Years from now, when asked what I remember about 2020, one thing will be foremost in my mind. That was the year the North American Trade Finance market pivoted towards using third-party platforms for Receivables Finance (Receivables Monetization). Kidding aside, due to a confluence of factors, North American Corporates are this year increasingly interested in Receivables Finance solutions and the technology to facilitate financing.
The Covid crisis has led Treasurers and Procurement to prioritize working capital and supplier health with sponsor portfolio companies continuing to explore ways to finance receivables not already encumbered under an Asset Based Loan (ABL). Corporates are learning more about Payables Finance and Receivables Finance and are pushing the boundaries of traditional structures. Combined these factors have contributed to utilization increasing between 10 and 30% across bank and fintech-led programs alike.
The end of spreadsheet-managed programs?
In response to this increased demand and complexity, banks are turning to third-party vendors for. Purchasing receivables is nothing new for most corporate banks. However, this product was historically operated via spreadsheets, with information exchanged with clients via email. Some banks employed internal platforms to record exposures, but these were rudimentary and with little thought given to user experience or ability to adapt.
Now, this is happening for several reasons:
- In the past, user interface/experience was not seen as relevant for the product, and this attitude is changing. User experience is important to bank operations teams as well as their clients.
- Banks are focusing on the risk of operational error. High profile fraud cases in the commodities sector have focused banks compliance departments on the need to record, process, and administer trades using a third-party platform.
- Banks are moving to distribute larger portions of their Receivables Finance books. Platforms can help to manage this process, providing accurate reports for a bank and their investors.
Proliferation of third-party platform solutions
These factors create a ‘pull’ dynamic from banks, which coincides with a proliferation of solutions being rolled out by fintech companies. Many providers of Supply Chain Finance (SCF) are rolling out Receivables Finance platforms, leveraging the technology they use for Payables Finance. Demica has taken its longstanding expertise in Receivables Securitisation, and combined this with the functionality of its Supply Chain Finance platform, to roll out a Receivables Finance product for bank and corporate use. Adoption by bank customers has been more rapid than forecast with three deals won in the past three months alone including Lloyds Bank announced last month. Prime Revenue and LiquidX have also begun selling receivables monetization platforms on a white-label basis. Funders such as Raistone Capital have used a technology solution to bring Receivables Monetization to the Small-Medium Enterprise (SME) space.
Finally, there have been experiments and Proofs of Concepts using distributed ledger technology or artificial intelligence to assist with reconciliation for Receivables Monetization transactions. This innovative approach has yet to gain traction on a wider scale.
Improvement in the functionality of Receivables Finance platforms comes at an opportune time. Fintechs have improved their capability just as corporate demand increases, and banks consider how they can expand the scope and size of their Receivables Finance programs.
While it is difficult to predict what awaits us in 2021, we can with confidence point to a continued increase in volumes for Receivables Finance programs, and to a larger role for third-party platforms, both in direct origination and as vendors to banks.
Best wishes for the holiday season and stay well.
Andrew Holmes – Head of North American Origination at Demica Limited
See this link to learn about Demica’s Receivables Finance capability:
Enrique Jimenez joined Demica in June 2016. He previously worked at Banco Santander as Head of Supply Chain Finance & Trade products in Continental Europe. Enrique has 20 years’ experience in corporate banking with a mix of Equity Research and Working Capital Solutions roles. He covered the full spectrum from Product Specialist to Origination and hence managed the team who originated, structured, implemented and monitored operations.