Last year, PWC’s Working Capital Report 2019/20 analysed the largest global listed companies of the past five years to assess trends in the approach to working capital management. According to PWC, there is €1.2tr excess working capital tied up on balance sheets, and they concluded that improved working capital management is one of the most effective ways in which value can be created.

Evaluation challenges at the pre-funding stage

However, as anyone who has been involved in the evaluation and structuring phase of a working capital programme will attest, one of the most frustrating components of this early stage can be the amount of time it can take to get the programme over the line. In the modern-day world of compliance, and with the ever-present risks of portfolio non-performance and potential fraud, every effort needs be made to understand the underlying assets so that all parties to these transactions are protected.

Receivables-backed programmes

With receivables-backed programmes, it is vital to gain a full understanding of sellers and their accounts processes, to see how they manage collections performance and elements such as aged debt and dilutions. It is also critical to be able to understand their clients, analysing patterns of trade and behaviour and seeing clearly the concentrations and risk within the portfolio. 

Even today, in our technology-rich world, we see so much of this being done manually. Funders take files of data and reports, with headline statistics compiled by the seller themselves, to be validated and scrutinised by analysts using models in Excel. This data is then verified and audited, and the outputs used to provide the initial pricing for these programmes. All of this takes a huge amount of time, and it can be several months before anyone can move on to structuring the programme and putting the documents in place.

It’s not just a matter of the inertia caused by these delays. Relying on reports created by the seller and a single cut of receivables data can lead to broad-brush structures with additional layers of protection built in. Often the reserves may be higher than actually required, with lower-than-optimal advance rates added for protection. This though compounds the problem and may make your offer uncompetitive. 

With greater demand in the sector, more and more organisations are deploying technology to help them during the pre-funding stage. Those using advanced analytics for the process are able to dramatically reduce the time spent on some of these critical elements, as well as gaining insights that are nearly impossible using traditional methods. 

An attractive asset class

Aronova have been helping banks, asset managers, private equity companies and insurers to analyse portfolios since 2003. Almost every programme we see has several potential suitors as receivables, as an asset class, are becoming more and more desirable. Receivables are large programmes with nicely diversified risk, and long-term investments with a good, stable return, and not only are we seeing a lot of activity from the traditional banks but a growing appetite from the capital markets and investment funds. 

At this early stage there is the greatest risk of losing the opportunity to a competitor, but the ability to automate the process and use advanced analytics can reduce this. 

How the technology works

A single upload of current and past data – the kind of standard data recorded in any accounts system – can be a real game-changer in these scenarios, providing instant, comprehensive analysis of the portfolio:

• Smart-matching to DUNS validates every obligor and flags those of concern
• Enriching the data shows concentrations of obligor, group, sector and geography
• Analysis shows performance over time and key areas of risk
• Proprietary behavioural analysis algorithms spot trends in behaviour and identify potential fraud
• Clear visibility supports simple go/no-go decision making

This all not only dramatically reduces the time needed to analyse the portfolio but enables organisations to provide tailored, competitive programmes which fulfil the borrower’s specific requirements. In addition, it effectively protects all counterparties to the transaction, significantly improving the likelihood of being selected to fund the programme.

By improving the accuracy of analysis at the pre-funding stage of a working capital programme, all parties involved in the transaction can evaluate, simplify and unlock the benefits more quickly. Digital technology is now more accessible and flexible to use, and should be a standard tool for accelerating working capital improvement.

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Corporate fraud and invoicing

According to PwC’s 2020 Global Economic Crime and Fraud Survey, economic crime has reached its highest levels in the past 24 months, with 56% of UK businesses surveyed stating they were impacted by fraud, corruption or other economic crime.  Nearly half of these frauds being perpetrated internally.  

Throw into the mix the devastating impact Covid-19 has had on many company cashflows and we probably have the perfect storm.  Increasing desperation probably means an even greater propensity to commit fraud, with financial fraud being high on the hit list. 

As the likelihood and sophistication of corporate fraud increases, so must the tools used to identify and respond to these threats. 

What does fraud look like for corporates involved in receivables-backed finance? Well, examples include the invoice that’s sold, only for the issue or due date to change so the terms exceed the allowable maximum credit period, or the invoice whose value or advanced amount changes post sale.  

Sure, some of these are innocent data corrections, but when regular patterns start emerging, transaction parties must question just how innocent these changes really are. More importantly, all parties involved in a programme need a way of automatically dealing with these ‘innocent’ changes and a way to identify this potentially fraudulent activity. As part of our ongoing innovation, we have developed a new application called ‘Collateral Shield’ to help. 

A couple of months ago, our Head of Partnerships & Alliances, Ben Grant wrote an article called ‘The Invisible Fraud in Working Capital Finance’ on just this very subject. From the feedback we’ve had, we’re not the only ones to see or suspect that this is happening. Post-sale changes to receivables data are more common than many originally thought.

Aronova is ideally placed to help police these ‘innocent’ changes. We receive daily invoice data directly from the Corporate, we process the data to assess eligibility and we’re effectively the first line of defence in the receivables finance chain. We know which invoices are sold and we can identify where significant post-sale data changes occur. Of course, identification is just one part of the story. The actions taken next are what really count and it’s where our Collateral Shield technology we can make a real difference. By automatically detecting threats and then implementing a series of actions, we can protect the transaction parties from the effects of post-purchase data changes.

Collateral Shield

Collateral Shield is a really interesting piece of ‘always-on’ technology that sits discreetly behind a receivables-backed working capital programme. It works by monitoring significant data changes to sold receivables and executing a series of corrective actions when changes occur.

The significant changes we’re interested in are those that would potentially affect eligibility if an invoice were to be re-assessed. For example, changes to invoice terms, invoice value or advanced amounts. More dramatically, we’re also monitoring for changes to debtor identification as this could affect multiple invoices due to credit limit, activity sector or country aggregation tests.

Once we identify a significant change, and depending on a programme’s set-up, we can first auto-repurchase a sold receivable, then automatically re-assess it for eligibility (excluding any invoice ageing tests).  Finally, so long as the changed invoice is still eligible, we can automatically resell the invoice back into the funding programme.  But crucially, if a retested receivable fails eligibility, it won’t be resold.

How we help

Collateral Shield protects transaction parties with an auto-response mechanism to counteract the risk of invoice and white-collar fraud.  It can be switched on or off for each funding programme and different policing levels can be configured per client. In summary, it’s highly adaptable and can be built to the precise requirements of the programme and its constituent parts.  Its abilities seamlessly integrate with our standard Movements Reporting suite to ensure invoice level visibility, monitoring and programme reporting. After seeing the technology in action, the majority of our clients have either added this to their reporting suite or are in the process of upgrading. 

Source:
PwC’s Global Economic Crime and Fraud Survey 2020

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