UK business insolvencies reach an all-time high
A recent research report indicated that insolvency filings by businesses in the UK rose to their highest level since 2009 during the most recent quarter, and it is anticipated that things will worsen before they improve. According to the UK's Insolvency Service, there have been 5,629 company insolvencies reported, an increase of 81% over the same timeframe last year. This is said to be the largest number of businesses to file bankruptcy in the UK in over 13 years.
Creditors' voluntary liquidations (CVLs), where a company's directors take on the responsibility to settle the insolvent company, reportedly accounted for approximately 87% of all company insolvencies. According to Samantha Keen, a partner at EY-Parthenon, the unprecedented number of CVLs are the first wave of insolvencies involving businesses that have battled to remain viable without government support offered over the pandemic. Keen further commented that they anticipate more insolvencies in the upcoming year among larger organizations as they try to manage during challenging economic times, limited capital and elevated market volatility.
Inflation and rapidly rising energy costs are said to be the main challenges for UK businesses. The Bank of England is also poised to increase interest rates by the most in 27 years later this week, raising finance costs for many businesses.
The study notes that 22% of UK SMEs that required external finance or capital in the last few years were unable to obtain the funding. Additionally, more than 25% of businesses have had to cease or pause an aspect of their operations due to a lack of funds.
The extension of the Recovery Loan Scheme (RLS Phase 3) announced last week may offer some hope for UK businesses. As the need for working capital surges to historic levels, more companies urgently need liquidity provisions to address record inflation rates, rising interest rates, and supply chain difficulties. Douglas Grant, Group CEO, Manx Financial Group PLC, commented that while the announcement helps to alleviate some of the short-term pain, a sector-focused permanent government-backed loan scheme can bring together both traditional and alternative lenders to ensure the future of SMEs.
Reserve Bank of India plans to adopt blockchain for cross-border payments
With high taxes imposed on the crypto sector, India has shown opposition to cryptocurrencies. However, it has become more open to blockchain technology, with the Reserve Bank of India (RBI) now investigating how the technology can be used to facilitate cross-border payments.
A neo-banking firm based in India, Open Financial Technologies, intends to use blockchain technology to facilitate cross-border payments, an initiative that began in September 2021. Furthermore, the Reserve Bank of India has granted the company permission to provide a monitoring solution for cross-border transactions. The recent approval of Open Financial Technologies coincides with the depreciation of the US dollar, and such platforms are expected to relieve pressure on importers and exporters.
According to Quartz, a financial news publication, Open Financial Technologies is expected to officially launch a solution known as the BankingStack along the US-India corridor. Financial institutions will be expected to use the enterprise banking product to introduce a digital banking solution within the next few weeks, said reports. The product will be open-source, enabling all parties involved to access the necessary records at each stage of the transaction.
The RBI has approved four companies to deploy cross-border payment products based on blockchain technology, including Open Financial Technologies. These firms are participating in the Regulatory Sandbox program, which was launched in July 2022. Nearby Technologies, Fairex Solutions Private Limited, and Cashfree Payments India Private Limited are the other companies involved.
Aside from collaborating with the private sector, the RBI has announced plans to incorporate blockchain technology into India's Core Banking System. The RBI reportedly collaborated with major commercial banks in July 2022 to deploy blockchain technology through a trade finance platform.
The project is being led by the RBI's Innovation Hub, and banks can expect to use blockchain-backed tamper-proof Letters of Credit (LC) records. The Innovation Hub has already organized a workshop with the banks involved, and it has received support from US-based companies.
European Central Bank favours CBDCs to Bitcoin for cross-border payments
The ECB is reportedly interested in determining the optimal cross-border payment solution as it serves as the central bank of the 19 European Union countries. A recent ECB study on identifying the ultimate cross-border payment medium identified central bank digital currencies (CBDCs) as the victor over competitors such as banking, Bitcoin and stablecoins, among others.
EBC's view of Bitcoin as a poor cross-border payment system is based on the highly volatile asset's settlement mechanism, stating: "Because settlement in the Bitcoin network occurs only around every ten minutes, valuation effects are already materializing at the moment of settlement, making Bitcoin payments actually more complicated." The study concluded that the underlying technology, particularly its "proof-of-work" layer, is inherently expensive and wasteful.
However, CBDCs were recognized by the ECB as a better match for cross-border payments due to their better compatibility with foreign exchange (FX) conversions. The preservation of monetary sovereignty and the ease of instant payments through intermediaries such as central banks were reported as the two major benefits highlighted in the study.
In contrast to the ECB's reliance on CBDCs, Australian central bank Governor Phillip Lowe states that a private solution for cryptocurrency adoption will be better as long as risks are mitigated through strong regulations and state backing. Lowe further added, "if these tokens are going to be widely used by the community, they are going to need to be backed by the state or regulated just like we regulate bank deposits."
