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What Happens to the ‘Indispensable Nation’?

Chris Kuehl, Ph.D.

The political crisis that has gripped Germany may or may not be real. Many analysts assert this is all posturing and leveraging for better positions. The Free Democrats (FDP) have been employing this tactic for years; they have always been quite capable of switching from the center left to the center right, and have been in coalition with both the Christian Democrats and the Social Democrats. The decision to pull out of these negotiations may just be a means by which to force Chancellor Angela Merkel to pressure the Greens on the provisions the FDP considers important. The reality is that members of all of these parties want a slice of power. That means they need to find a way to work together.

There is a bigger issue here. Even if one assumes the talks start up again and a coalition gets cobbled together, it is going to be a fragile one with partners that do not trust one another and differ on many key issues. It is even odd that the Greens are in the club as they have been considered far more compatible with the Social Democrats in the past.

Assuming that a coalition does form, the position of Merkel will be weakened dramatically. She will have to constantly balance the demands of her two prickly partners as well as the far more conservative wing of her own ruling group. The Christian Social Union (CSU) has exerted its influence in the past and will do so in the future.

All of this internal intrigue and German angst has the rest of Europe in a quandary as it no longer knows what policies it will be able to count on from Germany. Three areas stand out as the most important.

The first and most obvious is the refugee situation. This is the issue that cost Merkel the support of many of her conservative backers. The CSU has been in revolt since the policy emerged. The refugee issue is what prompted the formation of the far-right party, Alternative for Germany (AfD). There will be a great deal of pressure on Merkel to reverse course on refugees, and she may not be able to push back as she has in the past. This is an issue that may have dropped from the headlines to some degree, but it has continued to be a major concern with hundreds of people trying to make landfall in Europe every day. If Germany takes a more hostile approach to refugees, it will have a profound impact on the rest of Europe as well as the countries where the migrants are coming from.

A second issue is whether Germany can continue to be the economic engine it has been. The majority of southern Europe remains in trouble financially. It has been German largesse and investment that has kept the likes of Spain, Greece, Italy, Portugal and others afloat. The Free Democrats have been opposed to this policy from the start and may demand severe cutbacks. The Greens have been far more supportive of this policy, but may not be willing to make this a priority. If German policy shifts on these bailouts and supports, a swift set of crisis situations will develop. That might drag the growth of the whole EU down.

Finally, there is the whole question of European leadership. Does Merkel start to lose that influence at the precise moment that Emmanuel Macron of France starts to emerge as the leader of Europe? His ambitions are clear—he has set out an ambitious agenda. The fear is that France lacks the economic stamina to back him. Right at the moment, France is not ready to replace Germany and Macron was intending to partner with Merkel on these plans. Is that still a viable strategy or will Macron be left holding the EU together on his own? Greens are pro-Europe, but the FDP has been skeptical and so are many within the CDU/CSU group. 

Getting Prepared for Disruption

Finance and treasury professionals know that new technologies like artificial intelligence, blockchain and robotic process automation will disrupt their function, yet they believe their organizations are not prepared for the coming changes, according to a new AFP MindShift survey.

The poll of 279 finance and treasury professionals finds that just 11% believe their organization is “fully prepared” or “very prepared” for these new technologies. Fully 36% believe their organization is “minimally prepared” or “not prepared.”

The AFP MindShift survey also found that:

  • 50% say blockchain and the internet of things (IoT) will have a moderate or significant impact on their profession.
  • 48% do not plan to implement IoT technology; it is even higher for blockchain (51%), artificial intelligence (54%) and robotic process automation (55%).
  • 58% say the biggest hurdle to adopting emerging technologies in their organization is “awareness and engagement.”

The survey results should serve as a wakeup call, said Jim Kaitz, president and CEO of the Association for Financial Professionals, who is one of the creators for AFP MindShift, a consortium that connects technology innovators to the corporate finance and treasury community.

