How all businesses can play a role in the financial inclusion revolution

Business Impact: How all businesses can play a role in the financial inclusion revolution

How all businesses can play a role in the financial inclusion revolution

Business Impact: How all businesses can play a role in the financial inclusion revolution
When used in a socially responsible way, technology can revolutionise the way wealth flows, and just minor changes from business can help spark a big change, says fintech CEO, Narisa Chauvidul-Aw

The inexorable rise of fintech poses new questions about how we approach finance in the 2020s. Last year’s huge jump in investment into the field of 144%, from $53.9 billion USD to $131.4 billion USD marks the trend: venture capitalists are taking notice of the seemingly limitless potential.

How, then, can we leverage fintech to better serve the interests of communities, on a global scale rather than local? Connections are now made instantly, whether you are in Manila, New York or London. This can apply to transactions between new banks on the smartphones of users, in a world where fees don’t need to be so prohibitive and access to financial services is democratised. 

This isn’t limited to the ‘developing’ world at all. In the US, an estimated 7.1 million people were unbanked in 2019. Financial institutions often have fees, minimum deposit requirements and other upfront costs that create steep barriers to entry for people without much cash.

Small business can make a change

SMEs in the UK made up over 99% of all businesses in 2021; there were 5.6 million of them at the last count. Collectively, there is massive power in the decisions they make with their company in terms of consumer experience.

Wallet and QR code payments are fairly common in Asia but not in Europe — this is something that can change to the benefit of millions. It will take only minor costs and effort in order to make businesses more friendly to the unbanked – people, who in future can simply use an app.

The single biggest challenge is the glacial pace at which many firms respond to technological innovation. Business owners need to be receptive, openminded and willing to make minor changes to help spark a big change. It’s therefore vital that the process is so streamlined and straightforward to take up that it becomes illogical to resist.

We’re swiftly moving to a world where it’s so cheap and easy to move funds and make payments that fintech companies offering banking and financial services will be in prime position to revolutionise business transactions and cross-border transfers. SMEs will need to get on board to accelerate the process.

The role of technology

Nascent technologies, such as blockchain, AI and big data analytics, are integral to the modernisation of financial services. When it comes to business, B2B transactions can be simplified and peer to peer, similarly, will enjoy a boon to the ways we all use our money.

Digital currencies hold incredible potential to change the world. It’s easy to lose track amid speculation on cryptocurrencies dominating media headlines, with the public hearing about all-time highs on bitcoin and then subsequent market crashes wiping out investments.

At its core, digital currencies on the blockchain offer near-instant payments with low fees to anywhere in the world. Cutting the costs of money transfers could unlock $15 billion USD that is currently lost to middlemen when the approximately 250 million migrant workers choose to send money back to their families in their home countries. The upshot is plain to see – instead of lining the pockets of already-rich banks, there will be more funds available for those who use every last penny on sustaining themselves and building for a better future.

Technology when used in a socially responsible way can revolutionise the way wealth naturally flows. In a sense, money can become more democratic and financially empower the individual rather than corporate entities. 

Creating universal access

Fintech firms are rewriting the story of payments and banking in various ways. The mission to facilitate payments and offer simple money management for everyone is not just a noble cause, but an oft-neglected consumer demand across the globe.

Universal access to payment services is crucial to progress, both nationally and internationally, whether it’s sending money home, running a small business, or keeping control of finances in a trackable, non-cash manner. There are 1.7 billion adults worldwide who still don’t have access to a bank account because they are on a low income, move regularly as migrant workers, or have a poor credit history.

The inability to obtain a bank account creates more problems and exposes people to debt and risky transactions. These individuals are those most in need of secure money transfers: it cannot be reiterated enough that they are often sending money home to feed their families in the most basic yet vital utility of money.

Ethical, socially conscious fintech is therefore of paramount importance. Solutions for a mobile wallet combined with a digital bank account will reach into the neglected corners of the globe by providing financial services which make sense and carry a low barrier to entry for businesses as well as the public. Many people in the world own a smartphone, but they don’t always have access to banking which serves them better than cash does.

It will be a silent revolution

Already, we have seen financial transactions change because of the internet. Everything can be done online, even by mobile, and it’s all at the user’s fingertips. Today, many small businesses find it is far easier to reach a larger demographic online than offline.

In the future, helped by the use of Central Bank Digital Currencies (CBDCs) and internet and mobile banking, we will see the phasing out of physical bank branches with a drastically reduced need for cash. Digital money will replace physical money, but this will not change overnight.

The younger generation are well-acquainted with everything being placed in digital spaces. The older generations perhaps not, and their adjustment to new methods must be taken into account while fintech revolutionises payments and banking. Some countries, like Sweden, are already promoting cashless-only establishments and we can only expect this trend to continue.

While technologies such as blockchain ostensibly make transactions far more transparent — each payment lives immutably on a public chain — there is the issue of ethics in the companies that operate behind it. With innovative technology, it can also be easier to hide transactions or carry out money laundering.

