RECEIVABLES FINANCE GLOBAL OUTLOOK 2022 | VOLUME 4
NAVIGATING 2022 AND BEYOND
In our latest Global Outlook report, receivables finance industry experts provide commentary and predictions for 2022. In this volume, they share how it is more important than ever that lenders assess the viability of borrowers to protect themselves from unnecessary risk.
In 2021, COVID-19 continued to shake up the global receivables finance industry. We estimate that the size of lending books has dropped by 50% since the pandemic first emerged. Plus, with the extension of government support schemes, the market has remained challenging for longer than expected.
Over the coming months, as government support schemes are withdrawn, borrowers will once again look towards receivables finance lenders for funding. During the last half of 2021, lenders have gradually begun to onboard new clients. But equally, with the withdrawal of government stimuli, lenders may run higher levels of risk. Around a third of respondents in our EQ Riskfactor survey of finance professionals across the US, UK, France, Germany and the Netherlands are concerned that fraud has risen since the start of the pandemic – often through circumstance rather than malice. It is, therefore, more important than ever that lenders can assess the viability of borrowers to protect themselves from unnecessary risk.
However, our survey shows that only 78% are satisfied or somewhat satisfied with their risk management. Encouragingly, more than 50% are aiming to digitise their onboarding processes over the next two years.
These are just some of the findings from our EQ Riskfactor Receivables Finance Global Outlook series over the past 12 months. In this fourth volume, we look at what the receivables finance industry hopes to see in 2022, both through our own commentary and predictions from our external experts.
Mark Watkins, Director, EQ Riskfactor
Increased supply of capital tends to pressure both risk appetite, as well as the pricing paradigm.
John De Pledge, Leumi Business Credit
Key challenges for the year ahead
The year ahead brings vast potential opportunities. A recent report from FCI, a global representative body for factoring and financing, shows that the receivables finance industry declined in volume in 2020 by 6.6% – almost six times greater than the 2008 financial crisis and the most significant drop in factoring volume ever recorded. In the first half of 2021, the global industry grew in almost double digits, and FCI anticipates even more significant gains in 2022.
But 2022 also presents several potential challenges. “With the rise in the new Omicron variant, we do not yet know what the true industry impact will be,” says Peter Mulroy, Secretary General, FCI. “Such a fluid environment makes it challenging for factoring companies to plan their future investments.”
Another potential challenge will be the withdrawal of government support schemes. While this is good news for receivables finance lenders, there is also likely to be a spike in business insolvencies during the first half of 2022. There may also be a further increase in fraud amongst underperforming businesses that want to look attractive to the lender. Even if this is often more circumstantial than pre-meditated, it is fraudulent all the same and exposes the lender to unnecessary risk.
Lenders will need to recalibrate the business plans and growth ambitions they had prior to the pandemic. At the same time, they will be faced with other dynamics such as fraud, business failure, writs of overtrading, or frail supply chains. It takes just one misjudgement when onboarding a client to impact the bottom line.
“A significant challenge for UK receivables finance lenders – and for all commercial finance providers – in 2022 will be to support client businesses in the transition to a more ‘normally’ functioning commercial finance market. The last 24 months have seen some extraordinary state interventions which have mitigated against long-lasting damage to the UK economy. Now we are hopefully looking at what is required to support the recovery, it is for the commercial sector to come back to the fore,” says Matthew Davies, Director in the Commercial Finance team at UK trade body, UK Finance. “This includes making businesses aware of the full range of appropriate finance options, particularly the working capital solutions that have been less prominent over the last two years,” he says.
John De Pledge, Head of Asset-based Lending, Leumi Business Credit – a division of Leumi Bank USA, and Past (2020) President of The Secured Finance Network, adds from a US perspective that as the market normalises, increased competition will also be a significant challenge for receivables finance lenders in the coming year. “Lenders’ balance sheets are in excellent condition, and they are looking to deploy additional capital in their senior secured receivables financing and asset-based lending businesses,” he says. “Increased supply of capital tends to pressure both risk appetite, as well as the pricing paradigm.”
A significant challenge for UK receivables finance lenders – and for all commercial finance providers – in 2022 will be to support client businesses in the transition to a more ‘normally’ functioning commercial finance market. The last 24 months have seen some extraordinary state interventions which have mitigated against long-lasting damage to the UK economy. Now we are hopefully looking at what is required to support the recovery, it is for the commercial sector to come back to the fore.
Matthew Davies, UK Finance
Lenders’ balance sheets are in excellent condition, and they are looking to deploy additional capital in their asset-based lending businesses.
John De Pledge, Leumi Business Credit
With the rise in the new Omicron variant, we do not yet know what the true industry impact will be.
