US exceptionalism should prompt ECB to consider higher rate cuts

US exceptionalism has topped global headlines in recent months, and the consensus now predicts real GDP growth of 2.4% in 2024, writes Michala Marcussen, Chief Economist and Head of Economic and Sector Research for the Group, Societe Generale, in an update on the bank’s website. This GDP figure is well above trend and nearly double the forecast late last year. The gap to the other major economies is striking, with most of them expected to see growth below trend. In the case of the euro area, for example, consensus sees growth of just 0.5%.

Moreover, with the US disinflation process hitting a rough patch in early 2024, market pricing on the future path of the Fed’s key rate has also seen a remarkable shift. While markets late last year expected the Fed to cut rates by at least 125 bps in 2024, market pricing at the end of April is looking for just one 25 bps rate cut. This poses challenges for central banks elsewhere, not least the ECB.

As the US economy often leads the global cycle, a first question arises as to the strength and robustness of the US expansion, Marcussen writes. The first release of Q1 2024 GDP at just 1.6% quarter-over-quarter annualised and softer leading indicators certainly cast some doubts. A further point worth noting is that the dynamics of the US economy stem from just a few sectors and have been underpinned by past fiscal policy easing that is now turning more restrictive. Looking ahead to 2025, there is greater uncertainty, moreover, on the US outlook with the upcoming elections. The danger is to see more protectionist trade policies leading to a lose-lose situation for both the US and its key trading partners.

With the euro area facing several years of tighter fiscal policy and a still restrictive monetary policy, hopes of a significant lift from a stronger US economy should be put into perspective, according to Marcussen, not least with other key export markets still facing a lacklustre growth outlook.

A second concern she notes is that the US may now be exporting inflationary pressures through a stronger dollar. With the EUR/USD at 1.07 at the end of April, this will indeed mechanically push up inflation for key commodity imports priced in US dollars, and not least oil all else being equal. The broader impact hereof will, however, all else being equal, be disinflationary as consumers are forced to spend more on energy leaving less to spend on other goods and services. A further point to consider is that with other major currencies also trading weaker against the US dollar, the trade weighted euro has seen less depreciation thus dampening the risk of more broad-based imported inflation.

Additionally, the currency channel is not the only spillover from US monetary policy. Given the dominance of the US financial system, the higher US interest rates often spill over, and least in part, to interest rates globally. Marcussen says that this is indeed what has been observed in recent months, and this has the impact of tightening financial conditions elsewhere. Bottom line, she argues that the present US exceptionalism is an argument for the ECB to consider more, not less, rate cuts.

 

Pan-European proof of concept showcases request to pay value

EBA Clearing has announced that, together with eight multinational payment service providers (PSPs), it has completed a pan-European proof of concept leveraging its R2P Service. R2P is a pan-European messaging infrastructure enabling payment service providers to deliver request to pay solutions for end users.

As part of this initiative, the participating institutions successfully exchanged request-to-pay messages via R2P in milliseconds. In a statement, the company said that the proof of concept thus confirmed the readiness of R2P to support commercial use cases. It also showcased how PSPs can roll out and create value around request-to-pay, putting a special focus on e-invoicing in the business-to-business space. 

The initiative, which aims to pave the way for live implementation of request-to-pay solutions, was started by frontrunners among the funding institutions of EBA Clearing’s R2P Service. Participants in the proof of concept included BBVA, BNP Paribas, CaixaBank, Commerzbank, Crédit Agricole, Deutsche Bank, DZ BANK, and Pine & Cone.

“By exchanging requests to pay and related responses across Europe, our eight participants demonstrated how easy it is to use and integrate R2P with their end-user solutions and gave a powerful outlook on the benefits that request to pay can generate for the invoicing processes of businesses across the continent,” said Fredrik Tallqvist, Project Manager for the R2P PoC at EBA Clearing.

 

Is it time US banks left legacy behind?

US banks are failing to meet demand for instant payments, according to research from RedCompass Labs. Its report, “Time to leave legacy behind? Instant payments in the US”, surveyed 300 senior payment professionals in US banks to get a better picture of the demand for instant payments, the barriers to implementation, the challenges banks face, and other important payment trends.

The research has revealed nearly two-thirds (63%) of US corporate bankers experience significant or overwhelming demand for instant payments from their corporate customers. Yet, at best, less than a third of US banks are signed up to RTP and FedNow, which means less than a third can offer instant payments as a service.

Over half (53%) of all bankers said they feel either significant or overwhelming demand or adoption from both corporate and retail clients, while virtually all (99%) said they feel at least some level of demand or adoption from both sides. 

The existence of Zelle, Venmo, Cash App, PayPal and other wallet services has dampened US Banks’ appetite for implementing instant payments, with half (50%) feeling a lot or significant impact. Nearly all (98%) experienced some form of impact. Given these apps have a huge market share and offer near-instant payments already, many banks see Zelle as a ‘good enough’ instant payments solution.

More than a third (34%) of US banks are concerned about updating their core infrastructure to handle the increased volume and speed of transactions. Other challenges include 24/7 availability (34%), cannibalising other revenue streams (32%), and choosing between RTP and FedNow (31%).