Proper compliance will be a cornerstone of the new age of financial services. Onboarding customers to such platforms will require KYC/AML (know your customer/anti-money laundering) guidelines/policies to avoid becoming a vehicle for nefarious activities.

Institutional change will not arrive with a bang. Instead, people around the world will integrate new financial and banking services slowly into their lives with a significant material effect on their livelihood. This is the difference fintech can make, when applied in a socially responsible manner, to the lives of billions.

Narisa Chauvidul-Aw is the CEO and Founder of international mobile payment app, KogoPAY. She holds a PhD in accounting and information systems from the London School of Economics and Political Science (LSE) and has many years of experience working both in academia and business.

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What does the future hold for fintech?

Business Impact: What does the future hold for fintech?

A career in digital finance is a great way for business graduates to address problems in global society, says Michael Donald, CEO of ImageNPay

How many credit cards, debit cards and pre-paid charge cards do you think there are in existence in the world?

I’ll give you a clue. The human population currently stands at almost eight billion, although of course many of these people are too young to have a payment card or may not have one for other reasons. Yet despite this, the number of plastic cards is expected to hit 30 billion within the next three years – more than four times the entire number of people on the planet.

The majority of these cards are made from PVC material that is non-recyclable. They are typically renewed every three to four years, with a huge carbon footprint involved in their manufacture and transportation.

This is just one of the social and environmental challenges faced by the financial sector – and technology can play a huge role in helping to solve these problems.

Is fintech right for you?

Many of the graduates who I meet through my work tell me that they wrongly assumed that an ability to write computer code is a requirement for a career in financial technology (fintech).  

In fact, just like any other thriving sector, we hire talent from across all disciplines and there is always a demand for young people with strong business skills.

My own background was not originally in heavy tech. My first job was in project management, helping to draw up plans for maritime emergencies. This enabled me, later, to join American Express (which must have liked what they saw on my CV). I spent the next 25 years working for major financial institutions before founding ImageNPay, which offers consumers the ability to make plastic-free digital payments with a virtual Mastercard,

Another key member of the team is our Head of Digital Marketing, Naomi Harris, who joined us while on a gap year from Warwick University, where she is doing a degree in global sustainable development. Fintech was not an option that she had considered when we met. This is what I find so refreshing about the digital finance sector and its ability to bring people together from different disciplines. 

Fintech’s potential for change

The fintech sector is evolving at an incredible pace and it has the ability to change the global financial system for the better.

One of the things that ImageNPay was able to achieve during the pandemic was to create an international internship, which operates remotely with students at the San Francisco de Quito University [USFQ] in Ecuador.

Conventional wisdom suggested it was risky to launch a project on the other side of the world during a pandemic, but it’s now in its second year and going strong. The programme centres on our core values of financial inclusion, financial education, sustainability, innovation, and diversity.

As a result of this initiative, our interns are now reaching out to other universities in equatorial regions of the globe to launch a movement that will seek to protect vital ecosystems on the equator. At its simplest level, this might involve enabling consumers to support equatorial conservation by making a donation when they download an image or artistic design with which to personalise their virtual Mastercard. It will also enable them to send out a powerful message to ditch plastic.

By integrating digital content into payment platforms – whether it’s images, artwork or NFTs [non-fungible tokens; a one-off digital artwork] consumers can turbocharge their relationships with charities, non-profit organisations, and socially responsible brands.

Why does all this matter?

In the future, corporations will increasingly want to get inside your head so that they can monetise you. In fact, this is something that they already try to do. They know what you spend and where you spend it. It’s just that they don’t always know for sure what motivates that behaviour.

But, as we increasingly lead our lives in virtual spaces – especially since the advent of the metaverse – brands will literally be able to map everything that you do in order to know what you think.

Why not turn this around so that it is to the advantage of the consumer? What if instead of passively letting businesses harvest your data, you could use that process to promote good and call out the unacceptable?

If you are a graduate starting out on your career, the inside of your brain is the most valuable commodity on the planet. The metaverse belongs to you, whether it’s a gaming platform like Minecraft or inside a digital arcade within a virtual shopping mall.

Of course, the future of the human race will also be shaped by how we conserve the real world and a digital NFT of a tiger or a blue whale can raise awareness about conservation. However, my fear is that if we don’t do enough to protect them today, then in the future the metaverse will be the only place you will ever see those creatures.

How will innovation change the world?

Innovation within the fintech sector offers consumers an opportunity to decentralise the powerbase within the financial system so that it calibrates away from the major financial intuitions back into the hands of consumers.

For example, according to data published by Statista there are 3.24 billion computer gamers on the planet (e.g. users of platforms like Fortnite and Minecraft).  However, many of these people are younger consumers who pay for digital services on the parent’s credit cards.

