Monday, October 10, 2016

WHAT LIES AHEAD FOR FACTORING?

The Factoring World has no Amazon – Yet!

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When Amazon gets involved in a business area, you can bet the current incumbents are shaking in their collective shoes.  There will be disruption.  The Giant has too much tech, too much capital, and too many resources.
Just a few examples of the dominance include 55 percent of online shoppers start their products searches on Amazon and 185 different types of distribution centers in the USA alone (eg. Prime Hubs, Delivery stations, sorting centers, etc.)
If you look at valuation, Amazon’s market capitalization is $400 billion compared to some banks (Deutsche Bank $13 billion; CIT GroupInc. $7 billion, Barclays Bank $25 billion and non banks (PayPal$45 billion, Ant Financial $60bn).
So what does Amazon have to do with the world of factoring?  One area is people.  Data scientists combined with an understanding of credit and new risk and underwriting methods are the new rock stars. They don’t work in the banking world.  The data contained in procurement networks, b2b networks, einvoicing networks, Transportation SaaS companies, Construction SaaS companies, etc. is enough to make the idea of Petabytes seem quaint.
No one knows when this combination of data science, digitization and new risk and underwriting models will reach a tipping point, if ever.  But I wouldn’t bet against it.
Traditional lenders are inundated every day by the PR hype machines. Let’s face it:
  • Blockchain is not (yet) impacting the factors world – tokenized invoices and new forms of payable and receivable finance using blockchain have a ways to go.
  • Receivable auctions have not had an impact on factors.
  • Neither have procure-to-pay (P2P) systems, with new forms of early pay finance, from Ariba to Tungsten and in between (including dynamic discounting) had an impact yet.
  • Network-based factoring replacement models (e.g., Basware) have not yet scaled
  • Supply chain finance is not really impacting their customer base – at best one or two clients may partake in programs.
What has had the most impact is the merchant cash advance market on small factors.   I have talked about how MCAs have an advantage given control over cash.  But again, this only impacts small companies, typically below $10 million.
So with no Amazon on the horizon, you can feel the only competition is beating the brains in of your fellow lenders.
But I would bet every enterprise customer will have some early pay capability (and most likely a suite of them) in a few years. And if their suppliers, the customers of factors, start getting good rates to retire a receivable in 5 days, perhaps we dont need an Amazon.  If your model still relies on an origination team, brokers, credit underwriters, document administrators, you may find receivable erosion over time. Or maybe not, maybe we are suffering a fool’s gold.
But I wouldn’t bet against it. Nor would I bet against Amazon and other big data experts getting into the factoring game.