Collaboration between banks, factors and insurers is the way forward.
Corporate treasurers have long been plagued by the administrative burden of offloading receivables portfolios to numerous buyers. Yet with banks, factors and insurers working in collaboration, deliverance may finally be at hand, says Sebastian Hölker, head of structuring and implementation of supply chain finance products at UniCredit.
On the face of it, selling a receivables portfolio in one go ought to be a simple process. Yet because of the specific limitations suffered by banks, insurers and factors, the reality is often very different – saddling corporates with the task of selling different parts of their portfolio to different buyers. Thankfully, this is about to change. Banks are now looking to work in partnership with factors and insurers to create a single entity for financing receivables.
This is a prospect that will have treasurers breathing a sigh of relief – easing access to an increasingly important financing technique. Indeed, receivables financing has enjoyed much success on the back of its liquidity benefits. And in today’s liquid markets, treasurers are coming to appreciate other advantages – including more robust risk management, better asset quality and lower Days Sales Outstanding.
The limitations of individual buyers
Realising these benefits, however, is easier said than done. The problem is that the way most buyers are structured means that they are only interested in certain types of contracts, forcing firms to find multiple counterparties in order to sell their entire portfolio. This is a time-consuming operation, and one which, given the limited demand for liquidity, can easily wear away the financial benefits of supply chain finance.
This selectivity among buyers comes down to the way they operate. For example, factors and insurers use standardised analytics to spread risk evenly over numerous contracts – an approach that sits ill with large contracts, which can concentrate risk in one section of their portfolio.
Banks, on the other hand, are happy to take on concentrated risks. This is because they evaluate each debtor in depth – giving them the confidence to accept greater exposure. Of course, this also means banks tend to avoid large numbers of smaller contracts – where their research earns smaller returns.
The potential of collaboration
Fortunately, the very selectivity that makes these firms imperfect buyers also makes them perfect bedfellows. While as individual companies they are only interested in specific parts of the portfolio, together they are interested in the whole. This is the basis on which UniCredit is working to forge a solution – collaborating with factors and insurers to find a way of buying entire portfolios in partnership.
In order to present these joint services as a seamless operation, it makes sense to have a single party front the collaboration. Banks are well placed to take up the mantle here. A familiar face for many clients, they can act as the sole point of contact, using digital platforms to on-board portfolios and share them with their partners.
With this in place, the different parties must also find a way of operating harmoniously. Of course, this is no simple matter. Banking and insurance are age-old industries that have each developed in their own way, with fundamental differences embedded in their regulations. Yet these companies have identified ways of adapting their practices to align both with one another and with their respective regulatory requirements.
With this harmonisation achieved, the potential advantages are clear. Banks, factors and insurers will each benefit from exposure to new potential clients, as well as the greater attraction of a collaborative service.
But as UniCredit leads the way in ironing out the final wrinkles to this collaboration, it is corporates who have the most to look forward to – with the prospect of seeing the days of dividing portfolios consigned finally to the past.