A demand for new sources of financing, particularly among SMEs, arose after the financial crisis when regulation and restrictions meant that banks were less able to meet their needs. Banks have been trying to redress the situation and create an environment that will allow them to provide greater levels of funding in this ‘new normal’ landscape. As such there has been a new focus and emphasis on three business critical aspects of not only receivables finance, but other forms of business finance too. These are: risk management; operational efficiency and compliance. Whilst these areas have been recognised for particular attention, most banks have been relatively slow in their ability to adopt the technology now available to support them in this optimisation process.
- Risk Management
In terms of risk management, in the UK most receivables finance providers have been successfully managing risk for many years using Equiniti Riskfactor’s risk management software - being the only dedicated risk solution provider for receivables finance operations. However, although receivables finance is considered a ‘low loss solution with very low absolute and proportional loss levels (EUF, Jan 2016), more recently there has been a growing threat and incidence of receivables finance fraud in continental Europe. Accounts in these regions are largely being managed without the benefit of any sophisticated risk monitoring and reporting and, as such, the risk climate is escalating. As a result, we expect a significant uptake and spread in the use of risk management solutions to counter the increasing incidence of receivables finance fraud outside of the UK.
- Operational Efficiencies
The second business critical area is in improving the customer experience. Despite a technology-enabled world most businesses still rely on paper in the production of invoices, purchase orders, proof of delivery notes etc. The dematerialisation of these processes will create opportunity to hugely increase the flow and integration of the associated information by streamlining structures, enabling new reports and value-adding data mining propositions, while achieving significant cost savings.
One example of this is in enabling customers to more easily engage with the lender and for banks to make more accurate and quicker credit decisions. More comprehensive and complete data access is required to do this and suitable technology is now available allowing banks to access directly the clients’ accounting system on a real time basis. This means that banks and finance providers can have access to precise and up-to-date client financial data that will facilitate accurate real time credit assessment for funding and risk assessment. This can be used not only in receivables finance but in other areas of banking where credit assessment is required.
Banks are well aware that there are a number of layers to the compliance landscape. In the UK there is the Prudential Regulation Authority and Financial Conduct Authority that banks have to comply with. Then there is operational risk compliance where each manager and employee is accountable as part of their daily routine in certain areas. For example, if you have a stock of invoice discounting clients submitting reconciliations every month, then an operational risk requirement might be that you have to complete all reconciliations in the month that they are received. But if you are receiving reconciliations on say the 15th of the month, then you only have 15 days to process the work. However, with new technology it is now possible to track how many reconciliations you should be receiving by the 15th of the month and create escalation points if they are not received. Once received they can be processed using Equiniti Riskfactor’s automated calculation of reserves module (Invoice Discounting Analysis) Benefits of IDA for the lender include reduced processing time and enhanced risk intelligence and an overall greater customer experience.
Similarly, in terms of risk and pricing and complying with Basel 3 requirements, in the near future lenders will be able to drop in their key metrics into a Basel 3 framework which will provide a probability of default, and loss given default. Currently this task absorbs a huge amount of banks resources, but technology will be able to automate this to a large extent with commensurate savings in terms of resource.
Making life easier
Platform technology will soon be available where banks can pick and mix functionality from extraction, risk assessment, survey and audit through to decision making templates for new business, all in a seamless process methodology. This can be introduced relatively quickly and efficiently as an outsourced service. The climate for banks is right for change in improving efficiency and customer service and the technology is now available to help do that.
‘First published in Receivables Finance Technology 2017. For a free e-copy of the publication please email email@example.com’