To say the world has been going through a period of instability of late may seem like an understatement to many people.
Conflicts in the Middle East and Ukraine continue to rage, and the global economic landscape is always in dire need of good news after a few years of recession in large parts of the world.
Instability is nothing new to the globe, however, and is nothing new to its financial institutions either. Years of various crises, whether political, economic or social in nature, help to sort the financial wheat from the chaff to some extent – only the resilient carry on after all.
Any financial institution with serious ambitions for long-term success and stability needs to factor geopolitical factors in mind. Economic stability, a military conflict or new political policies can have domino effects from country-to-country, region-to-region, impacting everything from stocks and shares, to crypto markets and cash management.
Learning from the past, preparing for the future
“There is no question that the geopolitical situation has changed somewhat, and that has become increasingly more difficult for an area like cash management,” says Allan Kissmeyer, Global Head of Cash Management at SEB, a Swedish multinational bank.
“Cash management is very much about facilitating trade, global trade, and when you have a polarised world, trade becomes difficult.”
Polarisation as a result of geopolitics can be seen in financial regulation, Kissmeyer explains. When different regulating bodies start using the sanction tool, it obviously has implications on banks trying to facilitate trade related cash flow.
Finance firms need to ensure that political and regulatory driven factors are taken on board, in tandem with the ongoing need to modernise legacy systems and foundations. This is ‘quite a massive challenge’, says Kissmeyer.
As already discussed, geopolitical challenges are nothing new – these difficulties are as old as the financial sector itself. For as long as banks have existed, they have had to contend with wars, financial crashes, natural disasters, changing governments and ideologies, to name some of the most notable.
In recent memory, the COVID-19 pandemic is the most obvious example of a major global disruption event. Casting our minds back a bit further through, the 2007/08 financial crisis was a major learning point for global finance.
In Kissmeyer’s experience, the 2007 financial crisis ‘made everyone aware’ that the Nordic banking network needs to be resilient, noting that his senior role at one of the region’s biggest banks means the Nordics is an area he speaks with most confidence on.
“It created a common understanding in the financial community that we needed to have very robust Nordic banks in place, system critical banks,” he says.
“That was a task where the authorities were working very closely together with the different banks, and I think that there was a lesson learned from that. I think we are at a much better place today than we have ever been before with the Nordic banks, being better capitalised than basically any other banks around the world.”
Nordics are ‘more prepared than ever’
Nearly 20 years on since the 2007 financial crisis and four years on since the world woke up to locked down cities and mandatory facemasks, global finance finds itself facing a raft of new geopolitical challenges.
Russia’s invasion of Ukraine is coming close to the end of its second year, and unfortunately appears to be no end in sight.. Meanwhile, the world’s eyes remain firmly glued to the Middle East where one year after the Israel-Hamas War began, instability has spread to Lebanon.
The focus of the financial services industry may be even further east, however – to potential instabilities concerning China, a country whose geopolitical relations with the West have been at something of a low point in recent years.
For finance, banking and payments, political issues arising with China will undoubtedly prove troublesome. China’s role in the world economy is huge, with the country hosting the world’s second largest economy by GDP, three of the world’s 10 largest stock exchanges by market cap (Shanghai, Shenzhen and Hong Kong) and being the world’s largest exporter and second largest importer.
“Everyone’s worst nightmare is further politicisation when it comes to global trade relations. For example that we see additional measures taken – from a trade war point of view – in regards to China. Another main concern is the growing tension around China and Taiwan, obviously,” Kissmeyer says.
“It is very difficult to talk about global trade without having China in the equation, that is probably my main concern.”
It may seem like an obvious statement, but for most firms the geopolitical landscape will vary depending which region they are located in and focus on. As noted above, SEB’s home market is the Nordics, though the bank maintains a strong global presence.
Whilst some other Nordic banks have opted to withdraw from global markets, SEB maintains a strategic network across various regions of the world. The firm’s international focus, its Head of Cash Management reflects, means SEB may have to navigate challenges that other Nordic banks are not as exposed to.
However, Kissmeyer expresses a lot of confidence in the Nordic banks’ resilience against future geopolitical uncertainties, having onboarded the lessons of 2007 and subsequent troublesome events – but Asia remains an area of concern, one which financial stakeholders may want to keep a close eye on.
“I can hand on heart say we are more prepared than ever, with a very strong capital base, very strong risk functions in place, and lessons learned from previous crises,” he reiterates.
“The picture is somewhat different when you look at the Asian banks, where I think you will see, depending on what direction the economy goes in, upcoming challenges.”
Where do we stand on standardisation?
Geopolitics is not the only emerging challenge banks have to contend with, however – though challenge may not always be the most appropriate word. The demands of changing technologies, modernisation, and standardisation, are being felt across the global finance sector.
One of the biggest standardisation initiatives underway right now is ISO 20022. The long-running process to adopt ISO 2022 is nearly complete, having first been introduced in 2004 and the final deadline and timeframe for adoption occurs next year.
There are two common opinions throughout the financial services world about ISO 20022. Firstly, that it is a necessary measure needed to modernise and standardise contemporary banking, and that in the long-term its impact will be positive.
“This is one of the few examples where the community worldwide has agreed and moved forward in the same direction, being fully aligned,” Kissmeyer summarises. “It is not very often that we can get the full community to agree on something as massive as this.”
He continues: “For banks this is absolutely essential, because cash management is all about standardisation, it is a marginal business. You need to create a happy flow and any deviations from this are time consuming and cost a lot of money. Standardisation to secure the same format across the line is absolutely key.”
The second widely held view is a little less optimistic, this being that some banks may struggle, and that many are already struggling, with adopting the measure’s provisions. This is not great news for the banks involved or for the system as a whole.
The challenges banks are facing are as varied as you’d expect in such an all encompassing and far reaching industry. Implementing the ISO 20022 format into legacy IT systems is a central challenge to the underlying payments infrastructure of commercial banks and central banks alike, Kissmeyer observes.
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Massive investments are subsequently required to remedy such challenges and upgrade legacy systems to meet the new format. Investments in areas like data enrichment often need to be explained to clients, and as for some companies, the more subtle changes going on will not appear like a revolutionary upgrade.
“I think some banks will struggle, some banks are struggling for sure,” Kissmeyer says. “You will see a stepwise adaptation to this, where the leading banks will come out first. For this to be successful we need everyone to be onboard, receiving and sending.”
Many banks will understandably look to new and emerging technologies to assist with such challenges – Kissmeyer highlights Artificial Intelligence (AI), one of the biggest talking points in payments technology right now, as a particularly exciting innovation.
Technology is not a silver bullet to all problems, however. With ISO 20022’s deadline approaching and a myriad of geopolitical challenges ever present, financial institutions need to ensure forward planning and preparation for any changes, in any region, is as fine tuned as possible.
