Global finance is experiencing a digital revolution that is going to affect the way money circulates. Centralized financial institutions are testing new technologies in order to facilitate transaction processes and reduce costs related to human interference, such as corruption. According to Accenture, blockchain technology will reduce banks’ infrastructure costs by 30% and therefore improve efficiency. In fact, since blockchain engages peer-to-peer operations on a distributed structure made of secure records, no physical entity is required for it to work.
Overcoming this limit has increased the number of startups involved in the spread of customer-friendly banking services. Fewer fees are applied to transactions when implementing decentralized and transparent systems. They become cheaper and faster. Many major institutions are already on it. In 2015, a consortium of more than 70 financial firms, including Goldman Sachs, J.P. Morgan, Credit Suisse and Citi, founded R3CEV, a tech company aimed at researching and developing blockchain usage in the financial system. Thus, the benefits of the race for crypto-techs by institutions in such a competitive environment is going to increase benefits for banked people.
Lack of trust
However, two billion adults still don’t have a bank account. The failure of traditional financial institutions in providing services to nearly 40% of the world population is due to a lack of trust. Most of the time, people from third world countries don’t have access to loans as a result of the absence of collateral and credit history.
Furthermore, due to the level of risk, local lenders impose extremely high interest rates to those who want to open small businesses. There are many cases of deception against borrowers and landowners based on tampering and corruption. So, it is clear that, in line with the poverty reduction scenario, financial inclusion must be a priority on the political agenda.
The combination of blockchain-based cryptocurrencies and microfinance might be the solution. In particular, can this new technology be the key to break down the barriers to microcredit access? Microcredit is nothing new. In 1983, Muhammad Yunus, who was awarded the Nobel Peace Prize in 2006, founded Grameen, the first microcredit institution, on the belief that loans rather than charity could improve economic development.
Grameen – known as the bank for the poor – applied a 20% interest rate, far higher compared to that of traditional banks. In this way, only those who could generate enough surplus were able to afford microcredit.
The crypto revolution is going to change these conditions. As said before, many startups have been trying to implement blockchain technology to their services. In particular, microcredit startups leverage on the traceability of the records through cryptography in order to exchange digital goods as collateral. The whole process doesn’t include intermediaries. Again, less additional fees, and a further step on the road to limit corruption.
Among these projects, Everex stands out. It was developed on the Ethereum network and is characterised by speedy confirmation times (i.e. one minute).
It gives the ability to exchange its crypto cash with fiat currencies. Loan transactions are carried out between different markets – the physical one and the virtual one. As for credit history, it is located and stored on the network chain and generated on the basis of behavioural data.
The unbanked will no longer have to establish contacts with physical financial institutions to create their credit scores. They will not even need to rely on external documentation. In addition, microcredit startups will now give the option of generating smart predefined contracts that cannot be edited. Everything is stored and public, which makes ownership impossible to manipulate, as it is registered and untouchable.
Whether or not it is the first step to end poverty, blockchain is a reality. Major institutions have already learned this. Society is entering a new digital revolution, in which the consequences may forever change the way people interact in a more inclusive economy.
Carillion’s Collapse: It’s The Management, Stupid!
When UK-based construction company Carillion PLC finally hit the buffers after months of pointless government efforts to prop up the public sector contractor, it wasn’t long before the finger of blame again pointed to Public Private Partnership (PPP) projects for the financial mess.
It’s a familiar argument that is promoted reflexively in a lot of the UK press because it fits an anti-corporate narrative. It follows the line that when public authorities invite private sector businesses to design, build and operate a public asset, the result will be huge profits for the contractor, its bankers and its shareholders while the public sector carries the bag for bailing out projects when they fail.
In the case of Carillion, that narrative got a boost from a National Audit Office report this week that stated that there’s still insufficient evidence to show that the UK’s Private Finance Initiative (PFI) program delivers value for money. It also said that the cost of PPP/PFI to taxpayers comes to £200bn, a particularly uninformative claim, considering that the equivalent public sector contracting almost always goes over budget and costs taxpayers untold billions of pounds through inefficiency, non-delivery and cost overruns, yet is rarely reported about in the press.
Boost for Nationalist Agenda
The NAO report will boost the Labour Party’s current position that all such projects should be nationalized, whatever the cost.
The only problem with the way that this has been reported is that PFI is not why Carillion collapsed.
In fact, the main reasons for Carillion’s collapse are that it failed to deliver on a wide range of contracted services, so it wasn’t being paid, even as it took on more projects and more and more debt, estimated to total £900m. The company also continued to boost dividends, despite a widening pension deficit, which now sits at £587m. Finally, Carillion incurred cost overruns and delays in the delivery of many public sector projects, of which only three were PFI.
