Are automated debtor credit limits sufficiently reliable for use in trade credit insurance and trade finance environments?

We hear a lot about “AI” and “Turning Data into Knowledge.” However, do these advances realistically have a place in debtor credit limit management and should insurers or funders rely on them?

From our experience, I’d say the answer is a qualified yes.  Data, of course, is key, and a seller’s trading experience in isolation isn’t enough to set reliable debtor credit limits.  After all, trading experience alone doesn’t tell you if a debtor is or becomes insolvent and invoice data doesn’t tell you what a debtor does or how long it’s been in business. 

We’ve found that a tranched approach often produces the most reliable results; automatically set smaller debtor credit limits using a combination of seller trading experience and basic firmographic data such as debtor activity, age and current operating status.  For higher value credit limits, enhance the data with risk scores and probability of default, then for the largest or most challenging credit limits, add a manually review capability.

Some of our insurance partners issue non-cancellable debtor credit limits, which become more difficult to manage when based on a seller’s invoice data.  Live trading experience is great for giving early warning signs of changing payment patterns, but how derogatory must that experience become before a debtor credit limit can be cancelled?

Across our trade credit insurance and trade finance products we are setting hundreds of thousands of automated global debtor credit limits, predominantly using a combination of credit agency firmographic data and the payment experience of one or more sellers trading with the subject debtor.  They allow credit limit decisions to be made on every debtor in a portfolio-wide insurance or funding program and can remove the uncertainty often associated with discretionary cover.

But to maintain acceptable loss ratios, automated limits need to be used conditionally and in combination with the backing of a manual credit risk analysis capability. 

Ready to learn more?

Contact us to find out more, and talk to a member of the Aronova team.

The post Setting portfolio-wide debtor credit limits appeared first on Aronova.

Over the next five years, financial institutions have a unique opportunity to capitalise on the rising demand for receivables finance. Let’s first look at the evidence for this trend before exploring how institutions can maximise the opportunity.

The global economy

According to the International Monetary Fund, global growth will be “stable but underwhelming” in 2025 – and hit a “mediocre” 3.1 percent over the next five years. Regionally, the IMF anticipates growth downgrades for the Middle East, Central Asia and sub-Saharan Africa, driven by oil conflicts, civil unrest and extreme weather events. The US is expected to fare better but European markets are also likely to see revised forecasts on the downside. On the other hand, China and India, thanks to surging demand for semiconductors and electronics, are predicted to perform well.

So, what does this picture of global GDP imbalance and geopolitical instability mean for business funding going into the New Year? Possibly very little, if recent rather optimistic forecasts, are anything to go by.

Ongoing global instability won’t dampening appetite for growth

Findings by EY ITEM Club suggest that bank-to-business lending in the UK is on course to grow by 3.1 percent in 2024, and then 5.6 percent in 2025 and 6.2 percent in 2026. The important point is that companies’ appetite for borrowing is set to increase as capital costs decrease.

Private equity firms’ confidence in deal making in the year ahead is surging, according to a survey by Deutsche Numis, which found that 84 percent of respondents expected to complete five to 10 deals next year. That’s significantly up from 2023, when just 12 percent of private equity firms surveyed said they were “highly likely” to execute bolt-on acquisitions to portfolio companies.

Experts tentatively predicted this renewed confidence at the beginning of the year. Quoted in a Euromoney article, HSBC’s head of global trade and receivables finance Vivek Ramachandran said falling cost of credit, linked to falling reference rates, would “hopefully provide a little bit of impetus for companies to embark on new economic activity or expansion.” And rates have fallen, albeit gradually, in the UK, the US, the eurozone and China. Indeed, there have been recent rate cuts by central banks responsible for seven of the top 10 most traded currencies.

Do financial institutions have the tools to meet the rise in lending demand?

