The global factoring business of $600 billion has been registering an impressive growth over the past 25 years. The players and beneficiaries of this product include banks and FIs, and sellers and buyers of goods and services. Like other financial products, factoring is a highly knowledge-based and service-oriented business. By design, factoring encompasses multi-locational complexities bridging transactions between Client1 and Customers2 located in different parts of the globe or within the same country. Therefore, reliable and timely market intelligence, and flexibility to process transactions of growing complexity, are of critical importance.

In this article, we shall examine the issues which factoring software must address. Guided by the market demands of users, the focus is on risk management and finer pricing, market intelligence, structured deals, multi-locational transactions, and legal and operational complexities.

Risk Management and Pricing
Factoring as a business is reliant on the ability to gather information from various sources. The decision to contract any risk is dependent on information of both objective and subjective nature. This is the key to the successful ability to accurately price products and manage risks. Consequently, inadequacies in this process can also have a far-reaching adverse effect on the business. "Close to cash" status is the most desirable aspect of working capital financing. However, traditional working capital financing does not always pass on the benefit of this transition of risks within the working capital life cycle to the borrower. It is also experienced that working capital financiers may not always differentiate their pricing and risk management methodologies between financing raw material, work-in-progress, finished goods and receivables.

The result can often be indifferent pricing or lack of benefit to clients, either because working capital financiers may choose not to do so, or because they do not have the tools available to them to monitor and track such transition of risks. Risks are dynamic and change over time, hence the need to also respond on a dynamic basis. Contemporary factoring software will provide improved monitoring techniques and early warning indicators to provide better pricing and risk management tools.

Today’s factoring software should identify risk elements of the business, categorize, differentiate and offer mature analysis to price risks competitively. For example, a particular transaction pertaining to a seller and a buyer based on the credit scoring of the buyer is plausible.

Market Intelligence
Market intelligence is understood and used by the financial services industry and corporate sector in many different ways. Whilst product pricing by the seller has to factor the real credit period and associated risk with regard to the buyer(s), a financially disciplined buyer with a sound vendor policy practice will demand finer commercial terms from his business associates. From the factoring institution’s perspective, there is a compelling need to differentiate the deals of the seller with individual buyers having varied vendor policies and financial discipline.

There is a critical need for software deployment to be designed to institutionalize the collective knowledge base of the factoring institution. The subjective—and perception-based business decisions should be refined over a period of time in the organization. The software should carefully assist the line managers to take finer decisions based on actual facts and more such decisions and experiences should be brought back by the software to refine the knowledge base further.

Structured transactions: Market focus
Today’s competitive and complex corporate business brings enormous challenges to factoring institutions not only in terms of speedy turnaround of financing requirements but also in their ability to provide and support case specific tailor made deals. Factoring institutions that equip themselves in a proactive manner to support these requirements will see their business growing. Whilst it can be safely assumed that factoring institutions have many resources available to them, lack of customer focus in the deployment of software impacts the business adversely.

Challenge of multi-locational networks
It may not be physically possible for the client or the factoring institution to be physically present near the customer all the time, whereas service standards cannot fall short of user requirements at any time. Today’s software will have to be designed to make available all the information both to the customer and the agent of the factoring institution who is in physical proximity, so as to enable completion of the transaction by collection, furnishing clarifications as required and so on.

Legal and operational complexities
Every deal of the factoring institution brings in substantial legal issues. Different requirements may need to be satisfied at various stages of the transaction. A mature software will recognize this need and will capture all these complexities.

Strategising Software Technology
The ability and use of software as a resource is often underestimated. It was perfectly all right as long as software was considered as a tool to automate processes and address operational issues. However, with the evolution of business complexities and competition, it is only natural that the business should, and will, place greater demands on various resources, including software.

Therefore, it is essential to look for certain critical features in the software, such as:

n Risk oriented of the finest nature: The software should have been designed to identify various risk elements of the business, categorize and differentiate and offer matured analysis to price the risks competitively. It should alert the decision-making system adequately to take finer and competitive decisions.

n Self-learning: Software deployment should be oriented towards the institutionalization of the collective knowledge and experience base of the factoring institution. The software should be deployable to assist the line managers to take finer decisions based on a collective knowledge base.

n Market focussed: The software should aid full cycle tailor made solutions offered by the factoring institutions.

It is essential that top management of factoring institutions, as well as end-users, are involved in acquiring the right software product. It should be ensured that vital market intelligence is provided for conducting the business effectively. Whereas both the users and the software providers normally play down these softer, but strategic features, justifying them to be built in future, which never comes.

In short, demand more from this critical resource called software technology!

Article by Manoj Kunkalienkar, executive director and president, ICICI Infotech
1 Client refers to the seller of goods and services.
2 Customer refers to the buyer of goods and services.