Global Payments to acquire EVO for $4 billion to help expand its B2B business
Global Payments, US-based payment and technology provider, is acquiring EVO Payments, Atlanta-based payments provider, for approximately US $4 billion in an all-cash transaction that will reportedly expand its B2B reach. EVO is said to have a significant presence in Europe, which accounted for nearly 40% of its revenue in the first three months of 2022. The firm currently provides merchant acquiring and payment processing services to over 550,000 merchants across 50 markets and 150 currencies.
Global Payments is reportedly paying a significant premium for the acquisition, which it plans to use to broaden its geographic footprint and add accounts receivable automation software capabilities to complement its existing B2B and accounts payable offerings. According to reports, the transaction will give Georgia-based Global Payments access to new markets such as Poland, Germany, Chile and Greece, as well as help scale up its business in existing markets such as the United States and Canada.
Cameron Bready, President and Chief Operating Officer, Global Payments, commented that the partnership will provide a suite of distinctive software and payment solutions to their combined 4.5 million merchant locations and more than 1,500 financial institutions globally. The transaction coincides with the $1 billion sale of Global Payments' Netspend consumer payments business to Rev Worldwide.
Reports indicate that the deal is expected to close by the first quarter of 2023 and is hoped to generate $125 million in run-rate synergies.
US $30 million fine levied against Robinhood Crypto for regulatory violations
The crypto division of Robinhood Markets Inc. has been fined US $30 million by New York State's financial regulator for alleged violations of anti-money-laundering, cybersecurity and consumer protection rules. According to the New York State Department of Financial Services (NYDFS), Robinhood Crypto did not devote enough resources to addressing compliance and cybersecurity risks.
The online trading app has been the subject of several regulatory investigations, including those sparked by last year's meme stock turmoil. The NYDFS stated that as part of the settlement, Robinhood Crypto would be required to hire an independent consultant to evaluate its compliance practices.
A trillion-dollar reverse repo problem affects US banks
The Fed's reverse repurchase facility (RRP) has reportedly drawn a diverse range of market participants, assisting in the removal of excess liquidity from the financial system. Money market funds have driven volume at the reverse repo window above US $2 trillion for 39 consecutive days. Following its 75-basis-point interest rate hike last week, the Fed is paying a record reverse repo rate of 2.3 percent. Reports state that Barclays expects daily reverse repo levels to range between $2.8 trillion and $3 trillion by the end of 2022.
As stated by reports, investors are withdrawing their deposits from banks and investing them in government money market funds, which primarily invest in Treasury bonds and repos. These money funds then channel the funds to the Fed's overnight window. Repo allocations from government money market funds have risen to nearly 40% of their assets, up from around 30% at the start of 2022, according to Barclays.
Beginning in September, the Fed expects to reduce its balance sheet by $95 billion per month, accelerating the quantitative tightening (QT) that began in June 2022. The report emphasized that the outflow of deposits from banks into money market funds could rapidly deplete bank reserves, hampering lending to financial markets and the broader economy.
Joseph Abate, Managing Director, Barclays, commented that "the Fed's QT will rapidly reduce its balance sheet. Bank reserves, on the other hand, are expected to fall much faster as cash moves from bank deposits to government-only money funds. We anticipate that money funds will invest this cash in the RRP.”
Furthermore, analysts expect that the US Treasury will increase bill issuance for fiscal year 2023, which begins in October, alleviating the excess of inflows into the reverse repo window. However, bank reserves, according to Abate, will fall to $2.3 trillion this year, close to the minimal sufficient level of $2 trillion, as deposit withdrawals begin to weigh on their balance sheets.
American Express introduces a digital, cross-border payment solution for small businesses in the US
American Express has launched American Express Global Pay, a new digital solution that reportedly enables US businesses to initiate domestic and international B2B payments via a simple, secure and mobile platform. Business customers can expect to send payments funded from their business bank account to their suppliers in more than 40 countries and multiple currencies, with potential to earn points on their foreign exchange payments. American Express Global Pay is currently available to eligible American Express Small Business Card Members in the US.
An American Express survey conducted in June 2022 stated that 64% of US small and mid-sized company owners and financial decision-makers expect their total spend with businesses outside the US to increase over the next six months, citing access to a broader range of products and services (43%) and supply chain diversification (35%) as some of the key strategic benefits of cross-border B2B spending. However, about one-quarter (27%) reported that process complexity is one of the most significant barriers to making cross-border payments. Nearly half (48%) of those surveyed regarding the qualities small and mid-sized business owners and financial decision-makers seek in a cross-border payments solution said transparent fees and rates, as well as an easy user experience (44%).
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