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RECEIVABLES FINANCE GLOBAL OUTLOOK 2021 | VOLUME 2

TECHNOLOGY
– THE ROUTE TO RESILIENCE

Introduction

The COVID-19 crisis forced many businesses all over the world to close and cease their services or operate in a limited capacity. Fast government action in the form of stimulus packages cushioned concerns of a surge in both debtor fraud and business insolvency during the pandemic. As these schemes begin to wind down, the current concern is how the more distressed businesses will fare once such stimuli are withdrawn. The degree to which business distress will impact receivables finance lenders* will ultimately depend on the robustness of their risk and KYC processes.

Technology clearly plays an important role in supporting risk assessment, both when onboarding new receivables finance customers, and then monitoring them ‘in-life’ throughout the lending cycle. But while technology is fundamentally transforming the possibilities of how receivables finance lenders operate, it can only produce the best results when combined with human insights and industry expertise.

These are some of the main talking points we cover in our second volume of the EQ Riskfactor Receivables Finance Global Outlook report, based on a survey of senior receivables and trade finance, credit, compliance, fraud and risk professionals across the US, UK, Netherlands, France and Germany. Each report, supported by expert external contributors, explores different aspects of the wider study, revisiting views, opinions and analysis as the impact of COVID-19 evolves.

Michael Ellis,
Managing Director, EQ Riskfactor

* For the purpose of this report, all references to ‘lenders’, ‘customers’, ‘facilities’ and ‘industry’ are within a receivables finance context. A customer, for example, being a borrower. We understand that the term ‘receivables finance’, can also differ internationally – for example ‘factoring’, ‘invoice finance’, invoice discounting’ or ‘asset-based lending’. Here for simplicity, we use receivables finance as an umbrella term.

Mixed concerns over fraud and business failure


Lenders didn’t experience risk issues, since companies were not distressed because of their low business activity levels supported by stimulus packages.


Patrick De Villepin, BNP Paribas Factoring


We’ve been rolling out risk awareness training for our relationship managers, credit teams, risk managers and client-facing teams.


Ian Miller, HSBC


It may be that a company doesn’t truly grasp the ramifications of fraudulent activity. A company may feel justified in its actions to cover operating expenses. However, it is very common for a minor incident to snowball into a major problem for a lender.


John De Pledge, Leumi Business Credit

HAS FRAUD INCREASED OR DECREASED IN 2020?


Global figures
surveyed markets


Globally, the figures show quite an even spread of respondents’ views on whether fraud has increased, decreased or levelled out in 2020, compared to 2019. Drilling down to individual markets, the UK and most countries in Europe reported a decrease – with the exception of the Netherlands, which along with the US saw a significant increase.

HAS BUSINESS FAILURE INCREASED OR DECREASED IN 2020?


Global figures
surveyed markets


Similar to fraud, there was quite an even spread of global respondents who felt that business failure in 2020 had gone up, down, or remained at similar levels to 2019. The US saw the biggest increase in business failure whilst the UK saw the biggest decrease.

At first glance, industry opinions on both fraud and business failure may seem quite balanced. In practice, however, some lenders are more susceptible to fraud with the higher risk nature of certain receivables finance product types, such as confidential invoice discounting. Equally, while it was right for governments to roll out stimulus plans as quickly as they did, through their necessary haste it is highly possible that a certain level of fraud has slipped through the net over the past year.

It is also concerning that a third of respondents felt fraud had increased compared to the previous year – particularly considering that government stimuli may have masked the financial pressure of many businesses, and the possible impact that could be felt when these stimuli are withdrawn.

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$1.9

trillion stimulus is thought to have gone to many other purposes rather than exclusively for business support




THE JURY’S STILL OUT

There may be very different reasons for how lenders and businesses in individual countries have fared. Along with the UK, respondents from France saw some of the biggest decreases in fraud levels. As Patrick De Villepin, FCI Chairman and Factoring Global Head of BNP Paribas Factoring observes,”Lenders didn’t experience risk issues, since companies were not distressed because of their low business activity levels supported by stimulus packages.”

