Despite volatility across much of the world, the global factoring industry has continued to grow for three straight years. In fact, according to the FCI 2024 annual review, the estimated volume for global factoring in 2023 reached €3.79 trillion.

What is the industry doing to continue to promote growth, what role does FCI play in these initiatives, and where are the further market opportunities?

At the 56^th annual FCI event in Seoul, Neal Harm, Secretary General, FCI, was joined by Doaa Hafez, Executive Committee Member, FCI, to dive deeper into these topics.

Regional similarities and differences 

When it comes to factoring, there are many regional differences, as well as many commonalities across markets. One example from Egypt is from the beginning of the adoption of international standards. 

Regulators and stakeholders in Egypt realised early on the importance of adopting international standards in the factoring industry. 

This required extensive customisation to suit the market. Hafez said, “It depends on the readiness of the market, the infrastructure, the legal and regulatory framework, the culture, the economic and financial circumstances.” 

By taking lessons learned from international experiences, the industry can tailor specific needs for the domestic market, regardless of how unique the needs may be.

Technology and factoring growth go hand-in-hand

Part of the process to bring factoring to domestic markets and properly customise the market experience is utilising the correct technology.

And FCI was one of the first fintechs in the trade finance space to help with this, dating back to nearly 50 years ago.

Hafez said, “It is a very good selling point, even in developing markets. When I am approaching new prospects, I say that we are an FCI member, and FCI has invested a lot in a brilliant platform, Edifactoring.” 

Edifactoring is the FCI members-only platform, operating for more than 20 years. But Edifactoring 2.0 was released in 2022, creating a two-factor platform that helps bridge the foreign languages and local laws gap by allowing local factors to communicate with each other in one safe and transparent place.

In order to stay up to date, FCI invested a further €1 million into the Edifactoring platform to incorporate other supply chain finance solutions. This has been very successful as the platform is able to cater for multi-currency transactions across many compliance landscapes. 

Hafez said, “This is one of the selling points of what we are doing inside Egypt. We want to offer this type of product to SMEs, corporates and other stakeholders to help them better understand.” 

With supply chain finance being so ubiquitous, Edifactoring’s integration with new and traditional factoring products is crucial. Because of this, there is a high demand from FCI members for IT solutions focused on risk prevention and fraud, as well as the development of ecosystems that connect sellers, buyers, funders, banks, and non-bank financial institutions.

Hafez said, “The future will be going in this direction. Combining traditional ways of doing business with new technology.” 

Linking factoring and supply chain transactions 

Opportunities for factoring in supply chain finance are significant, particularly in terms of open account finance. Increasingly, there are cases of banks integrating factoring transactions into supply chain financial transactions. 

Nevertheless, many continue to see them as separate products. But that is not the case, and there needs to be an effort to explain this to all parties involved. 

Harm said, “Many banks and financial institutions view the products as separate, that factoring is separate from the supply chain. But here at FCI’s annual conference, we’re starting to hear that integration can work, and how a factoring transaction becomes a supply chain transaction.”

Having the flexibility to understand what the market needs, and how to utilise all available solutions is the key to gaining more support with banks, both domestically and internationally.

Hafez said, “We can do the service side, they can do the funding side, or we can even have this type of collaboration with the corporate buyer because now the technology is part of their system.” This is moving towards a state of “embedded finance” that is particularly beneficial for small and medium sized enterprises (SMEs). 

Hafez said, “We have to be so energetic, smart, understanding, and have the expertise to provide tailored solutions. Because of our relationship with FCI, Egypt Factors developed a great and early understanding of the market. This has given us the leverage to do what we are doing right now.” 

This educational perspective is one of the key value propositions FCI offers its members, enabling them to truly understand market opportunities. 

A real-life example of this is deep-tier supply chain finance. Whilst deep-tier supply chain financing is not yet a widespread concept, its growth presents an important opportunity for the sector. 

However, due to the buyer-driven market, an increasing number of Egyptian exporters are becoming aware of deep-tier and embedded financing and the associated benefits.

By integrating elements across IT platforms in enterprise resource planning (ERP) solutions, companies have been able to provide deep-tier financing in a complete solution across supply chain finance to great effect. 

Fostering partnerships on a global level

According to Harm, Africa is one of the most exciting markets for the use of deep-tier supply chain finance. Harm said, “When considering deep-tier financing, Africa offers some of the largest opportunities.”

Hafez said, “The African market is the potential of the growth of factoring.” However, to leverage this opportunity, more stakeholders must actively engage with one another. 

