Interest Rates and Inflation: A Big Deal or Business as Usual?

Commerce Ventures
7 min readNov 17, 2022


All sectors of the economy have been impacted by the historic increase in interest rates and inflation over the past several months. Not all sectors have been affected equally.

As the Federal Reserve continues to aggressively raise rates to stem the rising tide of inflation, retailers will feel the impact as consumer sentiment worsens. But for an industry that’s faced a persistent onslaught of challenges in recent years, inflation itself isn’t the most pressing issue facing retailers. A fundamental shift in consumer demand combined with supply chain challenges have made inventory-related issues loom larger than inflation or interest rates.

Unlike retail, financial services will likely experience a tectonic shift driven by a change in the conditions that have defined the past decade. These conditions — notably the availability of cheap capital, easy credit, and surplus savings — led to the explosion of several large FinTech categories, including BNPL, bank challengers, retail brokerage, crypto, and embedded lending. We are beginning to see these fault lines emerge: Layoffs at Stripe and Chime; down-rounds at Klarna and BlockFi; a valuation reset at MoneyLion, Dave, and Opendoor; and the implosion of FTX. The impact is direct, variable, and extreme.

Retail: Inflation Dwarfed by Structural Shifts

Retail has faced more concurrent hardships in recent memory than perhaps any other industry on the planet. The rise of e-commerce and seismic shifts in consumer preferences had already been weighing on retailers’ minds for years. Then the economic tsunami of the pandemic hit, which broke global supply chains and forced the overhaul of entire business models virtually overnight.

Retailers like Walmart and Target discussed inflation in their most recent earnings releases but blamed excess/wrong inventory as the primary headwind. Inflation has some role in this — as some consumers shifted purchases from discretionary goods to non-discretionary categories. However, the vast majority of this challenge is a result of multi-year trends coming to a head in recent quarters. Retailing is simply becoming more challenging as a result of these five mega-trends:

  1. COVID Changed (and Continues to Change) Buying Behavior in Unpredictable Ways: The pandemic dramatically transformed consumer behavior, causing significant swings in demand across sectors. Apparel retailers saw their revenue plummet as customers on lockdown deprioritized adding to their wardrobes. With everybody spending more time at home, there were huge upticks in demand for things like furniture and home exercise equipment. The rise and fall of Peloton may be the most stark example of this trend.
  2. Retailers No Longer Dictate Consumer Trends: In the late 1990s and early 2000s, brands such as J Crew and GAP dictated consumers’ tastes. Orders could be placed nearly a year in advance as consumers could be counted on to buy what was on the shelves because it was on the shelves. Today, influencers on TikTok drive short-lived trends and fast-fashion retailers such as Zara and Shein find ways to get product to market before a fad runs its course.
  3. Good Help is Hard to Find: The retail industry is one of the country’s largest employers, representing more than 6% of the entire U.S. workforce. But it’s historically faced incredibly high turnover rates, with retailers like Walmart turning over as much as 80% of their staff every year. The pandemic caused many workers to reevaluate where and how they want to work, which has driven up wages and created a buyer’s market for retail jobs.
  4. Global Supply Chain in Tatters: The pandemic was the ultimate unplanned test of the modern global supply chain, and revealed many major vulnerabilities in the intricate system responsible for moving consumer goods around the world. The sudden stress on the global supply chain stretched it to the breaking point, resulting in prolonged, widespread product shortages. Even today the supply chain hasn’t fully recovered, which is pushing up prices to bring goods to store shelves.
  5. Consumers Expect Fast Delivery (Even if Economics Don’t Support it): Though not a new concern, the “Amazon Effect” is an enduring challenge for brick-and-mortar retailers. Few retail businesses can match the scale of Amazon’s vast distribution network and speed of delivery. The rise of 30-minute delivery startups fueled by cheap venture capital dollars didn’t help — and while most of those models have faded away, consumer expectations have not.

To be clear — inflation is a real risk, and the impact of inflation on consumer confidence and, thus spending is likely to be significant. However, as we talk to our friends in the retail world, they spend more time worrying about these longer-term structural trends that have fundamentally changed what it means to be a retailer.

Financial Services: The Capital Reset

Increasing interest rates are fueling a growing divide between models that have been reliant on cheap cost of capital to maintain business operations and fuel customer growth and those that can leverage yield for sustainable income. We believe rising rates will likely impact different areas of financial services in materially distinct ways. Below are seven scenarios that could present meaningful risks over the next 6 months and reset the “winners” and “losers” across financial services.