In the UK, the perceived low levels of business failure may partly be attributed to what have become known as ‘zombie’ businesses – non-profitable and non-growth businesses that have received an extended lifeline through government stimulus. This is even more prevalent when considering that regulators in countries such as the UK and Germany put a hold on business insolvencies as the pandemic set in.

In the US, the most recent $1.9 trillion stimulus is thought to have gone to many other purposes rather than exclusively for business support. John De Pledge, Head of Asset-based Lending, Leumi Business Credit – a division of Leumi Bank USA, and Immediate Past (2020) President of The Secured Finance Network, points out that much of the fraud that has occurred could be more circumstantial when faced with difficult trading conditions than pre-meditated. “It may be that a company doesn’t truly grasp the ramifications of fraudulent activity. A company may feel justified in its actions to cover operating expenses. However, it is very common for a minor incident to snowball into a major problem for a lender,” he comments.

Top 3 fraud prevention strategies

01

Implement best practice fraud risk assessment and identification processes and procedures to ensure a clear financial analysis of both the customer and their customers.

02

Use technology to change risk monitoring from a reactive to proactive strategy, which adds another level of monitoring and enables customer centricity.

03
Enhance fraud risk awareness by continually improving the training and knowledge base of teams.


We’ve been rolling out risk awareness training for our relationship managers, credit teams, risk managers and client-facing teams.


Ian Miller, Global Senior Manager, Transaction Risk Management at HSBC

TECHNOLOGY AS A ROUTE TO ECONOMIC RECOVERY

It is too soon to predict the business impact when governments do withdraw their support. All the more reason that now should be the time for lenders to implement the technologies to build a detailed credit history of their customers and new prospects, so they can make faster and smarter decisions. As the recovery takes hold, companies will need to unlock working capital for their growth. And as government interventions end, receivables finance – aided with the right technology tools – is the perfect vehicle to support economic recovery.

At the same time, with the withdrawal of government stimuli, there is a likelihood of increased fraud. Lenders need to be prepared and technology will be key. This is even more the case for those countries where support has come in the form of loans. The financial performance of some customers may not be enough to bear the additional burden of financial repayments amassed over the pandemic. Lenders will therefore need detailed analysis to monitor the payments of such loans and re-baseline the financial metrics they are measuring.

By having the right data sets, lenders can minimise their own risk exposure, capitalise on economic growth, and better serve their customers – particularly businesses with growing order books but immediate cash flow challenges. Through special algorithms, lenders can spot and flag any adverse trends such as identifying deteriorating collateral profiles, or any indicators of fraudulent financial manipulation. And because of the scalable nature of automation technologies, lenders can take on and manage more clients without bearing additional risk.

In addition to strengthening their data sources, many lenders are also conducting extensive fraud training and awareness programmes so they can navigate both the risks and opportunities of the economic recovery. “We’ve been rolling out risk awareness training for our relationship managers, credit teams, risk managers and client-facing teams,” says Ian Miller, Global Senior Manager, Transaction Risk Management at HSBC.

Fuelling growth through informed risk management


Risk management is more than just measuring metrics. It is about managing customer relationships and supporting clients in managing their own risk.


Matthew Davies, UK Finance


While a certain amount can be done through remote verifications, a large part of risk assessment is through touch-and-feel.


John De Pledge, Leumi Business Credit

HOW SATISFIED ARE LENDERS WITH THEIR RISK MANAGEMENT PROCESSES?

Both on a global and individual country level, most respondents were somewhat satisfied with their risk management processes. A smaller proportion were very satisfied, and fewer still were somewhat unsatisfied.

In a highly competitive marketplace, with emerging forms of finance and a comparatively low cost of entry, there is a concern about the large proportion of lenders that are only ‘somewhat’ satisfied with their risk management processes. This potentially restricts which customers they can onboard and limits the opportunities they can capitalise on.