Unforeseen events aside, it would appear that 2025 is going to see a marked uptick in demand for trade and receivables finance, as part of a wider business investment trend. The question financial institutions need to ask themselves is, do we have the operational capacity and tools to meet the growing need for short-term borrowing?

It’s certainly the case that many small to medium-sized commercial banks and asset managers find it challenging to offer trade and receivables finance to corporate clients. This is because these financial institutions are without the necessary operational infrastructure. We wrote about this in more detail back in July 2024 – see our blog here. As for larger lenders, while they undoubtedly have the capacity to meet renewed growth in business funding, they might still face difficulties caused by legacy platforms that slow decision making and require time-consuming manual inputs.

Thankfully, Aronova can support all sizes of banks and asset managers with their short-term business lending strategies, providing they require a revolving working capital facility of at least $10m. Our cloud-based platform allows banks and asset managers to outsource the day-to-day management of receivables purchase programmes, with functionality covering seller data collection, invoice eligibility, invoice sale and the calculation of seller cash settlements. We’re also tackling white-collar fraud through advanced monitoring tools and are enabling portfolio-wide automation of global debtor credit limits.

By transferring the above operations to Aronova, businesses can spend more time building their working capital portfolios. And with many experts predicting a renaissance in corporate investment and borrowing in 2025, financial institutions must have the ability to seize the opportunity for growth.  

Ready to learn more?

Contact us to find out more, and talk to a member of the Aronova team.

Sources:
IMF – Global growth is expected to remain stable but underwhelming
Bank lending to business set to grow by 2.6%
BCC economic forecast
Private equity firms’ confidence in dealmaking surges, survey shows
Trade finance survey: Outlook hangs on rate cuts by year end

The post Is Receivables Finance set to surge in 2025? appeared first on Aronova.

Moving swiftly through the analysis and due diligence of a funding opportunity is key to maintaining deal momentum, and ultimately converting an opportunity into a live working capital program.

This process can be particularly challenging for portfolio-style receivables programs, where it’s important to understand the makeup of an entire debtor portfolio and not just focus on the top “x” or larger debtors.

Data plays an important role in this process, but there’s often a fine line between how much information you ask a seller to provide versus what the seller can provide relatively easily. We’ve probably all encountered situations where the seller can’t easily provide what we’re asking, becomes disinterested, and ultimately switches off.

Over the last 15 or so years, we’ve seen a significant change to corporate attitudes regarding data sharing, and until relatively recently, most mid-cap corporates were very reluctant to share their receivables data. I make the deliberate distinction between a mid-cap and an SME, as banks and insurers were often able to put greater pressure on an SME to share its data or else risk not getting their funding or insurance program.

Mid-cap and larger corporates increasingly understand the arbitrage between sharing their precious receivables data and achieving the working capital or insurance program they need. Technology is also helping this process, and the reliability of automated data connectors, coupled with their ease of implementation, can be a game-changer if positioned properly. Not only do these automate the process of collecting and transferring detailed receivables data, but in the eyes of the corporate, they also outsource the often onerous responsibility and compliance elements of accurate data provision.

Data connectors and our automated PASS reports give us the ability to reliably shorten the triage and due diligence processes, maintaining deal momentum, providing a competitive advantage, and hopefully improving conversion rates.

Ready to learn more?

Contact us and find out how our solutions are helping financial institutions to overcome barriers and offering new products and services.

The post Deal Momentum and Receivables Data appeared first on Aronova.

In this edition of ‘Receivable Only’ we’re focussing on receivables data manipulation and the hidden world of white-collar fraud.

Across all our receivables programs, we process in excess of 1 million invoices a night.  These range from invoices processed for trade credit insurance purposes to invoices considered for receivables-backed funding eligibility through to invoices analysed purely for portfolio analysis and credit monitoring reporting.  Regardless of why they’re being provided, every invoice generally has the same characteristics – debtor details, an issue date, a due date, a value and a close date if closed.