“The benefits of new technology for finance and treasury are clear: increased productivity, reduced costs and better decision making,” Kaitz said. “However, the challenges are just as clear: lack of control over technology, cyber security, companywide consistency, maintaining employee skills and the potential loss of jobs. Treasury and finance needs to get their heads out of the sand and begin to grapple with these challenges.”

Finance and treasury departments should pay attention to emerging technologies such as robotics process automation, artificial intelligence and blockchain, according the AFP MindShift released whitepaper, which was also released by the Association for Financial Professionals, Marsh & McLennan Companies’ Global Risk Center and Starfish Leadership.

The paper defines the technologies as the following:

  • Robotic process automation: The use of sophisticated computer software that automates routine and standard tasks normally performed by humans, without the need for constant human supervision;
  • Artificial intelligence: Amplifies cognitive abilities, providing solutions to problems where the complexity is too great, the information is incomplete or the details are too subtle and require expert training; and
  • Blockchain: A shared database that provides a transparent and secure way to efficiently record and transfer information; using a distributed ledger, it offers a decentralized recordkeeping solution that is encrypted, digitally synched and shared across the network.

Each new technology presents unique opportunities for finance and treasury, and accordingly, requires a practical set of moves to help the function accelerate awareness and proactively manage adoption risks, the paper states.

“When finance and treasury roles consider applying emerging technologies, such as robotics process automation and AI, to their processes, there are a number of attractive capabilities that can potentially transform the way they operate and enable their business to be more competitive,” said Leslie Chacko, director, Marsh & McLennan Companies Global Risk Center. “However, there are serious challenges and considerations in governance, talent strategy, cyber risk and more that have to be very carefully considered. That said, ignoring these technologies isn’t an option.”

The paper outlines the following six moves that finance and treasury can make to enhance their awareness, assess their organization and test these technologies with minimal risk exposure:

  • Be clear on your respective finance strategy—determine how technology fits into this strategy and make sure organizational peers and team members understand it.
  • Keep an eye on the market and landscape—monitor major developments for technologies applicable to your organization.
  • Engage the broader organization (board, technology counterparts and internal finance and treasury teams) on opportunities and risks of emerging technologies—determine how to address concerns and share where technologies can enhance productivity and employee experience.
  • Identify a specific problem to solve—a scenario that showcases technology’s potential and that does not disrupt existing operations.
  • Invest in a pilot vs. going all in—succeed with a small implementation, and manage risk and resources through a focused effort with a small team.
  • Determine where it makes sense to partner with an external firm—a trusted partner can help accelerate and de-risk initiatives.

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December 11-December 15

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Seven in 10 Banks Lose Business Due to Inefficient KYC

Financial institutions need to improve the efficiency of their know-your-customer (KYC) and sanctions remediation processes or risk losing business, according to the latest report published by LexisNexis® Risk Solutions. 

About 70% of professionals in financial institutions are worried that customer friction caused by inefficiencies in these practices are resulting in lost business, the data show. “KYC and remediation procedures are in place to investigate whether a new or existing customer flagged as a potential financial crime or sanctions threat, poses a genuine risk.”

Industry feedback indicated that common reasons for losing business due to inefficiencies included customers frustrated with delays or repeated requests for information, and institutions rejecting potential customers that were erroneously flagged as a financial crime risk.

The report, KYC & Sanctions Remediation: The Impact of Inefficiency, interviewed 151 decision makers responsible for KYC and sanctions alert remediation in U.K. financial institutions (including banks and investment firms), to identify both the root causes and business impact of inefficient financial crime compliance processes.

“Financial institutions are challenged with balancing the needs of the business and customers with financial crime compliance obligations, which can often cause friction,” the report finds. Over half (59%) of the decision makers surveyed stated that their current KYC and sanctions remediation processes are less than very efficient (63% of small- to mid-sized firms and 54% of large firms), which has a subsequent negative impact on their organization.

The biggest factor impacting process efficiency was found to be disparate and siloed data systems, with 60% of those with less efficient processes citing this as a key concern. The next two most common factors were the lack of a single risk view for customers and prospects, and the time required to maintain an audit trail, both cited by 59% of respondents.

