Unpredictable interest rates, rising cost of technology!! What will this mean for the business to business financial services sector and its small business clients? More importantly what will this mean for the current and future global economy?
But before that, let’s take a look at sustainability in a business context. Well, according to the Brundtland Report, “Sustainable development is a development that meets the needs of the present generation without compromising the ability of future generations to meet their own needs” (Brundtland Report, 1987). So, going back to the main point of this blog, is the fluctuation of interest rates and the cost of technology sustainable into the future?
Interest rate fluctuation, “is a significant risk that can arise from banking activities. When interest rates change, the present value and timing of future cash flows change. These changes can affect the underlying value of an institution’s assets, liabilities and off-balance sheet items” (Office of the Superintendent of Financial Institutions, 2019). In other words, banks play a crucial role in the fluctuation of interest rates in the economy as a whole. The way they carry out their key production processes determines whether their business model will be sustainable in the future or not.
It is known that interest rates are easily affected by various economic activities and their trends are difficult to predict. Fluctuations become prevalent as more and more business clients take on loans from banking institutions, the demand for money supply increases thus increasing the interest rates. However, banks have a method to assist small businesses when interest rates increase and this is done by allowing them to sign on to a fixed interest rate contract. This assists those businesses to not get burdened with unpredictable costs and allows them to continue doing business with those banks. One particular example is when “ Bank of Canada holds interest rate steady at 1.75%, citing trade tensions” (The Canadian Press, 2019) This shows how the bank is attempting to stabilize the interest rate to slow the rapid increase that has been in progress. Moreover, this example explains how an unforeseen increase in interest rates can affect the cash flow of business clients making it difficult for them to repay the loan. “Outlook clouded by trade, central bank says, lowering global growth forecast” (The Canadian Press, 2019) This will help other countries and big businesses but not small business. If in the future this trend of increasing interest rates continues, not only will the banks and business clients suffer, but it will also affect the entire global economy.
Technology also plays a key role in the sustainability of the business model of the financial services sector
Technology is ever-changing at a fast pace. In order to keep up with this pace, the financial services industry is pursuing advancements in technology and adopting digital platforms to enhance the services provided to their business clients. Technology has changed the way businesses bank; for example, banks have relocated many of their services on to an online platform to enable business clients to have more conveniences. This allows small business owners to save their most valuable asset, their time. Efficient operating system also benefit small business clients as it can help organize spending and identify gaps in their financing. However, considering the environment and its negative implications to the future generation the usage of computers in financial services are overall damaging. Computers are widely used in order to manage databases, keep track of all sorts of transactions, expenditures, as well as, to maintain accuracy. Despite these benefits, one large drawback of this is the fact that it requires updates and replacements in order to keep its capability at its best status. This is due to the planned obsolescence of software which is always being updated and therefore requires new equipment periodically to keep up creating pollution through manufacturing. Furthermore, when in use computers also generate a huge amount of energy waste which is turned into excessive greenhouse gases resulting in global warming and climate change. Therefore, when considering the environment we will be passing down to our future generation and the consequences they will have to burden, increasing the usage of technology, especially computer, is not a sustainable strategy.
In the end we think that the fluctuation of interest rates and the cost of technology is not sustainable into the future. Having known the unpredictability of interest rates, business clients need to be smart when it comes to borrowing and lending money. This is a crucial determinant to the economy, financial situation, and purchasing power that is passed down to our future generations.
Here is another interesting article on how to protect small businesses when interest rates rises: https://www.canada.ca/en/financial-consumer-agency/services/interest-rates-rise.html
References:
Blackwell, R. (2017). Remember When: What Have We Learned from the 1980s and That 21% Interest Rate? Retrieved from http://www.theglobeandmail.com/real-estate/the-market/remember-when-what-have-we-learned-from-80s-interest-rates/article24398735/.
Office of the Superintendent of Financial Institutions. (2019). OSFI Guidance Addresses Interest Rate Risks at Deposit-Taking Institutions. Retrieved from www.osfi-bsif.gc.ca/eng/osfi-bsif/med/Pages/b12-nr.aspx.
Brundtland Report, Our Common Future, 1987 World Commission on Environment and Development
The Canadian Press (2019) Bank of Canada holds interest rate steady at 1.75%, citing trade tensions | CBC News. Retrieved from https://www.cbc.ca/news/business/bank-of-canada-economy-interest-rates-1.5206389
Financial Services Business to Business 