These young consumers are currently effectively invisible because their payment data is in their parent’s name. There is no definitive list of these 3.24 billion users and there is obviously a large degree of overlap between various platforms. However, imagine the power the gaming community would have if technology were able to unite them together for a common cause.

Blockchain is a case in point (but don’t worry, I’m not going to talk about Bitcoin). The significance of blockchain is that it enables peer-to-peer transactions without requiring the services of multi-billion dollar corporations.

That’s not to say that major financial institutions don’t have a legitimate role to play in society. Clearly they do and it’s likely that they always will. They just need consumers to guide them to make the right decisions.

I started this article by saying that nearly eight billion people live on the planet. According to the World Bank, around one billion of these people are ‘unbanked.’  This means they do not have access to traditional financial services or products, including banking, insurance or pensions.

For example, In South America, it is believed that more than a third of the population remain unbanked, in spite of recent improvements that are the result of government inclusion schemes. Globally, the individual countries with the lowest levels of access to financial services are China, India, Indonesia, Pakistan, Nigeria, Mexico and Bangladesh. 

Encouragingly, there are signs that things will change very rapidly as technology gathers pace, but of course, we all know that technology can, equally, be a force for good or bad.

I suggest to you – as business graduates and undergraduates – that if you wish to ensure digital technology is a force for better, then join the fintech sector.   You’ll find that you will be most welcome.

Michael Donald is the founder of ImageNPay. Previously, he was a UK Board Director of Visa, Chief Commercial officer at MBNA, and Head of Emerging Payments (Europe) at Bank of America.

Headline image credit: Joshua Sortino on Unsplash

Money talks: Why banks must learn to communicate with ordinary people

European Central Bank at Frankfurt city riverside sunrise. Business Impact article image for Money talks: Why banks must learn to communicate with ordinary people.

If the public can be engaged in monetary policymaking, the impact will be powerful, says Chicago Booth’s Michael Weber. Business Schools can help by teaching future economic leaders the importance of effective communication between policymakers and the public, and equipping them with the skills to achieve that

‘The ECB needs to be understood by the markets that transmit its policy, but it also needs to be understood by the people whom it ultimately serves. People need to know that it is their central bank, and it is making policy with their interests at heart.

(European Central Bank (ECB) President, Christine Lagarde, 2019).

Central banks will lose their grip on inflation if they continue to overestimate how much consumers listen to their announcements. Inflation in the UK could rise above 4% this year and it sits at a 13-year high in Europe. In the US, inflation is at high levels too and it is leading the pack with rapid rises.

These figures took inflation watchers off guard and financial journalists and investors kicked into overdrive trying to predict what central banks would do to control it. But consumers – who drive inflation – seem unfazed, continuing to remodel their houses, indulge in retail therapy and spend roughly the same as they usually would on their food shop, as the Covid-19 pandemic drags on.

This disconnect between policymakers and the general public runs deep. Those in charge at the Federal Reserve System, the Bank of England and the ECB can no longer afford to sit in ivory towers making interest rate decisions that the public aren’t paying close attention to. Today, there is a need for a serious rethink regarding how central banks communicate with normal people, to ensure monetary policy remains effective.

Why communication matters and how we’ve tried before 

Policy communication has become a key measure in the toolbox of central banks worldwide, especially during times of low nominal policy rates, that ultimately determine the funding costs of banks, such as those that many developed economies have faced over the last two decades and will arguably face going forward. Traditionally, the focus on policy communication has been to guide the expectations of financial markets and professional forecasters and move longer-term interest rates even when conventional monetary policy is constrained because policy rates are already at their lowest level. The idea is that policy communication aimed at markets and institutions will then transmit to households and firms.

At the same time, though, recent research makes clear that monetary policy is simply not getting through to ordinary people – it’s too difficult to understand and frankly, not engaging enough. Ordinary consumers, who are often economically illiterate, simply do not understand the implications of policies. Most people’s perception of what the economy is doing is wildly different to what economic theory suggests, which reduces their reactivity to policy measures.

For these reasons, since the Great Recession, central banks around the world have recognised that in times of low interest rates, households’ and firms’ choices should be influenced by managing consumers’ beliefs directly through communication. Of course, a rationale for direct communication with households and firms also exists outside these special periods to increase the trust in, and the credibility of, central banks.

But despite all these good reasons to articulate policies in simple terms, central banks continue to communicate in a highly technical way, aimed mainly at financial market participants and institutions. The increased communication by the Bank of England with the public, for example, has not increased the general knowledge of the pillars of monetary policymaking since 2001. People don’t understand or follow policy announcements, instead they use the price signals they observe in their daily lives, especially from grocery shopping, to form their inflation expectations. Most households focus on the price at the petrol pump, or the cost of milk, to inform their views of the overall price pressure.

Solving these problem demands a rethink. Changing how communication is used as a policy tool will force, for the first time, central banks around the globe to understand the interplay between mass communication and policymaking. If the public can be engaged, the impact will be powerful.