This effort requires the collaboration of supranational banks, regulators, financial supervisors, and commercial banks, given the broad and varied opportunities and challenges across the continent.

Hafez said, “For us to be able to do business in Africa and to grow the factoring business, we have to connect with supranational banks, regulators, and other commercial banks, to get one big solution across the board. And this, of course, will be supported by a digital platform. Digitalisation here is key.” 

More specifically, FCI is positioned for great opportunities in terms of bringing partners – whether banks or non-banks – together at the global market level. 

Hafez said, “Because the legal and regulatory framework and credit insurance are still difficult to find in most of the African markets, having the Model of Law coming from a supranational bank will help, the adoption of the Afreximbank model of law is a leading example, as well bank guarantees. By leveraging the Afreximbank or EBRD Trade Facilitation Programmes, the deal becomes much more comfortable.” 

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In April 2021, the world of football was rocked by the announcement of the European Super League (ESL), a proposed elite competition that sought to permanently place Europe’s top football clubs in a closed league. 

The plan – met with widespread criticism – was seen as a move that prioritised financial gain over sporting merit, threatening the inclusive nature of the sport by potentially leaving smaller clubs and their fans behind. 

This incident serves as a parallel in the world of finance, particularly within the factoring industry, raising pertinent questions about ensuring growth, resilience, and inclusivity. As the factoring sector continues to expand, significantly impacting global trade and economic development, it faces the challenge of evolving without creating disparities reminiscent of the ESL debacle. 

To better understand the principles of financial inclusion, equitable regulation, and sustainable growth in the factoring industry, Trade Finance Global’s (TFG) Deepesh Patel spoke with new FCI Secretary General, Neal Harm. 

Understanding factoring: A catalyst for global trade

Factoring is a financial service that profoundly impacts global trade and economic development. 

This service involves financing receivables, where a business sells its invoices to a third party at a discount in exchange for immediate cash, allowing the business to improve its cash flow and access working capital without needing to wait months for its invoices to be paid according to their credit terms. 

Factoring is a big business, and getting bigger.

Harm said, “It’s estimated that volumes of global factoring are over $3.6 trillion per year, growing consistently.”

This growth embodies the multiple ways that this financial mechanism serves as a catalyst for global trade growth. 

Firstly, it addresses a critical pain point for businesses, especially small and medium-sized enterprises (SMEs), which often struggle with cash flow due to delayed customer payments. By providing immediate liquidity, factoring enables these businesses to continue their operations, invest in growth, and take on new opportunities without being constrained by cash flow issues. 

Secondly, factoring is particularly beneficial in financing open account trade receivables, a common practice in international trade where goods are shipped and delivered before payment is due. 

This aligns with global trade needs, where extended payment terms are standard and can pose significant risks and liquidity challenges for exporters.

The factoring industry can tap these benefits for global markets by increasing awareness and understanding of factoring and by fostering partnerships with financial institutions and regulators. 

Harm said, “What’s interesting – and it’s history repeating itself – is how we’re entering those emerging markets today. It’s no different than 56 years ago. It’s learning about the market, advocating for the product, and educating the members on what this product is and what it isn’t. Then it’s watching it grow.”

By following this proven approach, the industry can open up new markets and support trade finance in regions where access to traditional banking and financial services is limited, helping to lift nations out of poverty and facilitating their integration into the global economy.

Expanding horizons: Factoring’s growth in emerging markets

Factoring has significant growth and potential in emerging markets, underlining its vital role in enhancing economic development and facilitating trade. 

Harm said, “If you think about the African region or the Southern Asian region, particularly India, there’s a huge opportunity for growth as they mature with open account finance.”

This opportunity lends itself to the evolving understanding and adoption of factoring as a crucial financial service that supports businesses in managing cash flow and accessing working capital efficiently.

A key aspect is the exponential growth potential of factoring in these markets, propelled by increasing trade volumes and the need for alternative financing solutions that complement traditional banking services. 

The growth of factoring in developing regions is not just a function of the expanding global trade but also a result of deliberate efforts towards education, advocacy, and the establishment of supportive regulatory frameworks that recognise invoices as investable assets. 

Harm said, “It’s complex and it requires coordination between banks, financial institutions, and regulatory agencies. With all of those groups working together, we can figure out the best way to make an invoice into an investable asset –  the regulations we need to put around it, how we secure it, and how we bring liquidity into the market to support it.”