As a rule, we expect first to receive details of a new invoice overnight following the invoice issue, and then we’d expect to see updates to that invoice as payments or credits are allocated towards the invoice closure when we’d expect to also receive a close date. There are legitimate circumstances when we might see other forms of invoice update, such as correction of provided details being one, but this tends to happen early in the life of an invoice.  Due date extension within a maximum extension period is another, but this assumes the underlying insurance policy has an MEP provision. 

In a certain sense, Aronova is a bit like a credit card company in that we track each and every invoice during its lifetime, automatically look for trends or suspicious invoice behaviour, and, for years, provide our insurance, funding, and credit monitoring partners with ‘anomaly reporting’ — the identification of potentially suspicious invoice behaviour.

The scenario we see most is where a corporate has a trade credit insurance policy with a maximum credit period clause that restricts insurance to those invoices with, for example, a maximum tenor of 90 days.  We receive an invoice with a 90-day tenor, and assuming there’s capacity within the aggregate tests, we process this invoice as “insured”, and the policy beneficiary trades on the basis that the policy covers the invoice. 

A few days later, we get an update to the invoice that extends the due date by 15 days, which now breaches the 90-day maximum tenor restriction.  We can now invalidate the insurance on this invoice from a trade credit insurance perspective. However, what if the policy is being used to support a receivables finance program and the invoice has already been sold?  There’s no simple solution, mandatory repurchase is certainly an option, but things are starting to get messy.

This is just one of the many examples we see where suspicious data change is occurring, and in some programs, we’re not talking about the odd change here or there, but wide-scale, repeated changes.  There’s often a fine line between genuine data correction, approved due date extensions, and more sinister data manipulation.  We all rely on accurate and trustworthy data to make decisions, power AI, operate programs and to drive increasing levels of business automation, but with this comes perils and the often hidden world of white collar fraud.

Ready to learn more?

Contact us and find out how our solutions are helping financial institutions to overcome barriers and offering new products and services.

The post Data Manipulation – The hidden world of white-collar fraud appeared first on Aronova.

Following a year of record profits in 2023, European banks have posted a drop in gains during the first three months of 2024. For example, Lloyds Banking Group reported a 28% year-on-year fall in profits between January and March – from £2.3bn to £1.6bn. This was broadly in line with analysts who forecasted a first quarter-profit of £1.7bn. The reason for the dip, according to Lloyds, was a combination of increased business costs and lower net interest income.

Natwest Group has followed a similar trajectory, with profits falling by almost 28% to £1.3bn in Q1 2024, while Barclays posted a 12% drop during this period. Yet despite the gloomy first quarter, Fitch Ratings says Europe’s largest banks will report “sound profitability” in 2024, with only a “slight weakening” due to “moderately higher” loan impairment charges and costs. The global ratings agency expects that operating profit/risk-weighted assets ratios will average 2.6%, down from 2.7% in 2023. This prediction is based on interest cuts playing out gradually rather than abruptly, and good asset quality performance.

That said, Fitch warns that”profitability trajectories will differ among banks, reflecting varying balance sheet dynamics, deposit pass-through rates and interest-rate hedging strategies”. Meanwhile in the US, S&P Global reports that analysts are warning of possible “sequential declines in earnings per share at eight of the 15 publicly traded banks with more than $100 billion of assets” as net interest income comes under threat.

A time to focus on growth strategies and business development opportunities

Weighing up 2024’s first quarter performance, it’s clear that banking leaders urgently need to develop new growth strategies to counter the impact of falling interest rates. In fact, there are a range of challenges that will need to be taken into account as part of this work. As well as sliding interest income, banks face new regulatory pressures arising out of the failures of Silicon Valley Bank and Credit Suisse in 2023, and customer demand to accelerate digital transformation.

