Banking isn't sexy; its future is sustainability, CBDCs the future of payment, Cash won't die, Open banking is a glass half empty, and the Petroyuan is coming!
Pandemic spending shows why cash isn't going anywhere even with CBDC!
1. Banking isn’t sexy; its future is sustainability
2. CBDCs: the future of payments
3. Pandemic shows why cash won’t die
4. Open Banking: glass half full or empty?
5. Petroyuan rising, USD co-hegemony!
This week’s art: Motor boat at full speed, Benedetta 1922/1922, Galleria d'Arte Moderna Rome, Italy. A masterpiece of Italian Futurist painting, describes from an elevated viewpoint the passage of a motor boat through a calm sea or lake. Frankly, I couldn’t find anything that matched this week’s stories, so I went with this one because I simply love the image! I have a copy of it in my study. The yellow and blue reflections off of still water are fantastic.
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1. Banking isn’t sexy; its future is sustainability
McKinsey goes all in, putting banks on a path to sustainability to pump valuations, but it won't be easy!
McKinsey takes a look at banking and doesn’t like what it sees: “Half of the world’s banks trade below book value.”
“That so many banks have such low valuations is a clear sign that the banking industry lacks a future-proof business model and the growth premium seen in other industries.”
Banks aren’t sexy, and in comparison to their digitally enabled fintech brethren, their prices are taking a beating.
Bank performance is tied to 4 key metrics:
This year, if your bank is in the EU or China it’s game over. “Overall, we find that
a bank’s primary business location now accounts for 68 percent of its valuation.” Mckinsey also notes that the notion of “emerging markets” in banking is dead as all markets now perform independently.
"Well-valued specialist players and fintechs are—not surprisingly—active in banking products that generate profits, including deposits, payments, and consumer finance. The result is a two-speed system in which traditional banks are left behind." But McKinsey demurs to say what banks should specialize in.
🔹Segmentation and demographics:
Here, McKinsey tells bankers what they already know. “Analysis suggests that, in retail banking, disproportionate revenues tend to be locked in specific segments." Who could disagree?
Go big or go home. “50% of banks that are destroying value (price/book<1) control some 70% of assets! So those banks with P/B>1 with 30% of the assets should go on a buying spree! Asset-rich institutions may not agree.
Can sutainability save banks?
McKinsey's solution to growth is sustainable finance which is entering its “next era.” Funding needs for a net-zero transition could exceed $4.4tn annually through 2030.
From this $4.4tn there are three profit opportunities for banks through 2030:
Direct financing opportunity of $820bn/yr.
Corporate investments, $1.5tn/yr.
Debt investment revenue of $100bn/yr.
Are these numbers real?
Are these numbers real? We don’t know, and that's the problem. How will banks with limited sustainability expertise jump into this market? It won't be easy. I don’t doubt that sustainability will be an important component of banks’ business in the future.
What I think is debatable is the time frame for this transition to occur. McKinsey says it’s happening now, and it is, but as we’ve learned with going digital, turning the hulking ship of banking takes years.
And just in case you’re wondering, China’s banks were in first place with the global worst banking performance. That said, even with pandemic lockdowns and the property market decline, banks are healthy.
Banking is in a transitional period and needs to learn new tricks that show a more exciting future.
McKinsey is betting on sustainability as a path to higher valuations, but my take is that McKinsey is being optimistic.
Sustainability is important, but it's not clear how long the market will take to develop.
For now, watch for M&A activity.
2. CBDCs: the future of payments
The Future of Payments is CBDCs, and like them or not, they'll be 24 of them in 2 years.
The OMFIF’s Digital Monetary Institute and SWIFT did a great job on this paper. It is a fabulous read, and kudos to both!
That said, the paper focuses on CBDC interoperability, with the subtext that standardization, potentially on SWIFT’s designs, should be the goal of the CBDC builders.
Twenty-four CBDCs will launch within one or two years, and thirty-six within five!
This is, at best, an unrealistic expectation when confronted by the highly specific CBDCs being developed at a blistering pace. Of 100 central banks surveyed, 24 will launch within 1-2 years and 36 within 5 years!
There are no standard designs for CBDC, which isn’t to say that interoperability isn’t important, but are the US and China really going to cooperate on CBDC anytime soon? More importantly, should nations building CBDCs slow down and wait for standards, and if so, whose standards should they follow? That’s why so many nations are simply going it alone and designing what works for their unique needs.
The OMFIF should read BIS reports!
The OMFIF's central thesis is that it is surprising that CBDC design lacks an emphasis on cross-border interoperability. Doesn’t it read BIS reports?! The BIS surveyed central bankers' CBDC motives and found that cross-border transfers ranked 5th out of 5 for emerging markets and 3rd out of 5 for advanced nations.
When nations build a CBDC, domestic payment efficiency is the No. 1 priority for both emerging and advanced nations, according to the BIS. Proving that domestic concerns are paramount in CBDC issuance.
