The Disruptive Power of the Old with the New

Something very interesting has been happening in the world of receivables finance over the past two or three years. In fact it’s much more than just ‘interesting’ – a more appropriate description would be a dramatic and game- changing phenomenon taking place that will transform the face of the receivables finance industry forever.

The receivables finance business has been growing by rates above 20% year-on-year (YOY). Volumes for factoring alone are in excess of €2 trillion per year and, according to McKinsey, bank revenues generated by receivables finance are expected to increase by over 400% by 2020, from US$9bn today to US$40bn. This startling prediction is largely based on the fact that there is a new global environment for factoring, supply chain finance (SCF) and receivables finance in general. Physical, financial and technological processes are merging to create a powerful combination for providing working capital solutions to small to medium-sized enterprises (SMEs) and larger corporates.

Events since the 2008-09 financial crisis have greatly contributed and accelerated a trend towards greater efficiency in the utilisation of excess working capital. This has seen the beginning of a transformation in the delivery methodology of receivables finance, particularly in Western Europe and markets such as Brazil, France, Mexico, China and Hong Kong. The key to this transformation lies in the combining of two elements – that of traditional receivables finance products, such as reverse factoring, and new technology platforms that enable the digitisation of key transaction documentation such as invoices, purchase orders and proof of delivery notices.

This dematerialisation to ‘e’ data is a central part of the change. Already it is enabling products such as highly-automated supplier finance platforms and receivables exchange type platforms used by the likes of Platform Black and Market Invoice in the UK, Debitos in Germany and The Receivables Exchange in the US.

Forces for Change

These innovative solutions are beginning to disrupt the ways in which receivables finance has traditionally been delivered. Not only will this disruption continue, but it will also herald a new era in business finance with much larger volumes being transacted and receivables finance becoming a much more mainstream offering. To some extent this development may eat into the traditional factoring market and also other forms of business finance such as the overdraft and term loans. Yet it will open up new markets for receivables finance, such as in the mid cap sector as well as secondary markets and create huge opportunities for banks, independent factors and platform providers.

While reverse factoring, also known as supplier finance, has been very successful, particularly in markets like Spain, it is largely managed as a paper-based service. As such, it involves a large element of human intervention. By combining reverse factoring with modern technology platforms, the human aspect is largely removed, leaving clean data flows and straight-through processing (STP). This allows large volumes at a much faster pace. It also greatly reduces processing costs, meaning cheaper funding and potentially higher profit for the funding provider because of the greater throughput.

Additionally, once you start to get large flows of short-term, self-liquidating, and relatively stable-value assets, such as in trade receivables, you start to attract the interest of secondary markets. Which is what is happening now – JP Morgan being one example of an agent selling pools of receivables to institutional buyers with rapidly growing appetites for such asset classes.

The business world has begun to see the strength of the receivable, not just for SMEs but large corporates as well. The events of the crisis and downturn have accelerated and continue to drive the trend towards greater efficiency in the utilisation of excess working capital. It has also meant that banks, financial institutions (FIs) and corporates are beginning to understand that the receivable is an asset that can be counted on much more than many other business assets.

More than ever, the crisis projected the receivable into the limelight. It could mean potentially enormous opportunities loom on the horizon for factoring companies and other receivables financiers as only a small percentage of trade receivables are currently financed.

Receivables finance is rapidly evolving and new methodologies to move the business finance world are quickly being employed, together with new strategic thinking to exploit the market’s new and rapidly evolving dynamics, Those market players that are quick to absorb and understand the ‘game changing’ forces and the future market structures that are developing in the receivables finance sector will be tomorrow’s market leaders.

34 views

Related reading