Such market volatility also presents a challenge for financial institutions, for example, in the form of heightened credit risk and loan defaults, and reduced investment appetite and pressure on margins. Again, data bears this out. In July last year, Fitch Ratings revised its US leveraged loan default rate estimate for 2024 to between 5.0 percent and 5.5 percent, up from 3.5 percent and 4.0 percent. The agency said “cash flow pressures from slowing GDP growth and high interest rates” were challenging highly levered issuers’ liquidity positions and their ability to service debt.

In addition, the Trump presidency has brought additional and significant uncertainty to investors and businesses across the world. 

Yet despite this economic backdrop, it’s essential that banks and other lenders are empowered to keep funds flowing to the wealth creators – and in the process protect billions of livelihoods. But what measures can financial institutions take to build the levels of resilience needed to ride out this age of volatility? 

Tech to the rescue: how innovation is helping financial institutions to mitigate volatility

While part of the answer lies in central bank policy and government intervention, technological innovation also has an important role to play. For instance, when it comes to credit scoring, artificial intelligence and machine learning are proving increasingly invaluable to financial institutions.

Banks are calling on a wide range of data points, including real-time transactions, supply chain data and social media sentiment to gain a holistic picture of a business’ creditworthiness. This not only paves the way for more positive decision making, but it also allows banks to offer tailored finance solutions to their customers. On top of this, AI-powered credit scoring can accelerate approvals.

Another area where technology is supporting B2B lending is through modern supply chain finance platforms. By digitising invoices and automating payment processes, new systems are speeding up payment cycles and improving cash flow. 

Finally, open banking is drawing on the power of APIs to streamline lending processes, removing many manual steps in loan applications and approvals. Open banking is also playing a useful role in credit scoring by enabling financial institutions to tap into diverse data sets. 

Beyond traditional lending: the rise of short-term B2B finance

In addition to advancements in data processing, a new generation of short-term lending solutions is helping financial institutions overcome the limitations of traditional products – limitations that are sorely exposed by economic volatility. 

Innovations include revenue-based financing, in which corporate borrowers repay a percentage of their revenue until a predetermined amount is reached, and embedded finance, where loans and credit are incorporated into platforms and processes that businesses use, such as accounting systems.

Invoice financing and factoring and supply chain finance are also becoming more accessible thanks to technology. A point underpinned by market data. Global supply chain finance volumes rose by 21 percent year-on-year to $2,184bn, with funds in use up by 20 percent to US$858bn, according to BCR Publishing’s World Supply Chain Report 2023. Growth in Europe and the Americas experienced a spike of between 15 percent and 30 percent, while Africa and Asia saw volumes expand by 39 percent and 28 percent.  

Experts say this trend is in large part due to new entrants, enhanced regulations and greater collaboration between fintechs and banks in this area. 

Similarly, invoice financing and factoring is enjoying sustained growth. According to Valuates Reports, the market globally was valued at $1946.5bn in 2021, and is projected to reach $4618.9 Billion by 2031, growing at a CAGR of 9.4 percent between 2022 and 2031.

Aronova: unlocking liquidity and empowering growth in volatile times

Aronova is at the forefront of innovation in B2B finance, allowing banks and asset managers to offer dynamic short-term borrowing solutions to clients with confidence. One way we’re doing this is through our AronovaLive! platform, which offers real-time control of working capital finance. 

Using this system, financial institutions can make an immediate assessment of invoice and supplier eligibility, give instant decisions on acceptance into funding programmes and process seller/buyer invoice data in real time. 

AronovaLive! does this by creating a secure API connection between data sources to facilitate near-instant communication of changes to accounts receivable and payable, and credit collection information. Lenders are then able to make a real-time calculation of global debtor credit limits, assess invoice eligibility and process invoice purchases. 

Corporate borrowers derive two important benefits from the platform. These are improved cash flow and an optimised working capital position, both of which help to boost resilience in an age where market volatility weighs heavily on businesses. 

To learn more about AronovaLive! and how it’s proving to be an essential tool for financial institutions grappling with a turbulent world, contact us today.

Sources:

81% of UK businesses expect to raise prices in the next two years in response to high energy costs – PwC research

US Leveraged Loan Default Rate for 2024 Revised Up Amid Deterioration

Invoice Factoring Market By Type (Recourse Factoring, Non-recourse Factoring), By Enterprise Size (Large Enterprises, Small and Medium-sized Enterprises), By Provider (Banks, NBFCs), By Application (Domestic, International), By Industry Vertical (Construction, Manufacturing, Healthcare, Transportation and Logistics, Energy and Utilities, IT and Telecom, Staffing, Others): Global Opportunity Analysis and Industry Forecast, 2021-2031

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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.

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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.

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.

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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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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.

