Future Visions: Exploring Trends in Technology for the Factoring Industry
In an exclusive Q&A, Jamie Clemons of Artis Trade Systems and George Souri of LQD Business Finance provide insight on the most pressing trends in factoring technology, including artificial intelligence, machine learning, APIs, robot process automation and more.
These days, technology is accelerating at tremendous speeds, leaving some firms behind with every new product. To give us an update on the developments most pertinent to the factoring industry, Commercial Factor spoke with Jamie Clemons, co-founder of Artis Trade Systems, and George Souri, founder and CEO of LQD Business Finance, about the current state of factoring technology and where the industry is headed.
How are things like artificial intelligence and machine learning making an impact in the factoring world and how can companies in the industry utilize these tools?
JAMIE CLEMONS: AI and machine learning will have [a] significant impact in four areas that have overlap and are not mutually exclusive: operational efficiencies, identifying fraud risk, payment application and underwriting. However, AI is often used precariously to mean many things at once, and as a result, can often present as a misnomer and sometimes even seem meaningless given the overreach of application.
If we are referring to AI as any machine that exhibits traits associated with a human mind, I have seen very few, if any, examples from fintech startups in the factoring space. Machine learning, which is a subset of AI, in its simplest form, is pattern recognition focused on learning from data and improving the accuracy input over time without being programmed to do so. Machine learning is rather “easy,” but it is also very expensive to do well. I think in the very near future all companies will have access to machine learning as a tool for a fraction of the current cost.
The most significant impact factors will likely experience will be AI/ machine learning-based forecast and credit performance prediction tools implemented by fintechs and banks. The projected level of accuracy of these tools as well as the removal of human underwriting represents a remarkable and unprecedented outsourcing of human decision-making within the industry. Of course, there are inherent dangers [in] outsourcing decision-making to machines, especially if there is a wrong decision that is made at scale by machines. It could result in abnormal losses until the incorrect assumptions/model/algorithm is updated.
Thus, we have a “buy versus build” question. In the foreseeable future, it is my belief that factors will be successful in the “buy, not build” scenario, and factors will successfully deploy available AI and machine learning offerings into their operations, allowing for significant automation.
GEORGE SOURI: The term artificial intelligence is one of these terms that everybody uses and everybody hears but nobody really knows what it actually means. Artificial intelligence is really just a big blanket term for a variety of techniques to improve decisions that maybe otherwise would have been made by a human, and machine learning is one form of those techniques.
The way machine learning works is by feeding a bunch of data into a machine learning model, and as that model sees more and more data, it tries to make predictions. The idea or the hope is that the predictions of the model are adequately precise such that you can use the model to automate decision-making.
As machine learning is learning, it makes a lot of errors and it needs the right data set, and the data set a model like that would need just doesn’t exist. That’s problem one. Problem two, to build it would be extremely costly because you would have millions and millions of dollars of charge-offs. I think the biggest opportunities are not in machine learning but in using logic-based systems and using automation and then using data integration to make the process more efficient.
APIs are another technology that is becoming more and more prevalent in the industry. What trends have you seen on this side and how can this tech best be utilized?
CLEMONS: APIs are nothing new; they have been around for 20-plus years. Like our AI/machine learning discussion, API is also a broad term that is often over-extended to the point of detracting from meaning. API is ultimately just computers communicating with other computers. APIs are becoming more prevalent as more things are cloud-based. On-premise systems, versus cloud-based, cannot talk to each other, but once you are cloud-based, you now have the ability to connect to other systems.
What is really driving the adoption of APIs are third party software providers like Zapier, who make it relatively easy to connect APIs. These companies provide simple workflows to connect APIs for cloud-based solutions. Historically, if you wanted to do things with APIs, you would have to be very technologically savvy. However, with these emerging providers, the process is being streamlined and becoming more accessible. That being said, if one is trying to connect to a robust or complex system, IT expertise is certainly required for successful facilitation.
Regarding how it can improve business processes for factors — simple, if you automate something, you become more efficient. When you become more efficient, you have better workflow and likely better capital efficiency.
SOURI: In theory, API sounds great. There are a couple of challenges to the use of APIs. The first is not all data’s available through API. So, if somebody is using a local server version of Sage Accounting or QuickBooks, you can’t use an API. And to the extent it’s theoretically available, it’s not consistently available.
Problem No. 2 is APIs break all the time, especially application-to-application APIs. So, people need to be very sober about the fact that using an API integrated app-to-app connection is going to require maintenance.
However, the biggest problem is that once you get the data, if that data is not accurate, then nothing that comes after it is going to be useful. So, it’s not a be-all-end-all. Where APIs can be very effective, however, is as it relates to outgoing data. If you have incoming data that you have cleaned and warehoused, and you want to set up a portal for customers or investors, APIs can be very powerful. But while they are powerful with respect to acquiring and aggregating data, there are some challenges with APIs that I think people need to be very sober about.
What emerging technologies should factoring companies keep an eye on?