I loved this report here’s my take by chapter:
1️⃣ Cross-border payment:
CBDC interoperability is important, and the paper does a great job of pointing this out! Still, the chapter's focus is on ISO 20022 and SWIFT. That the chapter doesn’t discuss m-CBDC in Hong Kong is telling!
Read pg 20, where it references regional solutions and think of Asia!
2️⃣ Crypto and emerging markets:
What can you say? The dream that crypto will be the savior of emerging markets won’t die. It is cruel to put volatile crypto exchange risk on the shoulders of the most vulnerable or further dollarize emerging markets with stablecoins.
3️⃣ CBDC promise and peril:
The only chapter that covers the BIS multi-CBDC projects Dunbar, in Singapore, and m-CBDC in Hong Kong! Odd that the world's only functioning cross-border CBDC transfer systems get so little coverage!
4️⃣ CBDC cybersecurity:
Big and important topic! Still, it is important not to lose sight that Alipay, Visa, and Grab already tackle this problem daily. It is solvable.
5️⃣CBDC and the Metaverse:
The author doesn’t dare mention the potential for CBDCs in the metaverse! Given metaverse and Web 3 proponents' desire to shill crypto, this very deliberate slight to CBDC is no surprise. As a fully digital payment method, how is it that CBDC can be ignored?
CBDCs are coming! We'll have 24 in 2 years.
Interoperability is good, but a tough sell to c. banks primarily focused on domestic concerns!
Regional CBDC trading in Asia will be first to take off!
3. Pandemic shows why cash will never die
Four KEY payment trends from the pandemic show how cash isn’t going away but do hint at our cashless future!
The BIS once again shows us the future in a great analysis of our pandemic cash use!
Look at what's here to stay:
1️⃣ CASH WILL NEVER DIE Above, Pg 3, grph 2, Pg 8 grph 3
Hey, you thought this was about going cashless? Guess what look at the explosion in cash in circulation during the pandemic! Surprised? When the going gets tough, we all want the psychological comfort that ONLY a wad of cash can bring! Crypto or CBDC won't cut it.
Still, despite people’s desire to hold cash for emergency use, it's clear that during the pandemic, cards and payment apps ruled! The pandemic hastened the ongoing shift away from cash for most people. Pg 10 grph 6, shows how people shifted away from cash in the past decade.
Cash’s future is secure! It is a safety blanket that most of us need during difficult times and why I say “cash will never die.”
2️⃣ CONTACTLESS CARDS, Pg 9, grph 4
Contactless isn’t going away. While the fear of covid may be over, people want the convenience of touching or tapping.
Does anyone really want to swipe a card anymore? Not really. The problem is that card-based contactless payments are rife with fraud. Why not go with QR or Apple and Google Pay-style wallets with better security? The cost of contactless card fraud is a known problem, and we only have it because card companies want you to carry around pieces of plastic forever!
3️⃣ PAYMENT APPS Pg 10, grph 5
During the pandemic, payment apps were the only way for many to pay, and the number of downloads exploded. Post-pandemic, guess what? People aren’t giving them up! Both the number of users and weekly active use show that payment apps are holding on to the market share they took from cash!
Payment apps were the undisputed winner in the pandemic cashless competition! Not only did they capture market share, but they held onto it. Showing once more that once people go cashless, they don’t want to go back!
4️⃣ CBDC! Pg 11, grph 7
The BIS also notes the rising interest in CBDCs during the pandemic! Clearly, with a large percentage of the population switching to digital payments investigating a lower-cost and more inclusive means of payment makes perfect sense!
Still, while the pandemic may have given CBDC a boost, the graph of central bank CBDC speeches shows a big rise that started pre-pandemic and, in my view, is more strongly tied to the rise of crypto and an idea whose time had come!
Cash provides psychological peace of mind that crypto and CBDC never will!
Yes, even I, the pro-CBDC guy, have a couple of thick wads of cash in my desk drawer! It feels good! And that’s why cash isn’t going away!
Payment apps were the big winner during the pandemic. New users are still using the apps.
Contactless payments show us that cards' days are nearing the end. Why tap when phone-based wallets are far more secure?
CBDCs aren’t going away….but you already knew I’d say that!
4. Open Banking: glass half full or empty?
A FANTASTIC Banking Survey shows that open, and embedded banking are either “a glass half full, or half empty!” You be the judge!
Finastra’s open banking survey is a fantastic read that ties together many articles I’ve written in the past months! It’s a holiday present come early!
Finastra shows that the efforts of management consultants like McKinsey to push banks into “The Embedded Finance Revolution” are having an impact for some, but not all. See my take on Embedded Finance entitled “Embedded Finance is Living Hell for Bankers” here on substack! This issue reviews McKinsey’s and The Economist's take on the topic. It isn’t pretty!
47% say that “management or decision makers are stuck in old ways of thinking."
You tell me if the glass is half full or half empty?
🔹 OPEN BANKING/FINANCE:
According to Finastra 60% and 48% of bankers surveyed say that open banking and open finance are a must-have.
That’s great, but it still means that 40% and 52% still haven’t gotten the message!