According to Accenture’s Commercial Banking Top Trends for 2024 report, a core area of regulatory focus this year will be capital optimisation. This will cut across management of prudential risks, ESG and tech innovation. Consequently, we can expect new capital requirements and impacts on product portfolios. Consultants KPMG also describe how “tighter regulation” is aiding a rapid evolution of banking. Its survey of 400 commercial banking leaders found that embedding regulation in the development of new technologies was key to building trust with customers.

On the topic of new technologies, the big story of the past 12 months has been artificial intelligence. There’s no doubt this area of innovation has stolen the limelight from fintech, whose funding nosedived after investors started to demand profitability over growth. Perhaps fintech’s mission now is less about building the next big neobank or expense management platform. It’s more about providing effective tools that automate processes and use artificial intelligence to provide powerful insights. 

This makes cooperation rather than competition between traditional financial institutions and newcomers imperative. In fact, the trend of banks and fintechs favouring partnership over rivalry was already well established prior to the economic downturn. As leadership teams look for future growth opportunities, this is sure to expand.

A partnership approach: principles for banking growth in the years to come

Working with fintechs goes far beyond automating and digitising existing processes and products. Although that is a vital part of the equation. Bank bosses mulling tomorrow’s sources of earnings in an age of falling interest rates should also be looking at technology as an enabling force in terms of serving new markets. That’s because businesses which have previously shied away from offering certain products due to a lack of infrastructure or human resources may find that there are easily attainable solutions to such challenges. For example, with modern SaaS propositions banks don’t have to build on-premises infrastructure.

Encouragingly, many digital tools for commercial banking have been created by industry veterans. These are people who understand the challenges and have stepped outside to innovate, free from large-corporate inertia. This is very much Aronova’s story and it has enabled us to build a workable receivables finance proposition, powered by AI and machine learning. By partnering with these modern and knowledgeable banking tech providers, financial institutions can take the sign marked ‘growth’ as they navigate this historical crossroads.

Ready to learn more?

Contact us and find out how our solutions are helping financial institutions to overcome barriers and offering new products and services.

The post Banking at a crossroads: what are the future growth prospects of financial institutions? appeared first on Aronova.

A recent report by Allianz describes how global working capital requirements (WCR), i.e. the amount of money businesses require to cover operating costs, increased for the third consecutive year in 2023 to reach their highest level since 2008. The trend shifted from quarter to quarter, rising sharply in the first three months of 2023, before dropping slightly in Q2 and then dropping further in the final three months of the year.

Allianz put 2023’s annual increase in WCR down to a “combination of softening economic growth with higher inflation and the higher cost of financing”. However, the global financial services group observed that there had been softer changes between July and December for two years in a row.

The research findings are based on an analysis of 45,000 listed companies in 35 countries. And the implications for business leaders and financial institutions are stark: the more working capital requirements rise, the more firms need to seek out short-term borrowing solutions.

Late payments: can we afford to reduce terms?

Meanwhile in Europe, companies are having to wait longer for invoice settlement due to an ongoing profit squeeze and rising costs. In a bid to tackle late payments, the European Commission has set out proposals for new regulations that could see terms cut from recommended 60 days to 30 days binding. But there are genuine fears that this will create cash flow problems for many firms. Allianz says companies will need an additional €2 billion in finance under such restrictions. Which is no surprise when we consider that 42% of companies were looking at payment terms above 60 days at the end of 2023.

The very real nature of these challenges was underlined in research by C2FO, which found that one in four businesses didn’t have enough access to liquidity to operate for a year. Another pressure point is highlighted in PwC’s Working Capital Study 23/24. It says that despite rising input costs, global revenues have continued to grow. This creates a situation where companies need more working capital to support this growth, even as they strive for efficiency.

There’s a need for working capital. But is it being met?

