The macroeconomy, the impact of going digital and an ESG focused future

Chris Skinner discusses how macroeconomic trends affect the financial industry and the short to medium-term outlook for the financial world.

What is the current macroeconomic outlook?

The impact of several global events, including the COVID-19 pandemic and subsequent lockdowns, along with the ongoing war in Ukraine, have impacted the macroeconomy in the past several years. At the time of publication, global markets are slowing, with the threat of a recession looming on the near horizon.

"I focus on the future from a political, economic, social and technological perspective," says Chris. "So, though not an economist, I would say that the current macroeconomic landscape is very recessionary; we're in a downside market where everyone is selling and no one is buying."

Despite this outlook, it may represent an opportunity for individual investors and companies. Within the payments industry, the key to stability and growth in the short to medium term may lie in maximising the value they provide their customers and growing their consumer base, as Chris suggests.

"This possibly represents a great moment for those with assets to invest, and the question from a macroeconomic view would be, therefore, where would you invest? As a result of my specialisation in FinTech, finance and technology, I would say it would be to invest in companies with a growing consumer base."

With the financial world so fragmented due to diverse technological developments and a rapidly expanding range of payment types and digital services, offering standardised services may be the key to retaining and growing a customer base and weathering the potential storm ahead.

How is digitisation across industries, but especially the finance sector, impacting the macroeconomy?

Digitisation is a major driver of change across the payments and finance industry. It presents challenges for companies that rely on legacy systems, as outlined in the 2022 World Payments Report. Digital services have become an integral part of our lives, especially in the wake of COVID-19 lockdowns and the global shift to remote and contactless interaction. This societal shift and the rise in popularity of digital currencies and digital payment platforms have put pressure on banks and financial institutions to meet the demands of their modern customers efficiently.

This diversification of product offerings and solutions has challenged many players in the payments world, especially regarding balancing resources between innovation, development and efficient provision of services to customers.

“Diversification is a strategic decision about trying to retain your true integrity or be a challenger in some markets," says Chris. "This is strategic decision-making. And both strategies can work in terms of being a partner and a competitor. But you must be clear about where and why you're competing."

A change in mindset is needed for companies to fully embrace digital transformation and its challenges and benefits - concepts such as open banking, blockchain currencies and the much-discussed metaverse challenge traditional notions in finance.

"Most traditional companies do not understand digital operations because they approach it as a project," suggests Chris. "They create a project to transform the company into digital, often delegated to a Chief Digital Officer with a team and a budget. And it becomes fairly irrelevant. It becomes just another function. This is why most digital transformation projects don't work - they're not transforming the company to be digital, it just becomes part of a job function."

How are consumption habits evolving? In what ways is this linked to digital services and economic adaption?

Thanks to rapid digitisation and technological innovations, consumption habits have evolved. Even before the global COVID-19 pandemic ushered in the rapid adoption of remote and contactless services en-masse, the way society consumed products and services was increasingly guided by access to digital technology, such as smart devices.

Today, subscription services and on-demand products dominate the macroeconomy. In turn, these digital products have required new and innovative ways of payment, along with opening wider access to previously niche concepts, such as cryptocurrencies. Now, digital economies are gaining traction, with concepts such as the metaverse having the potential to support digital workforces and e-commerce platforms.

"In April 2020, the pandemic contributed to the UK having a total of a million downloads of banking apps, with a 12% rise in usage," says Chris. "This was sustained through most of the pandemic because people couldn't go out. So, Amazon, Netflix and other such companies had a great impetus, which I think we've seen the reverse this year due to multiple factors, specifically mounting energy prices, the access to capital markets and the weakening of currencies. So, we're in a really interesting time now if you're a futurist. But, the question is, where are we going? It's not economically clear."

So are digital services here to stay?

The global lockdowns and restrictions resulted in a substantial uptake in digital services across industries, including payments. Much like the arguments for the continued importance of cash as a payment option, some have questioned whether the pace of digital development can be sustained or whether long-term digital services are here to stay.

Despite growing economic and political uncertainty, Chris believes that the importance of digital services and the level of investment by businesses makes them invaluable to companies seeking to expand their customer base. In other words, they are here to stay.

"I've been a huge fan of the idea of a globalised network and that the world is becoming one. I think the internet and the wider connectivity network brought by our mobile systems and apps make us feel like we're coming together. But now things are changing. As a result of what has been happening with the economics of the world and politically, we're very much seeing an increase in localisation.

Despite this, digital Services are here to stay. We see that most fintechs are not confronting the whole sphere of everything to do with banking and finance. They're engaging in specific processes. Whereas a bank currently thinks it can provide everything, they fail compared to a fintech that specialises in certain areas of the supply chain. Parts of the payments supply chain are being transformed by technology and it is here that the opportunities for disruptors and established providers lay. We see this happening everywhere.

For this reason, some years ago, I said that the best strategy for a bank is to be an integrator. The best way to optimise and take advantage of new financial processes is by partnering with the best breed of those processes. This will allow effective digitalisation without costly development when they transform themselves."

How does the future look? What will be significant drivers in the economy that may influence the payments industry?

Future developments can be difficult to predict accurately. The world continues to change and evolve economically and politically, all of which impact resources available for innovation and technological development.

 What can be stated with accuracy, however, is that digital services will continue to dominate the payments industry. Despite the fragmentation of services and increased competition, long-term, the payments landscape is moving towards integrated and standardised platforms capable of supporting the full range of services and products that the modern consumer demands. Alongside this, wider global challenges influence business decisions, whilst regulations guide companies towards a more sustainable, ethical future.

"Over the last 25 years, we've discussed how technology is challenging and impacting the financial industry,” states Chris. “I was involved in many meetings in the 1990s, for example, where people said that technology would destroy finance as we know it, and it hasn't. Most companies have been around for 100 years and they're still here. Think of Charles Darwin's quote: 'not the fittest or fastest or strongest survive, but the ones that are most adaptable to change.'

Then you have to ask yourself, what change do we have to adapt to? And in the last decade, most of us have said we must adapt to digital transformation or digital requirements. I think that's finished. The discussion has been about using digitalisation to support the United Nations sustainability goals and the ESG agenda.

ESG is not just about climate emergency and being green; it's about diversity, supporting ethnicity, and ensuring that we run ethical companies. I believe this will be a significant driver for the next decade; how to use technology to deliver on the balance of stakeholders rather than shareholders."

As Chris suggests, technology challenges companies to do better, much like society now stands as the challenger. With these joint demands, the future decade will be dominated by adaption, transformation and alignment with a broader social push towards a better future for all.