Fintech Trends in the Factoring Industry
Written by: Dane Cook, Co-Founder, Tank Payments
A few weeks ago, one of Silicon Valley’s leading financial technology companies (“fintech”), Stripe, announced that customers on their platform processed $1 trillion last year, equivalent to 1% of global GDP. Stripe’s mission is to “grow the GDP of the internet,” which—surprising though it may be—is just a drop in the bucket of global GDP, with many years of growth still ahead. Eventually, nearly every financial interaction will be intermediated by software, conducted online, with 24/7 availability, from anywhere in the world. Inspired by this milestone, we invite you to consider how fintech is growing the GDP of the factoring industry.
Across every sector of financial services, the adoption of fintech is all about meeting customers where they are, with a product specifically tailored to them. To put it simply, instead of going to the bank—in a fintech-enabled world—the bank comes to you. Or rather, in our case, the factor comes to you; delivering products that are designed for your business, easy for you to use, and available right when you need them.
Customers of financial services used to have one big thing in common: how far they were willing to drive. Even the terminology used to size banks is geographic. A “community bank” tends to hold $10B or less in assets, whereas a “regional bank” holds between $10-$100B, regardless of where they operate. With financial services now online, customer traits, preferences, needs, and behaviors are far more important than location. In recent years, fintechs have launched specialized payments and banking products for niche customer profiles ranging from real estate landlords to social media influencers to Latin American immigrants.
Using fintech, factors have the same opportunity to bring their products and services closer to their clients. From my perspective, working for a fintech building specifically for factors and their clients—primarily in the trucking and transportation sector—I have a unique vantage point to comment on how fintech is influencing the industry and how factors can leverage it to grow.
Three fintech-enabled business models are developing in the factoring industry. First, VC-backed technology startups are becoming factors themselves. These are software companies first and foremost who are bundling factoring into a suite of products and services to create a one-stop-shop experience. In the transportation sector, this means banking, card issuing, fuel discounts, accounting, payroll, and factoring all rolled into a single experience that looks and feels more like a consumer-grade product than one built for business. Through vertical integration, these companies capture a large amount of customer data, which enables them to optimize cross selling. For example, they may offer a lower factoring rate for those customers who hold money in their first-party financial accounts.
Second, fintech companies are leveraging factors as a distribution channel for their own product lines. This is nothing new. Fuel card resale programs have wide adoption among transportation factors, and some factors still use money codes. What is new is the quality of the software. Market entrants are seeking to displace incumbents with a better experience for the end user. In their pursuit of the broadest distribution possible, these fintechs tailor their offering to the channels where they find the most traction, including brokers, large carriers, as well as direct marketing to end users, so factors must evaluate how well these products fit into their unique relationship with clients.
The third—and increasingly prominent—fintech business model is that factors are building their own technology, whether strictly for their own use or for resale to other factors. These fintech applications have the advantage of deep industry expertise, but their success may rely on driving consolidation to achieve scale. In the tech world, it’s conventional wisdom that, in the future, every company will be a technology company. However, this glib remark flies in the face of thousands of years of surplus generated by specialization. Banking is a relevant analogue. While the total number of banks in the US has been declining (for a variety of reasons), front-footed banks have gained market share by becoming increasingly interoperable with software companies, not by becoming software companies themselves.
Only in some markets, does technology trend toward consolidation, but in every market, it leads to divergence—divergence between those who leverage it, and those who do not. Every factor is different, and technology strategies are not one size fits all. Regardless of size or sector, factors have common goals which are being unlocked by fintech:
Speed: Faster payments at lower cost. Consumer apps such as CashApp and Venmo have set the bar, especially for younger generations. In an increasingly cashless world, slow payments are not only becoming unacceptable, but incomprehensible. Clients are expecting payments from their factor to be as fast as splitting the check.
Availability: Once you leave the bank branch behind, the concept of a bank being “closed” is anathema to 24/7 industries like trucking and transportation. Factors are increasingly offering payments on nights, weekends, and holidays.
Higher quality revenue streams: Given factors’ deep understanding of their clients’ businesses, they have an opportunity to monetize activity that is currently conducted elsewhere, including interchange from card transactions, cash advances, and buy-now-pay-later bill payments. Increasing regulatory scrutiny of so-called “junk fees”, will put downward pressure on revenue from paperwork processing and money transfers.
Security and control: Reversing accidental fundings and monitoring downstream activity for potential fraud can save factors tens of thousands per year. Guaranteeing that brokers are paying carriers or general contractors are paying their subs through payment automation can grow lines of business that were previously too operationally intensive.
Workflow automation: From payments to cash application, automating workflows frees up time for factoring staff to spend more time on your most important work: engaging personally with prospective and existing clients.
I believe the fintech tide will lift all boats, and that there exists massive opportunity for factors to capitalize on the trends driving fintech forward and provide a better core product, better service, and deeper relationships with their clients.