, was a success. Revenue doubled each year before it went public in 1995, Hastings told Inc. magazine, and it was soon snapped up by a competitor, Rational Software, for $750m. The deal wasn’t particularly well received by Wall Street, but Hastings didn’t worry about what others thought. “I was doing white-water kayaking at the time, and in kayaking if you stare and focus on the problem you are much more likely to hit danger,” he told The Times. “I focused on the safe water and what I wanted to happen. I didn’t listen to the sceptics.”
After inspiration for Netflix struck, Hastings wasted no time in making his idea a reality. In 1997, he launched the business with co-founder and entrepreneur Marc Randolph.
Winning the rental wars
In its first year, Netflix gained 239,000 subscribers, and it wasn’t long before its red DVD envelopes became ubiquitous in the United States – and beyond. Hastings made waves by situating the business at the cutting edge of entertainment and technology. While Netflix first offered a pay-per-rental model for each DVD, by 2000 it had a monthly flat fee in place, nixing the need for late fees and due dates. “It was still a dial-up, VHS world, and most video stores didn’t carry DVDs, so we were able to sign up early adopters,” he told Inc.
The business went from strength to strength in the run-up to its initial public offering in 2002, when it listed its stock at $15 per share.
The company posted its first profit the next year, earning $6.5m on revenue of $272m. By 2004, its profits had ballooned to $49m, and in 2005 it was sending out a million DVDs every day. But 2005 marked the time of peak DVD in the US market, with sales reaching a height of $16.3bn. For Hastings, the next goal was to move into video streaming. He told Inc. that same year: “We want to be ready when video-on-demand happens. That’s why the company is called Netflix, not DVD-by-mail.” But the transition wasn’t without its problems. In 2011, Hastings announced Netflix would divide its DVD and streaming businesses into separate subscriptions with separate fees – and names. The streaming service was to retain the name Netflix while the DVD side would be renamed Qwikster. Neither customers nor the markets were happy, and Netflix’s share price fell 75 percent by the end of 2011, according to Forbes. After initially doubling down, Hastings eventually cancelled plans for Qwikster.
Despite the missteps, Hastings was winning the film rental wars. In 2010, Blockbuster, which once had 9,000 video rental shops in the US, filed for bankruptcy after being crushed by nearly $1bn in debt and torn apart by internal disputes. Blockbuster’s demise occurred just a decade after Hastings and Randolph offered to sell their business to the video rental giant for a mere $50m. Following the meeting, which took place during the dot-com bubble, former Netflix CFO Barry McCarthy said Blockbuster executives had “laughed us out of their office.”
Throwing out the rulebook
At Netflix, Hastings is known for being a hands-off leader. “Incredible people don’t want to be micromanaged,” he once told Forbes. “We manage through setting context and letting people run.” Hastings currently shares responsibilities with co-CEO and chief content officer Ted Sarandos, who became joint head of the company in 2020, having worked at the business since 2000.
In 2020, Hastings published No Rules Rules: Netflix and the Culture of Reinvention with business school professor Erin Meyer. The book outlined his leadership philosophy and how it plays out at Netflix. “We wanted to make the case that it’s good business to run without rules – which is a surprising statement,” he told Variety. The key, he said, is “embracing managing on the edge of chaos. And as long as you are tolerant of managing on the edge of chaos, of course there’s going to be some mistakes” – take Qwikster, for example – “but there’s also going to be a lot of innovation.”
Netflix’s annual leave policies are one case study of the ‘no rules’ strategy. Hastings plays the long game with employees, encouraging them to take time off via unlimited vacation policies and unlimited parental leave, in the hopes that any loss in efficiency will be regained by employee loyalty and innovation. “We’re willing to take some inefficiency narrowly and in edge cases to create an environment that’s extremely flexible because we think that outperforms in the long term,” he told Entrepreneur. Hastings said he takes six weeks off per year, explaining at The New York Times DealBook Conference that the time away from work “hiking some mountain” or “reading something not connected to work,” helps him get a different perspective and provides inspiration.
But it’s not all positives with the ‘no rules’ philosophy, and Hastings admits it’s not a perfect strategy. Some of Netflix’s policies have been challenged for creating a culture of fear. The infamous ‘keeper test’ is a process where managers are told to consider if a person on their team were to quit whether they would try to get them to change their mind or whether they would accept the resignation, perhaps even with relief. If their answer is the latter, they may as well send them packing now and look for someone they would fight to keep, the ‘keeper test’ advises.
