News that the Bank for International Settlements has cautioned that financial markets are presently in a state of “uneasy calm” begs the question: Which will win out – the uneasy or the calm?
And for our purposes, there’s a corollary to that question depending on whether ease or unease prevails: What does it mean for payments?
In remarks tied to the BIS diagnosis, the bond market is signaling via “anomalies [that] suggest that all is not well,” according to Claudio Borio, who heads the monetary and economic department at the organization. And bad loans are flashing another warning sign, in that the sheer number of them is “too high,” said Borio.
Add to that the looming United States interest rate hikes that are simply a matter of foreshortened time – think weeks, and not months – then the stage may be set for loans made in dollars, regardless of where they are, to be simply less attractive because they will be less affordable. Debt levels are already perched at high numbers, as loans in dollars to the fabled BRIC countries have more than doubled since the financial crisis to roughly $3 trillion. “Despite low interest rates, rising debt levels have pushed debt service ratios for households and firms above their long-run averages,” said BIS, which implies at least some global spillover risk. Indeed, the IMF tightened its global economic growth forecast for the year to 3.1 percent, down a bit from 3.3 percent, but more importantly the 2016 forecast is down too, from 3.8 percent to 3.6 percent.
All of this speaks volumes on a macro level, but there’s also a sentence that comes down on the side of “unease” and would be quite impactful to the payments industry. Borio said that “financial institutions, notably banks, are not using their balance sheet capacity as they once did.” If banks are not using their capacity, they are skittish about making loans — perhaps due to concerns about whether they will be paid back, and they may be anticipating a chill on demand. That bodes ill for loans, and especially affordable ones, being extended to large enterprises, and you can pretty much forget about small and mid-sized businesses, which have been reluctant lending choices for traditional outlets even in good times.
With fewer loans, and tighter lending standards, a vicious cycle emerges. Banks sit on their cash, earning, well, some interest, which is decent for them but not as good as earning higher interest on loans that would otherwise be made “out in the field.” Loan stagnation means that newer businesses don’t get off the ground, and don’t hire. In addition, they don’t buy as much from suppliers … and eventually all this hits the flow of transactions themselves, turning a steady stream into a trickle (and then less adoption of payment tech itself). It’s not too far-fetched to imagine that a real paralyzing effect on financial activity would have a very real and negative impact on FinTech innovation, eventually, with some companies never making it beyond the idea stage. For the payments industry, the butterfly effect of the bond market and other signals put forth by the BIS may be seismic in scope.