Whether it’s regulatory pressures or rising WCR, demand for short-term financing is only set to increase. However, there remain many financial institutions, particularly small to medium sized commercial banks and asset managers, that struggle to offer this vital form of business finance to their corporate clients, despite a desire to do so. Receivables-backed working capital finance is often seen as a cost-effective answer for corporate clients, but providing these programs can be challenging for many financial institutions.  They lack the capacity and infrastructure to run the daily operations, often resulting in them offering inferior working capital solutions that only fund receivables issued to larger debtors, or they simply shy away from the opportunity altogether.

Outsourced daily operations is one solution

Aronova is helping banks and asset managers of all sizes to overcome barriers to the provision of working capital products by providing outsourced solutions for the day-to-day management of receivables purchase programs. The products take care of seller data collection, invoice eligibility, invoice sale and the calculation of seller cash settlements. Extensive features include fraud monitoring, automated portfolio-wide global debtor credit limits (often with insurance certainty), and can provide backup servicing if required.

We aim to help banks and asset managers focus on origination and the funding of working capital programs by leaving the day-to-day operations to Aronova. Aimed at corporate sellers requiring a revolving working capital facility of at least $10m, our platforms can be deployed on an insured or uninsured basis. We anticipate the corporate seller remaining responsible for account servicing, cash allocation and the regular upload of receivables data to us. This data provides both lenders and corporate sellers with the transparency each requires to operate a modern receivables finance program.

In short, AronovaTransact! allows banks and asset managers to expand their working capital offerings without the burden of managing the day-to-day operations. Financial institutions that were previously unable to offer these products can now enter this growing market with confidence.

To find out more, Contact us to talk to a member of the Aronova team.

The post Corporate pressure: why the need for working capital is rising and how banks can help appeared first on Aronova.

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

The post Aronova quarterly update – October 2021 appeared first on Aronova.

And it seems like not just us here at Aronova who are feeling this. The market is really coming back to life and we’re involved in conversations with new funders and insurers, looking to do some really innovative things to fill the working capital finance gaps that have grown during lockdown.

Utilising the Aronova Live! technology that our Managing Director David Baker spoke about in our last update is enabling ways of providing funding that were previously unachievable and fulfilling some really interesting requirements that I’d like to share with you:

Instant SME supplier payments

We have partnered with our friends over at Blackstar Capital Europe and a large US-based invoicing platform to provide instant financing of SME suppliers on a pre-approval basis. However, where SCF has attracted a lot of negative press recently and where there are concerns about the accounting treatment of SCF, our programmes are set up as individual RPAs, all signed and managed through the solution to get vital liquidity into supply chains quickly and effectively

• Using historic trading data, we are able to identify high-quality suppliers who are eligible for the programme. Then, with our Live! technology and APIs, we take instant feeds of data from the invoicing platform as invoices are submitted, check eligibility against programme criteria and credit limits and provide immediate decisioning back to the payments provider to get the money into their accounts moments later.
• Full, end-to-end automation ensures that these processes are seamless, providing excellent data integrity and greatly enhanced programme security and anti-fraud measures.

This programme is live but we’re also working closely with a large US-based business process outsourcer to create a solution for their clients. More on this soon!

Instant Seller eligibility and capacity reserving for Factors

The factoring world is a highly competitive sector where even small additional benefits in accessing the right funding can make a real difference. A large and growing proportion of our clients are in this space with many well-known names using Aronova to keep ahead of the curve.

Right now, we’re working with a number of our clients to use our Live! solution to help them with seamless new seller onboarding and capacity reserving.

Whilst some of our programmes are already providing instant payment of individual invoices, for many of our clients, the need to transfer the cash immediately isn’t there.  But there is a need to instantly check eligibility and then maintain that eligibility for a period of time.  We call this capacity reserving and it gives certainty that when the time comes for the actual purchase, the invoices are still eligible and capacity hasn’t been used up by other invoices.

Capacity reserving is seamlessly built into Aronova Live – we receive invoice data via our APIs, immediately run eligibility and then return eligibility results live. Eligible invoices could then be purchased, but if the purchase is deferred, new invoices could be submitted which then take up the same capacity, making our previously eligible invoices ineligible.  This is where capacity reserving comes into play and its particularly important where the eligibility criteria includes aggregate checks such as country, sector or debtor group caps.

