The factoring of today – trends and forecasts

The situation that we have right now looks positive for the factoring industry. And if we talk about SMEs, the delays of payments from their counterparts has increased the awareness of the factoring as products among their entrepreneurs. Do you see the increased demand for this product in your companies and in the Polish market in general?

Paweł Kacprzak, Board Member at BNP Paribas Factoring in Poland: Well, to be honest, it's quite an interesting situation because I still remember 2009 when the last crisis started. And that was quite a similar situation because factoring becomes always more popular in unsafe times. This is very, very good information for us because still, by far, most of our new clients are the clients who use factoring for the first time in their history. So, it's very good to know that the companies are looking for the information about factoring by themselves. But to be honest, with this coronavirus, it's like, OK, we do see interest, but not that much in terms of demand from the clients. First quarter of this year was for our industry, still very strong. That was 30 percent growth year over year. Especially March was very, very strong. But now we know that companies were kind of gathering cash to be prepared for the worst times. Then we have quite a big decrease in the turnover. So, I'm afraid that as factoring is very closely connected to new sales, then as new sales of our clients decreased, also the turnover of clients decreased. We also made that survey among our clients, 1000 clients approximately. And the outcome is that we can see two groups of companies. First of all, corporate clients, they did struggle a bit. But I would say that the situation is under control. They are already preparing to come back to business as usual, the sales are growing a bit. And then there is SME client groups which I would say they are not even able to guess what is going to be in the nearest future. Not even mentioning, like, you know, next year. There is big uncertainty among those clients. They don't have that much cash reserves by themselves.

Łukasz Adamczyk, Micro Factoring and Product Owner at ING Bank Śląski in Poland: Yeah. Well, first of all, I'm very happy that the awareness of factoring is growing among companies in Poland. At ING we paid great importance to the financial education of small entrepreneurs for whom factoring is not an obvious choice. That is why we create educational materials in a simple and accessible form. Create case studies, explain the benefits of financing invoices and have our own blog where ING experts discuss interesting matters. At the same time, I believe it is a completely different thing to have knowledge of the factoring market and to be able to benefit from this form of financing. The key driver of interest today in factoring products seems to be the delimitation of access to do other, more familiar forms of financing, such as lending or leasing. And frankly speaking, the required attention to micro factoring, which strictly translates into sales, is similar to the pre-pandemic period. However, I am speaking on behalf of a person who deals with micro factoring clients, where the most likely client, is a sole entrepreneur or small company which has a significantly different financial needs from those of medium sized enterprise segments. First quarter this year was still better than the same period last year. The increase, I would say, was several percent in turnover, of course. However, for sure second and third quarter will see an increase in turnover compared to the previous year. And the entire factoring business faces this challenge. So, to sum up, it should be a little easier to return to the growth path than factoring companies targeting larger clients. Provided, of course, that they will have sufficient financial resources to survive in the market during the worst economic slowdown.

At Comarch, what feedback do you hear from your factoring companies, from your customers?

Karol Leszczyński, Product Manager at Comarch: I think that in the era of the pandemic, many banks changed their approach to financing enterprises. For example, the procedures for granting loans were tightened. But a slightly different approach was used in factoring where transactions are secured by payments from contractors or maybe an insurance company. And in my opinion, this approach gave positive results because companies’ awareness of factoring has increased significantly. Customers began to notice the additional benefits of factoring contracts besides financing, such as, for example, debt collection on the side of the factor. And in this case, the customer can focus on their current operations, not on recovering money and other benefits, for example, is taking over the risk of contractor’s insolvency. And in addition, banks and financial institutions that didn't fully specialize in factoring began to notice the value of this product. 

Let's actually talk a bit about the risk approach. Has it changed now after the lockdown?

