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

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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.

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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.

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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.

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