The importance of trust and why it’s crumbling

Trust in central banks is important for both the credibility and perceived relevance of the independence of central banks, which determines the effectiveness of policy communication. The rising levels and acrimony of anti-market rhetoric can become a serious threat to central bank independence if the general public does not understand and support the policy measures central banks implement and if they lose their trust in these institutions.

One core reason for people’s lack of trust is the widespread underrepresentation of certain demographic groups on important policy committees, such as the Federal Open Market Committee (FOMC) in the US, or the ECB board. Indeed, my research has found that women and African Americans have the lowest levels of general trust in the Federal Reserve and its willingness to foster the wellbeing of all Americans. Other research shows that expectations of inflation and the unemployment rate are, on average, least accurate for these underrepresented groups.

To win consumer trust, central banks boards would do well to start looking more like the people they represent. Research has proven that people are more responsive to central bank messages when they come from people who look like them and that those same people’s expectations of inflation become more accurate as a result. It couldn’t be clearer that the time has come to move away from the sea of sameness in banking boardrooms – for the sake of our economies.

Getting it right – the role of academia

Academics have worked tirelessly to dig into the issue of central bank communication and research has thrown up evidence of some central banks already dramatically changing the extent and modes of communication with consumers. And yet, there’s still a long way to go.

Most people remain ill-informed about the general pillars of policymaking – they do not actively attempt to obtain this information, and their expectations about policy-related variables tend to be biased and vary widely. And, yet, a growing body of work also shows that to the extent central banks can pierce the veil of ignorance, policy communication with ordinary households can become a powerful tool to steer aggregate demand.

More must be done to understand exactly which style, which sender, and which type of messages might increase policymakers’ ability to reach consumers. Moreover, all these features might differ systematically across countries, demographic groups, and over time.

Future policymakers and advisors must be aware that the most carefully crafted message and policy is bound to fail if members of the wider public are not reached, do not understand the implications for the optimal consumption-saving decisions, or simply do not care.

How can Business Schools help?

Inflation expectations determine virtually all the forward-looking decisions undertaken by households, including savings and consumption decisions, wage bargaining, labour supply, portfolio choice and more. Many Business Schools, like the University of Chicago Booth School of Business (Chicago Booth), already teach students how to adjust their decisions with inflation expectations. Not only that, but students also learn what inflation is, how it’s measured, how to form their own expectations and from there, how to make wise financial and monetary decisions.

In macroeconomics classes, students can also learn how central banks formulate their policies and how they manage and control inflation. So, at Chicago Booth – and many Business Schools across the world – students walk away from these classes with an advanced knowledge of what inflation decisions by central banks really mean. But the same can’t be said for society as a whole. The missing link today is finding ways for central banks to reach households with their policies and communications.

One way Business Schools can help is through classes in marketing which can teach future central bankers and consultants how to design simple messages that are palatable to ordinary households and identify the right channels through which to communicate these messages.

At the same time, the interdisciplinary approach of Business Schools can allow future leaders to draw on the insights across many different fields, such as psychology, behavioural economics and  macroeconomics as well as marketing, to design policies that not only work in theory, but also reach ordinary households in practice through identifying modes of communication and message design that normal people care about.

Steps ahead

The crux of that matter is that ordinary people are the ones who ultimately determine the effectiveness of monetary policy actions through their consumption, saving, and borrowing choices – which makes them the most important players in this game. Central banks need to start recognising that fact and adopt communication methods that work for ordinary people – whether this entails advertising on popular streaming platforms or getting creative with social media. The Bank of Jamaica, which has commissioned reggae songs that communicate inflation, provides one example of an attempt to use alternative methods to reach a wider audience. Perhaps central banks around the world could take a leaf out of its book.

Academics are helping central banks along this journey with crucial research, but Business Schools have an important role to play too. By educating our future economic leaders about the importance of effective communication between policymakers and the public, and equipping them with the skills to achieve that, we can ensure that the central banks of tomorrow don’t risk losing their grip on inflation.

Michael Weber is an Associate Professor of Finance at The University of Chicago Booth School of Business.

Four reasons why the finance industry is lagging behind on equality at the top

Business concept vector illustration of a businesswoman standing among businessmen. Living in a man's world concept.

The pervading shortfall in equality in finance-related industries at the senior management level threatens the future of these sectors. Yetunde Hofmann, global change, inclusion and diversity expert, looks at four critical areas to address to drive improvement beyond the rhetoric

The business case for gender and racial equality – and diversity in general across industry regardless of background – is clear. Having a diverse team at all levels of the business and particularly at the top enables creativity, innovation, breakthrough and commercial success.  

By its very nature, the finance industry, and related industries, should in turn be role models and trailblazers in terms of achieving equality in all of its guises, from the most junior members of staff to the CEO. This is particularly important at the top.

