CONTEMPORARY FACTORING SOFTWARE: Relevance and Urgency

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.