MMF boom threatened by US budget deficit row

Having received a boost from the recent banking turmoil, money market funds (MMFs) could see more troubled times ahead due to a political stalemate in Washington D.C. 

MMF coffers swelled in March, partly thanks to very favourable interest rates. The largest taxable MMFs monitored by research firm Crane Data had an average yield of 4.6%. MarketWatch reports that the average rate offered by savings accounts across the US was 0.37%, clearly highlighting the value provided by MMFs over bank deposits. 

At the same time, the banking crisis that struck regional banks in the US and saw the likes of Silicon Valley Bank fold eroded investor confidence in deposits. As a result, cash flowed into MMFs. Crane Data also reveals that March was the third-best month of inflows for MMFs of all time, with US$345bn. MMFs gain was very much bank deposits loss, as data from the Federal Reserve illustrates. While deposits in the biggest 25 commercial banks in the US still grew in March, up US$18bn, a whopping US$212bn was wiped off the accounts of smaller banks.

For treasurers that have invested cash into MMFs for the added security from the banking crisis and to take advantage of the bountiful yields available, there is a developing story to monitor that could be cause for concern. On Sunday, the Financial Times reported that the stand-off in Congress over the US debt ceiling could hurt MMFs. 

The FT’s Harriet Clarfelt and Kate Duguid reported that much of the inflows into MMFs have specifically been pouring into government MMFs that invest significantly in short-term Treasury debt. Typically easy to buy and sell, the partisan stand-off in the US Congress could stifle this ease of transaction for Treasury bills, meaning that MMFs could face significant volatility and potential losses. 

A linked concern reported in the FT piece is the impact that all this could have on how MMFs use the Federal Reserve’s overnight reverse repo facility. This allows MMFs to invest cash overnight with the Fed for a 4.8% return. A shortage of Treasury bills has already led MMFs to invest a significant amount of the new cash influx into this facility, and if the US budget drama rumbles on and Treasury bills become increasingly rarer, the sheer scale of the cash that MMFs place on the Fed’s overnight reverse repo facility might generate further trouble in the banking sector.

These potential issues could be alleviated by an agreement between the White House and Congress on a new debt limit. The FT report closes with the thoughts of Praveen Korapaty, chief interest rates strategist at Goldman Sachs, on what this would look like:

“Once the debt ceiling is raised, you’re going to see the Treasury issue a tonne of bills. Money funds will then be able to buy these bills and not shovel quite as much money to the RRP, and so that should actually provide some relief in the other direction.”

Biggest US banks exceed treasury management revenue expectations

A recent blog post from global research and advisory firm Celent highlights that the largest banks have sailed through the latest banking turmoil unscathed, at least in terms of their corporate treasury businesses.

Treasury expert Patricia Hines, CTP, Head of Corporate Banking at Celent, writes that the largest US banks kicked off first-quarter earnings season with a bang. For example, Citi Institutional Clients Group reported Treasury and Trade Solutions’ Q1 revenue of US$3.4bn, a 31% year-over-year increase. Citi also reported a 10% year-on-year (YoY) growth in cross-border transaction value (from US$76bn to US$83bn) and a whopping 40% YoY increase in commercial card spend volume (from US$11bn to US$16bn).

JPMorgan Chase Payments reported revenue of US$4.5bn, up 72%, which Hines notes was predominantly driven by higher rates, albeit partially offset by lower deposit balances. JPM’s total payments transaction volume in Q1 was 1.4 trillion, which represented an increase of 8% from Q1 2022.

Elsewhere, PNC Corporate & Institutional Banking reported card and cash management revenue growth of 6% YoY, rising from US$620m to US$659m, and Wells Fargo Corporate and Investment Banking reported treasury management and payments revenue of US$786m in Q1, an incredible 82% YoY increase.

 

Smaller US businesses likely to be hit hardest by bank turmoil

Stress in US banking, which has been concentrated among small and midsize lenders, is likely to hit smaller American businesses the hardest, according to Goldman Sachs Research. The financial jitters that started with Silicon Valley Bank’s collapse may also have a more significant impact outside of large cities.

Companies with fewer than 100 employees are a critical part of the US economy: they employ 35% of the private-sector workforce and generate a quarter of gross output. And they rely disproportionately on small banks for borrowing, receiving almost 70% of their commercial and industrial loans from banks with less than $250 billion in assets and 30% from banks with less than $10 billion in assets (versus 45% and 10% for larger businesses, respectively), Goldman Sachs economists Ronnie Walker and Manuel Abecasis wrote in the team’s report. Put another way: At least 70% of small business lending is done by smaller banks in 95% of counties, which account for more than 80% of GDP.

Bank stress is likely to reduce lending growth by 2-6 percentage points, according to estimates from Goldman Sachs Research. “Because small banks are likely to tighten credit more aggressively and small businesses disproportionately borrow from them, the hit to lending to small businesses will likely be larger,” Walker and Abecasis wrote. The services and construction sectors have the largest concentration of small businesses.

Geography also tends to matter. The physical distance between lenders and customers has, on average, increased over time amid bank consolidation and the growing popularity of online banking. But even so, our economists find that a substantial share of small business lending is still done locally, often by small banks: 60% of loans to small businesses are made by banks within 10 miles of the borrower, and around 75% of loans are made by banks within 25 miles of the borrower.