In reality, while there has been some progress to date, particularly on the boards of the FTSE 100 finance companies, the pace of change across the industry is still slow. The World Economic Forum, in partnership with the Financial Times, produced a report on the state of equality in finance-related industries that illustrated that in order for there to be a 50/50 split in gender at senior management levels by 2024 there would need to be 480,000 more women in UK management than the figures predicted there will be by then. The future, therefore, does not seem bright. There are several reasons why the industry is currently, and may remain, behind on equality at the top. 

1. Discrimination still prevails

Discrimination, and in particular race discrimination, still prevails within the finance industry, as is reported in this recent article for the Guardian, which states that two out of every three black and ethnic minority member of staff in the finance industry experiences discrimination on the basis of race. In the wake of the murder of George Floyd in May 2020 many organisations, a large number of which were from the finance industry, came out to state the actions they would take to combat discrimination and promote equality.  Sadly, today, four out of 10 employees still experience a lack of commitment to the establishment of an inclusive workplace from their employers.

2. Lack of visible role models

When a talented employee is in the earlier stages of their career in an organisation, one of the key elements of motivation is to see people who look like them and/or represent what they also stand for in positions of power and influence. In spite of the launch of the UK’s Women in Finance Charter and the many signatories to it, women hold fewer than 25% of today’s leadership roles in the finance industry. Some reports and articles, such as this one from STEM Women, state that the figure is even less than that.  When you then include the additional dimension of race, the statistics are worse still. Ethnic minorities make up less than 20% of employees in the UK’s banking and finance industry, according to government statistics, and at the most senior of levels the data is even more stark. In 2020 out of the 650 senior investment bankers in the UK, only three were black, as reported in this Financial News article. When there are very few or no role models in positions that matter to ambitious and talented individuals in the earlier stages of their careers, the message sent is that ‘this is not a position for you!’

3. Inadequate accountability

Gender pay gap reporting is slow in its prevalence across the industry and ethnicity pay gap reporting is very much behind. As recently as 2019, 90% of the industry in the UK still had not started the reporting of its ethnicity pay gaps. Although the UK HR association, the CIPD has requested that the government mandate ethnicity pay gap reporting for all FTSE 100 companies by 2023, there is little strong evidence that there will be consequences if they do not comply. On top of that, according to the Financial Times, the number of companies participating in gender diversity reporting has declined.

On the issue of disability, through the creation of the valuable 500, a number of organisations from the finance industry have signed up to enabling equality, which is a laudable initiative. Once again, it would be great to see accompanying methods and measures of accountability that will ensure effective implementation and ultimate achievement.

4. The pace of progression

As far back as 2016 it was reported in the Harvard Business Review that the pace of career advancement of women in the finance industry is slow. Today, the landscape is no different. A recent article by the Financial Times states that the gender pay gap has widened in industry generally, despite the push towards it. This is an indication of higher rates of attrition as well as the slow pace of progression. Women in the industry also report feeling that their career progression is blocked by male managers. For finance industry talent who are from ethnic minority backgrounds, the pace of progression is slower still and made more challenging. Two thirds of those with minority backgrounds report experiencing discrimination in the workplace. Demonstrating the confidence to go for promotion regardless of gender or race increases when you know you are valued, welcome and belong. It comes if there is belief in the presence of fairness and equal opportunity in the organisation, which currently the evidence available does not present.

What does all this mean for the finance industry?  The light at the end of the tunnel is the fact that with every problem or issue there is a resolution and a way to turn things around. What it requires is a decidedness and a commitment by leaders in positions of power and pivotal decision-making roles to genuinely drive change. This means change beyond the rhetoric. It means a willingness to step up and be role models in the industry. The keys to change lie not in the hands of government or research bodies. They lie in the hands of organisations and at the forefront of business is the finance industry.

Yetunde Hofmann is a board-level executive leadership coach and mentor, global change, inclusion and diversity expert, author of Beyond Engagement and founder of SOLARIS – a pioneering new leadership development programme for black women.

What a post-Covid global economy will look like

From shared trauma to stocking up on gold, a look at the markets’ reaction to the ‘Black Swan’ event that is Covid-19 and what this means for the near future

Markets inevitably fall when events the magnitude of the Covid-19 pandemic occur. We can label this outbreak under the category of ‘unknown unknowns’ and, economically speaking, there is never a ‘good’ unknown unknown, because there is no basis for the market to respond. 

This means that the market cannot make a tight valuation of how it trades, or even where to trade, as the world’s markets are all suffering the same trauma. Oil dropped to historic lows in April as demand fears forced the prices into freefall. Yet gold, the traditional asset of the terrified, is on the up. 

The last great pandemic is out of living memory for all but the planet’s very oldest, having occurred almost exactly 100 years ago, in 1918. Since China announced its lockdown, shock has led to panic across the world. The result is that the markets can only come up with spurious evaluations as they trade because they have no precedent to go on and because no one is certain if they should be buying or selling, or at what price. 

This means that prices are currently fragile. It is this fragility that has translated into the crashing and zooming of prices currently taking place on the world stage. This increased volatility is actually a good thing for traders, but it is a bad thing for investors and is usually a precursor of even more grim things to come, because certainty is an asset and uncertainty is a constraining liability. 