Peter Mulroy, FCI
Risk appetite for 2022
Depending on levels of exposure to specific sectors, lenders will need to set different risk appetites and adopt different policies and processes.
For example, a tier-one bank may adopt a more cautious risk approach than a smaller lender, perhaps backed by venture capital and more aggressive growth requirements. These often smaller organisations will be less able to sustain a more considerable loss.
For this reason, it is crucial that they adopt additional risk management strategies. Traditionally this would mean adding further headcount, but increasingly technology can provide an alternate approach at lower cost and deliver better customer outcomes.
We expect to see lenders using far more extensive and diverse amounts of data. A 360-degree view of their portfolio will enable the right data to reach the right people at the right time, so that they can make better informed decisions.
Making data-led decisions
With the potential upcoming challenges, lenders will need to stay ahead of the curve in understanding the impact of different industries and client portfolios, while keeping abreast of customer needs – and technology is key.
Through comprehensive data sets, lenders can gain greater insights and flag potential risk at the time of onboarding and throughout the client lifecycle – all while ensuring the client gets the right product and funding in the right way. By benchmarking trends aligned to a particular client, lenders can meet the borrower’s current requirements and help them map out a plan for their customers’ future needs.
Into 2022, we expect to see lenders using far more extensive and diverse amounts of data. A 360-degree view of their portfolio will enable the right data to reach the right people at the right time so that they can make better-informed decisions.
We also expect that data sources will become more diverse. More conventional data sources will include:
• Payments data from operating systems
• Third-party credit reference agencies
• Credit insurance partners.
But several alternative data sources are also emerging:
• Open Banking data
• Accounting data
• Payment/ Merchant data.
The last of these (Payment/Merchant data) also provide an opportunity for some to deliver embedded finance solutions, creating a new route to market.
As data sets become broader and more diverse, they also need to be analysed both quantitatively and qualitatively. While quantitative data is the core and hugely valuable, it is still a supporting function to qualitative human analysis and expert decision-making – not a replacement.
Like many sectors, the pandemic accelerated digitalisation in receivables finance – and we predict this will continue. A leading trend into 2022 will be in Open Banking, where lenders can extract data directly and seamlessly from clients’ systems, with their permission. This will simplify processes and save huge amounts of time for both lenders and their customers versus ‘manual’ data transfer.
With less administration and deeper customer insights, Open Banking is a fast-developing trend, and we expect it to gain traction quickly. However, adoption is still relatively low due to concerns around sharing. Therefore, the industry needs to educate borrowers on the advantages of Open Banking and be transparent about how this data will be used to support the client.
Rather than working with several partners, some lenders will move towards one consolidated technical partner who can manage different suppliers, understand the balance between quantitative and qualitative elements, and reduce implementation time and cost.
Tech strategy for 2022
Lenders must identify a key tech strategy. However, where clients are unwilling to share data or use new tools, lenders should invest time with clients and tech partners to truly understand objections and develop an adoption strategy. Consideration must be paid to those clients that lag. Do lenders have a different plan for them? They may have a different approach to new borrowers where they may choose to decline or price differently in line with heightened costs to serve.
Obtaining enhanced data
from various sources and extracting it into existing risk management tools, enables prospective clients to be viewed as an existing client.
Auditing will be critical in 2022
Many lenders will be eager to get out into the field again but travel restrictions, new lockdowns and the emergence of new variants are still a very real possibility. While a certain amount can be done through remote verifications, a large part of risk assessment is through ‘touch-and-feel’ – how physically organised a client business is, its quality of systems, and the people’s ability to run the business.
In 2022, having the right quality risk metrics, auditing tools, and monitoring triggers within a remote environment will be essential to assess risk, prevent fraud and grow portfolios.
When assessing a new business for receivables finance lenders should ask:
• Is the debt Assignable?
• Is the debt Contractually Complete?
• Is the debt Collectable?
• Are the potential dilutions/erosions Quantifiable?
• Is the business Auditable?
• Is the business financially Viable?
Obtaining enhanced data from various sources (already outlined earlier) and extracting it into existing risk management tools, enables prospective clients to be viewed as an existing client.
The ability to analyse these historical trends, across the receivables ledger and financial/viability history, can set the benchmark ‘swim-lane’ conditions for the prospective client and drive the right risk metrics of choice.
Get the right risk insights, first time
Addressing the key risk areas, across each facility identified during the KYC and due diligence process, embeds the correct ‘in-life’ monitoring criteria.
Using technology to effectively and efficiently manage this monitoring process, via automatic covenants, watch lists and alarm triggers is essential to benefit lenders and focus resource where it is needed.
Example metrics/covenants to monitor include:
• Dilution/Erosion Levels – both at nil notification levels and a set percentage parameter for that facility.
