Five Threats to the Factoring Business Model
Factors potentially left with the Hard Candy after HalloweenBeing in a Factor’s shoes is a lot like watching your big brother take all your good candy from your Halloween booty and leaving you with the candy corn and hard candies.
Looking at this space and having a crystal ball, I would be concerned about the next 5 years if I was in factors’ shoes. While data collated by the EU Federation for the Factoring and Commercial Finance Industry (EUF) indicates that factoring and commercial finance volumes in the EU continue to grow ( 5% to €1.26 Trillion in 2013), there are alternative models out there.
Factoring is relationship and operation heavy. They must work with individual sellers. Think about taking a book of receivables and doing analysis on what you will lend against, if you need to mitigate the buyer risk, and various other operational details. The process is not simple and it is time consuming. It is much easier to have a revolving facility or an overdraft line.
P2P Networks have a major advantage here with both buyer and seller data. Banks and factors generally only see content from one side of the relationship. Banks may claim to offer buyers a portal to capture purchase orders and invoices, but they do not have the sophisticated structured data that can match against agreements and POs, invoices, etc.
Here are five reasons to be concerned:
1. When large global corporations use these P2P networks for early pay to their suppliers that takes away the “good” candy from the factors, who are left with the bad and the ugly to lend against.
2. P2P lending platforms are still in the first inning of offering early pay solutions, but companies like Tungsten, Crossflow, Taulia, Nipendo, Ariba and others are poised to make this a much bigger market than it is today. And with their data, they are in a much better position to control for fraud.
3. Receivable Auction markets are becoming established in various countries to enable sellers to sell non credit enhanced receivables through an exchange (Sweden, Russia, UK, and USA all have auction markets).
4. New forms of transactional finance tying together Traders, Logistic providers, lenders, and data aggregator may play a future role. To date, while we can track collateral, the means to inject liquidity and monitor ownership, change in pricing, etc. is challenging.
5. The Bank Payment Obligation (BPO) provides another form of the Two Party Factoring model. While SWIFT is still focused on adoption, the BPO has the infrastructure and bank support in emerging markets to make this a potential interesting proposition. See SWIFTs Marathon to make the Bank Payment Obligation a success
Any way you slice it, being left with the hard candies is not a good proposition. It’s a big cost to work with small sellers and manage those relationships. Factors need to become more aware of how they can work with P2P networks to leverage the data to facilitate lending.