Shylock, The Merchant of Venice

For any organisation trying to provide a small business lending facility, receivables finance makes perfect sense. In the current climate, turning an unpaid invoice into a collateralised asset in return for a fee is a far lower risk to the lender than a traditional loan. Previously known as factoring – and once considered to be the ‘loan of last resort’ – receivables finance is making something of a comeback.

The old maxim that ‘cash is king’ rings true today more so than ever. The debtor and creditor situation is a crucial operational element of any business in the current environment – especially for small firms. The banks have been told by the politicians that they must provide a stimulus to business recovery and supplying small firms with lending facilities is a vital component of that strategy.

Unfortunately, the banks themselves are in a similarly precarious position. BASEL III (which effectively triples the size of the capital reserves that the world’s banks must hold against losses) and the Voicker rule (which prohibits proprietary trading at commercial banks in the US) both increase the pressure on banks to get their own house in order at the same time as they are being asked to back small business: therein lies the conflict. In the current context, therefore, where the banks do not have the reserves to provide traditional lending facilities, receivables finance is one solution.

The shift away from overdrafts

The major banks are all looking to move away from granting overdraft facilities to small businesses. There are two reasons for this. First, asset values are all depreciating. For example, property values are falling, so securitising on a tangible business asset such as premises is becoming less attractive. Second, when a bank lends it has to provide capital to support that loan and tying up capital is not an attractive option for a bank.

With receivables finance, however, the asset against which a bank is lending is an invoice. An invoice is a hard asset: usually people pay their invoices. Therefore banks are in a position to use the invoice as an asset against which to provide working capital, rather than an overdraft.

The typical cut for the factoring company is about 15-20 percent. Yes, the small business has a percentage fee to bear, but the opportunity cost of that £20 fee – thus receiving £80 from a £100 invoice – is outweighed if the £20 is used to sustain the business. The ‘Keynesian multiplier’ effect of that firm being able to pay off its creditors or buy more stock also benefits the wider economy.

Therefore from the government, bank and small business perspectives, if a firm cannot obtain a loan from a bank to keep the business running, receivables finance should be considered.

A growing, global market

According to the latest statistics from the receivables finance industry, sales in 2010 reached a new record with a 25 percent increase globally. The worldwide figures, released in April 2011 by Factors Chain International (FCI), the leading industry body, point to significant growth in open account trade within and from China as well as in Asia generally. For example, the receivables finance industry in China, which barely existed in 2001, is now of equivalent size to that of France.

The UK market was worth EUR 226, 243 million in 2010, after a third consecutive year of growth.

The technology challenge

While the banks are grappling with the new business opportunity of turning capital intensive overdrafts into receivables finance accounts, their ability to execute has been severely constrained by IT support.  Many banks built their factoring platforms twenty years ago, during the last big boom period for the growth of receivables finance.  Both these legacy platforms and those of third party vendors, built around the same time, aimed at processing invoices in the back-office with no thought for customer experience, credit risk or fraud detection.  Most were ‘high feel and touch’ platforms with significant manual processes to manage risk and fraud.

From a technological perspective, the challenge for the receivables finance provider is to deliver the right information at the right time. Process management and workflow play a fundamental role. It’s a retail-style environment, dealing with numerous invoices arriving from a multitude of business enterprises. Rather like on-boarding a retail banking client, extensive checks need to be built into the IT infrastructure to process credit histories when the relationship begins, in order for the bank to avoid default problems.

After that, the day-to-day issues for the provider’s back office platform to deal with are numerous. For example, the product being sold by the client may be inferior and therefore cause bad debts. Then the back office platform has to deal with the process of debt collection and the constant valuation of the exposures on the books. The task of risk management, record keeping and tracking is immense. The platform has to be able to collect static data about the organization it is collecting on behalf and, because the fees paid are ‘stepped’ according to the size of invoice, determine the transactional cost for the client.

All this has to happen at lightning speed, if it is to work at all. The client on-boarding process from application to decision has to be rapid, otherwise the client may go under. And once the client is on the provider’s books, the collateralisation of a new invoice must be almost instantaneous. It’s a high volume, high-speed industry requiring a demanding straight through processing IT capability. Scalability, speed and reliability are the watchwords.

A cultural change in British industry

Receivables finance addresses an issue at the very heart of the UK banking industry. It requires a cultural change, altering the manner with which small businesses manage cash flow in the future. Politically, the banks are being told to lend, but they won’t because overdrafts and loans carry are a higher exposure. Therefore they have to find another method of fulfilling their obligations to the Government. As a consequence, receivables finance provides an immense opportunity for all the UK’s national banks. And whilst it carries a bittersweet taste for many small business owners – hence the name change away from factoring – receivables finance can assist banks in their strategic move away from business overdrafts.

For banks to succeed in the new environment for receivables finance, platforms must provide straight through processing, integrated credit risk management and fraud management. They must also deliver easy to operate secure Internet and mobile-based receivable finance facilities that provide the same ‘ease of access’ to funds as Internet-based current accounts do today.

Then the banks really will have their pound of flesh.

Guest blogger: Ian Hallam, CEO, 3i Infotech Western Europe

The business users of performance data are diverse. It is generally accepted that performance data is now critical also to marketing, client relationship and a host of other staff so the information needs to be presented in a variety of formats. Visualisation has become key.

Performance is therefore now an integral part of the asset management process. It is no longer a department, or a back office or middle office function. It needs to be brought up out of its silo and integrated with the rest of the business and its valuable information shared.