Heading back to normality 

The global markets are all interlinked, and market prices represent the best estimates of what are essentially a group of highly motivated, informed, and intelligent fortune tellers. Once volatility levels start to come down (and they have done) we can start to breathe a little easier. This is a sign that things are starting to point back in the direction of normality. 

But the crash hasn’t been as deep as many had feared. There are essentially two types of market crash: a crash of 25%, and a crash of 40% or higher. The former – which we have seen, is likely to give everyone an uncomfortable ride for the next couple of years. A recession yes, but not a big depression. With a slump of 40% or more, we would have been looking at a bumpy ride for at least half a decade. 

By looking at how the market has reacted now, we can measure how the global economy will pan out over the next year. This is because the market, by nature, looks out over the course of the year ahead. So, what you see in today’s Dow and FTSE is likely to be similar to what you would see if you could peer into the future, in early 2021. 

Predicting the future

The theoretical physicist, Niels Bohr, once quipped: ‘prediction is very difficult, especially about the future.’

But by looking at how the markets reacted to the very worst, most uncertain and shocking unfolding of the pandemic, it is possible to plan accordingly. To know with a fair amount of certainty that, without some other global catastrophe, the direction the global market has already taken is predictive of the trend of the global economy for the coming year. 

The slump levels we have witnessed have not been a total surprise, because they were very high worldwide prior to the Covid-19 pandemic. Coupled with the fact that the central banks, including the Bank of England, have been totally nonplussed as to how to mitigate the situation. 

There are still likely to be bumps in the road on the way. Costly mistakes that could make the situation worse. But the good news is that, according to the current statistics, the markets should bounce back quickly from the present disruption Covid-19 is making. The market will move to drive the economy back quickly in order to appease or prevent a bad situation from becoming a chronic one. 

The Covid-19 pandemic can also be described as a ‘Black Swan’ event. A Black Swan is an event that no one could have predicted coming, but in hindsight, always seemed inevitable. In actual fact, the last pandemic was scarcely a decade ago when the H1N1 virus (also known as swine flu) killed tens of thousands across the world. We have also had two far deadlier coronaviruses than Covid-19 pop up in the last 20 years (SARS and MERS, with fatality rates of 10 and 32%, respectively). So emerging viruses, epidemics and even pandemics are more common than we would like to admit. The problem is, we have always been able to look the other way. Until now.

This pandemic – like the next market slump – was inevitable. But hopefully we can learn from Covid-19 how to react, prepare for, and mitigate the next virus outbreaks in the years to come. 

Richard Chamberlain works with Oakmount Partners, a UK-based investment consultancy firm.

Is AI making dangerous decisions without us?

Artificial intelligence (AI) is set to take control of many aspects of our lives, but not enough is being done with regards to accountability for its consequences.

The increasing application of AI across all aspects of business has given many firms a competitive advantage. Unfortunately, its meteoric rise also paves the way for ethical dilemmas and high-risk situations. New technology means new risks and governments, firms, coders and philosophers have their work cut out for them.

If we are launching self-driving cars and autonomous drones, we are essentially involving AI in life-or-death scenarios and the day-to-day risks people face. Healthcare is the same; we are giving AI the power of decision making along with the power of analysis and, inevitably, it will have some involvement in a person’s death at some point in the future, but who would be responsible?

Doctors take the Hippocratic oath despite knowing that they could be involved in a patient’s death. This could come from a mistaken diagnosis, exhaustion, or simply missing a symptom. This leads to a natural concern about research into how many of these mistakes could be avoided.

The limits of data and the lack of governance

Thankfully, AI is taking up this challenge. However, it is important to remember that current attempts to automate and reproduce intelligence are based on the data used to train algorithms. The computer science saying ‘garbage in, garbage out’ [describing the concept that flawed input data will only produce flawed outputs] is particularly relevant in an AI-driven world where biased and incomplete input data could lead to prejudiced results and dire consequences.

Another issue with data is that it only covers a limited range of situations, and inevitably, most AI will be confronted with situations they have not encountered before. For instance, if you train a car to drive itself using past data, can you comfortably say it will be prepared it for all eventualities? Probably not, given how unique each accident can be. Hence, the issue is not simply in the algorithm, but in the choices about which kinds of datasets we use, the design of the algorithm, and the intended function of that AI on decision making.

Data is not the only issue. Our research has found that governments have no records of which companies and institutions use AI. This is not surprising as even the US – one of world’s largest economies and one that has a focus on developing and deploying AI – does not have any policy on the subject. Governance, surveillance and control are all left to developers. This means that, often, no one really knows how the algorithms work aside from the developers.

When 99% isn’t good enough

In many cases, if a machine can produce your desired results with 99% accuracy, it will be a triumph. Just imagine how great it would be if your smartphone can complete the text to your exact specification before you’ve even typed it.