My take: The glass is half empty!
🔹 EMBEDDED FINANCE:
At first, you’ll think the statistic for embedded finance is great news but wait. Embedded finance and "Banking as a Service" a joint category, scores a massive 82% saying that it is "expected/demanded by our customers."
Here's the kicker! Only 35% are improving or deploying BaaS, and 33% pursuing embedded finance!
Here’s the irony for embedded finance. More than 4 in 5 agree that these propositions offer a means for institutions to grow (84%), and a similar proportion agree that they reduce their operating costs (83%).
Half full, the intent is there, but it's the delivery that counts!
Cloud gains are impressive! Just over half of the institutions (51%) have all or most of their software stack on the cloud, with a further third (32%) splitting equally between on-cloud and on-premises. A full 83% are on cloud or hybrid cloud! Impressive!
So what’s holding banks back? It turns out that for 96% of financial services organizations (95% in 2021), existing regulation remains a stifling force against innovation whether related to culture or cost!
See this article by Finastra and Money 20/20 specifically saying that US banking regulations hinder bank modernization. (https://bit.ly/3VVSsP5)
We talked about ESG in the article above, and 86% see supporting the environment and wider corporate social responsibility initiatives as important. But the survey is mute on how many are implementing these policies. Is this greenwashing?
Does the glass even hold water?
Bankers get it, the world is changing, but when 47% say that “management or decision makers are stuck in old ways of thinking," there’s room for improvement!
Add to this regulatory barriers and cultures that are slow to change, and it's clear that bank transformation will take a while.
The survey gives me reasons to be guardedly optimistic. How about you?
5. Petroyuan rising USD co-hegemony?
A polarized world where the US dollar and Chinese yuan exist in co-hegemony is nearly upon us! And after meetings in Saudi Arabia this week, a Petroyuan is coming.
When I started writing three years ago that we should watch for the rise of the yuan and wrote in “Cashless” that the digital yuan would play a role in de-dollarization, I was largely written off as either brainwashed or deluded.
Now with the IMF documenting the fall of dollar reserves and papers like this one from Allianz Trade, the rise of the yuan seems positively mainstream. Certainly, neither the IMF nor Allianz Trade is a “sympathizer.” Add to that this week’s meetings between the Gulf States and China in Riyadh, and it’s clear that a Petroyuan is coming. It’s not if but when.
Allianz makes its case clearly:
🔹 Since 2009, the CNY’s role in the global financial system has nearly doubled, just surpassing the JPY and GBP.
🔹 Allianz trade data confirms that 30% of trade with China is now settled in RMB compared to 20% two years ago (Aug 2022).
🔹 For “CNY-Bloc” countries, increasing interlinkage with China has contributed to reducing exchange rate volatility.
🔹 Digital yuan as a way to leapfrog? China has plans to combine its widely used CBDC…to accelerate the CNY’s role in the global financial system.
🔹 There is the underlying sentiment of unfairness, where emerging markets are exposed to financial shockwaves coming from the US.
🔹 Still, the path toward a polarized financial system is not straightforward. China’s capital account liberalization and domestic problems are issues.
Fintech shows the transition
So what will the transition look like? Clearly, the world’s assets are not going to revalue to RMB overnight; it isn't a binary process. When we look at de-dollarization, we need to think of it as we do fintech.
Fintech showed us all quite clearly how new players can influence incumbents. WeChat and Alipay are perhaps the best examples, as they forced banks to go digital to improve service but didn’t eliminate them or cause unsurvivable disruption.
This pattern was repeated in the West, where fintechs haven’t “disrupted” incumbents but have changed the playing field to the benefit of consumers.
Similarly, I don’t think that the yuan or digital yuan will “disrupt” the dollar. The media’s fixation with the yuan “toppling” or “beating” the dollar is misplaced. Instead, watch as the e-CNY subtly changes the playing field by bringing competition with the dollar monopoly that benefits everyone. Just like fintech, the yuan doesn’t need to “win” to have a significant impact. I expect it will be slow but significant.
It's already happening. The US’s CBDC program is the best example. The Fed loathes CBDC and is only pursuing it to keep up with global developments largely inspired by China. The playing field is already changing!
Global pressures are mounting that will create a “polarized” currency system.
Don't think in binary. It won’t be the USD or Yuan, but both.
Fintech shows how by changing the “playing field,” smaller players can influence far larger competitors.
Discontent over USD-centric systems from chip wars, sanctions & rate rises should not be dismissed.
China’s meetings with Gulf States in Saudi Arabia set the stage!
See how deep the “cashless” rabbit hole goes!
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Rich Turrin is the international best-selling author of "Cashless - China's Digital Currency Revolution" and "Innovation Lab Excellence." He is number 4 on Onalytica's prestigious Top 50 Fintech Influencer list and an award-winning executive previously heading fintech teams at IBM following a twenty-year career in investment banking. Living in Shanghai for the last decade, Rich experienced China going cashless first-hand. Rich is an independent consultant whose views on China's astounding fintech developments are widely sought by international media and private clients.
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