A lost opportunity could also emerge if a potential customer can obtain a loan or revolving credit line faster from an alternative provider because of its automated decision-making and customer onboarding processes. In an age where customer expectations are based on decisioning speed, automated processes provide an even more compelling proposition for lenders.

Automated risk management technologies allow lenders to build a comprehensive risk profile for each client. Through daily portfolio monitoring, they can investigate any outlying events, and not only monitor the individual circumstances of their customers, but the overall health of their own portfolio. Through automated collateral and financial risk scores, lenders can drive a more targeted and best-practice risk management, due diligence and verifications approach. 

At the same time, risk management is more than just measuring metrics, says Matthew Davies from UK Finance: “It is about managing customer relationships and supporting clients in managing their own risk. This is the added service that best-practice receivables finance lenders can provide.”

The need to assess client risk from a remote desktop position over past months has brought its own unique challenges. “While a certain amount can be done through remote verifications, a large part of risk assessment is through ‘touch-and-feel’ – how physically organised the client’s business is, its inventory turnover or volume of returns,” says John De Pledge, Leumi Business Credit. As vaccination rollouts progress and travel restrictions ease, many risk assessors will be eager to get out into the field again.

Case Study




CASE STUDY

30,000

hours per annum processing time saved


Business transformation
EQ Riskfactor recently worked with a key client to deliver the digital transformation of its risk processes and systems, and a lean target operating model.

 

The results were:
• A framework for process and workflow transformation
• The preparation, configuration and installation of a dynamic reporting tool, replacing multiple spreadsheets
• An automated workflow tool to enable closed feedback loops
• Increased standardisation and visibility for all, within a single source of truth and with a full audit trail.


Data extraction will become the new normal, and there will be no going back.


Matthew Davies, UK Finance

DATA AS A SINGLE SOURCE OF TRUTH

Part of the answer to the large proportion of respondents being ‘somewhat’, rather than ‘very’, satisfied may be a traditional reliance on rules-based processes, centred mainly around regulation compliance. As technology evolves, we are seeing a move towards risk-based processes instead.

By establishing digitised criterion rule bases, lenders can collate data from different sources, presenting team members from different departments, sites and borders with the single source of truth they need to make fast, informed decisions and price appropriately.

The key point here is that the user within the lender organisation should have the specific data they need to make effective decisions – but without being confronted with information overload.

At the same time, huge opportunities are also emerging in real-time data extraction, where a lender can extract accounting or banking data directly from their customers’ IT systems rather than the more traditional ‘push’ system where clients manually send through the information. This is both in assessing new prospects, enabling faster onboarding, and also continuous in-life monitoring.

“It is an interesting challenge,” says Matthew Davies. “On the one hand we have safe data messages like GDPR (General Data Protection Regulation) encouraging people to control their data. But then there are initiatives such as Open Banking, that encourage wider access to data. There are still some contradictory messages, and it will take some time. But data extraction will become the new normal, and there will be no going back.”

The biggest concern for both lenders and customers revolves not so much around transparency, but that the security of information should be intact – and rightly so. That said, at EQ Riskfactor we certainly see data extraction as a growing trend moving forward – particularly in a scenario where a lender becomes concerned over a customer’s business viability or potential to conduct fraudulent activity.

Data extraction also needs to happen within a proven and well-considered strategy. While customers are willing to share their data, they will only do so in return for perceived value – through substantial time or cost savings, or efficiency and accuracy gains for example.

Risk-based policies – more than just automation

Risk-based policies should not be 100% reliant on system output. Rather, technology should be used to make recommendations into areas which need closer inspection. Underwriting processes and industry knowledge remain at the core of risk due diligence, so it will always be a case of combining technology with industry expertise.

KYC

Know Your Customer (KYC)



10 or 15 years ago, KYC wasn’t even a thing. Now it’s front and centre.