Paweł Kacprzak: In terms of risk assessment, first of all, we introduced factoring holidays. This is the program under which our client can apply for delayed repayments of the invoices that we already issued or financed from our clients. And surprisingly, only three percent of our clients applied for such holidays. Ninety nine percent of applications were approved. So, I'm quite positively surprised that so few clients were applying at all. We do have a group of clients that we take a closer look at. These are the clients who work in a textile and shoe industry. Transportation industry. HoReCa and automotive. In this case, we just approach them and talk about how we could survive with them to the moment that the lockdown is over. So, they are still financed, and we are waiting for new sales to grow, it’s slowly but surely going on. There is quite a lot of a lot of uncertainty between the companies. Not all of the suppliers want trade credit right now. Some of them just want to cash payments. And in this situation, definitely reverse factoring could be very suitable. But with reverse factoring, it's, much, much more risky. We, as the Polish Factoring Association started to talk with BGK also to include factoring with this scheme. Well, the beginnings were very promising, but we still don't have, I would say, the final decision. But if factoring could be included, that would be a big, big boost for the factoring industry because we could finance whole supply chain of clients from the purchase of the goods from the supplier to the final sales to the clients. And this is monitoring on the per invoice basis. So, it's much, much safer compared to credit. 

Łukasz Adamczyk: From the beginning of the lockdown, we paid a great deal of importance to the KYC process for the existing clients. We try to spend even more time on higher risk transactions in order to provide quality financing. And the industries that have suffered most from the lockdown are those that couldn't normally operate or pivot in a short time period, like the whole HoReCa. And tourism. However, at the same time, in contrast, we have seen industries such as production and sale of chemical products or courier services or ecommerce having a very, very solid performance. For example, we can see it at ING, that the turnover of merchants trading online has increased several times since beginning of this year.

What are the tools that can help banks monitor their portfolios and underwrite new customers in these times?

Karol Leszczyński: Well, we think about now everything has changed. But for financial institutions, factoring companies or banks, I think one thing remains the same. They need to take care of the quality of their credit portfolio. And one of the tools that can help is an early warning system which monitors contract behavior on an ongoing basis. The tool detects contracts anomalies and passes them on the appropriate risk or monitoring or maybe a recovery department. This can be catching the delay, for example, in payments from individual contractors. And if the average payment delay increases from 5 to 10 days, the contract operator will receive a warning signal. Of course, it does not have to be the indicator that cooperation with this contractor should be terminated. But it only indicates that the contractor is worth having a closer look at, because it can prevent a situation, where the funds that need to be returned to the buyer will never be returned. Usually the factor finds out about the customer's non-payment or other problems when the money does not come for a long time. And I think it's better to prevent than cure. I think it's also worthwhile to mention the early warning retention. The information that the factor or bank can use to avoid the customer leaving for other financial institutions. Here, the system will catch a decreased activity on the contract. And it doesn't have to mean, of course, the company is ready to change the provider or factoring or banking services because there are a lot of seasonal companies in the market. But I think such information may come in handy in these difficult times. Because the customers of early warning solutions are not only banks or factors. They are mainly used by the customers of this institution who are receiving information wherever a given customer is solvent and whether it's worth selling them the goods with delayed payment date. And as we are talking about the new customers, I think one of those tools can be cooperation with insurance companies. Because knowledge about the contractor or counterparty, for example, about their payment culture is very important. I think it can simply prevent us from losing the money.

The companies that are providing a digital factoring process will have an advantage on the market. Are all your customers going now through this process?

Łukasz Adamczyk: The ING invoice financing offer is dedicated to smaller companies. We had to focus from the beginning on a fully digital process. This was the expectation of this segment. The financing is to be available right away, all packed in smooth online process with transparent terms. And let's say, without unnecessary formalities, the client should be able to conduct transactions both on the desktop in their office, but at the same time on a tablet or smartphone while on holiday with their family, for example. The whole process from registration through granting of new limits of funding to the repayment of funds is to be fully digital. And what's more, in the NPS survey we did at the end of last year, our clients appreciate the most the intuitive process, the simplicity of applying for higher limits and fast fund transfer.

What about KYC?

Łukasz Adamczyk: I would say the vast majority of ING invoice clients are INGB clients as well. So, we can rely on information that the bank has collected regarding KYC and AML processes. So, during the ING invoice financing registration process the client agrees to the transfer of data to the bank so we can benefit from the knowledge we already have in the ING group. So, with reference to anti money laundering, we check individuals and companies associated with high-risk countries, for example, by industry and registration documents. We check what product or service is an invoice item, for example, we verify contractors in various lists, black, grey, whatever. And finally, we look things up in STIR. STIR is the IT system of the Polish Clearing House developed to prevent tax frauds. So, it's a very, very helpful solution. And to summarize, I would say there is no single way to organize the access to information about enterprises. But there are a number of, let's say, complementary tools that are worth using combined.