Moreover, the strategic partnerships between global institutions like FCI and other local stakeholders can help to foster a deeper understanding of factoring and are crucial in creating an ecosystem where it can thrive by aligning businesses, financiers, and policymakers.

Vision and challenges ahead: Insight from FCI’s new secretary general

The FCI’s mission is to ensure the resilient, sustainable, and inclusive growth of factoring on a global scale. Central to this objective is the recognition of factoring as a financial tool and a vital component of the global trade ecosystem that can drive economic development and alleviate poverty. 

Harm said, “It comes down to awareness, advocacy, and education. That’s what FCI is there for. For us to be aware of what’s going on in the market, advocating as we see something happening, and then educating as fast as we can, to bring people up to speed.”

Recognising the challenges and opportunities of regulatory changes and economic trends, FCI positions itself as a voice for the factoring, open account and trade finance industries, engaging with policymakers and stakeholders to advocate for regulations and policies that support the growth of these markets. 

Through these efforts, the organisation aims to address potential challenges head-on, such as those arising from European late payment regulations, by promoting awareness and education, which can lead to more informed and constructive policy-making.

At the heart of FCI’s vision is the desire to see factoring and open account receivables recognised as a critical element of the global trade finance landscape, capable of driving significant economic benefits. 

Harm said, “I want FCI to be three letters that come immediately top of mind when someone is thinking about open account. If we’re talking about a receivable, the transaction, the financing, whether you’re a bank, whether you’re a regulator, we’re part of that conversation.”

This vision is not only about fostering growth in the volume of factored receivables but also about ensuring that the benefits of factoring are widely and equitably distributed, supporting businesses in developed and emerging markets alike.

Just as the football world united against the exclusivity of the ESL, the factoring industry must embrace inclusivity, ensuring no small player is left behind in the pursuit of global economic progress.

Putting the idea into practice, FCI is hosting their 56th Annual Meeting in Seoul, South Korea from 9-13 June, bringing together all global professionals to further the discussion into factoring and receivables finance.

For Harm, this event offers the opportunity to grow the industry. He said, “A big part of the event of awareness, advocacy, and education… It’s to have time with each other, learn how to do business and how to make money together. And again, to take that friction out of the transaction as it goes cross-border.”

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There are more similarities between football and factoring than one might think.

Both are delineated from other concepts. Rugby and football came from the same game (officially delineated into 2 sports in the mid-1800s). The original idea has spawned a lot of other similar things that achieve this same initial goal. 

Likewise, factoring has spawned many other means of financing trade, like invoice financing, open account financing, and payables financing.

But, factoring is older than football.

The origins of a rudimentary form of factoring have been traced back to ancient Mesopotamia 5,000 years ago, while the first known example of a team game involving a ball only dates back 3,000 years to Mesoamerica.

Both have morphed and changed over the millennia, and the rules, standards, and norms clearly defined today would be nearly unrecognisable to those ancient pioneers. 

Despite these changes, the modern editions of both remain true to their original purposes: the entertainment of the people and the financing of global trade.

The advancement of both football and factoring in the modern era is thanks to the associations that developed the rules and promoted each.  In football, it is associations like the NFL, EPL, La Liga, and many more. For factoring it is FCI – the global representative body for Factoring and Financing of Open Account Receivables.

Today, factoring and other related methods of financing trade – like invoice financing and open account – have become even more crucial to the global economy and essential for businesses to manage cash flow and liquidity.

This article examines how innovation and regulatory measures intertwine within the factoring sector, focusing on the essential fight against fraud to encourage worldwide economic expansion. 

It shows the significance of advanced financial solutions and regulatory policies in creating a resilient and transparent market environment. Furthermore, we need to discuss how these efforts not only mitigate risks but also pave the way for sustainable growth in international trade.

More than just factoring

When it comes to financing trade, the evolution is evident in the diverse applications and challenges financiers face across different global markets. 

With its mature factoring and invoice finance market, Europe grapples with issues arising from late payment regulations. Conversely, Africa sits at the opposite end of the spectrum, representing an emerging market where the foundational structures for factoring are still being established, indicating a significant growth potential. 

Organisations like FCI are pivotal in navigating these varied landscapes, emphasising the importance of tailoring approaches to fit each region’s specific needs and opportunities. 

Rather than applying a one-size-fits-all strategy, our team at FCI focuses on understanding and addressing the unique circumstances of each market, highlighting the dynamic and adaptable nature of modern trade financing. 

This approach facilitates continued development in established markets and supports emerging markets in advancing their financial infrastructure, showcasing the industry’s broad and evolving impact on global finance. 