Nearly all US banks surveyed (98%) plan on monetising their real-time payments service, and nearly nine in ten (87%) respondents plan on passing costs to their corporate clients. Nine in ten (89%) US banks are considering real-time payment interoperability across schemes, cross-border, and other real-time payment options such as pay-to-card, wallets, and cards. There is also growing awareness of ISO 20022, with 91% of US banks now aware of the XML message format, up from 28% in 2017.

The research also found that the biggest benefits of instant payments to corporates were payment certainty (53%), improved customer experience (48%) and working capital optimisation (47%).

“The US is taking sizeable steps forward in instant payments,” said Tom Hewson, CEO at RedCompass Labs. “Adoption is growing steadily but has been slow compared to the rest of the world… Banks that lead instant payments and overlay services will gather greater market share as US companies apply these tools to productivity and growth.”

 

In Europe, dividends and buybacks poised to reach an all-time high  

Companies in Europe's STOXX 600 index are expected to return more than half a trillion euros to shareholders via dividends and buybacks, a record high, according to Goldman Sachs Research. “Dividends will remain the main source of return, but buybacks are growing,” said Guillaume Jaisson, Global Investment Research at Goldman Sachs, in his team’s report.

The shareholder bonanza is expected, in part, because of the €1.5 trillion in cash that STOXX 600 companies have on their balance sheets, up 35% compared to pre-pandemic levels. These companies' cash-to-asset ratio is above the 2005 level, which preceded a major boom in capital expenditures, mergers and acquisitions, and stock buybacks.

In recent years, corporations have been the major buyers of European equities via share buybacks—so much so that buybacks now comprise 35% of total shareholder return, up from a historical level of 20-25%. The combination of buybacks and a lack of new issuance has meant that the net supply of public equity is shrinking at its fastest pace in history. The universe of European public equities has already shrunk by a net €170bn over the last 12 months.

Corporate balance sheets “do not look especially stretched,” according to Jaisson, who added that the level of net debt to EBITDA is close to an all-time low. Free cash flow yield is around 6% in Europe, more than a percentage point higher than in the US. The expected yield would make the STOXX 600 a reasonable alternative to 10-year US Treasuries and the S&P 500, Goldman Sachs Research finds. “In other words, European equities have rarely looked cheaper on an absolute and relative basis,” Jaisson stated.

 

Fed mulls expanding operating window of large-value payments services

The Federal Reserve Board on Friday requested comment on a proposal to expand the operating days of the Federal Reserve Banks’ two large-value payments services to include weekends and holidays, so that they would operate every day of the year.

Currently, both the Fedwire Funds Service and the National Settlement Service (NSS) operate Monday through Friday, excluding holidays. Under the proposal, both services would operate every day of the year. The operating hours each day would remain the same, with the Fedwire Funds Service open 22 hours per day, and NSS open 21.5 hours per day. Use of the expanded operating days by service participants, such as banks and credit unions, would be voluntary.

The Fedwire Funds Service is a wholesale payment service that allows service participants to send and receive individual electronic funds transfers up to US$10bn. The NSS is a settlement service for participants in private-sector clearing arrangements, such as check clearinghouses, a private-sector automated clearinghouse network, and securities settlement systems. The proposal does not include changes to the Fedwire Securities Service or the Federal Reserve's new retail service for instant payments, the FedNow Service.

The proposal follows feedback from a range of stakeholders on the benefits of expanding the operating days for each service. Providing large-value payment services every day would support the safety and efficiency of the US payment system and help to position the country’s payment and settlement infrastructure for the future, according to the Federal Reserve Board. For example, potential benefits of expanding operating days include improving the credit risk and operational efficiency of systemically important financial market utilities and private-sector retail payment arrangements, spurring innovation in new or enhanced private-sector payment solutions, and supporting more efficient cross-border payments flows. On the other hand, it would also require operational and technical changes that would impose costs. The proposal seeks feedback on all aspects of the proposal, including the benefits and potential costs and risks.

 

ADB and Citi look to boost APAC trade through supply chain financing

The Asian Development Bank (ADB) and Citi have partnered to sign a master risk participation agreement to enhance access to supply chain financing for small and medium-sized enterprises (SMEs) and support more than US$100m in additional annual trade across Asia and the Pacific. 

The agreement was signed between ADB’s Trade and Supply Chain Finance Program (TSCFP) and Citibank North America. It is designed to enable more SMEs across developing Asia to access Citi’s supply chain finance offering through ADB’s TSCFP.

ADB and Citi have been collaborating on trade finance since 2009, facilitating US$6.2bn worth of trade, expanding access to finance for SMEs, and contributing to the region’s resilience. The master risk participation agreement is expected to support more than US$100m in additional trade in Asia and the Pacific each year.

Backed by ADB’s AAA credit rating, TSCFP provides loans and guarantees to more than 200 partner banks to support trade, boosting imports and exports that foster growth. Since 2009, TSCFP has supported US$57bn in trade in more than 45,000 transactions in emerging markets.

