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“Bad News for SMEs and Fintechs”: Reaction as Central Banks Raise Interest Rates

The Bank of England, European Central Bank and US Federal Reserve have all hiked rates, despite the ongoing turbulence in the banking sector. While some analysts believe that the rate hikes are necessary to curb inflation and maintain economic stability, others worry that they could exacerbate the current economic challenges faced by businesses and households.

Many people expected that The Bank of England would raise interest rates and that the Federal Reserve would make a key rate rise. However, this comes at a time when the banking sector is still reeling.

Recent weeks have seen the collapse of two US banks and the rescue of Swiss lender Credit Suisse by UBS.

Concerns are also deepening around Deutsche Bank – its shares plummeted by as much as 14 per cent in the past week as the cost of insuring against bank defaults surged.

The cost of borrowing is increasing, which could make it more difficult for businesses to expand and for households to finance major purchases. At the same time, rising inflation – the UK inflation rate has seen a surprising rise to 10.4 per cent – has eroded the purchasing power of consumers, making it more difficult for businesses to maintain profitability.

We share reaction from the financial technology sector to the rise in interest rates (4.25 per cent by The Bank of England and a key rate rise of 0.25 percentage points by the Federal Reserve).

‘Tech businesses will find access to funding difficult’
Claire Trachet, CEO and founder, Trachet
Claire Trachet, CEO and founder, Trachet

The current economic climate is presenting major challenges for companies with limited cash reserves, comments Claire Trachet, CEO and founder of business advisory Trachet.

“The Bank of England announcing an interest rate rise, coupled with an inactive IPO market, means scaling businesses – predominantly in tech – are finding it increasingly difficult to secure funding,” she says.

“This is a significant concern for even healthy privately-owned companies, as declining shares of similar publicly traded firms can lead to a decrease in their value. We know companies will have to make difficult decisions and give up a larger portion of their equity in order to raise the same amount of cash and expect this to result in a growing number of down rounds in the coming year.

“Tech investment was a sector that was highly regarded for investors and lenders, and contributed to high revenue, however it has become evident for many investors this is now an investment the bank will not recover – this will likely spark a wave of M&A activity in the sector.”

‘Could lead to widespread closures’
Daniel Jones, corporate and FX dealer at Moneycorp
Daniel Jones, corporate and FX dealer at Moneycorp

Daniel Jones, corporate and FX dealer at Moneycorp, a payments services provider for banks, businesses, and consumers, warns the hike is “bad news for SMEs and fintechs”. He suggests with increased costs and lower consumer spending already hitting them hard, tougher trading conditions could cause widespread closures.

Jones says: “Today’s decision will result in even tighter trading conditions for UK SMEs, potentially wiping £12billion from the economy and pushing it over the edge. The Bank of England’s separate plans to end favourable lending treatment for small businesses will only add fuel to that same fire.

“And this is coming on the tails of another shock rise in inflation, and the consecutive demise of Silicon Valley Bank and Credit Suisse, all of which has highlighted just how fragile the financial system is. In such a context, it’s time to see more – not less – support for SMEs, and urgently.”

‘SMEs will struggle with profitability’
Michael McGowan, managing director at Bibby Foreign Exchange
Michael McGowan, managing director at Bibby Foreign Exchange

Michael McGowan, managing director at Bibby Foreign Exchange of invoice finance and factoring provider Bibby Financial Services, also warns that SMEs will find the decision difficult when it comes to managing profitability.

“The surprise rise in inflation has brought into sharp clarity the sense of nervousness felt by the markets, and left the Bank of England with little option, but to use the only tool they have available to dampen the UK’s inflation.

“The decision may well have been a necessary evil to protect UK’s weakened economy, but it won’t feel like that in the short-term for small businesses struggling to maintain profitability. Higher interest rates will squeeze consumer spending and raise borrowing costs for businesses.

“The impact on the Pound should also be closely monitored by SMEs trading internationally as currency volatility remains one of the only certainties in today’s unsettled outlook. Robust foreign exchange strategies will be critical for SMEs to retain profit margins in 2023.”

“Uncertainty of currency fluctuations’
Michael McGowan, managing director at Bibby Foreign Exchange
Michael McGowan, managing director at Bibby Foreign Exchange

Echoing this viewpoint on foreign exchange is Will Marwick, CEO at payments solution provider IFX Payments.

While many will question whether “closing the stable door after the horse has bolted will do enough to tackle runaway prices”, a focus on strategies for foreign exchange is essential, says Marwick.

“Foreign exchange markets are facing a busy week, and businesses with international operations will have to think carefully about how a stronger pound will impact their decision-making.

“It’s at times like this that it’s crucial for companies to understand their foreign exchange exposures, and have a well-defined risk management strategy to mitigate the impact of currency fluctuations.”

‘Concern for smaller banks’
Susannah Streeter, head of money and markets, Hargreaves Lansdown
Susannah Streeter, head of money and markets, Hargreaves Lansdown

There are worries that the fresh round of rate rises “could make a precarious situation worse”, comments Susannah Streeter, head of money and markets, Hargreaves Lansdown. “Fresh problems are bubbling up in a cauldron of worry about the implications of the rate rises we’ve seen over the past week, given that earlier hikes appear to have caused breakages in parts of the banking system.

“There are worries that the fresh round of rate rises could make a precarious situation worse for some smaller banks, particularly those sitting on large bond holdings which have lost value as monetary conditions have been dramatically tightened.

“The knock-on effects of the banking scare are still hard to determine, and with lending criteria expected to be tightened and loans set to be harder to come by, a forecast deterioration in financial conditions is likely to be the equivalent to further interest rate rises in the months to come.”

‘Could lead to higher prices’
Robert Pasco, co-founder and CEO of ethical lender Plend
Robert Pasco, co-founder and CEO, Plend

Robert Pasco, co-founder and CEO of ethical lender Plend, fears many financial institutions will use this interest rate increase “as a green light to hike prices further”.

He comments: “Despite recent global shocks in relation to Silicon Valley Bank and Credit Suisse, this increase in the BoE base rate would have come as no surprise to most banks and lenders which have already factored in a short-term increase in interest rates in the UK.

“Any knee-jerk increase is tantamount to profiteering at the expense of the great British public. I strongly urge all UK financial institutions to consider their customers’ current financial circumstances before pushing on a further rate hike.

“During a time of extreme financial hardship across the UK, the ability to access affordable credit is crucial. Plend has introduced a hard interest rate cap ensuring our customers are protected from any further rate hikes and have the support they need long-term.”

‘Could lead to supply disruptions’
Ciaran O'Malley
Ciaran O’Malley, VP of e-commerce at Trustly

Sweden-based digital A2A transaction platform Trustly also highlights concerns that the interest rates will have a knock-on effect to pricing and service delivery.

Ciaran O’Malley, VP of e-commerce at Trustly, said: “While businesses will face higher borrowing costs, which will erode their margins, there may also be second-hand effects due to the increased price of goods from suppliers, meaning businesses have to increase their own prices or face further supply disruptions.

“With this in mind, it’s vitally important that businesses focus on how they can maximise efficiencies through their value chain in times of high interest. By implementing technology which drives operational efficiency, improves cashflow management and customer experience, businesses can mitigate against the impacts of rising rates.”

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