However, even a 99% level of precision is not good enough in other circumstances, such as health diagnostics, image recognition for food safety, text analysis for legal documents or financial contracts. Company executives as well as policymakers will need more nuanced accounts of what is involved. The difficulty is, understanding those risks is not straightforward.

Let’s take a simple example. If AI is used in a hospital to assess the chances of patients having a heart attack, they are detecting variations in eating habits, exercise, and other trends identified to be important in making an effective prediction. This should have a clear burden of responsibility on the designer of the technology and the hospital.

However, how useful that prediction is implies that a patient (or her/his doctor) has an understanding of how that decision was reached – therefore, it must be explained to them. If it is not explained and a patient [that is given a low chance of having a heart attack] then has a heart attack without changing their behaviour, they will be left feeling confused, wondering what the trigger for it was. Essentially, we are using technical solutions to deal with problems that are not always technical, but personal, and if people don’t understand how decisions about their health are being made, we are looking at a recipe for disaster.

Decision making, freedom of choice and AI

To make matters worse, AI often operates like a ‘black box’. Today’s machine learning techniques can lead a computer to continue improving its ability to guess the right answer or identify the right result. But, often, we have no idea how the machines actually achieve this improvement or ‘learn’. If this is the case, how can we change the learning process, if necessary? Put differently, sometimes not even the developers know how the algorithms work.

Consumers need to be made more aware of which decisions concerning their lives have been made by AI, and in order to govern the use of AI effectively, the government needs to give citizens the choice of opting out of all AI-driven decision making altogether, if they want to. In some ways, we might be seeing the start of such measures with the introduction of GDPR in Europe last year. However, it is evident that we still have a long way to go.

If we are taking the responsibility of decision making away from people, do we really know what we are giving it to? And what will be the consequences of the inevitable mistakes? Although we can train AI to make better decisions, as AI begins to shape our entire society, we all need to become ethically literate and aware of the decisions that machines are making for us.

Terence Tse is an Associate Professor of Finance at ESCP Europe Business School and a Co-Founder of Nexus FrontierTech, which provides AI solutions to clients across industries, sectors, and regions globally. His latest book, The AI Republic: Building the Nexus Between Humans and Intelligent Automation is due for release in June 2019.

Why the tortoise can beat the hare in investment strategy

The benefits of low-volatility investing outweigh those of high-risk stocks, argues Pim van Vliet, in an interview with David Woods-Hale

For generations, investors have believed that risk and return are inseparable. Just ask the huge banks who invested billions in sub-prime mortgages prior to 2008. But is it time we accepted the truth: this just isn’t the case anymore? Pim van Vliet, the founder and fund manager of the multi-billion-dollar Conservative Equity funds at Robeco, has set out to rewrite the rule book on investment strategy. 

In his book, High Returns from Low Risk: A Remarkable Stock Market Paradox, van Vliet combines the latest research with stock market data going back to 1929 to prove that investing in low-risk stocks gives surprisingly high returns – significantly better than those generated by high-risk stocks.

The low-risk funds, in which van Vliet specialises, are based on academic research and provide investors with a stable source of income from the stock market. 

He is a guest lecturer at several universities, the author of numerous financial publications and travels the world advocating low-volatility investing. Together with investment specialist Jan de Koning, van Vliet has presented his counter-intuitive story as a modern upbeat stock market equivalent of ‘the tortoise and the hare’. And he explains why investing in low-risk stocks works and will continue to work, even once more people become aware of the paradox. 

But this theory flies in the face of traditional and accepted thought regarding classic investment theory – so how did he build a theory that goes against the grain?

‘High risk does not bring more return,’ he explains. ‘It’s a paradox and I want to get the message out there. Unfortunately, this is an inconvenient truth for the finance community and it’s puzzled me for half my life.

‘It’s because we define risk in the wrong way, but when I was able to reconcile the paradox and started to research and apply the knowledge I was accumulating, by managing low-risk funds for investors, we were able to generate high risk-adjusted returns by investing in low-risk stocks, which attracted billions of dollars

The concept of investing in low-risk stocks for high returns is a compelling argument, but at odds with the views of some economists. Van Vliet, outlines his own hypothesis as follows, explaining: ‘My investment hypothesis is evidence-based: any idea on investing should be validated by empirical data. Although this approach is common in the field of medicine, it’s not in the world of finance.’   

He pauses, then adds: ‘In general – at a high level – the truth still holds: more risk will equate to more return. In the long run, stocks will earn higher returns than bonds for example. But if you dig a level deeper down, this idea fails within the stock market and also within the bond market. Lower-risk stocks provide higher returns than higher-risk stocks. The slow stock beats the fast stock. I explore this at length in my book. 