“This partnership harnesses Citi’s expansive network and origination capabilities alongside ADB’s extensive presence in the Asia Pacific region’s developing countries, amplifying the developmental impact of trade and supply chain finance,” said ADB Vice-President for Market Solutions Bhargav Dasgupta. “Supply chain financing plays a crucial role in boosting trade by providing essential capital to suppliers, leveraging relationships with larger corporate partners.”

 

US small business owners concerns include inflation, fraud and political noise

Often the first to feel the effects of inflation and economic volatility, small business owners are optimistic about their businesses, even as economic challenges remain. KeyBank’s 2024 Small Business Survey has found that 65% of small business owners feel confident they could fund their operating expenses for one month with their cash reserves, if an unexpected need arose.

Still, 37% of business owners anticipate that inflation will slightly increase their operating costs and 27% expect a significant increase in operating costs in the next 12 months. The top challenges small business owners anticipate this year are fluctuating sales/revenue (35%), delayed payments from clients/customers (29%) and high overhead costs (28%).

Despite these concerns, small business owners are well-adjusted and taking precautionary measures to protect their businesses - and the employees and communities they serve. They are already implementing cost-cutting measures (32%), increasing cash reserves (30%) and exploring alternative financing options (22%). As one of the top indicators of financial resilience in the US, their actions could be the first signal of an improving economic environment.

Banks are at a pivotal moment to help their small business clients navigate cash flow and business operation concerns - and small business owners are turning to them for advice. The top three pieces of advice owners have received are: cut costs by reducing discretionary spending (34%), establish an emergency fund (22%) and diversify revenue streams by introducing new products or services (20%).

While more than half (52%) of small business owners are confident that their banks understand their cash flow concerns, almost 20% are unsure if their banks do so – pointing to an opportunity for banks and business owners to expand their relationships.

As business operations have become mainly digital, fraud has become a pain point among small business owners who are most concerned about payment fraud, such as unauthorised transactions or unauthorised electronic fund transfers (44%), followed by identify theft (37%), malware and ransomware attacks (28%) and phishing and email scams (27%). Fraud prevention has become a focus for small business owners who continue to be vigilant of evolving fraud tactics and implement preventative measures to stop potential future attacks. 

An election season creates a period of unease amongst Americans, and for business owners, political noise is magnified as potential policy changes could affect their business directly. While preparing for uncertainties, the top policy changes most owners are paying attention to are taxation (38%), employment and labour laws (25%) and healthcare policies (25%). 

 

FIS launches embedded finance platform

FIS has introduced Atelio, a fintech platform that provides the building blocks for financial institutions, businesses and software developers to embed financial services into their offerings.

The platform uses FIS’ existing financial technology via components that the firm says are easy to embed and consume. Atelio by FIS is pitched as where companies from all industries can go to create financial experiences such as collecting deposits, moving money, issuing cards, sending invoices, or leveraging the platform's tools to fight fraud, forecast cash flows, or better understand customer behaviour.

Atelio enables users to embed financial services into their products and workflows in a secure and compliant manner and lets companies offer financial services to their customers at the point of financial need. Three FIS clients - KeyBank, College Ave, and RoyalPay - are already building on Atelio.

The platform is designed to make scalable and compliant fintech capabilities consumable by banks, businesses and software developers - any innovator - where they can create the experiences they want to offer their customers.

“Atelio by FIS is our vision to lead where fintech is going, which is outside the boundaries of how businesses enable, and their customers consume, financial services today,” said Tarun Bhatnagar, president of Platform and Enterprise Products at FIS. “More than just a new solution, Atelio is built to lend the expertise, tools and distribution so that our users and clients can focus on creating.”

 

Chase digital products aim to help small businesses grow

Chase has announced a series of product innovations designed to help small business owners overcome some of their biggest pain points. Top concerns among small business owners include cash flow, staffing, and revenue growth. As such, the bank is introducing services that will allow small business owners to electronically create and send invoices, make better use of customer insights, and speed up the payment process. 

Starting in May, Chase is offering a digital invoicing solution that allows small business clients to bill their customers and get paid faster. It’s available for Chase Business Complete Banking customers at no additional cost. Through the bank’s website or mobile app, businesses can create invoices that can be sent via text or email and give their customers options to pay, including by Zelle or cheque.

Chase also plans to introduce Customer Insights, a business intelligence platform that provides simple, actionable insights to help business owners more effectively reach their customers, run more efficiently, and make better strategic decisions. The platform is already available for customers who use Chase to accept credit card payments.

Chase for Business customers will have complimentary access to aggregated, anonymised data about businesses like theirs, such as average customer profile, average ticket amount, and busiest shopping times. When they use Chase to accept credit card payments, they’ll get transaction-based data coupled with actionable insights.

Additionally, the bank recently introduced an online payments hub that gives business owners a menu of secure, on-demand options for paying vendors and employees. Business customers can send large sums of money quickly and securely, choose their delivery method, and pay as they go (per payment) versus a flat monthly fee.