The global impact of COVID-19 on banks, challengers, fintech: an interview with Richard Turrin
Last Friday I had the honour to discuss the current situation, in a global context, as well as on financial services with an expert like Richard Turrin.
Richard is a big voice on social media, a true influencer in the domain of innovation and financial services. He is the author of “Innovation Lab Excellence” (more on that at the end of the interview), and he has decades of experience in banking, banking technology and fintech.
On top of that, he is an American living in Shanghai, so he has a unique view on the global impact of Corona.
You can see or hear the interview here. If you like to read it, please scroll down:
Richard, how are you doing and how its life over there?
Richard: “I’m great, and part of it is just dumb luck. I’m going to tell a story because I think it is relevant to everybody. I live in Shanghai, but a few days before Chinese New Year I left for Taipei because my wife’s family is from Taipei. So, we go home for a family reunion for the New Year.
I was fortunate to be out of Shanghai during the worst part of the Coronavirus and we waited in Taipei for six weeks and we came back last week. What’s amazing is how fast everything Changed in China and how it adjusted itself because of Coronavirus and how they used digital systems to control and monitor.
At the same time, what was amazing for me is that when I came back to Shanghai, it has actually become one of the safe places to be in. when it first hit, we were happy to be away, but now both my wife and I are happy to return. We have excellent public services, the apartment complex where I live now everyone that comes needs to have a pass, they need to get their temperature. It is all very well controlled and monitored. So, your safety is relatively high.
Here is the irony: the only new Corona cases for the last 2 or 3 days on a row were imported by people flying in from Europe of the USA. That is the changing world we live in. Travel and all of the restrictions were very relevant for my wife and I. We live them and ironically we are very happy to be back in China.”
I see. How is the crisis still impacting the economic situation over there? The current situation in China is a bit of a black box for us in Belgium because all of the attention in the news is on our direct environment of course.
Richard: “It is pretty simple: walk in the streets of Shanghai and the streets are, I would say, empty. Let’s say 10% or 20% of normal traffic, so people are going out. The mall, that is right across the street from where I live, is empty.
Now the coffee shops where I go to are fortunately open. That’s the good news: I can go to the coffee shop, I can go out of the house, but there 6 people in there. So yes: it is impacting everyone.
I have not a basis to talk about manufacturing, except for what I read about, and I can tell you that the skies of Shanghai that you see are crystal clear blue. Electricity is coal fire, so this means they are not producing electricity and whatever local factories in the periphery of Shanghai there are, they are obviously not producing their normal amount.
Yes, it is a completely different world and, based on Bloomberg, the numbers of the economic situation are bad, not just in China. Many places will be hit by this.
Now, we are going to start to talk about digital things. China’s solution of lockdown was widely criticised in the press in the early days. It was called draconian, it was unfair, it was bad. Right now though, it seems fair to say it was a pretty good idea.
I understand there are a lot of caveats, particularly China’s early response on the virus. Right now, China has this under control and if China can do it, the rest of the world can do it as well.
What’s interesting about China, and this is interesting for our line of work, as we work both in digital transformation, is that from the very beginning the Chinese government immediately reached out to the Big Tech companies. That includes the likes of Tencent, who runs WeChat and Ant Financial, who runs Alipay. They said: hey, you are digital, you can be part of the solution.
What’s very interesting to me, and I posted this article on LinkedIn, is that when I came back to China, I was immediately told at the airport, before I got to China, to scan a QR-code. Thumbs up to QR-codes, because every airline on the planet flying to China can simply print out a QR-code and ask you to scan it.
We were also all told to download a health app that was part of the mini-programs of Ant Financial’s Alipay, which everybody uses here. There was also a health monitoring app that was part of WeChat. Those are 2 of the pillars of controlling.
When I return home, the WeChat app told me to input twice a day my temperature and after a week of monitoring it said: “OK your temperatures are fine, you had a week of monitoring and you are now clear, no problem.”
The Ant Financial app was different. This one looks at where you’ve been and where I’ve been was outside of China. It also looks at who you’ve been around with to determine you’re colour code red, yellow or green. This means that the app gives you a categorisation. You push the button, your picture comes up, with a QR-code and if the QR-code is green, you are free to travel in Shanghai.
If the code is yellow, you have limited travel access, in case of red you must stay at home.”
Do you think this will also impact the way we look at privacy in the future?