So what we do is set an eligibility time-out – a period of time in which we guarantee the eligible amount and, during which, other invoices can’t displace those already deemed eligible. Eligible invoices can be sold at any time during the time-out window, with the certainty that they are still eligible.  However, if eligible invoices aren’t sold during the time-out window, then the guarantee lapses and the reserved capacity is released back to the programme. So for a programme that wants to check eligibility as soon as invoices are raised, but wants to batch purchase those invoices daily or intra-day, Aronova Live! has it all covered!

In other news

Lastly, we’d like to announce our recent membership of ITFA to work with them on their InsureTech panel. We recently participated in a great webinar with our good friends over at AIG about fraud from an insurer’s perspective, looking at the challenges that fraudsters pose but also the benefits of great technology in combating this.

Whilst we talk a lot about the view from the funding side, we work very closely with insurance, helping to ensure policy compliance for the programme and providing enhanced certainty in the case of a claim. We also do a lot of work with insurers to help them keep track of the fluid nature of the assets in an invoice-backed working capital programme and ensuring they are well protected throughout the life of the policy.

We’re very much looking forward to getting stuck in!

We’ll be back next quarter with some more updates but in the meantime, stay safe and I hope to be able to meet with you in person as the world wakes up!

Ben Grant         
Head of Alliances

The post Aronova quarterly update – July 2021 appeared first on Aronova.

Earlier in the year  London celebrated the milestone of 15M UK citizens being vaccinated against Covid – a great achievement by the UK government, but my thoughts watching this took me back exactly 12 months ago.  I was in New York, my first US trip of probably 7 or 8 planned for 2020 and I’m not sure I’d even heard of Covid – oh how times change.

Like many companies, the last year has seen us transition to a remote working business, interspersed with brief periods of office based face-to-face working as lockdowns came and went.  We’re thankful we’ve been able to continue trading pretty much as normal and that our revenues have remained strong.  Whilst I’m not saying that 2020 was the easiest of years, we come into 2021 in a much stronger position than many.

But, as for when I’ll be able to use my now ‘frozen’ Virgin Atlantic tickets from 2020, well I’m hopeful that travel corridors or vaccine passports permitting, I might get back to New York during the latter part of this year and I’ll be heading straight to Harry’s restaurant just off Wall Street to celebrate!

Aronova Live!

Last year was difficult in many ways, but we’ve certainly not been idle, and Q4 saw the launch of Aronova Live!, our API based product delivery platform.  This was an important development for Aronova, enabling our clients to instantly exchange data via a secure host-to-host connection, and whilst on the surface this sounds like some kind of “techie development”, the implications for invoice-backed working capital programmes are profound:

• Instant eligibility, availability, credit limits and invoice sale, 24 hours a day – in response to requests from a number of our larger clients, Aronova Live! makes it possible to calculate global debtor credit limits, assess invoice eligibility and process invoice purchases on demand, and whilst we know this approach isn’t for everyone, for some the ability to calculate availability or sell an invoice within minutes of processing it, is game-changing,

• Improved programme security, reduced fraud risk and better data integrity – with API’s information flows to us directly from the originating invoice platform or accounting package, with no manual intervention, no delays and dramatically reduced possibilities of data manipulation.

We’ll continue to expand the scope of Aronova Live! during 2021.

Payables Programmes

For many years, Aronova has specialised in the operation and management of receivables-backed working capital programmes – 2020 saw us also move into payables.  Many people see payables as simply the other side of the coin to receivables – change a few screen labels and you’re there, but alas it’s not quite as simple as that.

Our payables programmes are supported by a number of new eligibility rules, targeting payables specific characteristics such as invoice approval and expected payment dates.  Our trigger functionality was also extended to identify ‘under-performing’ payables, with the option of issuing mandatory repurchase notices.  Oh, and we also changed some screen labels.

