Chris Foster

Financial resilience part 1: Data processing and secure payments

Chris Foster

This article was first published by Alliance Trust Investments on 17 February 2016.

This is the first part of a four part series around the subject of financial resilience, a key theme we have been researching this year and an increasingly important issue. The first part will look at data processing and secure payments, the second part; peer-to-peer lending, the third part banks and the final part will explore insurance.

What is financial resilience, and why does it matter?

Financial resilience refers to the ability of a society to take advantage of growth and development opportunities, as well as to weather difficult times (1).  Financial resilience is a social issue and falls under our theme of Resilience.

A lack of financial resilience has the potential to undermine the effectiveness of monetary policy, exacerbate economic downturns, trigger capital flight and exchange rate pressures, and create large costs related to rescuing troubled financial institutions. Increasing connectivity among financial institutions and tighter financial and trade linkages between countries mean that financial shocks in one jurisdiction can cause a contagion effect to seemingly unrelated industries and countries (2).

You only have to go back to September 2008 to see the impact that weak financial institutions, inadequate regulation and supervision, and a lack of transparency had on the global economy.

Nomalised performance  of major indices

The impact on stock markets (3)

Over an 18 month period from the middle of 2008 the MSCI World Index lost around 60% of its value and has taken 7 years to recover. On a first derivative level, listed businesses saw their value more than half, as did many individual investor’s savings and pensions. Regardless of your view on stock markets, huge declines such as this have severe and far reaching consequences.

GDP growth of the 10 largest economies

The impact on Gross Domestic Product (GDP) (4)

The annual output of every major economy fell dramatically following the crisis and world GDP shrank 1.7% in 2009.

Financial Resilience is clearly a broad but extremely important theme that can be played in a plethora of different ways. I will briefly outline some of the key areas we are actively investing in a series of articles, as we believe they play in an important role in making our financial system more resilient.

Part 1. Data Processing and Secure Payments

The importance of digital payment

A recent study by the Harvard Kennedy School recommended that the UK's £50 bill should stop being printed as well as the $100 and €500 notes. The study estimates that global crime flows total £1.4tn per year, with corruption adding another $1tn (£700bn) (5).  It recommends banning the high-value notes to make it more difficult for criminals to carry out large transactions with no record.

Electronic payments however pose risks of their own.

High profile data breaches involving more than 100 million credit cards at big retailers, such as Target and Home Depot or at Telecom firm TalkTalk more recently, have grabbed headlines. On a more positive note, there have also been innovative developments spurred by the proliferation of smart phones, the emergence of wireless transfer technology, and the developments of e-commerce, which makes financial transactions more secure.

One of the areas we are particularly interested in is credit cards. The biggest opportunity for increased credit card penetration is the replacement of cash, as indicated in the slides presented by Visa back in 2013. We prefer recorded, electronic payments over cash, as we take the view that the ‘black economy’ – untraceable business dealings that are not reflected in a country’s GDP – and tax evasion will be made more difficult. 

Potential winners

Electronic payment networks such as VISA are well-positioned to benefit from an increasing trend towards digital payments whilst companies that specialise in data protection are also likely to experience increasing demand for their products. Checkpoint and Sophos Group – companies that have expertise in data security - are two companies held in the SF funds that we believe are set to benefit from such a trend.


1 UN School of Government: Improving Financial Resilience
2 IMF: Financial System Soundness
3 Data source: Bloomberg
4 Data source: National Accounts Main Aggregates Database
5 Making it Harder for the Bad Guys: The Case for Eliminating High Denomination Notes, Peter Sands et al, 2016


For a comprehensive list of common financial words and terms, see our glossary here.

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Wednesday, February 17, 2016, 12:00 AM