“Think of a great athlete,” Hastings told Variety. “You kind of know you could get injured, maybe even a career-ending injury, in every game. But if you think about that and if you obsess on it, it’s only going to hurt you. So we have to hire the psychological type that can put that aside and who aspires to work with great colleagues and that’s their real love, is the quality of their colleagues or the consistency of that, versus the job security.” If job security is your priority, Hastings said Netflix’s message is clear: “We’re not a good place to come. We don’t want people to feel debilitating fear; obviously that’s not productive.” But, he said, Netflix is looking for “a special kind of person who can ignore that fear.”
Hastings believes this strict approach to weeding out mediocrity is key to maintaining Netflix’s competitive edge and innovation. He saw the alternative at Pure Software. “We stopped being innovative. We were all about process. And then the market shifted, and we were unable to pivot and ended up selling to our largest competitor,” he told Variety. “So it ended up as a really good success financially, but it did not become an epic, world-changing company in the way we want to make Netflix.”
Changing tack
Flexibility and innovation are important to keeping Netflix’s offering fresh and its business model agile, but the business’s recent change in strategy regarding advertising is more akin to a U-turn. Hastings had long committed to keeping advertisements off the platform, with Netflix’s chief financial officer saying advertising was “not in our plan” as recently as March 2022. But in April, Netflix reported its first quarterly decline in subscriber numbers in more than a decade, and a tumbling stock price forced a swift rethink. Now, the streaming giant’s plan is to funnel in more subscribers through its cheaper, ad-supported service.
The television advertising industry was buoyant on the news, with Brian Wieser, president of business intelligence at WPP-owned GroupM telling the Financial Times that Netflix poses “a great untapped audience.” And the advertising world, which brings in more than $60bn a year, offers an equally large opportunity for Netflix. However, Netflix has to battle the perception that by offering an ad-supported service, it is compromising its brand. As Rich Greenfield, an analyst at LightShed Partners, told the Financial Times, “It is scary if the only way to reinvigorate growth is offering cheaper products that worsen the consumer experience, essentially making it more like the dying linear TV experience.”
Being an entrepreneur is about patience and persistence, not the quick buck
Hastings himself has admitted that advertising is no fast-track to growth. “Advertising looks easy until you get in it. Then you realise you have to rip that revenue away from other places because the total ad market isn’t growing, and in fact right now it’s shrinking,” he told Variety in 2020. And in a 2019 letter to investors, the business said, “We believe we will have a more valuable business in the long term by staying out of competing for ad revenue and instead entirely focusing on competing for viewer satisfaction.”
Market researcher Kantar noted in a July report that streaming growth was most significant in paid ad-supported streaming and free ad-supported streaming, while paid streaming without ads grew at a slower rate.“Value is increasingly important to retaining streamers as platforms are competing for screen time or risk being cancelled and replaced,” said Nicole Sangari, vice president of Entertainment on Demand at Kantar Worldpanel Division. “This upward trend of significant [paid and free ad-supported streaming] growth is correlated to high stacking [of multiple subscriptions]. As stacking reached new heights, consumers were willing to reduce their overall streaming costs for ads. Streaming has gone full circle, once being the destination to avoid cable TV ads, to increasingly relying on ads to drive growth.”
Of Netflix’s ad-supported tier, Sangari said the move was a “suitable strategy to combat losing subscribers due to its cost and value.” Offering an ad-supported tier “can help win back its lost subscribers,” she said, as customers who had planned to cancel their subscriptions can switch to a cheaper service instead. However, as the business fights password sharing, it is expected to lose customers. “Their strategies are having lingering effects on how loyal customers perceive its features and value.”
While Netflix teeters on the unknown, two of its rivals, HBO Max and Hulu, have seen growth. “The platforms have focused on cost-savings to prove value and created a content niche that over time they expanded: HBO Max with new releases and Hulu with next-day cable to Hulu TV series,” Sangari said. “Both started by offering something unique to the market, and with greater competition have focused on diversifying their offerings to drive engagement.”
Netflix’s Chief Content Officer, Ted Sarandos, and CEO, Reed Hastings
Changing the world for good
While Netflix’s shift to ad-supported advertising is welcomed by some industry experts, seeing Hastings’ commitment to ad-free viewing crumble overnight may cause investors to wonder if other commitments will be dropped. From live news and sports to gaming, there are a multitude of ways Netflix’s content offering could shift.
