Technology has long been the backbone of the working capital finance industry. From major players dependent upon legacy systems to monitor and service large portfolios to the small players manually tracking loans using spreadsheets. Finance providers have relied upon technology to provide efficiency and improve risk management. However, we are seeing a face to technology in our personal lives that is far different from what is customarily seen in the business world. It is more intuitive, agile and accessible. The evolution of personal technology is influencing our expectation of technology in the business world. Meeting that expectation will result in new and varied opportunities for both upcoming and established players in the finance industry.
Until now, the provision of working capital finance has been predominantly focused on providing funding to businesses at the lowest possible cost. Consequently, the choice of technology in the corporate sphere has largely been focused on cost savings. There has been a clear disparity between the B2C and B2B markets. Consumers will pay a higher price for more creative products. One example of this difference is demonstrated by the growing popularity of paid streaming services such as Spotify. The music website has seen the number of its paying subscribers double over the last year (to 20 million) despite the fact that users can still access a slightly reduced service for free. This corporate focus on cost savings won’t suffice for much longer. The way we use online and mobile technology in our personal lives is the precursor to a big shift in the way business services will be provided in the future. Agile, more intuitive technology solutions are about to become part of our corporate everyday – especially as a younger, more tech-savvy generation comes into the workforce. New flexible technology or software, which has the ability to adapt to different circumstances, will facilitate easier entry into new markets and services. Considering that technology has little respect for borders, this flexibility will allow providers to adapt to different geographic markets, as well as different industries. In this context, the focus of provider’s on meeting the higher service levels will drive creative technological innovation. And this will open up new ways of providing working capital finance solutions to businesses. The next question is where will new opportunities for growth come from?
“One area of opportunity is the use of technology to link the borrower’s accounting system with the Lender’s software. The US market, due to the cultural sensitivity of personal data, has been reluctant to embrace the technology that is widely used in the European marketplace”
Historically, it has been easy to assume that the precedents set in more mature working capital finance markets would drive the development of more embryonic markets. But on closer inspection the reverse is just as true. Some of the emerging markets are in fact exporting crucial lessons that, combined with flexible technology, will drive innovation. Many less-mature markets, such as those in Central and Eastern Europe for example, are not burdened by historical baggage. These working capital finance providers are consequently able to side step the issues that more developed market providers face, such as the costs of keeping tired, legacy systems in operation. This makes these markets more nimble as the money that would otherwise be spent on band-aiding information technology issues or migrating historical data to new platforms can be put to better use. Activities in these emerging markets are anticipated to shape innovation in the field. One area of opportunity is the use of technology to link the borrower’s accounting system with the Lender’s software. The US market, due to the cultural sensitivity of personal data, has been reluctant to embrace the technology that is widely used in the European marketplace. The technology is advantageous to both borrowers and lenders. The lender gains greater oversight of the borrower’s position, at a fraction of the cost of manual monitoring, while providing improved risk management and potentially a lower cost of funds. As a result, more lending opportunities are made feasible. Borrowers also benefit from the reduced effort of reporting requirements and the increased availability of lenders to the market space. Here then, the combination of flexible technology and a better acceptance of the available processes would allow US providers to enter the new markets. The right flexible software would mean components could be adapted to suit specific regional opportunities, enabling companies to stretch outside their safe zones while taking on considerably less risk.
Technological innovation is also providing us with access to more data. Consider the general shift towards online transactions, for example: as more business is conducted and recorded online, working capital finance providers are able to see across a client’s whole business with much more clarity. This offers a glaring opportunity to add value by addressing the more holistic needs of a business, rather than just individual parts of it. As a consequence, there is likely to be a shift towards a more holistic approach to working capital finance solutions whereby a client can expect one solution to cover all of its financial needs for purchasing, inventory and sales. The impact of digitization is potentially even larger. Electronic billing and statements, for example, are now commonplace in our personal lives, from online banking to PayPal transactions. It is also a major upcoming shift in B2B commerce, which presents huge opportunity to the industry. The Brazilian government , for example, in an attempt to build an audit trail to make tax avoidance harder has increased its tax revenues significantly by making electronic invoicing obligatory through its Nota Fiscal Eletronica (NF-e) system. In doing so, it has created a digital record of every transaction. This offers a whole new set of data that will likely fuel new innovation. Having all of this data digitally also allows providers to build transparent solutions, by offering electronic links between a company and a funder. Digitization also offers significant cost savings. Companies can reduce the cost of storage by using more scalable, high-security cloud based services. These cost savings will be significant in some of the more mature, low-margin markets, and will further fuel the growth of innovative value-based service propositions as finance is freed up.
“A number of exciting shifts are going to occur in the way working capital finance solutions are provided. As the markets become more focused on service value and less focused on margins, technology is going to provide increasing flexibility”
A number of exciting shifts are going to occur in the way working capital finance solutions are provided. As the markets become more focused on service value and less focused on margins, technology is going to provide increasing flexibility. This flexibility will make it easier for providers to enter new markets and take advantage of more niche opportunities thereby increasing profit at much lower risk. As technology enables firms to seize more opportunities, regional variations and regulatory change will likely present options to grow profits. Developments in the less-constrained developing markets, which are free of inhibiting legacy systems and practices, are likely to drive new innovation across more mature markets. While the market evolves beyond the traditional factoring and asset based lending offerings, increased access to data is likely to lead lenders to think of their services much more holistically. All of this brings significant opportunities to working capital finance providers and is likely to lead to a growth in the provision of working capital finance solutions globally.
By Tony Smith, CEO, HPD Software North America www.hpdsoftware.com