Modernize and Automate: The Technology Solutions Factors Need to Succeed

Is your technology as up to date as it can be? Rosanne Doyle, product manager ABL/factoring at Solifi, and Mark Watkins, a director at Lenvi, explain the importance of having a modernized and automated technology stack to capitalize on opportunities in the marketplace in 2023.

What are some of the primary technology trends you are seeing now or expecting to see for the factoring industry over the next few years?

ROSANNE DOYLE, SOLIFI: We’ve seen an increase in factors needing configurable, flexible cloud solutions that support the quickest and most efficient way for data to transfer between internal and external disparate systems. With so much data available, the use of APIs is a common request, as software-as-a-service technology allows different applications to share data, connect software programs, talk to each other in real time and gather meaningful insights. These APIs are the functionality happening behind the scenes to ensure applications work and create a seamless end-to-end digital customer journey across an entire enterprise. Other items to highlight include mobile apps to enable access anywhere and the use of analytics tools to make more informed decisions and identify customer behavior trends.

MARK WATKINS, LENVI: Right now, accounting data extraction is a prominent theme. This means directly extracting data from a client or prospective client’s accounting packages, driving toward real-time data analysis and speed of decision for clients’ and prospective clients’ funding requirements.

How might newer technology tools help factors as they traverse a rising rate environment and prepare for an impending recession?

DOYLE: Mitigating fraud risk. Like all financial products, factoring is exposed to the same risks triggered by fraudulent activity. With potential for a recession, factors must remain vigilant and quickly identify threats which could minimize their profits and increase risk. Customers may not always make the right decisions under financial stress. A proven software solution can significantly reduce risk and improve the factor’s ability to track customer behavior by analyzing and providing real-time insights to help determine whether a particular instance or behavior is a concerning trend or just a poorly made decision. Automation and data analysis can detect new suspicious activity in account receivables in real time, enabling factors to act upon fraudulent invoices, verification discrepancies and payment fraud.

WATKINS: Lenders need to be flexible, agile and act fast to support and manage a client’s or even a prospective client’s working capital needs. Technology is the key to helping a lender automate and integrate various data sources to provide a single view of a customer and enable the lender and its staff to make data-led decisions for supporting the borrower quickly and efficiently. It’s time to remove the paper driven, manual spreadsheet monitoring approach and utilize the various technology that is out there. Technology will support the risk management requirements for protecting a lender’s net funds employed and also enhance a operational efficiencies and processes, which will free up time to be client centric and manage relationships, particularly where signs of distress — given the economic conditions facing businesses — need investigating for fraudulent behavior and/or possible business failure.

With the onset of newer disclosure laws in many states, how can newer technologies help with compliance for factors?

DOYLE: As the volume, along with the varied interpretation of these laws between states increases, not to mention companies doing business across state lines, countries and continents, manual tracking has been rendered virtually impossible as a solution for compliance assurance. Factoring software provides factors the ability to easily generate reports that can be submitted to regulatory governance agencies. Customers’ technology should have record level audit trails to identify areas of non-compliance. Another feature is role-based security functionality, which allows granular access and permission within the to ensure data is protected and confidential while enabling oversight and accountability.

How can factors ensure their data is safe when using cloud-based software and other solutions?

DOYLE: Cloud-based technology is very secure because solution providers deploy a combination of encryption and authentication methods to ensure this. Service providers should put controls in place to ensure they continuously meet SOC guidelines and that data is encrypted in both transit and at rest. Additionally, they should ensure the most secure environments by partnering with Amazon Web Services to host solutions. Modern factoring solutions help mitigate risk by maintaining full control of the data supplied and stored in addition to frequent data back-ups, access controls (including password protection), two-factor authentication and role-based controls.

WATKINS: Cloud-based technology allows back-end services to be delivered on an as-used basis but don’t trip up on governance. Look for industry standard certifications and accreditations in the partners you use. Penetration testing of environments is essential to give comfort to a lender and, ultimately, a borrower, so ensure the solutions you utilize can confirm they have undertaken this exercise.

What are some areas within the factoring space that need modernization?

