With their customers’ needs and expectations changing so rapidly, lenders had no choice but to reassess their approach to decision-making. Unsurprisingly, they have to display more caution when assessing risk, even for those clients that weren’t experiencing challenges before the pandemic. Though recovery from the global health crisis is underway, the social and economic uncertainty it left behind is still a concern, and risk management in the global receivables finance market is more important.
As part of our commitment to supporting lenders and SMEs to successfully and safely navigate the new economic landscape, we undertook some research into strategic priorities in 2021 for global finance organisations as part of the EQ Riskfactor Receivables Finance Global Outlook report. We surveyed finance leaders from the UK, US, Germany, France, and the Netherlands, and this first report closely examines their views on the changes they saw in 2020, and their predictions and strategies for 2021.
We learned from the report that global finance leaders understand the importance of technology and innovation, and are focused on digitising their operations as a way of future proofing their organisations.
Technology as a Transformation Driver
With the pandemic forcing more businesses to shift online, digital transformation has been a key theme for business success in the ‘new normal’. More and more businesses are realising the potential of technology to transform their businesses, but it’s important to focus on solutions that are not only complete, but that can offer immediate results. The current economic landscape combined with client expectations mean that lenders don’t necessarily have the time to trial solutions that aren’t the right fit.
They need an effective roadmap for harnessing the potential of technology; something that delivers value by:
- Improving customer experience
- Growing business sustainably
- Operating efficiently
- Reducing risk
A New View of Risk Management
No matter how robust an organisation’s continuity and scenario planning might be, the global impact of COVID-19 was totally unexpected. While some adapted to the need for remote working and strategy changes better than others, the need for financial support from governments across the world was almost instantaneous. As the various levels of financial support ends, there will no doubt be businesses that sadly fail, something that is important to take into account. And while government stimulus packages were essential in defending economies against the initial shock of the crisis, they definitely had an impact on many types of commercial finance, including receivables finance and asset-based lending.
Although credit quality as a whole has reduced on a global scale, with lenders having to more closely monitor the associated risks of their clients, we’re also seeing more businesses turning to receivables finance as a short-term solution. And once their immediate cash flow issues are resolved, they are more likely to be open to forming longer-term credit relationships as they continue to grow. So, as well as challenges, the pandemic has opened up more opportunities.
Broadening Data Horizons
With both the challenges and opportunities that 2021 brings, the key to robust receivables finance is risk management, and data is at the heart of that. But just pulling in every data source possible is not the way forward. Firstly, you need to identify exactly which types of data will give you the most varied perspective. You need to make sure this data is obtained in a timely manner and subjected to real-time monitoring. And finally, you need to make sure you are managing and analysing the data in the most effective and intelligent way possible. Working with a partner that has data embedded within applications on corporate arrangements is ideal for this.
You can use data to better shape decisions and apply technology to deliver rapid policy iteration, testing, and learning within days, rather than months. Moreover, being armed with smarter policies and processes means you are then able to reassess and reconsider the appropriate operating models. There may even be functions you realise would be more efficient to automate or outsource to specialist partners that can better scale, for example, audit, KYC verification, reconciliation or collections.
Power to the People
While technology is vital at driving successful risk management, it is important not to forget the role of your people in the process. Using a risk-based approach to managing your clients from cradle to grave is going to be key to mitigating risk in 2021, and a smart combination of technology and human intervention will offer the best results.
Use automation to harness the right data and direct the focus of risk management processes, then place people in the position of making informed decisions and driving timely action. Without that human touch, gaining insights from vast amounts of data can be overwhelming. The most successful lenders will instil the knowledge of the most senior risk managers within the organisation as a whole, through micro decision points that drive activity, thus ensuring oversight and auditability.
While there can often be resistance to change within an organisation, developing a culture that actively seeks and thrives on change, particularly when it comes to technology, is a great benefit to managing risk. And once that culture starts to take over, even the most change-resistant among your teams will begin to understand.
Invoice Finance as an Island?
We often see conflicting investment proposals where businesses struggle against other parts of their organisation, but receivables finance does not have to be an island. All of the principles outlined above can be delivered in collaboration with other forms of finance, and we’ve seen this so often in the impact on other areas like overdrafts, asset finance, and both secured and unsecured loans during COVID-19. Businesses across all industries have often had no choice but to innovate and pivot if they were to succeed, and the lending industry is no different. Many lenders had to innovate in terms of the solutions they offer, and in some countries this was not primarily invoice finance.
Rolling out consistent fraud and risk analytics across a range of products can give a harmonious central view of your customers. This not only gives you the best way of managing customer relationships, but it also lets you use the right products and the right points, as well as giving you a holistic view of exposure and trends – crucial in risk management.
We understand that internal resources can often be a barrier to change, but presenting value to the wider organisation will ensure that invoice finance businesses are not seen simply as highly specialist niche teams. These specialisms can share learnings with other product classifications delivering a single, coherent client management strategy. This not only reduces risk and builds efficiency, but is also expected from an end client perspective, as that client has a relationship with your company, not a collection of products.
The Future of Risk Management in Receivables Finance
The COVID-19 pandemic brought with it a new wave of risk, and a new way of working. While there are undoubtable new challenges facing lenders in the receivables finance space in 2021, there are also opportunities to harness those challenges and modernise your risk management processes with innovative technology solutions.
Business and client needs may be increasing rapidly, but so too is the technology you can use to meet those needs. EQ Riskfactor is both proud and appreciative of its global client base that continually expands our knowledge. We work closely with a range of industry suppliers as part of our commitment to collaboration, which is key to valuable insights that help lenders realise the full benefits of risk management and fraud prevention technology. Our consultancy services are available to help lead or support transformation projects, which often involve neatly stitching together solutions from a number of providers during initial conscious design to build out an effective ecosystem tailored to your needs.