The consequential business impacts varied from internal friction between departments and decreased productivity, to loss of business. Notably, over two-thirds of professionals from banks (67%) with processes that needed improvement, pointed to losing business due to inefficiencies in remediation practices, with 50% of investment firms flagging the same issue.

Global Roundup

Mugabe leaves legacy of economic ruin, upheaval in Zimbabwe. From widely acclaimed liberator of his nation to despotic dictator, Robert Mugabe’s 37-year rule of Zimbabwe has been one of Africa’s most controversial and influential. Wily and ruthless, the 93-year-old Mugabe outmaneuvered his opponents for decades, but was undone by his own miscalculation in his final weeks in power. (AP)

The challenges to reform in post-coup Zimbabwe. Robert Mugabe’s grip on Zimbabwe has finally been released after 37 years, following the Nov. 22 takeover by the military. But the country’s problems are far from over. (Global Risk Insights)

Japan’s best export performance since 2008 crisis rolls on. Japan’s exports grew by double digits for a fourth-straight month in October, continuing the best year-to-date performance since the global financial crisis. Improving global demand has fueled strong growth in Japan’s exports throughout the year, with new smartphones creating demand for parts and machinery in recent months. (Bloomberg)

EU-Japan free trade deal still penciled in for end of 2017. EU trade Chief Cecilia Malmström confirmed again on Nov. 17 that her team wants to wrap up a commercial agreement with Japan, another major deal on the EU’s free trade agenda, before the end of the year. Despite promising to scrap around a billion euros of trade tariffs, one of the main sticking points in the talks is how to settle investment protection disputes. (EurActiv)

Mexico, Canada shun NAFTA autos counteroffers: Sources. Divisions over updating the NAFTA trade deal showed no sign of easing on Nov. 19 as Mexico and Canada signaled they would not offer counterproposals to U.S. demands for far stronger automotive content rules, people with knowledge of the talks said. (Reuters)

Trinidad & Tobago: Crime, forex shortage impeding investments. United States Chargé d’Affaires John McIntyre says the foreign exchange shortage and crime are impediments to U.S. investment in Trinidad & Tobago and some U.S. companies have even threatened lawsuits against importers that could not settle their bills because of restricted access to U.S. currency. (Guardian)

Israeli container shipping firm ZIM trials blockchain-based bill of lading. Israel-based container shipping company ZIM, in collaboration with Sparx Logistics and Wave, has completed a first pilot of paperless bills of lading based on blockchain technology that allows secure exchange of original documents on the blockchain. Developed by Wave, it uses distributed ledger technology to ensure that all parties can issue, transfer, endorse and manage shipping and trade-related documents through a secure decentralized network. (Econotimes)

Washington slaps new sanctions on North Korean, Chinese firms. The Trump administration imposed new sanctions on a slew of North Korean shipping firms and Chinese trading companies on Nov. 21 in its latest push to isolate the rogue nation over its nuclear-weapons development and deprive it of revenue. (AP)

U.S. sanctions individuals, entities for Iran-linked counterfeiting. The U.S. Treasury Department on Nov. 20 sanctioned a network of individuals and companies it said counterfeited Yemeni bank notes potentially worth hundreds of millions of dollars for Iran Revolutionary Guard’s Qods Force. The network circumvented European export restrictions in order to provide the counterfeiting supplies and equipment, according to a Treasury statement. (Reuters)

U.S. trade deficit with China continues to rise. In the third quarter of 2017, the U.S. trade deficit in goods with China reached $103.1 billion—a 6.7% increase over the same period in 2016—due to increased imports, which grew 8.1% year-on-year to reach $134.9 billion. U.S. exports to China grew robustly to $31.8 billion, up 13% year-on-year, according to the most recent report from the U.S.-China Economic Security Commission, a U.S. government agency. (Global Trade Magazine)

Week in Review Editorial Team:

Diana Mota, Associate Editor and David Anderson, Member Relations