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Our latest innovation gives those in charge of working capital finance access to a range of market-leading features.  This provides more control, saves time and increases security. With Aronova Live! you have:

• immediate assessment of invoice and supplier eligibility
• access to instant decisions on acceptance into a funding programme for buyers/sellers
• real-time processing of seller/buyer invoice data and eligibility
• improved cash flow and optimised working capital positions
• rapid access to collections and credit control analysis which frees capacity more quickly
• full automation of processes, reducing operational risk

Ben Grant, Head of Partnerships, explains how Aronova Live! has been developed and tested with our global partners:

“We have a team of developers dedicated to continual innovation based on our global network of funding providers, banks, institutional investors, insurers and corporates. We know that those responsible for receivables programmes struggle with the risk, inefficiency and added cost of manual processes. Aronova Live! was developed in response to these issues and we know that those now using it have seen their operations benefit substantially.”

Instant decisions and reduced fraud

Aronova Live! works by establishing a secure API connection between the data sources. This enables the near instant communication of changes (new records, changed records, closed records) to accounts receivable, accounts payable and credit collection data. In addition, other asset classes that can be expressed as an invoice such as portfolios of corporate loans, leases, credit cards can also be included in the data flow.

This makes it possible to calculate global debtor credit limits, assess invoice eligibility and process invoice purchases live and on demand. While not everyone requires this, we know that for some the ability to calculate availability or sell an invoice within minutes of processing is a major benefit. And it’s not just improved efficiency, the technology also reduces fraud risk.

The API creates an uninterrupted flow of information directly from the originating invoice platform or accounting package. With no manual intervention, data manipulation is less likely, resulting in improved programme security and better data integrity.  Automation also takes some of the legwork out of Know Your Customer and anti-money laundering verification.

The importance of digitisation

The trend towards digitisation of trade receivables during the pandemic has accelerated as remote working has made paper-based processes even less viable, and injected urgency into financial service providers’ previously slow-burning digital initiatives. As a result, digital financing flows multiplied across the entire financial services industry during 2020, helping working capital finance platforms reach a critical mass of user and transaction numbers.

We know that real-time technology will become the norm in the years ahead, but we’re pleased to be able to offer this facility long before many others have even started to automate their manual processes. 

You can learn more about AronovaLive! here or contact us for more information.

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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.

Economic outlook

As if Covid-19 was not bad enough, we now have the spectre of a no-deal Brexit looming closer by the day. Whether you believe that they’ll finally get a deal done or not, it inevitably leads to even greater levels of uncertainty.

Early in December, the OECD downgraded its outlook for the UK economy amid surging coronavirus cases and has warned of a hit from a no-deal Brexit:

“Brexit would entail physical and financial disruptions of different magnitudes across sectors, with exports falling by more than 30% in a few manufacturing sectors (notably the motor vehicle and transport, meat and textile sectors) and by almost 20% in the financial and insurance sector.”

Effects on behaviour

History tells us that not only do these uncertain times damage companies’ performance but they also lead to significantly increased risk of fraud, as stress in the economy changes people’s behaviour. This month, Global Banking and Finance Review wrote about the increased risk of fraud and described the ‘Fraud Triangle’. The Fraud Triangle is a framework explaining the factors that cause someone to commit fraud:

• The first factor is pressure. This is the risk that is most likely to cause Directors, CEOs, CFOs or mid-management employees to cross the line. An increase in pressure in any organisation contributes to a heightened fraud risk. Companies are facing liquidity challenges, leading to missed obligations such as rent or loan repayments, and many are having to consider alternative sources of finance. In addition, there are the less tangible pressures such as reduced morale and the challenges of keeping teams running from people’s homes.

• The next factor is opportunity. Working from home and having a reduced workforce in the traditional place of work presents a considerable opportunity for fraud. Many of the controls and mitigating processes are severely compromised, and therefore present individuals with an opportunity to commit fraudulent acts.

• The final factor in the fraud triangle is rationalisation. It is possible in the COVID-19 context, with large numbers of employees being made redundant or furloughed, that some individuals may rationalize committing fraud. They may believe they are in some way helping the business in the short term, or gaining a personal advantage, by looking for ways to benefit from a fraudulent act.

The need for improved controls

In these turbulent times, keeping control of a working capital finance programme is more critical than ever. As we learn more about the Brexit deal, or lack of one, the behaviour of decision makers will undoubtably change. The uncertainty in the market place and changes in payment patterns represents a huge risk to potential funders.

The application of technology to give funders and insurers up-to-the-minute visibility of the changes in risk and performance of funded portfolios can no longer be put off. In 2021 ability to quickly identify changes in portfolio’s performance will be vital. Those relying on periodic updates from a manual source and spreadsheets will find they are unable to react quickly enough to the issues that organisations will face. There may be huge changes in payment performance between one report and the next. This poses a material risk to the programmes as well as being very poor at spotting potential fraud.

Aronova

Our technology protects our partners in both settled and turbulent times. We provide the support and visibility to enable you to keep lending, to protect your portfolios and minimise the risk of fraud. For more information please contact us.

You can read more about fraud risk in our article The Invisible Fraud In Working Capital Finance.

You can learn more about how we help organisations increase portfolio performance in our article Increasing The Profitability Of Working Capital Programmes.

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