A key question is whether small businesses can look to larger institutions if credit gets harder access. The answer partly depends on the willingness and ability of larger banks to make those loans, according to Goldman Sachs Research. In places where they don’t operate, bigger institutions may be more reluctant to lend to small businesses that aren’t already customers because it’s harder to assess the riskiness of loans to individual small businesses (which also tend to be riskier borrowers). 

Furthermore, economic research suggests that part of the reason that small banks disproportionately lend to small businesses in the first place is because their closer geographic proximity to individual small businesses gives them an informational advantage in gauging the creditworthiness of those borrowers.

And in many counties across the US, there’s no nearby alternative to smaller banks. There isn’t a globally systemically important bank (GSIB) branch in roughly two-thirds of counties, making up 10% of US GDP, according to Goldman Sachs Research. For those same counties, the closest GSIB branch is roughly 40 miles away, compared with 3 miles away for other counties. Our economists also find that non-GSIB banks provide 90% of loans to small businesses in more than half of US counties.

States that are more rural and Republican-leaning (based on the state having more than two-thirds of its congressional delegation from that party) tend to have fewer GSIB branches and, as a result, may see a larger drag on lending growth. Seven of the ten states with the lowest GDP-weighted share of counties with a GSIB branch are Republican-leaning states. Only two — Vermont and Maine — are Democratic-leaning states (using the same congressional delegation criteria).

There are also challenges for small businesses to get access to lending from non-banks, which can include hedge funds, pension funds and insurance companies. While US businesses have become significantly less reliant on the banking system in the last few decades, small companies continue to use banks much more than other sources of financing, according to Goldman Sachs Research. Moreover, survey data indicates that small enterprises like doing business with their small lenders. “Small businesses are more satisfied with small banks on net compared to other sources of financing,” Walker and Abecasis wrote.

 

Deloitte and Riskified bring fraud benchmarks for e-commerce merchants

Riskified, an e-commerce risk intelligence firm, has partnered with Deloitte to provide merchants with real-time insight into how their chargebacks, approval rates and fraud costs compare to similar companies in their space. This benchmarking service is designed to help retailers formulate a scorecard that can uncover new opportunities to reduce operational costs, lower chargeback and fraud losses, and boost revenues by minimising false declines.

This offering is underpinned by Riskified’s e-commerce, fraud and identity intelligence derived from analysing more than 2.5 billion transactions worldwide. This, in conjunction with Deloitte’s experiences in payment and fraud advisory, should help merchants elevate their payment and fraud capabilities. 

Benchmark analyses cover various industries, including fashion, ticketing, travel, luxury, digital goods and more. Key metrics include approval rates, authorisation rates, fraud losses, false declines, chargebacks and the cost of policy abuses surrounding returns, refunds, promotions and resellers.

“Improving profitability is a key topic for businesses today,” said Kevin Luh, Director, Fraud Management at Deloitte. “As merchants continue to invest in their e-commerce experience, optimising performance metrics such as transaction approval rates and false decline rates has become a critical priority.”

The offering is currently available via Deloitte Canada, with plans to extend into new regions in the future.

 

Online merchant CFOs detail impacts of fraud and cost of living 

Online businesses are being hit by a damaging double-whammy of fraud as the cost of living crisis bites. A survey of CFOs at online merchants across 10 countries, commissioned by fraud prevention platform Ravelin has found fraud is on the increase across the board. The study shows fraud remains a significant source of profit erosion for businesses trading online. Payments fraud remains the respondents’ number one business risk, followed by friendly fraud, account takeover, and policy abuse.

As a result, finance leaders overwhelmingly expect their fraud teams to grow over the coming months - with a third of respondents agreeing that their teams could increase by 20% or more. 

The CFOs surveyed say the rise of the criminal customer and professional organised fraudsters has increased dramatically over the last 12 months. Some 57% of CFOs polled agreed they see increased evidence of sophisticated ‘fraud as a service’. These schemes involve organised groups buying items using stolen card details, reselling them to customers who are often unaware of their involvement in criminal activity. 

The survey also finds that merchants’ own customers are almost as likely to commit fraud as organised criminals. Indeed, over a third of finance leaders describe first-party frauds, including “friendly fraud”, returns, and promotions abuse, as the number one risk factor facing their business. The high levels of “friendly fraud”, promotions, and policy abuse, possibly accentuated by the cost of living crisis, mark the rise of the “criminal customer”.

The trend seems particularly pronounced among younger age groups. A separate study by fraud agency CIFAS found one in 13 people admitted to involvement in some form of first-party fraud - rising to one in seven among digitally-savvy 16-34 year olds. 

The data also highlights the challenges of fraud relating to buy now pay later (BNPL) schemes and other novel forms of payment. While debit (63% of respondents) and credit cards (68%) remain the most common vectors for card fraud, they are the easiest for merchants to challenge in fraud disputes successfully. 

On the other hand, methods such as Apple Pay, Google Pay, and BNPL schemes like Klarna are more likely to represent a headache for online merchants regarding dispute resolution. Just 5% of respondents agree they have had success challenging BNPL payment disputes.

“CFOs at online businesses, who have overall responsibility for fraud, tell us fraud from organised criminals remains a perpetual thorn in their side,” commented Martin Sweeney, CEO, Ravelin. “But fraud by their own customers runs close behind. They recognise the vast majority of internet shoppers are scrupulously honest, but recognise they need to be increasingly vigilant for those who are not.”