Absolutely, and there is no question that this is a major privacy issue. Google right now, is looking at apps that have some ability to look at where people are going, but perhaps not with the same level of personal tracking.
I agree: China is unique, no argue. I understand that the app China uses, may not be directly transferable to the West. But we have a pretty unique pandemic situation right now.
Here is how China looked at it: at its peak, China had more than half of the population, around 750 million people, under restricted travel. By giving this categorisation app, they were able to use the scalpel to determine who is at risk, who is at low risk and who is free to move.
This allowed hundreds of millions of people to begin to resume something that resembles normalcy, not completely of course but something closer to that. That is a good thing: to helps the economy, it helps people avoid what you are currently living through, and that is staying in your home.
So I understand the privacy issues here, but I’ll toss this to you then. Would you subject yourself to online tracking if it allows you to visit your local coffee shop today?”
I probably would use online tracking, especially with the guarantee that it is exceptional and short term.
Exactly, I fully support that, and I fully understand that. The Chinese apps are not directly transferable, but you would be willing to give up some privacy to regain the ability to travel again.
With the most recent technology, it is perhaps even possible to anonymise the data, so that only you know about your data, no?
I haven’t looked today, but Google’s quote from 2 days ago was that they are working with the government to investigate on how to anonymise whatever position data they may, or may not use to help in this crisis.
What’s valuable for the West is to say: China was the first to counter Corona, with digital apps. Have a look at which parts were used, leave out the bad parts and see what is possible.
The major point is that the Chinese government, very early on, recognised digital as a potential solution and immediately engaged tech players to help them categorise people and to monitor the Coronavirus. I understand that it’s hard, no one likes it, I don’t like it but it works. I can go to my coffee shop and Shanghai has 0 infections for 3 or 4 days, apart from those that were imported.
Today the world is in an economic crisis I have never experienced in my relatively recent life (and I am 35 years old). You recently quoted a study by Accenture that showed that only 43% of consumers trust their bank to look after their long-term financial well-being.
On the other hand, you hear increasingly more voices that in 2008 the banks were the ones creating the crisis, this time it will be the banks to resolve the crisis. Do you think this number of people trusting banks will go up again, now consumers look for safety?
That is a very interesting question. Let’s look at it particularly with respect to challenger banks, neobanks, digital banks. You got this new concept: digital banking. They are right now trying to position themselves and grab as many clients as they can.
So an increasingly bigger part of the population says: hi, we don’t trust our banks, we don’t really like our banks. After 2008 that is not really a surprise. We don’t like big banks, we don’t like the fees, we don’t like the penalties. People often refer to it as the “Fine Print”, the service charges.
You can look at this in two ways. One is that there will be a flight to safety and anyone afraid for the wellbeing of their savings will run from neo banks because they want the safety of a large institution that has been around for a couple of hundred years.
The second way to look at it is that we are all in the middle of home lockdown. What’s interesting is that all these neo banks are 100% digital, including in China. We can all start using these financial institutions without literally leaving our house and without anyone ever asking us to come to the branch to sign something.
Well in Belgium, most incumbents are already in that stage as well, including digital onboarding in many cases.
That is a really good point because what happened in the last couple of years is that incumbents have spent a lot of time and money upgrading their digital services.
That said, if you look, and I have an account at a smaller local American bank, and they are very undigital. Literally, my father knew the president, so I became a customer as well. I respect the bank, but they are digitally very way back. How are people going to deal with them if they are not digitally sophisticated?
You got sort of this balance of 2 things going on right now. A flight to safety has not manifested if itself yet, although the market has obviously crashed. But currently, this is not a banking problem, there is no issue yet in terms of safety of the deposits, so I don’t see this as a banking crisis like in 2008 that makes people terrified to keep their money in the bank.
Indeed, now look at it differently: in the Netherlands and Belgium, you start to get messages from banks to be supportive, to help customers in the hard times of the crisis: if you cannot pay this month, try again a month later, without a penalty, use contactless because it is more healthy than cash. They start pushing more for digital services as well.
Here is the good news for you and me, as we are in the digital bank business. There is no going back from digital banking. The concept that you go to your branch is going to be reduced. People will no longer be interested in cash.
In China, they are taking away the cash from the Hubei province and they are burning them. The US is taking pallets full of 100-dollar bills that are coming back from China and they are sticking them in quarantine for 6 weeks.
Let’s face it: we are going cashless and we are going cashless faster than ever because we don’t want the dirty money.