In recent years, one of the main priorities for the global financing industry has been preventing fraud.

Fighting financial fraud

In global trade finance fraud prevention is paramount, which has led regulators to develop laws and rules that govern these transactions in order to maintain fairness and integrity across the market.

Merely having these rules, however, is not enough. Effective enforcement is just as important. 

FIFA, the international governing body for football, has a 144-page rulebook that establishes what is and is not allowed on the pitch, but the efficacy of those rules lies in having a referee on the field to enforce them.

The same is true for the financial sector. While the laws exist, vigilant monitoring is still required to detect and prevent fraudulent activities and technological advancements and innovative approaches to governance are making this easier.

MonetaGo, for example, provides a fraud prevention solution for trade by leveraging digital technologies and a registry-based approach that assists financiers with validating transitions and authenticating trade documents.

Such advancements are similar to the Video Assistant Referee (VAR) systems used in professional football matches that help catch the infractions that even the best referee is bound to miss.  

In the fast-moving world of invoice finance, where assets and payments change hands quickly, instantly detecting and addressing duplications or other forms of fraud is invaluable, as MonetaGo has shown with our experience in India. 

Case study: India

MonetaGo’s experience in India has underscored the invaluable nature of being able to instantly detect and address duplications or other forms of fraud within the financial sector. 

The introduction of regulatory reforms that have enabled non-banking financial institutions (NBFIs) to offer factoring services and the establishment of the International Financial Services Centre Authority (IFSCA) in India’s GIFT City (“Gujarat International Finance Tec-City”) have been pivotal. 

These reforms have catalysed the adoption of technologies that authenticate commercial invoices, fostering an ecosystem of trust and reducing the incidence of fraud through duplicate financing.

The ability to validate commercial invoices in real time has enhanced the confidence of market participants and directly contributed to increased liquidity within the sector. This is largely due to the reduction in losses that typically result from fraudulent activities, showcasing how technology can serve as both a deterrent and a mitigation tool. 

As MonetaGo is involved with many of these processes, we’ve observed firsthand the positive impact that regulatory bodies have had in shaping a safer market environment. Our proactive approach, combined with the deployment of Deduplication solutions, has been instrumental in this transformation.

The next steps for India involve scaling these successes to further enhance the financial ecosystem. The aim is to increase financing volumes significantly, thereby supporting economic and industrial growth across the country. 

While the main value of this approach has been in curbing duplicate financing fraud, it also has the added benefit of establishing a precedent for financial institutions globally to adopt similar measures.

As the Indian case study shows, one way to do this is by leveraging public-private partnerships and continuing to innovate in fraud prevention and detection. 

Public-private partnerships for fraud prevention

Public-private partnerships play a crucial role in combating fraud and fostering innovation in financial solutions. 

These partnerships involve regulators, government agencies, international organisations, and the private sector collaborating to address financial fraud, and often, the dialogue centres on removing barriers to data access and adopting digital solutions to ensure safer, faster, and more cost-effective financing. 

A significant aspect of these initiatives is the focus on resolving the issue of duplicate financing, which is a prevalent form of fraud where trade documents are financed multiple times by different financiers. This challenge strains the entire ecosystem, leading to losses and undermining trust in the financial system. 

Local and international registries play a crucial role in preventing duplicate financing and verifying the authenticity of trade documents. Local registries were established to address this challenge; however, they encounter similar limitations to those faced by diverse electronic Bill of Lading (eBL) offerings when scaling internationally. 

Digital islands only cater to specific communities, and achieving connectivity to all domestic registries globally to resolve cross-border fraud is both costly and demands a standards-based approach. Swift entered the scene by providing the MonetaGo Global Hash Registry through its API gateway to all 11,000 Swift members worldwide. This initiative is specifically designed to address the challenges posed by fragmentation. 

At FCI, we are actively involved on multiple fronts, engaging with regulators and collaborating with a wide range of stakeholders in the financial industry. Our goal is to share the best practices and innovative solutions we’ve observed across different markets. 

By positioning ourselves as a neutral intermediary, we’re able to facilitate the adoption of strategies that are not only effective but also tailored to fit the unique legal and cultural nuances of each market.

Too good to not be true

A financial industry best practice that benefits all parties on the value chain by simultaneously derisking liquidity and increasing financing may seem too good to be true, but that is exactly what these fraud detection solutions can provide.

Leveraging public and private sector partnerships can enrich the strategic capabilities needed to bring these solutions to fruition and allow them to grow and develop. 