Paweł Kacprzak: Take the onboarding process. By onboarding, I mean KYC process signing the contract with the client. Before the coronavirus the digital signature wasn't very popular. That was a bit of a problem with developing the digital processes. Right now, I can see that even small companies are becoming more and more familiar with the digital signature. We also, as a bank, became the shareholder of a FinTech called Autenti. This is the FinTech which had, let's say, an alternative way of identifying clients. So, this is an alternate, very interesting way to deal with signing the contract, confirming it without the digital signature. Which has been an obstacle until now, definitely. But on the other hand, if we talk about digitization, I must say that me and most of the corporate clients, we are a bit old school in one part of the process, which is introduction meetings. Because still, factoring for most of our clients is still a new service. They didn't use it before. So, if I have a face to face meeting, I can feel that cold sweat from the client. And on the other hand, over the last two weeks, especially corporate clients were, let's say, very reluctant to meet or to start new negotiations because they said, okay, but see, you know, it's too important a decision for me to start those negotiations without knowing each other. But it’s a different story, of course, with micro clients. We already started to do video meetings, and that looks like a perfect fit because they are more willing to do that. But the bigger the client becomes, the harder to start the negotiation with the clients or the introduction meetings without physical meetings. So, I would say it really depends on the segment of the clients that we talk to.

Karol Leszczyński: I think that the pandemic has shown how quickly individual financial institutions can adapt to changing conditions. Because just a few months ago, opening a bank account online without leaving home seemed unreachable. And now almost every bank has implemented such a solution. So, in my opinion, the next step will be signing a new contract with the companies online without visiting the bank. This approach was used by fintechs, I think a few years ago, and I think, of course, banks have different procedures and many requirements imposed by financial regulators. And I think banks must catch up with fintechs and allow their clients to go through this loan process without leaving home, because I think it will be a standard in a few years. And in this case, time to cash is very important. The faster we can provide cash to your client, I think the better opportunity you have to gain more clients.

What is the current approach to the reverse factoring for micro customers? And what does the situation look like in terms of foreign suppliers?

Paweł Kacprzak: Well, to be honest, if we talk about the factoring companies, there is no approach at all. So, we don't really have an offer of reverse factoring for micro clients from, say, risk management issues. On the other hand, if factoring was included in the BGK bank scheme, that would definitely be a boost also for reverse factoring in this matter. Definitely there is a space in the market for reverse factoring for micro clients.

Will the factoring industry be an alternative to the bank financing this year?

Łukasz Adamczyk: In micro factoring, the first symptoms of declining client liquidity were felt very quickly, basically from the first days of March. So certainly, we took, let's say, small steps on our side to tighten the process of granting new limits. And, of course, we have less than two percent of clients for whom we deferred their payment. So, it's about one point six, if I well remember. So, we try to be flexible. 

Paweł Kacprzak: If there is a delayed or expected delay in the payment, our client could apply for the postponement of the due date of such invoice. And we are great for that because we treat it as a bit of a freezing situation rather than expecting that this client will not pay anymore. And the interesting story is that at the beginning of April, I guess, the sum of delayed payments on our portfolio rose by 10 percent. But in two last weeks of May, it came back to the standard situation. I wouldn't say that we have very big, dramatic impact on payments from the debtors. Right now, we have a situation that we have more incoming payments than financing new invoices. So, it doesn't look like we have a kind of a backlog of payments between the companies. Also, the outstandings with the credit lines went up. So, it looks like the companies gathered the cash and now they're using this cash to pay their responsibilities, also towards us. But that also give us the opportunity of growth. But I would say it’s still 30 percent less than it was before the coronavirus. I was working in other bank in 2009, and that was a bit similar because there was limited access to credit. The lines were used. And as the economy moved on, the clients were switched to factoring because it was much easier to get finance from factoring compared to credit line. So yes, I would say that it always was, and I hope it still will be a very good alternative to us as we go  on.

Karol Leszczyński: Factoring will be the most interesting thing right now because the banks have a safer financing product. They can cooperate with insurance companies. So, the money they lend is much safer, because we have natural payment resource bonds from contactors on counterparties. And what, for example, insurance companies can do is they can take the risk of this payment. And the knowledge about every counterparty, I think is the clue here and the diversification. The factoring will be the product the banks will want to sell most.