Speculation over when Hastings will leave Netflix is also emerging. With Sarantos sharing the position at the head of the business and making the big calls on Netflix’s content, Hastings appears to be putting the wheels of a succession plan in motion. In a recent earnings call he suggested he would be leaving the business by 2030. But he insists he’s committed to Netflix. “What I don’t want people to think is that I’m checking out,” he told Variety. “I guess it is the beginning of the end in the sense that eventually, I’ll be gone. At least for the next decade, I’m super-excited by what we’re doing and full-time, so it was a statement that it’s not a short-term situation.”
Outside of his work at Netflix, Hastings is known for his philanthropy and political contributions. Through Netflix, Hastings accumulated a substantial fortune. In 2017, he was added to Forbes’ 400 list of the richest people in America, with the group estimating his fortune sat at $5bn. Between 2001 and 2011, Hastings spent $8.1m on political donations in California, according to the Silicon Valley Business Journal. In 2020, he donated $1.4m to Joe Biden’s presidential campaign, Business Insider reported, having previously gifted $89,000 to Barack Obama’s 2012 re-election campaign.
Hastings and his wife, producer Patty Quillin, also joined a philanthropy pact founded by Bill Gates and Warren Buffett to give away the majority of their fortune. “It’s an honour to be able to try to help our community, our country and our planet through our philanthropy,” Hastings and Quillin said in a statement at the time. “We are thrilled to join with other fortunate people to pledge a majority of our assets to be invested in others. We hope through this community that we can learn as we go, and do our best to make a positive difference for many.”
Education has been a consistent theme in Hastings’ philanthropy, and he has made a pledge to spend $100m of his fortune reforming the US public school system. In 2020, he and Quillin gave $120m to fund scholarships for black students through a partnership with two historically black colleges in the US and the United Negro College Fund, and he also spent $20m building a training facility for teachers. “Being an entrepreneur is about patience and persistence, not the quick buck,” Hastings told Inc. in 2005. “If we can transform the movie business by making it easier for people to discover movies they will love and for producers and directors to find the right audience through Netflix, and can transform public education through charter schools, that’s enough for me.”
The streaming wars
Netflix has indeed transformed the movie industry. Not only the way films were delivered, but also through the content itself. In 2012, the business produced its first TV series, House of Cards, which went on to receive over 56 Emmy nominations, winning seven. Since launching the political thriller, a stream of critically acclaimed successes has flowed from Netflix’s original content production machine, including Stranger Things, The Crown, Bridgerton and Sex Education.
Netflix has proven it has significant strengths in the market, despite losing subscribers
Netflix’s streaming service has now expanded into 190 countries, and the business’s next aim is to become content king. In the second quarter of 2022, Netflix commissioned 160 film and TV show titles in total, with most of the originals being produced outside of the US. “What’s next is becoming a great Turkish developer of content, becoming a great Egyptian developer of content, and sharing that with the world,” Hastings told Variety. Indeed, content is one differentiator in the ongoing streaming wars. “Netflix has proven it has significant strengths in the market, despite losing subscribers. It has the content and easily navigable interface to keep subscribers engaged,” Kantar’s Sangari said.
The use of streaming services continues to grow. The proportion of US households with streaming services reached 88 percent as of June 2022, according to Kantar, with 113 million households accessing streaming products. According to the research, the average household has five subscriptions to streaming services. But Netflix’s competitors aren’t confined to its streaming peers, according to Hastings. In 2017, Hastings said Netflix’s biggest rival wasn’t Amazon or traditional broadcasters, but sleep. “You know, think about it, when you watch a show from Netflix and you get addicted to it, you stay up late at night,” he said. In 2019, he said video games were causing the business to lose more subscribers than rivals. “We earn consumer screen time, both mobile and television, away from a very broad set of competitors. We compete with (and lose to) Fortnite more than HBO – there are thousands of competitors in this highly fragmented market vying to entertain consumers.”
But Hastings isn’t afraid of a little competition, and he is confident of Netflix’s position, even as rivals like Disney+ make bigger gains in subscribers. In a recent letter to shareholders, the business effectively said it was winning the streaming wars: “Our competitors are investing heavily to drive subscribers and engagement, but building a large, successful streaming business is hard – we estimate they are all losing money, with combined 2022 operating losses well over $10bn, vs. Netflix’s $5bn to $6bn annual operating profit.”
Hastings said it himself: he isn’t in this for the quick money. He wants to build a “world-changing” company – one subscription at a time.
