The Age of Resilient Digitisation

The Age of Resilient Digitisation

Setting up a robust technology-based financial future is a challenge not for the faint of heart

Under ‘normal’ circumstances, the World Economic Forum (WEF) usually hosts an annual meeting in Davos during the month of January: discussing current global economic phenomena and charting a course for global organisations for the year to come. This year, the ‘Davos Agenda’ is, of course, going to be a virtual event to be held in the final week of January 2021: the nodal point of the discussion, of course, strengthening the resilience of the global economy post the COVID-19 pandemic.

Keyword for the year: Resilience

The ramifications of the COVID-19 pandemic on the global economy is well-documented: it not only exposed the under-preparedness of several institutions in case of severe global-level challenges but also accelerated the digital transformation that many had estimated would take place over the course of the next 3-5 years. Additionally, it helped sharpen understanding of the fact that climate change could potentially upend the entire financial system if immediate action is not taken.

It is, however, prudent to note that pandemic also catalysed a ‘wartime footing of speed and ingenuity in response’: qualities that will be indispensable in shaping the post-pandemic financial system. The resilience of the financial system, in itself, has indeed evolved markedly since the 2008 global financial crisis. Firms have refrained from amplifying risks and have collaborated extensively with policymakers and global organisations in the disbursement of emergency lending and offering forbearance. The call, now, is to strengthen the global financial infrastructure through swift innovation and collaboration.

The digital recovery path for small businesses

Medium to small-scale businesses form the engine for most economies worldwide: providing for over half the private sector jobs in Europe and the United States. In India, MSMEs (Micro, Small and Medium Enterprises) employ almost 120 million people, accounting for almost 30% of India’s GDP and 45% of India’s total exports. Businesses in this sector have historically been the biggest job creators, innovators and ‘enablers of opportunity’ in almost every economy around the world. And yet, the pandemic proved that it is this sector that will suffer the most in times of disruption.

The COVID-19 pandemic glaringly highlighted the difference between larger firms and MSMEs access to capital. Although guaranteed lending programmes and other sources of financing played a pivotal role in helping several small businesses recover from the massive impact of the pandemic, there are many who missed the boat and were forced to shut shop. Going forward, it is thus going to be critical to devise a more rounded strategy for financial institutions to provide access to finance to small business whilst fostering a much broader sense of digital enablement. According to the WEF: “Integrating inventory management with working capital, minimizing fraud, or helping connect businesses to digital marketplaces are just as important as payments. This is an urgent priority for finance.”

Resilient regulation

For governments, facilitating a policy environment which will include processes such as democratising access to data, removing barriers to entry and exit of funds across international borders, and investments for digitising business processes will be key to creating a resilient business environment for the years to come. The WEF writes: “This requires urgent and far greater investment by financial firms, technology providers and regulators. We also suspect we’re on the verge of a seismic shift in the way banks and insurers manage software – to buy not build – as firms now understand they need best of breed. What’s more, many more non-traditional players are playing larger and larger roles in financial infrastructure. Regulators will need to play catch up with these profound changes and update regulation for the digital age.”

For instance, the setting up of digital payment structures for all will require ample upgrades to broadband and mobile telephone networks; while strengthening public cloud infrastructures will require massive collaboration between regulators and financial services and cybersecurity professionals.

Open Financing, in this regard, will require data regulators, competition authorities, lawmakers and financial regulators to think holistically about the entire problem, all the while keeping risks at a minimum. Opening up data, for example, may create several unintended risks which cybersecurity professionals will have to face. “The lack of a level playing field between technology companies and regulated institutions requires urgent attention, argues the chair of Santander, Ana Botín.”

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