ARONOVA QUARTERLY UPDATE – OCTOBER 2021

The quarterly newsletter from our MD David Baker provides an overview on:

• the recovery after the pandemic
• instant credit limit decisions
• rated funding programmes
• Q4 forecasts and predictions

Start of the return to normality

Q3 was a really interesting quarter for Aronova, and as for many businesses, the green shoots of new business, market opportunities and a relative return to pre-Covid normality were increasingly evident.  People are starting to return to offices, albeit on a “hybrid” basis, markets are definitely waking-up and I for one can’t wait for President Biden to announce a date for the re-opening of US borders to us Brits.  I’ve missed my regular trips to the US and I really look forward to seeing old friends and colleagues again.  We’ve all got by with Zoom, Teams etc, but sometimes you can’t beat a good ‘old-fashioned’ face-to-face meeting.

From a marketing and communications perspective, our Q3 focus has centred very much around Aronova Live!, the move towards instant eligibility and the implications this has for invoice-backed working capital programmes.  Hopefully, many of you will have seen our Aronova Live! video that was expertly put together by our friends at Fingo Marketing and Financial Services Partnership.  Q4 will see us build further on the Aronova Live! theme, so watch out for more LinkedIn activity and further video stories.

Making instant credit limit decisions

We seem to be having lots of conversations at the moment about instant credit limits, the use of payment information and how to set credit limits when no previous trading experience exists.  Many of these conversations are driven by “marketplace” or “factoring” opportunities, where offering a credit facility, possibly linked to funding, can make a real difference.

For many years, we’ve been writing insurer-approved credit limits based purely on accumulated payment data. These instant global credit limits often sit within the DCL structure of a trade credit insured programme. They can either be written on a single corporate entity, or for the benefit of a corporate group, and shared amongst associated group subsidiaries. However, the key thing about these limits is their status. For many credit insurers these trading experience-based limits have the same insurance status (and therefore insurance certainty) as limits written by an underwriter.

There is increasing debate around extending the use of trading experience to incorporate “mesh” credit limits, i.e. sharing credit limits across multiple corporate relationships.  But to do this, you need lots of trading experience information. 

Let’s say Supplier A is trading with Buyer A and we’ve used the trading experience record to generate a credit limit for Buyer A. Buyer A now wants to trade with Supplier B, but Supplier B has never traded with Buyer A. In this case, it might be possible to use a “mesh” credit limit, i.e. to allow Supplier B to benefit from Buyer A’s trading experience with Supplier A.  Thanks to our use of DUNS numbering, “mesh” credit limits are technically possible, but there are other implications we need to work through such as key supplier relationships and terms of trade. 

Watch this space. Mesh limits are transformative and will fundamentally change how credit limits are established and maintained in high-volume invoice processing environments.  The role of artificial intelligence is key, and numerous factors need to be considered each time a mesh credit limit decision is made or reviewed.

Sometimes there’s the option of using credit agency data to make instant credit limit decisions. However, this is not always possible and there are many parts of the world where reliable credit agency data, particularly on SME businesses, is simply not available. From experience, we’ve always favoured blending payment data with credit agency intelligence. Even if the credit agency can only verify the existence and ongoing trading status of the corporate, this adds confidence to any payment-based credit limit decisions we make.

Rated funding programmes

The other theme we’ve seen during Q3 is an increase in rated transactions and, operationally, the need for Aronova to apply assessed eligibility criteria when determining the eligible asset pool.  It could also require the calculation of reserve requirements using S&P type methodologies.

Ratings are important for some funding programmes and can fundamentally change the pricing and overall availability of different funding options.  Some funding pools may only be available to transactions with a certain rating, and this might only be achievable if the programme is insured and if operational risk is demonstrably controlled.  Newer, smarter forms of credit insurance more closely bind Aronova, transaction data, assessed eligibility criteria and effective risk transfer, bringing greater certainty to rated transactions.

We’ve been supporting rated transactions for a number of years, but even in this very traditional segment of the market, the availability of regularly updated invoice data is enabling change.  Those familiar with rated transactions will be aware of the required monthly cycles of data calculation but we’re increasingly seeing a desire to move towards daily calculations and a more dynamic reserve calibration.

Looking forward to Q4-2021

In Q4 we’ll continue our LinkedIn activity and have a number thought leadership articles planned. We’ll further develop the Aronova Live! theme, focussing on different aspects such as Smart Insurance, Fraud and Instant Cash. We’re also planning on being more active with ITFA, and Ben Grant, our Head of Partnerships, has been asked to be part of a new InsureTech panel.  More on this over the coming months.

Lastly, how many of you have started arranging office Christmas parties?  Well we have, but ours will be a lot more reserved than in previous years. We’re planning a company-wide lunch in our Fetcham Park offices and we’re currently choosing a menu from a selection of external caterers. It’s amazing to think that this will be the first time in nearly two years that we’ll have managed to get all the Aronova staff at together in the same location. For some, it will be the first time they’ll have met their work colleagues face-to-face.

Best wishes,

David Baker
Managing Director