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Industry roundup: 14 April

UK government may extend loans scheme for SMEs

The UK government is being urged to continue loan schemes for smaller businesses introduced during the Covid-19 pandemic and extend them indefinitely, after Britain’s inflation rate rose to a 30-year high of 7% in March.

“[The] announcement will become a little repetitive as we proceed through 2022 and inflation continues to rise,” said Douglas Grant, Group CEO at Manx Financial Group. “We believe that demand for working capital is set to soar to unprecedented levels as more businesses desperately require liquidity provisions to counteract rising interest rates, supply chain issues, increases in wages and additional pandemic-induced headwinds. With the cost of borrowing set to increase, many SMEs are struggling and will continue to be challenged this year.”

Earlier this month, the Financial Times reported that government officials were already in talks with banks on previous Covid financial support schemes and exploring ways how Treasury-guaranteed small business loans could become a permanent feature. Over the past two years a total of £79.3 billion (US$103.4bn) in business loans has been made through pandemic financial support.

One person close to the talks told the FT that the focus is on supporting businesses to grow rather than just survive the pandemic or the current energy crisis.

According to Grant: “Having successfully deployed multiple relief schemes – the Bounce Back Loan Scheme (BBLS), Coronavirus Business Interruption Loan Scheme (CBILS) and Recovery Loan Scheme (RLS) – for SMEs throughout the pandemic, the UK government should, in our opinion, now turn their attention towards a permanent loan scheme to help leverage businesses going forward.

“Now is a vital time for the government to work together with traditional and alternative lenders to guarantee the future of our SMEs and to ensure the successes of these emergency schemes are not wasted.

“As we look towards the post-pandemic era many SMEs are at a critical tipping point, some between failing and surviving, others between surviving and thriving. As the government looks for ways to power the economy’s resurgence, the importance of a permanent scheme cannot be understated, it could act as the fundamental difference between make or break for many companies, and in turn, our economy. SMEs would be well-advised to take stock of their current capital structure and if appropriate, access fixed term, fixed rate loans to prevent additional exposure to an increasingly volatile lending market.”

“There is definite need for a permanent follow-up,” said one banking executive who had seen the questionnaire that the government sent out to bank officials.

Among the questions asked is at what level to set the Treasury guarantee (the £44 billion BBLS had a 100% guarantee, while the CBILS was 80% covered), whether personal guarantees would be needed, and what sort of companies should be eligible. The current RLS which guarantees 80% of a bank loan up to £10 million ends on 30 June. More than £3 billion has been lent by UK banks under the scheme, a senior industry executive told the FT.

The possibility that the government could make state-backed guarantees for business loans permanent – encouraging historically reluctant banks to lend more freely to SMEs – is unlikely to please everyone, including those business lenders outside such a scheme.

The previous BBLS was criticised for handing out money to small businesses with few checks, leading to peer Lord Agnew calling the whole scheme “one of the most colossal cock-ups in recent government management”. The Department for Business, Energy and Industrial Strategy believes that £4.9bn of BBLS loans could be unrecoverable due to fraud.
 

BoJ official outlines aims of digital yen

A senior central bank official at the Bank of Japan (BOJ) has dismissed speculation that Japan might introduce a digital yen as a means of achieving negative interest rates.

Shinichi Uchida, executive director at the BOJ, has outlined the next phase of work on the country’s prospective central bank digital currency (CBDC).  Earlier this month, the central bank started phase 2 of its proof of concept (PoC), after which it will consider a pilot programme with financial institutions and payment service providers (PSP).

The decision as to whether Japan should issue a CBDC cannot be made by the bank or the financial sector alone, Uchida said. However, he confirmed that although Japan had experimented with negative interest rates in 2016 as part of its quantitative easing (QE) policy “while the idea of using such a functionality as a means to achieve a negative interest rate is sometimes discussed in academia, the Bank will not introduce CBDC on this ground.”

Uchida’s speech follows a warning earlier this year by the former head of the BoJ’s financial settlement department Hiromi Yamaoka, who said that CBDCs could potentially destroy the Japanese economy. While Yamaoka agreed with the idea of digitising payment methods, he did not support the idea of using a CBDC for it.

Uchida also confirmed that if the creation of digital yen does move forward, Japanese citizens can expect the CBDC to be released with a series of unique features. The BoJ is considering imposing a limit on the transaction amount of each individual or entity for the duration of the pilot and is also debating whether to make the digital yen an interest-bearing asset.

The BoJ first shared its three-phase trial outline for a CBDC in October 2020. The first two phases of the trial are focused on testing the proofs-of-concept while the third phase would see a pilot currency launched.