Let’s come back on that later one. Let’s first look at the fintech industry: the Fintech News is still dominated by recent numbers of record investments and acquisitions. On the other hand, we are currently confronted with a cool-down like never seen before. Can we expect a bloodbath in the Fintech industry, with a few Giants as survivors? Or is that vision too dark to be true?
Not too dark to be true. Let’s have a look at who will be the winners and who will be the losers in this new world we’re living in.
Let’s first have a look at the potential losers, of which I think neo banks risk to be part of it. That is not because of the services they provide, the services are fine. The problem is they are paying out to buy customers.
At least in the United States, but in Europe are well, they are paying higher rates of interest. We’re in an awful low-interest-rate environment. I did some calculation for US neo bank and it came out that they are losing on average 1,5 percentage points on deposits for every new customer. How are you going to pay for it? OK, if you have what we had until 2–3 weeks ago, were healthy deep pockets of investors that were happy to fund them with additional cash so they could buy more clients and that interest spread was cheap, who cares?
I’m not sure these deep-pocketed investors will continue to exist. We can also say that there are a lot of neo banks, all of whom have exactly the same products. Yes, there are some differences, but they are pretty much doing the same thing. So, some of these banks are going to be the losers because their investors have cooled, they no longer have the money they had a month ago. That’s the reality, all of a sudden everybody loses.
Second category: innovative Fintechs without clients. Imagine you’re a great fintech, I have a great idea, but no clients and investors that are supporting me: you’re dead!
Your investors have to have a tremendous amount of vision to stick with you in these specific circumstances.
Unless perhaps they support banks to become more digital?
Well, the flip side is that when you are a fintech with a good client-based revenue stream, things look relatively positive. God bless you, you’re probably in the best position as you can be. But if you a Fintech that is visionary and the investor bought into this long-term vision that needs to be funded, it is going to be hard.
Where is the money going to come from? Not sure anybody has the patience right now to fund them long term.
Or who will be investing in these uncertain times? We don’t know what is going to happen tomorrow, next week, next month. We don’t know.
We never do! None of us does. That’s the thing. We like to delude ourselves to the fact that we think this would happen. Look, I’m 59 and a half, I lived through multiple crises already: I lived through ’87, I lived through the dotcom bubble, the financial crisis. I’ve seen the scene on the trading floor 3 freakin’ times already. We like to think it is not going to happen and we delude ourselves that stability is the norm, but it is not.
I can only recommend one author: Nicolas Nassim Taleb, who wrote Black Swan and more recently Skin in the Game. He writes about this all the time.
Volatility is, in fact, good and we’ve lived for a decade under suppressed volatility because we look to the Fed to solve our volatility thinking volatility is bad and should be omitted.
Well, volatility… perhaps a bad comparison, but it is like the flu: it is bad, but it is there, we learn how to deal with it, when to expect it, how to cure it.
Now we were talking about winners and losers, right? We talked about neo banking, about innovative fintechs without clients.
How about crypto? Bitcoin?
Yes, what happened there, I expected a rise there, but that is not happening.
Not happening. Now you know the German expression ‘Shaden Freud’? It means to find joy in somebody else’s pain. I have not Schaden Freud, I take no joy in the pain of crypto holders. But it is important to point out one thing. The early advertising of Bitcoin was always that Bitcoin is digital gold. It is an uncorrelated asset. It is something to hold in times of crisis.
What we learned is that Bitcoin is just as pickled and subject to market forces as stocks, bonds and everything else. So calling it non-correlated, calling it a safe haven is not exactly true. If you’re listening to me and you’ve got crypto, I feel for you, I don’t hate crypto but we’ve got to be honest about what’s there.
The advertising that this is digital gold, that is it uncorrelated, is not true.
Right. Although in other crises, like in Greece, Venezuela,… you did see the rise in price in uncertain times. What makes today any different?
I am not a crypto expert, but one impact, without question is that many of the crypto lenders lent to people who took the money they borrowed and took more crypto, leveraging themselves. Therefore, when crypto popped they had margin falls and they needed more collateral and then they had to sell into a falling market. That was one important factor.
I think it is fair to say that with massive market dislocations like this, that crypto, like all other assets can’t find buyers, people flee to cash.
Conclusion: crypto is a loser in this market.
Now… let’s look at the winners, the other side of it!
There is a new category of digital assets that is being proposed, and these are central bank digital currencies.
That was going to be my last question! Please, go ahead 😊.