‘Benchmarking provides an important explanation for this effect. If you have stocks with lower risk factors, you will be less affected by the stock market. Imagine a stock posting a fixed return of 10% per year. That stock has – in absolute terms – 0% risk. However, when adopting a relative perspective this low-risk stock would lag behind if the market is delivering a return of 40% in a year, or be well ahead of the market during a market loss of -20%. This 30% return gap – whether positive or negative – is perceived as relative risk. It is the misalignment of interest here that poses a problem, because the role of an investor is different to that of a money manager. A professional investor is paid to take risks with people’s money to generate return and if they are not taking these risks, they could be shunned. In other words: due to benchmarking low-risk stocks become unattractive.’

Van Vliet compares his investment hypothesis similar in idea to the fable of the tortoise and the hare in that ‘slow and steady’ often wins the race but there is a human nature lesson here as well as advice for financial strategy. 

‘Most people want to bet on hares,’ he says. ‘In psychology, finance and literature it’s the moves in the market that generate the most attention and they drive up prices in stocks, which in turn makes the news. Tortoises are never in the news. Volatility makes headlines – this exacerbates a culture of short-termism and people who are bullish and want a quick buck.’

Van Vliet is quick to point there is fine line between ‘bullish’ and ‘reckless’ when it comes to investment and he worries that investors in general are too quick to ‘shun’ more defensive equity funds. 

He elaborates: ‘For this reason, society is experiencing a collective sense of over-confidence [in that they want to invest in high-risk funds]. This is really good for people’s mental wellbeing but it’s bad for financial health.’ 

Tortoises, according to van Vliet, are stable companies and defensive funds that ‘never seem to go up’ in stock market terms. But, as the saying goes, at least, fortune favours the brave – and in van Vliet’s analysis, it’s those that invest in risky funds that view themselves as brave. He counters this assumption. 

Re-defining bravery

‘Low-risk investors are brave,’ he asserts. ‘They are seen as conservative, but in reality they are not following the crowd. It’s like the character in The Pilgrim’s Progress, following a tough long road, but leading to a good end result.’

To capitalise on the low-risk anomaly, a long-term investment vision is required. The advantage of a low-volatility strategy is that the stocks involved will fall less than other stocks in a declining market. Once the market recovers, low-volatility stocks have less ground to make up to recover and start yielding positive returns again. 

Citing the experiences of the world’s second-richest man as an example, van Vliet explains that Warren Buffett is inclined to take a long-term view when it comes to his investments. Instead of following the crowd, Buffett has built his career and success on seeking out undervalued investments. Although Buffett’s portfolio has lagged behind the market several times during his career, he has beaten the market average decisively over time. 

For Buffett, average is doing what everybody else is doing; to rise above the average, you need to measure yourself by what he terms the ‘inner scorecard’ – judging yourself by your own standards and rather than the world’s.

A sustainable approach

 But where do ethics fit into a low-risk investment strategy? Does van Vliet agree that a values-led, sustainable approach to investing is becoming more important in the current financial climate?

He explains: ‘Low-risk portfolios make for sustainable, long-term investments, but in terms of ethics, the key consideration is how we, as investors, take care of our clients’ money – perhaps by investing in green companies or more sustainable funds for that reason.

‘High-risk and low-risk investments have the same mechanisms. And low-risk investments drive up risky projects. I’m not saying that a degree of risk is not a good thing – but prudent decision making is more important.’ 

Does van Vliet therefore believe that would-be investors have to be finance experts to understand the intricacies of the market?

‘You can over-train for a marathon,’ he explains. ‘You need information about the markets and I’ve outlined this in my own work – but the secret to successful investment is wisdom [rather than market knowledge only]. For example, the latest “hare” in the market place is FinTech and investors are keen to invest here. The truth is that some of these FinTech organisations will win, but most will lose.’

 He sums up by adding: ‘I think a good philosophy for investment is “some risk”. Putting this into the context of diet, a moderate amount of vitamins and salt is a good thing – but not taken to the extreme. There is no such thing as “no risk” as the risk spectrum is not linear. You have to create a bit of risk to generate value. If there is no risk, your investments will be negative. I believe the ideal investment choice, is what I call the “conservative middle”, which is a situation between very high and very low risk. 

‘We often are attracted to the extremes, but ancient philosophers wisely pointed to the virtue in the middle. Too much risk hurts long-term wealth creation, but a moderate amount of stock market risk is good. There are more and more companies that live and work according to this prudent investment principle, from private equity firms to family businesses. This is the secret to sustainable investing.’

Dr Pim van Vliet is a Senior Portfolio Manager within the Quantitative Equities team of Robeco, an international asset manager with
a strong belief in sustainable investing, quantitative techniques and constant innovation. His primary responsibility is Robeco’s conservative equity strategies.

Van Vliet has published articles in the Journal of Banking and Finance, Management Science, the Journal of Portfolio Management and other academic journals, plus a book on the topic of low-volatility investing. He is a guest lecturer at several universities, advocating low-volatility investing at international seminars, and holds a PhD and
MSc (cum laude) in Financial and Business Economics from Erasmus University, Rotterdam.

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