Phase one began in April 2021 and ran to 22 March. The BoJ began its second phase of trials on 24 March and said that it would begin testing the more technical aspects around the issuance of the digital yen.

However, the BoJ’s governor, Haruhiko Kuroda, said recently that the bank has no plans to introduce a CBDC in the near future.

Earlier this week, Brazil’s central bank announced that it plans to launch a CBDC pilot programme in the second half of 2022 and the Reserve Bank of South Africa has finalised the technical proof of concept for its own planned CBDC.
 

Feedback imminent on US proposed money market fund reform

The deadline of 12 April has passed in the US for commentary in response to the Securities and Exchange Commission’s (SEC) proposed reforms of money market funds (MMFs) – although late submissions might still be accepted – and feedback is expected over the coming days.

Preliminary reports suggest that critics of the SEC draft rules claim they would be detrimental to the industry. “US asset managers are pushing back on draft rules aimed at fixing systemic risks in the US$5 trillion MMFs industry, arguing that one of the proposed measures would kill off popular products,” Reuters reported this week. “After taxpayers bailed out MMFs, a key source of short-term corporate and municipal funding, for the second time in 12 years during the pandemic-induced turmoil of 2020, the industry is facing renewed regulatory scrutiny.

“In December, the SEC proposed boosting MMFs’ resilience by, among other measures, adjusting a funds’ value in line with trading activity so that redeeming investors bear the costs of exiting a fund and don’t dilute remaining investors. In theory, this “swing pricing” reduces the incentive to run to the exit first. The industry is pushing back hard on the swing pricing measures, arguing they would be operationally challenging, impose excessive costs on fund sponsors, and reduce daily liquidity for investors.”

The report quoted Jane Heinrichs, associate general counsel at the Investment Company Institute, who told Reuters: “We really do believe that it would kill the product.... Funds would determine it’s not worth the changes necessary to make it work for a product that will no longer meet the needs of investors.”

The report also quoted Peter Yi, a director at Northern Trust Asset Management, who commented: “While swing pricing is used by some European funds, it is an unfamiliar concept to US investors. Without a doubt, swing pricing is going to be very difficult for investors to understand.”

An article in the publication Plan Sponsor comments: “The SEC had to bolster money market mutual funds during the 2008 global financial crisis and the 2020 onset of the pandemic. Both times, investors pulled cash out of the funds. So the agency is moving to tighten the withdrawal rules.

“The comment period on the SEC’s proposal [has ended] and there’s a lot of opposition. Big money market investors are threatening to yank their cash out of the funds. The funds mostly invest in commercial paper and bank certificates of deposits. And these, said SEC Chair Gary Gensler in a statement, tend to be illiquid in times of stress. The problem, he stated, is that there isn’t a lot of trading in commercial paper and certificates of deposit (CDs) in good times. In stressful times, it almost entirely disappears.

Plan Sponsor adds: “What particularly sticks in the craw of many fund investors is ‘swing pricing’, which essentially shifts the cost of redemption onto redeeming shareholders. Now, the investors who didn’t redeem shoulder the cost. The other controversial feature of the SEC plan is to increase the daily and weekly liquid asset minimums to 25% and 50%, respectively, from 10% and 30%. Also, the plan would expand available information about the funds and thus the SEC’s ability to monitor them.”
 

Companies’ IT decision-makers “value profit over cybersecurity”

Many IT decision-makers would be ready to turn off their firm’s cybersecurity measures if it resulted in improved performance, and ultimately better financial results for their company, according to research from US tech company F5.

F5, which specialises in application security and online fraud protection surveyed almost 1,500 IT decision-makers from numerous industries across the world for its 2022 State of Application Strategy Report and found 76% would be ready to make the trade-off. The company says that organisational cybersecurity is now evolving to risk management, in which businesses are taking a modified approach. 

Among the reasons for the shift, the report adds, is due to identity-based security now surpassing traditional app security and delivery technologies, particularly in terms of prevalence. Nearly all the respondents (96%) claim to have embraced zero-trust policies, but nearly half (44%) have inconsistent security policies across all applications. 

At the same time, highly distributed architectures, and a broader threat landscape that results from the ongoing digitalisation of previously physical experiences, are making businesses embrace a “variety of solutions” to help them manage the growing complexity and address the ever-widening skills gaps. 

“Our research shows that the average organisation manages hundreds of applications across data centres, multiple clouds, and edge deployments—as well as more than 20 different app security and delivery technologies,” says Kara Sprague, EVP and GM, App Delivery, F5. 