Oh! I’m sorry, I didn’t know that. So digital currency, one of the winners, potentially, in this are central banks that issue its digitized version of fiat currencies and that may or may not use blockchain to do it.
China, one of the leaders that planned to launch this year, delayed now, they are very clear not to use blockchain because it is not scalable enough to cover their needs.
As we said earlier: this is the time for digital cash. In the digital cash, we will also see Central Banks to start issuing digital currencies because it allows for digital transfer of funds, a true digital fiat currency that you can have on your phone. It will be instant, and a real, a regulated national currency and it could push them along.
It will be good.
Isn’t it also going to be a tool for Central Banks to have more direct impact on the global economy because it would allow them to start distributing cash directly of the end-consumer instead of redistribution through commercial banks?
It depends on how they set it up. The biggest point in favour of digital currency is to reduce the frictional cost of cash within the economy.
That was indeed the main argument until a few weeks ago.
Yes, and that argument is still there. That is a fundamentally good thing in favour of a CBDC, but a bad thing for banks. They make a lot of money out of all kind of small fees for every cash transfer.
So, the winners of this crisis: CBDC, Fintechs with a viable product that want an exit. This is going to be their time.
It will not be easy to go ahead alone, also the prices are going to be depressed a little bit. They are clearly not going to exit at the peak of the market, but this will be their time to say: “we’ve done it alone long enough, we need to partner with somebody”.
The third winner of this will be incumbent institutions that want to acquire new digital skills. They are going to be able to buy them on the cheap. Of course, the banks still have piles of money, they want to buy a fintech and they looked a billion dollars before. Suddenly they become a real deal of a few hundred million. Not sure the drops are that big, but the difference in price will be substantial.
It will be a buy time for incumbent right now to buy fintech on the cheap.
Given your background, experience and your current country of living: what do you think the impact will be for China influence on the global financial world?
That is a really fascinating question. It is going to be a tough one. As far as China’s impact on the financial world, it will be tremendous.
A recent Financial Times article talked about this. In 2008, after the financial crisis, China extended a huge amount of credit to its corporation and people to buy stuff and to keep the economy stimulated. That was fundamentally positive for Europa and the United States. Chinese people and companies had huge amounts of money to buy Louis Vuitton, Gucci bags, factories bought German machine tools. From my own life: my Italian cousins are in the Italian textile business, the Chinese bought Italian textile machines.
China very much helped to bail out the rest of the world because China was still buying.
What we’ll see with this crisis is different. Yes, China is still extending massive amounts of credits, but mostly to support small and medium enterprises, so they can continue to operate so don’t have to close their doors. This will not be the big buying opportunity that we saw back in 2008.
Look, China is the second, or the largest economy of the world, depending on how you look at it. It is a global player, it is going to stay, and it will remain tremendously important, but what China will not do is to bail out the rest of the world.
There are probably tremendous points of view on this, but China post-2008 was a tremendous recovery engine because it spent so much, it consumed so much from the rest of the world.
After the financial crisis, we saw an increasing wave to further globalisation, resulting in a hyper-connected world. One of the, I hope, only short-term, consequences may be a deglobalisation, a localisation of the global economy, to some extent.
I have a bad answer for you: I don’t know. This is such big picture stuff that is hard for me to figure out.
There is another angle to this I can talk about: China’s economic report will be unchanged. In the future, it will still be tremendously important and 2 other factors are going to happen.
Interestingly enough China is sending medical supplies, experts to Italy. China is reaching out to the planet to help them. It is not fair to say that China is trying to export its way of dealing with the crisis, but at least they are putting their people out there to say: “This is what we did”; “train your people, we have techniques that work for us”; “we’ll tell you what worked and what didn’t work”.
A few days ago, there was a headline in Bloomberg stating that Chinese scientists said: “you did exactly what we did in the beginning. This is what you should do now.” If that advise helps people, if it helps against the spread of the virus, it is a good thing and we will all be grateful for the Chinese knowhow and doctors and technology. That helps us to temp down the virus, that’s a good thing.
So the soft power, ironically, may increase that way.”
Richard, thanks a lot for your time. This was probably my longest interview thus far for The Banking Scene with a lot of food for thought.
Post note: Richard is the author of the book “Innovation Lab Excellence — Digital Transformation from Within”.
The keyword is “from within”, your company should be transforming inside itself. The book, with a review score of 4.9 is globally availably on Amazon.