Some things never change for lenders. The need to run efficient businesses, attract and retain customers and avoid bad debts are in the plan every year.
But there are several significant factors in play in 2018 which will provide challenges and opportunities in equal measure.
The Invoice Finance market has never been more competitive. But the providers are becoming increasingly segmented between the Banks, the independent lenders and a new breed of fintech-led funders. The latter are providing a direct challenge to the traditional lenders through innovative products like supply-chain finance, single invoice funding, and peer-to-peer lending.
We expect 2018 to see new entrants in this 3rd tier, including blockchain-based invoice trading platforms. This is already happening in Trade Finance and these developments will continue in Invoice Finance as well.
The Banks have a number of advantages in the market – marketing power, access to cheap money, full range of products, national coverage and so on. But the cost of the infrastructure and hefty regulatory and compliance costs are inevitably passed on to the borrower.
It is the Banks who will be the first in the sights of the new competitors and who will need to be agile in response to pressure on rates, or the threat of losing customers.
In the face of the potentially cheaper and more efficient Fintech challengers, everyone else will be looking to improve efficiency. This is easier for the existing specialist independent Invoice Finance lenders than it will be for the Banks. Process change and adoption of new technology is simpler in smaller organisations.
With the largest share of the market to protect, we expect technology investment within the IF divisions of the major Banks to continue throughout 2018 and beyond, together with significant structural and procedural change.
There has been strong credit appetite across the board over the last 3-5 years, resulting in no shortage of sources of funding for SMEs. Some sectors continue to thrive, especially exporters benefitting from the weaker pound since the Brexit vote, and for now at least, continued access to EU markets.
Conversely, the cost of imported raw materials has risen significantly which has put margin pressure on manufacturers. In tandem with this, inflation and real-terms reduction in consumer spending power, will continue to drive a reduction in high street and discretionary spending. We expect to see an uptake in insolvencies in sectors directly linked to consumer spending, and further down the supply chain.
We also expect to see a tightening of credit risk controls across the industry in response to these economic factors. In the past we have seen lenders apply lending restrictions or withdraw from specific sectors – but only after significant losses were made. In 2018 we anticipate a shrinkage of credit appetite even before bad debts are suffered, and more caution in lending – first with the Banks and then the rest of the market.
This is partly a function of the compliance framework the Banks now have to operate within. “Horizon scanning” and vigilance on loan performance by sector, and all the associated internal reporting, may be time consuming and expensive, but it will help the Banks avoid any shock by restricting lending to “at risk” sectors.
While less heavily regulated, we predict the independent and Fintech segments may also become moderately more risk averse in some sectors, most likely after bad debts are suffered, rather than before.
Efficient risk management remains central to the successful IF business. With effective credit risk processes, good quality new business can be identified and won. Strong and long-lasting relationships can be maintained. With efficient processes, internal costs can be reduced, and service levels raised. The Banks have arguably the greatest opportunity here – or put another way, have the furthest to go.
We are already seeing new technology being harnessed to improve regulatory reporting and risk management. New developments in this area have delivered simplified and improved pre-lend due diligence applications. This improves customer experience and accelerates decision making. Risk management software has evolved and improved and brings reduced customer audit requirements and improved staff to customer ratio.
The use of risk management software to drive efficiency will become further embedded, but in 2018 we also expect to see an increased trend towards outsourcing of non-core activities. This will include routine Audits and pre-lend due diligence, as well as credit control and monthly reconciliation activities.
In summary, an interesting year ahead, with the “traditional” lenders doing well to respond quickly to the challenge of innovative products from new entrants and choppy economic waters ahead. Efficient processes, strong risk management and streamlined structures will be needed by all providers to attract and retain new business and avoid bad debts.