Whilst payables was probably the main divergence for us, we also saw a number of other asset classes, especially in the corporate loan space and this is an area we’ll look at more closely in 2021.

The Funding Point

I’d lastly like to talk about The Funding Point, our new programme delivery platform that we’ve been working on for about 18 months.  As I write this newsletter in mid-February 2021, we’re in the final throws of testing The Funding Point and its amazing ability to operate invoice-backed funding programmes that require multiple collateral pools.

It took me a while to get my head around multi-collateral pools and I’ve found myself asking the “so what” question many times.  But I’m convinced that structurers and programme arrangers currently don’t really think about tranching a programme into multiple collateral pools because they’ve traditionally been a nightmare to operate and costly to setup.  Well, The Funding Point changes all of that.

Imagine a payables programme where you want different eligibility criteria, funding arrangements and risk transfer provisions depending on whether an invoice is approved or un-approved.  Or a receivables programme where you want to tranche a book of receivables by risk and use the different collateral pools to manage risk-based pricing and syndication.  The Funding Point lets you easily setup and automatically manage these processes.

I promised my marketing team I’d keep this short and sweet, so I think I’ll stop here.  We’ll aim to issue an update on a quarterly basis, so until May, please keep safe.

David Baker
Managing Director

The post Aronova quarterly update – March 2021 appeared first on Aronova.

Part of the solution, not the problem

The Covid-19 crisis offers banks a rare opportunity to rebuild public trust and prove they are a true friend to business, while failure to support industry with sufficient credit will be remembered long after public health and financial markets have recovered.

Banks have not yet been absolved in popular consciousness for the role they played in the 2008/09 financial crisis or the decade of austerity it ushered in. In the UK, many banks also bear fresher scars from payment protection insurance (PPI) mis-selling and other scandals.

The UK’s Financial Conduct Authority (FCA) issued banks a warning in April, reminding them that they must support small and mid-sized enterprises (SMEs) through the pandemic and avoid repeating their alleged maltreatment of such firms following the financial crisis.

After a slow start, UK banks have largely lived up to that challenge, HMRC figures suggest. By early July, they had lent more than £43 billion to British firms through the 80% government-guaranteed Coronavirus Business Interruption Loan Scheme (CBILS) and the Bounce Back Loan Scheme (BBLS), which is 100% government guaranteed.

While non-performing loan rates from the schemes are indeed expected to be high, for banks with strong balance sheets but poor public trust, the reputational harm of not shouldering that risk could last longer than any damage to their bottom line.

Participating in emergency loan schemes is however only one of the ways that banks can demonstrate their support for business through the pandemic. For many firms – including those whose business remains fundamentally sound – ongoing working capital injections, including in the form of supply chain finance or invoice discounting programmes, may offer more long-term benefit than one-off loans.

The current crisis offers banks a chance to demonstrate their value with innovative products and services, as well as a speed to market that has been lacking in the past. Teaming up with a fintech or challenger brand has become established as one of the fastest, most cost-effective ways for banks to expand their product offering or reach new customers quickly, for example through working capital programmes, but can be achieved in-house with the right tech and marketing expertise.

However banks decide to support corporates, it is vital that they do. In an era when revenue-hit corporates are slashing staff and shrinking their footprints – and suffering corporates and retail customers had already started a migration towards non-bank lenders – the sector cannot afford to take another reputational hit.

Profit boost

The economic downturn ushered in by Covid-19, combined with the lower interest rates now on offer, has also put banks under more pressure than ever to diversify their lending, including venturing into markets they may have shied away from in the past.