Ian Miller, HSBC



HOW SATISFIED ARE LENDERS WITH THEIR KYC PROCESSES?

As with risk management, most respondents, both globally and within our individual surveyed markets, were ‘somewhat’, rather than ‘very’, satisfied with their KYC processes. While there was a much wider gap between being ‘somewhat’ and ‘very’ satisfied in the UK and European markets, US respondents were much more evenly split. 


We should strive to share KYC information between our mother banks and their factoring subsidiaries so that we don’t duplicate the work.


Patrick De Villepin, FCI, BNP Paribas

PUTTING KYC FRONT AND CENTRE

The satisfaction gap as shown above may lie partly in the fact that KYC is a comparatively recent phenomenon. “10 or 15 years ago, KYC wasn’t even a thing,” says Ian Miller, Global Senior Manager of Transaction Risk Management, HSBC. “Now it is front and centre of our customer due diligence at onboarding stage.”

There are huge opportunities for lenders that develop robust KYC processes. As KYC typically starts when onboarding a new client, lenders can improve the customer experience by using digital tools, rather than collecting paper copies or certifications. This helps them capture client information faster, at reduced cost and without duplication. Then, by aligning the digital information captured with their customer relationship management (CRM) system, they have a single source of truth and can monitor the entire client lifecycle as credit scores change.

Another aspect is efficiency. “We should strive to share KYC information between our mother banks and their factoring subsidiaries so that we don’t duplicate the work,” says BNP’s Patrick De Villepin. “Such processes can be very demanding in terms of both time and workload, which isn’t good for business development. Efficient data sharing in both KYC and risk analysis will be key moving forward.”

Is your KYC process easily auditable?


Use the EQ Riskfactor 4-point checklist:
01. Do you have policies and procedures which you follow consistently and accurately?
02. Are at least 97% of your KYC assessments completed ‘right-first-time’?
03. Do you have an automated workflow tool with integrations into internal systems, with external data sources and search providers?
04. Can you provide extended risk identification to customers’ debtors and the wider supply chain?

Optimistic Outlook

Optimistic outlook


Lenders remain optimistic in the signs of an already-emerging recovery

Should there be a future crisis on the scale of COVID-19, it is difficult to imagine the levels of government intervention we have seen over the past months. It may fall on lending institutions to fill the gap, but equally this presents an opportunity to show how the industry can thrive and support economic recovery in times of adversity.

In terms of our current crisis, the vaccination rollout is a very good indicator of the economic recovery. Within the geographical scope of this report, the success of vaccine programmes in the UK and US has been phenomenal, and other European countries are accelerating their own vaccination rollouts.

Lenders remain optimistic in the signs of an already-emerging recovery – particularly in the potential of the receivables finance model to support business resilience. But while industry optimism is well-founded, there is no room for complacency. Investing in technology will be the driving force to the business resilience of lenders coming out of the pandemic – and moving forward, reducing the chance of errors and oversight, enhancing due diligence, speeding up onboarding and mitigating risk exposure.

Thank you to our external contributors. Their insights have added an invaluable context to our own research and findings, and we appreciate their involvement:
• Patrick De Villepin, Chairman FCI and Factoring Global Head of BNP Paribas Factoring
• Ian Miller, Global Senior Manager Transaction Risk Management, HSBC
• John De Pledge, Head of Asset-based Lending, Leumi Business Credit – a division of Leumi Bank USA and Immediate Past (2020) President of The Secured Finance Network
• Matthew Davies, Director, Invoice Finance and Asset Based Lending, UK Finance

Report Mockup 2100X1400

Receivables Finance Global Outlook – Gearing Up For Growth

In this report we investigate:
• The impact of Covid-19 on demand for receivables finance across the globe
• Revenue expectations for 2021
• Strategic priorities for lenders and why technology was high on the agenda.

READ GEARING UP FOR GROWTH

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