The idea that PFI was to blame for Carillion’s collapse and that taxpayers are now on the hook for the many public sector projects is going to stick, even though it’s nearly as inaccurate as the claim that the company, its investors and its bank finance providers are profiting from the company’s demise.
The Guardian, for example, singled out three PFI investments, including two troubled hospital construction projects, for their contribution to the collapse of the company. These included the £335m rebuilding of the Royal Liverpool University Hospital and the £350m Midland Metropolitan Hospital, both of which ran into expensive delays.
But the media focus on Carillion’s mishandling of three PFI contracts ignores the larger issue, which is the company’s own inability to manage risks associated with the delivery of any of its services.
There is a legitimate debate around whether PFI and its successor, PF2, deliver value for money to public sector institutions such as The National Health Service (NHS). This is because of the higher financing costs for private sector borrowing and thus the significantly higher cost to NHS trusts of having the private sector operate and maintain these assets once they are built.
Bottom Line Focus
At the end of the day, what matters most is the company’s ability to deliver. We’ve seen this before when another opportunistic PFI company, Jarvis, got in over its head and collapsed.
There have been more than 130 health-related PPP projects in the UK since the PFI scheme was established in 1992. Almost all of the large hospital projects were delivered on time and on budget using PFI during the Labour government from 2001 to 2010. This was followed by a sharp fall in waiting lists for surgery and other essential healthcare services across the country.
The issue in this instance should not be the delivery model, but rather the company that is responsible. In Carillion’s case, there is ample evidence that when it came to running the projects that were at the core of its business, nobody effectively managed the rising costs and declining receivables, even as they inexcusably boosted the dividend in each of the 16 years since the company was founded.
The end result, while enriching a few investors, was a precipitous share price decline since the middle of 2017 that more than erased those gains. The company’s lenders are also reported to have started writing down the £835m of committed bank facilities and £140m in short-term facilities, though their exposure could be much higher.
Business as Usual?
Despite all the handwringing, there is no shortage of public sector contractors who will happily take over the many public sector construction and support service contracts that Carillion’s collapse will require the government to put up for tender.
This will follow an established protocol that is designed to ensure that essential services are not interrupted. The larger, more troubled Carillion projects will take longer to renegotiate but will ultimately find replacement companies to deliver them. Work interruptions are likely to be limited, and people who have been laid off as a result of the collapse will quickly find new work, particularly given the current healthy state of the labour market. The takeaway from all of this is simply that bad businesses, whatever their line of work, go to the wall and better ones replace them.
Whatsapp Launches New Venture Aimed at Businesses
Whatsapp has launched a new app targeted at businesses, called the Whatsapp Business App, which they claim will enable companies to “communicate more efficiently” with present and potential customers.
This forms part of Whatsapp’s wider strategy to branch out into the corporate world. It plans to use the app to generate new revenue by charging businesses for using the extra communication tools that will enable them to better connect with their customers.
Although the app is set for worldwide release, at present it will only be available in Indonesia, Italy, Mexico, the UK and US. It includes a feature which indicates a business is authentic with a green tick badge next to their name.
Amex: Troubled Credit Card Company Reports $1.2bn Net Loss
On Thursday, American Express, or Amex, reported a net loss of $1,197m in the fourth quarter, the first net loss the company has experienced for 26 years.
Although the company stated that revenue from interest expenses was up 10% to $8.8bn, Amex said recent reforms to the US tax code meant the company incurred extra costs, including a repatriation cost on its foreign assets as well as a devaluation of its deferred tax assets. It estimates total costs amounted to $2.6m.
For the full year, net income was $2.7bn compared with $5.4bn the company earned in 2017. However, even with the estimated $2.6m the company claims it incurred from the recent tax charge, net earnings were still $5.3bn, $100m lower compared to last year.
In New York, American Express shares (AXP) took a near 1% tumble at the beginning of trade with shares finishing the day on $99.90. JPMorgan Chase and Goldman Sachs anticipate greater earnings for 2018.
“Overall, we believe the Tax Act will be a positive development for both the U.S. economy and American Express” said CEO and chairman Kenneth Chenault. Chenault also said he will be leaving Amex in “very strong hands” when his successor, Steve Squeri takes over next month.
American Express has suffered from an ever-reducing share in the credit card market and ended its 14-year relationship with American warehouse chain Costco who in 2016 made an agreement with the market leader, Visa.
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