• Cash Measures – to monitor cash turn days, cash desperation and cash movement percentage. Understand how the clients’ collections rates compare as a percentage of the lender’s exposure.
• Debt Turn Trends – assessing what the target debt turn benchmark is and client’s expectations are, with alerts set to flag when the actual exceeds the benchmark.
• Sales Measures – monitor the movement percentage and whether this indicates signs of potential fresh-air invoicing/overtrading.
• Risk Score – utilise a risk score methodology to drive a risk-based approach to portfolio monitoring and due diligence scheduling.
Obtaining regular financial and key supplier data, via accounting package extraction, also enhances the overall credit risk monitoring of the client throughout its life cycle.
Moreover, lenders will gain a competitive advantage with borrowers during 2022 through using enhanced data available in the decision-making process as follows:
• Speed of onboarding
• Improved customer/prospect experience
• Data accuracy and transparency
• Reduced customer acquisition cost
A robust KYC process
improves onboarding and boosts compliance controls throughout the customer lifecycle.
The importance of KYC
The adoption of effective know-your-customer (KYC) standards and processes is an essential part of any financial institution’s risk-management practices. Organisations with inadequate KYC standards are subject to significant financial, legal, and reputational risks.
Lenders with a proven and robust KYC platform with effective KYC processes embrace routines for proper risk management oversight. Adopting KYC into risk policies and procedures will equip lenders with an efficient onboarding process, this, in turn, improves the customer experience, speeds up time to revenue, reduces processing times, and shortens onboarding cycles. A robust KYC process improves onboarding and boosts compliance controls throughout the customer lifecycle.
Key questions lenders should ask
• Do you have effective KYC controls that fit to your own business models and processes?
• Does your KYC function constantly adapt to the ever-changing nature of risk management?
• Can you provide a consolidated KYC system which pulls all data together in simple or enhanced workflows that complement your internal upstream and downstream processes?
• Did you know that ongoing monitoring of your clients, Periodic KYC & Event Driven KYC reviews are as essential as onboarding KYC for overall risk management?
• What is your risk appetite? Do you have an automated risk calculation based on your risk appetite that allows you to make an informed onboarding or ongoing AML monitoring decision?
• Do you have an experienced KYC supplier that can take care of all your KYC due diligence services for all your client and engagement types, in an efficient automated and timely manner?
KYCnet has all these capabilities as a solution https://equiniti.com/kyc
If US lenders could change one thing now, what would give them the greatest positive impact in 2022?
While US lenders do not have direct control over recent supply chain disruptions, once these start to abate and product flows run more smoothly, the additional commerce should lead to higher working capital. US lenders should see a positive impact on lending volumes as a result.
John De Pledge, Leumi Business Credit
Providing a frictionless customer journey
Clients want faster but accurate decisions from their lenders. They also want to self-serve to some extent. But within a more complex scenario, they still need seamless access to the right expertise.
Today’s borrower is informed, more open to trying different finance forms and sharing information. We will see lenders using more digital tools during the onboarding process – such as e-signatures and ID verification – to give clients the money they need faster than their competitors can.
With borrowers now needing faster access to money, we may see lenders offering 24- to 48-hour access to cash. However, providing such fast access often depends on how quickly clients can supply information. So, in reality, only a small proportion of loans will be approved this quickly.
need to stay adaptable to a fast-changing environment.
Uncertainty is the only certainty
We see 2022 as a year of both challenge and opportunity, and receivables finance lenders will need to be in a solid position to realise their objectives. The best way to achieve this will be for lenders to develop relationships with customers and demonstrate they understand and are aware of changing market conditions. You will need to be proactive in understanding all of your clients’ needs and their issues.
It will be a year for lenders to take advantage of how technology can speed up and optimise processes, both for themselves and their customers. At the same time, lenders will need to be vigilant and aware of any changes their clients are experiencing and protect themselves against risk by deploying multiple data sources.
Lenders also have a huge opportunity in targeting a new type of customer that may have previously been cash secure with a solid invoice pipeline. Previously, this type of client may not have considered financing but could now have changed its position on how the receivables finance model can help grow their business.
Without a doubt, medical developments around the globe and steps adopted by small business have helped bring greater stability to businesses and communities. Despite successes, challenges are still experienced, with new variants emerging across international boundaries.
Uncertainty, therefore, remains the only certainty, and receivables finance businesses need to stay adaptable to a fast-changing environment. At the heart of this lies technology. Not as a solution within itself, but to provide the data sets that support experts in their analysis and in making the right decisions for the business.
As always, we would like to thank our external contributors:
Peter Mulroy, Secretary General, FCI
Matthew Davies, Director in the Commercial Finance team at UK trade body, UK Finance
John De Pledge, Head of Asset-based Lending, Leumi Business Credit