  1. Real Estate Market Freezes Over: With the average 30-year fixed mortgage rate in the U.S. reaching a 20-year high (7%), real estate transactions are set to grind to a halt. Real estate transactions have hit a 28-month low in Q3 ’22, reflecting an (unsurprising) diminished appetite among consumers to transact and take on new, high-interest rate mortgages. While this reduction in demand will likely drive down housing prices, the corresponding reduction in supply may cushion an otherwise painful crash. Regardless of where prices go, the dramatic slowdown will create headwinds for lenders, mortgage originators,and other transaction-based businesses. The public markets have already reacted as at-scale challengers (e.g. Open Door, Rocket Mortgage) saw massive valuation resets and we expect to see the same play out in the private markets.
  2. ARMs Go Nuclear: In mid 2022, adjustable rate mortgages made up nearly 10% of all new mortgage applications, the highest since ’08 and up nearly 300% since 2020 (source). While this growth is unsurprising in the current economic climate, what is worrisome is the volume of ARMs that are set to expire in the coming 18 months. 5/1 ARMs that were issued at an average rate of 3.25% in 2017 represent $93B in value. With rates more than doubled, there is a risk that a meaningful percentage of these consumers will be unable to meet newly adjusted mortgage payments.
  3. BNPL Implodes: Increased cost of capital, a shift in consumer spend from discretionary to non-discretionary, and tighter credit standards will likely squeeze the BNPL market. Faced with higher rates and slimming margins, BNPL players will have to mark-up their pricing to merchants. The increased cost of acceptance could begin to exceed the marginal benefit of greater conversion — tipping the scale and making it unattractive for merchants to adopt and promote BNPL. At the same time, a weakened US consumer base will force BNPL lenders to tighten credit standards, reducing the number of people who qualify for the offering. While tighter credit standards will enable pay in 4 players to avoid major delinquencies, longer term players will likely face delinquencies on their long-duration loans. The secular shift from discretionary to non-discretionary spending could drive reduced demand for BNPL, with over 30% of consumers utilizing BNPL to finance purchases they wouldn’t otherwise be able to afford (source). Given these changes, we expect that BNPL will shift from a “no-brainer” to a more nuanced/difficult decision for many retailers.
  4. Credit Desert — A Growing Gap Between Demand and Supply: The CPI index has risen 8.2% over the last 12 months (NSA), and consumers have felt the impact. This quarter, the average interest rate on credit cards reached a 28-year high, at a whopping 18.43% — the highest since the Fed began tracking in 1994 (source). As average Americans will be forced to borrow more money to cover basic expenses at higher costs, we expect to see a substantial increase in the demand for credit. At the same time, tightening underwriting standards may reduce the availability of credit — especially for those who need it most. Lenders with a largely prime customer base will benefit from increased net interest margin. Lenders with subprime customers will likely pull back lending volume — or face the risk of increasing delinquencies.
  5. What ReFi Market?: Arguably the most unsurprising casualty in this climate is the ReFi market. Fewer than 1 million residential refinance mortgages were issued in the second quarter of 2022, the lowest in 36 months (source). This trend is not exclusive to mortgages. In Q2 ’22, SoFi reported that its student loan refinancing business had been at less than 50% of pre-COVID levels for the last two years. With student loans increasing more than 33% in the past year, refinancing volume will plummet even more dramatically in the new year. Interest rates for auto loans have similarly jumped nearly 15% YoY, which will likely result in diminished demand for refinancing services.As this trend continues, ReFi start-ups (e.g. SoFi, Upstart, Earnest) may be hit especially hard as demand for refinancing will retrench in the face of high and rising interest rates.
  6. FinTech Challengers in Retreat: Faced with a less friendly private market environment and an existential need to continue to spend more money on customer acquisition, FinTech challengers are facing growing headwinds. Less private capital and stale (artificially high) valuations will make it harder for venture-backed FinTech challengers to raise equity dollars. As access to capital constricts, challengers will face growing difficulty funding customer acquisition and sustaining user growth. Challengers that relied on cheap credit facilities (e.g., alternative/ embedded lenders, etc.) may be underwater on their unit economics and forced to pivot into new business models or seek unattractive exits. Consumers will likely pull back from the products that have defined challenger growth over the past several years — as a decline in artificially high savings rates will drive a shift away from retail brokerage, debit and alternative providers towards more mainstream credit and bank providers.
  7. Good to Be a Big Bank: Large incumbent banks are well-positioned to not only survive, but thrive. While certain business units (e.g. investment banking) will be hit, other areas like unsecured credit, consumer banking and transaction services will likely see growth. We have already seen several large institutions (e.g., BofA) outperform expectations in Q3, driven by increased net interest income especially in consumer banking.



Commerce Ventures

Early-stage venture capital firm investing in technology innovators in the retail and financial services eco-systems.