DOYLE: I see this in two areas. One is the opportunity to improve the overall customer experience and the second is to manage risk effectively through automation. From a customer experience standpoint, historically and still now, the process is often paper-based or on spreadsheets – both of which are cumbersome for all parties. Providers should offer streamlined processes, such as online onboarding, real-time access to data, customer portals with 24/7 access and mobile friendly access.

Another component critical to a factor’s success is the ability to maintain acceptable levels of risk. Using modern factoring software, factors can establish various criteria and leverage the system to automatically calculate and approve or reject transactions automatically, ensuring their overall factor risk is within acceptable levels.

WATKINS: I have lost count of the number of lenders that still use spreadsheets to track covenants and monitor something as simple as dilution and debt turn trends! So, there needs to be automation of manual and time-consuming processes and monitoring, including risk and operational processes to ensure a risk-based approach is embedded in a lender’s mantra. It is important that staff members have tools that automatically analyze various financial and collateral data and highlight where a client/relationship manager needs to investigate movement ‘away from the norm’ with that client or debtor being highlighted.

Lenders also need to widen their technology ecosystem and modernize their tech stacks to enable them to utilize technology that helps them understand the data available and, most importantly, be agile in the products and support they provide to a borrower.

Why is it important for the factoring industry to adopt automation?

DOYLE: Automation removes risky manual processes which are prone to errors. It enables factors to optimize their business processes by automating time-consuming tasks through smart workflows, giving you more time to focus on your other projects, not to mention reducing the burden on already limited resources. In addition, software automation standardizes processes, helping your team to meet quality and service standards. Other valuable benefits include cost reduction, competitive advantages and a better customer experience with faster processing times and access to data and self-service capabilities.

WATKINS: Automation drives efficiencies, speeds up decisions, improves accuracy and data transparency, and, most importantly, frees up staff to do what they are good at: managing customer relationships. Automation will also help lenders be able to grow their portfolios without the need for corresponding growth in staff numbers. Let the technology remove that manual and time consuming work required.

What will be the next big trend in factoring technology?

DOYLE: Artificial intelligence. While it’s been talked about for the last few years as the next trend, it will continue to show promise and opportunity in helping factors identify and manage their portfolio risk. Technology providers and customers are working through business use cases and real-world applications, making AI a reality in daily operating processes.

WATKINS: Machine learning. Whilst not to confuse machine learning with AI, lenders are looking to automate credit decisions, drive down costs and speed up the flow of working capital to their client base while gaining a competitive edge in the market. Machine learning will be essential — particularly with the uncertain times we are experiencing — to model patterns of expected behavior and help lenders’ risk management strategies, policies and ongoing monitoring requirements to be agile and flexible in a data driven and controlled way.

Open banking is another. Whilst the concept has been around for a while, lenders are beginning to see the benefit of enabling specialist technology providers access to various banking transactions and other bank data to further enhance a 360-degree view of a client’s need for working capital and, more importantly, the right product to provide, such as factoring.

What’s your overall outlook for the factoring industry in 2023?

DOYLE: I think the outlook is extremely positive. The factoring finance market is estimated to grow by $1.7 billion by 2027, with a CAGR of 7.54%, so there is no doubt that this sector represents a solid rock within the wider wholesale finance industry. With the upcoming fears of recession and potential negative financial implications across the ecosystem, where other sectors face challenges during taxing economic downturns, factoring allows companies to seize the opportunities which market instability can offer. When banks are less likely or willing to take on risky accounts, this opens the door for other businesses, like

factors, to help businesses leverage outstanding invoices and accounts receivables to access the working capital they need. There is plenty of opportunity for factors in 2023.

WATKINS: We always say that in times of recession and economic uncertainty, the factoring industry has opportunities for growth. [This year] should not be any different, but it still feels a little different. The last few years should teach us one thing: expect the unexpected. Businesses are under significant pressure with what has hit them over the last few years, including rising interest rates, increasing inflation, ongoing supply chain impacts and delayed payments, making for an ideal time for the factoring industry to support the market with a dynamic working capital solution.