Supply chain finance has been at the forefront of banks’ strategies for some time, and now factoring houses are being urged to get involved. Melodie Michel reports.
Sometimes referred to as reverse factoring – started by a buyer to help its suppliers finance their receivables – supply chain finance (SCF) seems like the next logical step for factoring companies.
At the International Factors Group (IFG) conference in Barcelona last October, factoring companies were urged to use their knowledge of the receivables market to help develop SCF opportunities.
Speakers explained that factoring firms could easily benefit from the huge demand for SCF products by building on their existing receivables offerings.
Erik Timmermans, IFG secretary general, tells GTR that SCF is “a logical, natural evolution” for factors that already have a receivables finance portfolio and experience in on-boarding suppliers, which has often been raised as an obstacle for SCF providers. He adds that the fact that factoring companies are increasingly collaborating with banks on product offerings should create bigger opportunities and help boost the SCF sector.
“There’s a trend in the factoring world to become more and more linked to the banking environment. Big SCF programmes are very bank-driven, and as the factoring world is becoming more integrated in the banking world, factors are taking more and more of a lead in the development of SCF, as they have big receivables finance knowledge,” he says.
However, Timmermans points out that there is still a lack of knowledge about the sector, despite obvious interest from factoring companies in learning about the opportunities.
Raiffeisen Bank’s factoring manager Simon Peterman says that most factoring companies already do SCF, as any financial product within the supply chain can be considered a supply chain finance product. “What we at Raiffeisen call SCF is really large-scale reverse factoring, and most of us already do a certain hybrid or variety of that product,” he tells GTR.
In Spain, reverse factoring, or confirming, has been very popular with factoring companies for the past 20 years, says Josep Selles, director general of Eurofactor Spain. He explains that Spanish companies traditionally tend to look for multiple funding sources, and now that the liquidity crisis has hit the majority of the developed world, he expects a boom in SCF demand globally.
In fact, a few days after UK prime minster David Cameron announced an SCF scheme in the UK, Bibby Financial Services’ head of international trade finance Simon Davies told GTR that the firm was in talks with UK Export Finance (UKEF) to help small and medium-sized enterprises (SMEs) increase exports through SCF products. “Governments are very keen in the UK and in all markets where we are based to incentivise exports, and SMEs are at the forefront of this. We think that there’s a good role for us to play with UKEF for example in order to assist those smaller operators with knowledge and provide them with the technical ability to start to export,” he said.
However, there is still some reluctance among factoring companies interested in SCF, particularly linked to the technology required to offer these services. “It’s a huge investment,” Oliver Belin, business development executive at PrimeRevenue, tells GTR.
“If a factoring company would like to enter an SCF programme with only one buyer and one or two suppliers, maybe they could do it themselves, but if they consider doing large programmes with cross-border transactions involving hundreds of suppliers, they will need special services, which means a whole IT connection, on-boarding support and education of the procurement team.”
Eurofactor uses its own software, but there is a trend towards using third party providers. “The advantage of having an in-house software solution is that you can tailor it to your needs and services. But when you do it internally the process is longer, whereas if you go through an external provider it’s ready to use. The trend is to go to external suppliers,”
Selles tells GTR.
Factors are not the only ones who need to invest in IT in order to do SCF – their clients (the buyers) must follow if the system is to work. Selles adds: “To establish a confirming line, the client must also be ready and have the structure and IT platform that allow them to use these services, because if it takes them a month and a half to confirm the invoices because of their internal system, they cannot use it.”
Malta-based trade finance bank Fimbank, which has created a number of factoring joint ventures around the world, uses its own software and does not see the need for a different system for its SCF activities.
However, the bank’s president, Margrith Lütschg-Emmenegger, tells GTR that it all depends on how far factors want to take SCF. “Obviously if you want to make it paperless, then maybe you need to invest more money to really go into the whole interbank circle, and that might trigger some need for investment.”
In order to make their transactions paperless, one of the options for factoring firms is to join Swift’s bank payment obligation (BPO), an SCF platform reserved to banks until now. Swift senior product manager David Hennah explains: “A lot of the factoring companies we’ve been involved with expressed an interest in extending their product range beyond traditional factoring to include things such as reverse factoring, approved payables finance and pre-shipment finance.
“We see the BPO as an actual vehicle that would enable them to do that, and for that reason we recently changed the governance attached to the membership criteria for the BPO, which means that the door is now open not only to supervised financial institutions (FIs) but also to non-supervised FIs, in other words, any member of the IFG group is now eligible to participate in this scheme.”
For Raiffeisen’s Peterman, choosing between in-house software and third party provider is a strategic decision for factors, but ultimately, they are likely to use both, as well as bigger banks’ solutions through partnerships.
“There are a lot of questions on the risk appetite that factors have. Usually factors have less capital than banks, and that can be an issue: can they take the risk appetite for it?” he asks.
Co-operating with banks would also allow factors to expand their footprint and risk appetite. “The main issue is having a global platform, which would allow us to launch products simultaneously in different markets. One of the options that we’re investigating is to work in partnership with people with existing platforms. Of course banks are one of the options,” says Bibby’s Davies.
Whether they want to gradually build on their existing services or jump into SCF head on, one aspect that causes concern for factoring firms is the legal requirement involved in cross-border transactions – something they don’t do on a regular basis. “It’s a matter of learning about the legal risks, since SCF is generally cross-border and they need to be sure that they can on-board cross-border suppliers,” says Timmermans at the IFG.
One of the options factors have when doing cross-border transactions is to use the two-factor system, with rules approved by both the IFG and Factors Chain International (FCI).
Lütschg-Emmenegger at Fimbank explains: “You can approach another factor in the country where you do the transaction, and they can guarantee the commercial risk and collect for you.
“When you deal with companies abroad, the rules between the two factors have already been agreed [by the IFG and FCI]. It’s actually not so difficult for a factor to do cross-border if they want to. The problem is more that most concentrate on the easy domestic market, where there is plenty of business.
“People may also feel like there aren’t enough factors in the emerging markets that are reliable to be used as your counterparty. We should all make an effort to develop our international business more.”
Regardless of how much cross-border business they do, or how developed their IT solution is, factoring firms could greatly capitalise on their SCF business – one of the fastest-growing areas of trade finance.
“The advantages are financial, in that you make profit if you do it right – we can’t lose sight of that. It also helps us in terms of differentiation and of our proposition, and in terms of the reputation and strength of the brand,” Bibby’s Davies adds.