Bank of England data show that UK households paid off much more than they borrowed from banks in April, despite falling interest rates making borrowing cheaper and large-scale take-up of payment holidays on mortgages and credit cards. During the month, they repaid £7.4 billion of consumer credit – the highest level since records began and up 100% from March. And although the recent introduction of stamp duty exemptions for the purchase of homes valued at up to £500,000 has helped revive the country’s housing market, mortgage lending looks set to suffer amid rising unemployment.

Within commercial lending, many of the sectors bearing the brunt of the Covid fall-out are also those that banks had targeted aggressively in recent years, such as real estate. Non-performing loans in such industries have surged while new lending opportunities dry up. Almost a quarter of loans backed by US hotels in commercial mortgage-backed securities, for example, were at least 30 days behind on repayments in June, while more than 6% were 60-plus days past due, according to data firm Trepp LLC. So-called delinquency rates for all property types in the month also hit an all-time high.

The woes of HSBC – which on August 3 reported a 65% plunge in pre-tax profits for the first half of the year – in some ways epitomise the wider banking sector’s challenges and its opportunities. The bank blamed a number of factors for its worse-than-expected performance, including lower interest rates and the need to set aside between $8 billion and $13 billion for bad loans, and revealed it had granted more than 700,000 payment holidays – worth more than $27 billion – on mortgages, credit cards and loans.

But while HSBC is now looking to shrink its operations in the Europe and the US, including potentially selling its US retail banking operations, it continues to invest in supply chain finance. It announced at the end of July, for example, a partnership with the Asian Development Bank to provide trade finance loans to Asian firms selling Covid-19 related items such as medical supplies. It also announced last month its first receivables finance transaction in Bangladesh, as well as its first fully digitalised SCF programme in Malaysia.

Working capital finance

Working capital finance certainly presents an opportunity in the current environment for banks to plug gaps in their credit income with relatively low-risk, high-volume and – for the moment at least – higher-margin business.

Supply chain finance has generated consistent revenue growth for funders like banks and investment managers since the 2008 global financial crisis, with worldwide revenues reaching between $50 billion and $75 billion in 2019, according to International Chamber of Commerce estimates.

And in the first quarter of this year, even while Covid-19 and other trade disruptions contributed to a 1% year-on-year contraction in global revenues from trade finance, those from supply chain finance specifically expanded 3% to 4%, with Europe and the US outpacing other regions, according to Coalition. The research firm partly attributes this growth to the lower funding costs and higher margins available from SCF than many other forms of lending.

Receivables-backed financing is of course not without risk, with credit rating agencies cautioning in recent months that because of the way SCF is treated from an accounting perspective – with programmes not counted as regular debt on company balance sheets – it can represent a hidden risk for funders if additional measures are not taken to improve corporate disclosure and transparency.

Still, platforms offering receivables finance point to a huge uptick in demand for working capital as liquidity remains a top priority for company treasurers amid market disruptions and economic uncertainty, while the number of banks and fund managers signing up to offer SCF programmes also continues to grow.

Some funders are also forming bilateral partnerships with industry titans, with Goldman Sachs, for example, announcing in June the formation of a new lending programme with Amazon to support the e-commerce giant’s third-party sellers.

The value of supply chain finance is also demonstrated by the trend for a wide variety of business types now looking to provide it to customers as a part of an integrated offering. UK-based digital freight forwarder Beacon, for example, announced in June plans to offer SCF alongside freight forwarding to help its customers manage their cash flow.

Banks keen to profit from the growth opportunities offered by receivables finance are under pressure however to act fast. Just as they did with banks’ traditional lending business, fintechs, asset managers and other non-banks are rapidly gaining market share in receivables finance and are proving particularly competitive in the SME space.

Window of opportunity

In a world where liquidity is king – but demand for traditional credit is low and the risks associated with it high – banks have a unique window of opportunity to gain a lead in working capital finance. They also have a social responsibility – and a chance to prove they are stepping up to it. How banks support companies through Covid-19 will define their relationship in the years to come. This crisis round, the sector must demonstrate it can be part of the solution, not the problem.

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