However, for this to happen, the performance industry must change its approach. The conclusion of the month-end syndrome, shifting power to the desktop and performance delivery in real-time are all factors that will shape this transition.

In today’s large-scale asset management operation, firms need the ability to operate efficient and transparent performance measurement processes across the globe. This involves all instrument classes and with highly effective human computer interfaces, in real-time. Performance teams need a technology that allows this, rather than the traditional ‘do your performance measurement and attribution calculation only at certain times of the day’ model. Without this functionality, a series of problems arise that seriously hamper the effectiveness of performance teams – and generate risks to the core business.

Over the last five years, the acceptance and use of performance standards has led to a homogenisation of portfolio performance and attribution systems across the globe. This standardisation has led to increasing commonality of operational best practice in the business areas where performance and attribution information is manufactured. Performance calculations have been standardised for many years; equity attribution has a number or well recognised industry favourites. This trend can be witnessed over both geographies and business areas. Even the performance business skill set has been standardised.

Once this happens, it becomes very easy for any vendor or service provider to simply build a performance and attribution capability into their product. We have witnessed vendors, who historically have not been in the performance attribution space, move towards it. Whether it is front office, compliance vendors or data providers, most of them have introduced some form of performance and attribution system.

In the past, different systems were required in different business areas: for example, by asset classes. Often these systems also varied across different geographies or offices. Today this is no longer necessary. In many ways performance and attribution are fast becoming commodities. Investment firms are beginning to embrace the many benefits this brings. By utilising one system and a common operational model, asset managers will improve their business agility and performance whilst simultaneously reducing their cost base.

Firms have had significant resource pools working in isolation – largely due to their historical systems infrastructure and some local isolated practices. GIPS and a greater understanding of performance and attribution as business processes rather than isolated functions, have swept these local differences away.

The performance system of the future will have a user experience that would one would compare to that of Google, iStore and online banking. The user interface will be so simple that anyone can use it. Simplifying the analytics underneath the user interface so that asset managers at the lower end of the market (for example hedge funds or asset managers with $500m AUM) can also use the system would also be a step forward for the industry.

There is also a need for ‘strategy level’ analysis. Asset managers are moving towards increasingly complex investment strategies, for example grouping positions together. Tomorrow’s performance platform will be able to handle these complex strategies as a matter of routine.

Fundamentally, performance vendors need to recognise that each user in an organisation has different analytical needs. Delivering the ability for the user to dynamically build their dashboards in a very user friendly way (using drag and drop functionality) will become commonplace.

There is a need to change the perception of software vendors in this space, striving to deliver updates and new capabilities in the same way as Apple and Microsoft – avoiding costly, high risk upgrade projects. More importantly this will enhance the profile of the performance function within the asset manager. As they are given the tools to deliver more powerful analytics to their business leaders, performance teams will expand the traditional definition of performance measurement.

“Russ has worked for me on a number of both marketing and PR projects over the last 5 years, and has always done a fantastic job. I have happily recommended Russ’ services to a number of companies over the years, without any hesitation at all, and will continue to do so for the foreseeable future.” Dean Brown, Director, Ernst & Young

“I have worked with Russ on several projects and would thoroughly recommend his work. He combines his strong marketing skills with enthusiasm and strong domain understanding, and constantly exceeds expectations. Russ also processes excellent interpersonal skills and fits into any project environment seamlessly.” Steve Young, Head of Business Development, Citisoft

“I would like to thank Fabienne and Russ for their fantastic work. Their approach of research and interviews with the team here resulted in deliverables that exceeded our expectations. It is a pleasure to work with an organisation who can relate to our domain and articulate our thoughts and points of view without the need for a relatively large amount of input and time from us. Great job guys and many thanks.” Ian Hallam, CEO, 3i Infotech

“When I was first introduced to Russ we were in desperate need of a marketing makeover that could be achieved within a tight budget.  Russ has since been instrumental in re-branding the company to co-comply, and has helped raise the profile of the firm through targeted marketing and PR work. Although the budget was small, the quality of the work and the impact it has had is truly remarkable.”Chris Kaye, CEO, co-comply Ltd

Firms must now attract and retain a next generation of younger investor who wants a different service model. Many of these next generation investors will not be the offspring of existing clients, but a generation whose families have never needed the services of a wealth manager. So what challenges does this present? For a start the engagement and servicing model will need to change. If there is currently no relationship with the investor then how is the relationship to be built? How will wealth managers market and differentiate themselves? The next generation will be far more used to interacting over the internet and prior to engaging a wealth manager will have undoubtedly used the current retail platforms for self-managing their investments. To survive, the Wealth Managers will need to have a slick website offering, something which will be new to many firms. But an internet presence is not just a marketing shop window, it is also the door to all of the services the manager provides requiring new or enhanced technology across the firm, technology that is able to provide real time access to investor portfolios and valuations and more sophisticated client reporting. The next generation investors will also look for the additional services or value that can be derived from the relationship. During their business lives they will have become sophisticated networkers building beneficial relationships from social networking sites such as Linkedin, or more informal environments. They will look to the Wealth Manager for these benefits and increased opportunities to further their own careers. Finally the long standing model of commission and fees is under threat. This is not a result of regulations but a questioning of why a wealth manager is rewarded regardless of any relationship to their performance against benchmarks. It is true that the manager’s fees reduce as stock markets fall, but in the same way institutional investors have moved to performance based fees when dealing with Hedge Funds and other boutique managers, so the next generation will see this as a fair model of compensation for the wealth manager.

Rising to these challenges will see many managers fall by the wayside and those that survive will have to balance their current service with a much newer model that is tuned to the needs and demands of the next generation.