May You Live in Exciting Times

How COVID-19 may act as a tipping point for the digital economy

The world is going through an economic revolution, driven by technological innovation and increased online activity. While these underlying secular drivers have been working their way through our global economy for a few years now, the COVID-19 crisis appears to have shocked the system. In many ways, the crisis has become a catalyst for a number of trends that have been shaping the general business environment, as well as forming new work habits and human behaviour, as the situation developed. Going forward, COVID-19 will have permanently changed the financial services industry. Charlotte Svensson, Working Group Coordinator with the European Chamber, looks at how deals are executed, capital structured and risks assessed by corporate management, who will now have to take into account the fact that a second wave or even a new pandemic might occur in the future.

The digital economy is a complex phenomenon. Whereas traditional linear business models create value through products or services sold directly to customers, platform-based business models create value by connecting users (both providers and customers of products and services) with each other through an online network. A successful platform requires both sides of a market to have sufficient market players. The platform must provide measures to ensure confidence is maintained among all parties in the triangular relationship it constitutes: the platform, the producer and the consumer. In essence, the emergence of third-party payment platforms provided a basic guarantee for online economic activities, which gave rise to new practices surrounding the sharing of physical assets and selling of services online.[1]

In the early days of the Web 2.0 era, the construction of the Chinese electronic banking system by state-owned commercial banks had just begun, and it was still too weak to accommodate internet companies. Therefore, big internet companies were forced to develop their own trademark virtual currency that could be purchased by fiat currency to trade and exchange on digital platforms. It was basically with the introduction of Alibaba’s Alipay[2] that the foundation for the Chinese online payment system was laid.

But the digital economy entails so much more than just business conducted on an online platform; it is about the interconnectivity of people, organisations and machines that results from artificial intelligence. If anything, the current pandemic crisis has brought to the surface the fact that the world is more interconnected than ever before.  

The need for strategies around digital banking, insurtech and loan management was clear before the pandemic hit. The question has now become whether financial service providers will remain committed to new models of daily operations post-COVID. Financial players will be encouraged, and expected, to provide financing for platform firms as they themselves go through their own digital transition. The presence of digital giants in financial services, and their significant advantage in data and customer access, however, highlights the dilemma for financial service providers of whether or not they should act more like internet companies or financial service providers.

There are a variety of reasons why businesses fail in times of crisis, but ultimately, it is because they run out of cash, despite great ideas and sound business models. Cash is the lifeblood of any business. Although there has been extensive reform to China’s financial system (such as a complete restructuring of the regulatory bodies) as well as some meaningful opening-up measures (such as removing some limits on foreign investment and entry barriers), the opportunities for European financial service providers to participate in China’s digital economy remain limited for the foreseeable future. Among others, the country’s stringent data localisation requirements and prescriptive cybersecurity risks break financial institutions’ global operational models, and increase European banks’ operational risks and associated costs.

Furthermore, in order to operate as an e-commerce platform, both European insurance providers and consumer finance companies can obtain the B21 licence (a sub-category of the value-added telecom services licence), but the application process is reported to be very long and complex. Another approach is to operate as an online service provider under the B25 licence, which requires the percentage of foreign ownership to be less than 50 per cent, thereby disqualifiing most European companies. Although there are other options available—for example, the special treatment for Hong Kong-based businesses under the Closer Economic Partnership Arrangement (CEPA), or establishment in a free trade zone – the best option for all would be for China to establish a level playing field between foreign and domestic players in this area.  

The function of financial institutions extends beyond money alone. For financial services, COVID-19 comes at a time of transition and conflict between the traditional and the blended/online model. Banks, insurance providers, loan operators and leasing companies are vital for any modern economy to function properly, but also for ordinary citizens to live a decent life, run their businesses and achieve their dreams.

COVID-19 could be the driving force behind the largest historical shift in business habits. The direct benefit of this is the forced adoption of digital processes and technology. For some, embracing the digital economy will be a struggle. Others already find themselves more closely aligned than ever with the new way of managing business operations. Financial service providers that had already substantially invested in building up their digital capabilities have been more likely to weather the storm. Not to mention that the impacts of the pandemic can also result in different synergies across various sectors: for example, whereas falling interest rates would weigh heavily on the insurance industry, it would be welcomed by consumer finance and non-bank loan operators. This is one of many conclusions executives are likely to make following the COVID-19 crisis; that digitalisation is a must, change is inevitable and customer behaviour changes.

This is a time to better understand how customers expect financial service operators to support their financial needs. It is also a time to reevaluate how technology and analytics can accelerate future organic growth. For instance, in the 2019 report Banks Brace for a New Wave of Digital Disruption by the Boston Consulting Group, the authors concluded that “bank leaders know that digital technology and changing customer behaviours will take the industry in new directions. However, many of them no longer think that disintermediation is likely in the near term. They expect an inflection point that will signal it’s time to move quicker.”[3] Only half a year later, the inflection point arrived in the form of a global pandemic. 

If China is truly recovering from COVID-19 and restarting its economy and Europe is easing lockdowns, then the rest of Asia—especially its growing middle class—will continue to be prime consumers of tech-savvy adoptions, and that is a situation also ripe for technological innovation. Not to mention that Asia Pacific has by far the largest share of banking revenue pools in the world.[4] For these reasons, despite all the doom and gloom the COVID-19 crisis has brought, it has never been a more exciting time to be part of the digital economy.  

Note: The opinions and statements in this article are those of the author, and not necessarily those of the European Chamber.

[1] Ma Yide and Haorang Zhang, 2019, Innovation, In Economic Development, and Intellectual Property in India and China, Development of the Sharing Economy in China: Challenges and Lessons, Springer Publications, pp. 467-484,
[2] The basic model of Alipay is that the user pays first to the third-party payment platform, and the service provider delivers the goods. After the user confirms the receipt of goods, the third-party payment platform completes the payment to the service provider. The third-party payment platform functions as a transaction guarantor.
[3] Kumar, Monish et al, Banks Brace for a New Wave of Digital Disruption, Boston Consulting Group, 25th July 2019, viewed 18th May 2020,
[4] Ibid.