“With these growing and more distributed portfolios, organisations require consistent security, end-to-end visibility, and greater automation in their app deployments to tame debilitating complexity and continuously add value for customers, streamline operations, seize new opportunities, and respond to emerging threats in real-time.”

This makes visibility a growing challenge and nearly all the respondents (98%) said they didn’t have the insights they needed to address business objectives and improve their customers’ experiences (CX). While 95% plan to mine operational data for insights they hope can improve the CX and drive business growth, 98% said that it wasn’t yet possible and even if they deployed more Artificial Intelligence (AI), many would still lack the staff, and knowledge, to properly identify relevant data, and put it to good use.


Bank of Canada accelerates policy tightening

The Bank of Canada has hiked its benchmark interest rate by half a percentage point to 1% in its latest move to rein in high inflation. It began raising rates last month with an increase to 0.50% from an emergency low of 0.25%.

The Bank is forecasting that Canada’s economy will grow by about 4.25% this year before easing to 3.25% growth in 2023.

Commenting on the move Rochelle Vaz, Associate - Global Capital Markets, at Validus Risk Management, said: “This marks the central bank’s first 0.50% rate hike since May 2000 and will precede a series of successive rate hikes that financial markets are implying will bring the policy rate to as high as 2.5% by the end of the year. The last time the policy rate was at 2.5% was in October 2008, underscoring the urgent need to rein in inflation expectations.

“The central bank also announced that it would stop its government bond purchases on 25 April to shrink its balance sheet. Its inflation outlook has been adjusted “substantially” higher and expects inflation to remain well above its range for the rest of the year. The Monetary Policy Report (MPR) expects food, energy, and supply chain constraints to push up inflation.

“Growth outlook for 2022 remains strong on the back of high commodity prices, a tight labour market and rising wage growth forecasts.

“[The] policy decision shows that the BoC has turned combative in its fight against inflation and marks an acceleration of its exit from ultra-loose monetary conditions. It is now clear that the BoC will continue to raise rates this year and the question now arises as to how long the BoC will remain in the tightening cycle.

“Canadian consumers are highly sensitive to increases in interest rates as household debt is one of the highest in the G10.”


EBANX and VTEX partner on Latin America cross-border payments

Brazil payments fintech EBANX and VTEX, the digital commerce platform for major corporates and retailers, announced a partnership focused on cross-border payments for Brazilian e-commerce in Latin America. The union will enable Brazilian companies to access more than 100 payment methods in 15 countries in South and Central America.

“We are very happy with this announcement,” said Paula Bellizia, President of Global Payments at EBANX. “The cross-border market in Latin America will move around US$45 billion in 2022, according to data from the Beyond Borders survey, and it is time for major Brazilian players to take advantage of this opportunity to expand their business.”

The Beyond Borders study in 2021 found that 68% of Latin American consumers were already e-commerce users – a rate well above the 45% in pre-pandemic years. In the past two years an estimated 150 million Latin Americans have purchased online for the first time, and the digital market in Latin America is expected to grow 30% per year until 2025, an acceleration comparable only to that of Asian markets, according to the study.

In 2021, EBANX’s processed volumes grew more than 110% and the company has operations in 15 countries, teams in more than 10 and over 1,700 bankers representing more than 20 nationalities. It offers over 100 local payment methods in Latin America to over 1,000 global customers such as SHEIN, Shopee, Spotify and Uber, and to over 35,000 merchants in Brazil.
 

Foundation 99 launches F99 bank card

US non-profit organisation Foundation 99 is partnering with fintech Investor Cash Management (ICM) to offer an investment cash management account (ICMA) that combines the convenience of a bank account with the investment returns of a brokerage account.

Established in 2019, Austin, Texas-based Foundation 99 is a public charity that aims to bring financial change to communities across the US and has so far focused primarily on education services across school districts, governmental employers, non-profits, and other community-based organisations. The new programme is available immediately to all members of the F99 community and those who support its values.

The F99 Bank Card “harnesses unique technology to provide clients an integrated banking, investing, and payments product that combines immediate access to both bank and brokerage assets with the higher returns of specified investment funds.

“By linking to PIMCO investment products – including environmental social and governance (ESG) funds – the F99 Bank Card aims to provide significantly higher yields than traditional bank accounts to provide a path to financial wellness and inclusion.”

Fred Phillips, CEO of Investor Cash Management, said: “Through our mission-driven partnership to democratise investment, the F99 Bank Card provides access to innovative financial services and a foundation to develop products that address important needs of the broader community.”

The F99 Bank Card is issued by Sutton Bank, pursuant to a licence from Visa USA Inc. and can be obtained by downloading the app via Google Play or the Apple App Store or visiting Foundation99.org/Bank-Card.

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