CLEMONS: The future is automation, AI and cloud-based solutions. The world is getting smaller and hopefully “smarter.” In order to remain competitive, businesses need to embrace technology or get left behind. At Artis, we believe one of the main keys to adopting technology is offering a program manager to help run the program on behalf of our clients. We not only provide cutting-edge technology but a turnkey solution to help you get it running smoothly. Technology fatigue is real, and we think the ability to make the process of adding new software as seamless and frictionless as possible is the No. 1 differentiating factor.
SOURI: There are two areas of technological innovation that I think will make a big impact, not only in factoring, but in trade finance and business lending at large. The first is robotic process automation. A lot of factoring companies and other lenders have what’s called a disintegrated data architecture. Because of that, there’s no good, straightforward way to use API or even FTP or other kinds of protocols to bring in data from here and put it there and then perform some action on it. RPA allows companies to automate a lot of processes and be more efficient because it doesn’t require the backend code difficulties that come with code-based data integrations.
The other piece that I think is going to make a big break is low code applications. Low code applications allow organizations to deploy very robust apps or very simple apps that can be totally customized to the organization’s needs with very reduced time and money costs, and with a significantly reduced instance of error because you’re not having to deal with hundreds of thousands, in many cases, millions of lines of code.
How much more important has it been to be on the cutting-edge of technology developments during the COVID-19 pandemic?
CLEMONS: Very important. Cloud helps dramatically, as employees can work anywhere versus being in the office; physical presence is not important. Companies that had been open to new technology and updating their operating systems did much better during this time than those on legacy and on-prem systems.
SOURI: Our platform is cloud-based and our data [is] all accessible by internet. We don’t have any local servers of any kind. So, if you were a company that still had local servers and you had to use a VPN, obviously you were going to have certain challenges that companies who had moved into the digital domain were not.
All of our loan agreements are all electronically signed. All of our servicing is done electronically and all of our reporting is done digitally. So, organizations that have not undergone a digital transformation … were going to have a very hard time in the world of COVID-19.
One of the things that technology cannot replace, though, is the degree to which you can collaborate and exchange ideas when you’re working on complicated problems. There are certain aspects of this where technology definitely acts as an equalizer, but it doesn’t solve all the problems.
When developing software for factoring companies, what are some of the pain points that are most critical to address?
CLEMONS: First and foremost, we focus on building our software to make it incredibly easy to use, and secondly, incredibly adaptive to allow it to be customizable to fit the user’s needs. We are fond of the quote “simplicity is the ultimate form of sophistication,” and we spend a tremendous amount of effort to make the sophisticated simple.
SOURI: The biggest problem is building a solution that can accommodate unforeseen future scenarios and requirements. This is what we call in the scientific world a particular solution versus a general solution. The idea is that the general solution solves for all cases, whereas the particular solution solves for a particular case.
The biggest problem with technology developers is they solve for a particular case, and then they want the user of the software to squeeze themselves into the software. My view is the technology must always act in service of the end it’s serving. In other words, my business should not be a slave to the technology. The technology must help me run my business better, and if it doesn’t conform to do the things I need it to do, then it’s not as good as it could otherwise be.
So, the hardest part is designing a structure that is adequately flexible and adequately robust in its design to enable you to accommodate the vast majority of requirements and needs.
How do you see this sector developing over the next five to 10 years?
CLEMONS: I believe that there will be consolidation in the industry, especially as more advanced technology makes its way into the industry. The factors that can incorporate AI and machine learning tools into their operations will have a competitive advantage and the opportunity to gain market share. I also believe that early payment programs are going to be made available by more and more [businesses], which will allow traditional factoring clients to accelerate their payments at a discount less than what they are factoring for. This will reduce the total available market (TAM) to factors. I believe factors will be able to create new lines of business by offering their expertise in invoicing, trade finance and payments to companies in some form, such as outsourced AR/AP operations, trade finance programs and business consulting.
SOURI: I don’t have [the] slightest idea, to be honest with you, because technology moves so quickly right now. We’re starting to work with blockchain to package loans. So instead of the more traditional securitization model, there are ways you can use a blockchain to package loans and all the related documents and offer those loans for sale to investors or loan buyers. There are tremendous innovations that are theoretically possible, the question is, what happens with adoption rate?
Jamie Clemons, CPA, is the co-founder and CEO of Artis Trade Systems. Clemons began his career in consulting and then transitioned into international finance and moved abroad to work for KPMG. After returning to the U.S., he worked for a former client, ON Semiconductor, directing and operating the internal audit and inventory audit groups. Clemons then worked for DriveTime to pursue his interest in asset-based lending before founding Artis Trade Systems in 2018. He can be contacted at 602-825-1841 or jamie.clemons@artistrade.com.
George Souri is CEO and founder of LQD Business Finance, a tech-enabled business lender based in Chicago. Souri has more than 20 years of entrepreneurial experience and leads LQD Business Finance’s strategic direction and innovation initiatives. Prior to founding LQD Business Finance, Souri spent seven years as the founder and CEO of Atria Capital, a Chicago-based advisory firm. Before Atria Capital, Souri was the co-founder and CEO of Ramzey Broadband, a national provider of end-user fulfillment services to cable companies.