FCI has our roots in factoring, which is still a significant focus, but we have also evolved with the needs of the market to become a leader in other financing methods like open account and receivables financing. This experience can provide invaluable independent support towards establishing such initiatives.

Continued collaboration will be key to successfully preventing future financial fraud in the world of global trade. 

After all, it takes an entire team to win a football match. 

The post Football, factoring and fraud: Kicking out the bad actors, creating rules and standards appeared first on Trade Finance Global.

As the factoring market continues to flourish, the growth of the industry is evident in the evolution of FCI as an organisation. This development is not merely a consequence of a thriving market but rather a deliberate orchestration to unite the industry under a common vision of excellence.

FCI has played a proactive role in shaping the growth of the factoring industry, setting standards, and envisioning a future for the market. 

By collaborating with policymakers and key stakeholders across the globe, promoting best practices through comprehensive education, and establishing industry-wide frameworks, the organisation has rightfully earned its position as the global voice for open account receivables finance.

In this video, Neal Harm, (incoming) Secretary General of FCI, sat down with Peter Mulroy, (outgoing) Secretary General of FCI and Daniela Bonzanini, (outgoing) FCI Chairwoman reflect on the organisation’s evolution, strategic initiatives, and the future of factoring.

A decade of transformative leadership

Over the past decade, FCI has strategically navigated the growth and development of both the factoring industry and the organisation itself. 

A key part of FCI’s transformative journey involved rethinking its membership approach. Beyond those directly involved in invoice finance, FCI has broadened its membership to include a diverse range of organisations, referred to as sponsor members. 

Today, FCI connects a broad community of industry providers and support businesses, including those from the legal, credit insurance, IT, and compliance sectors. 

Together, these members share the common goal of building business through network creation and spreading awareness. As Mulroy said, “We wanted to expand the type of members that we can bring in. We’ve not just allowed banks and non-banks, but also what we call sponsor members such as third-party providers and support institutions.” 

Furthermore, as the factoring market continued to grow, the need for FCI to scale its global presence became evident. Mulroy highlighted, “There’s no way that one or two persons can represent this organisation globally.” 

This has prompted FCI to develop outreach programs and foster relationships with entities such as the United Nations (UN), the World Trade Organisation (WTO), as well as development banks including the European Bank of Reconstruction and Development (EBRD), the International Finance Corporation (IFC), the African Export-Import Bank (Afreximbank), and the Asia Development Bank (ADB). 

Mulroy explained that this global engagement resulted in creating win-win relationships between FCI and many entities. He referenced, for instance, the 2016 merger of FCI with the International Factors Group (IFG), stating, “They were a smaller organisation than ours, but they were older. They brought new elements into FCI and helped us change the trajectory of the organisation.” 

The union with IFG created the largest association of factoring and receivables finance companies worldwide, boasting over 400 members across more than 90 countries. It also led to FCI establishing itself as a single point of reference for the receivables finance industry globally. 

Ultimately, FCI’s strategies over the past decade have steered the organisation towards decentralisation, demonstrating its commitment to collaboration, embracing diversity, and thriving in global markets. “We were a very centralised organisation. Now we’re all over the world across multiple regions,” Mulroy added. 

Chairing progress: Shaping the future of factoring

In its efforts to enhance awareness of the factoring industry, FCI has placed a strong emphasis on education. A remarkable transformation in this endeavour, guided by Bonzanini’s leadership, has been the extension of educational resources to non-members, effectively bridging the knowledge gap by disseminating information about the advantages of factoring—how it improves cash flow, mitigates risks, and supports business growth. Cagatay Baydar, the newly elected Chairman, will look to keep this momentum going.

Bonzanini, highlighting this transformative shift, said, “We now offer our educational services not only to non-members but also to individuals. Education is crucial, and through the extension of our services, our aim is not only to emphasise its importance but also to attract the interest of a wider audience.”

Another focus area for FCI in recent years has been Supply Chain Finance (SCF). The company has undertaken significant investments in SCF technology, exemplified by initiatives such as the EDIfactoring system for cross-border factoring and FCIreverse for reverse factoring. 

For instance, the FCIreverse platform not only grants members access to an operational platform for onboarding anchor buyers and both domestic and foreign suppliers but also facilitates the involvement of export factors worldwide. 

This is achieved by educating suppliers on the various benefits of reverse factoring, guiding them through the signing of local factoring contracts, providing Know Your Customer (KYC)/Anti-Money Laundering (AML) assistance, and potentially offering funding against assigned receivables upon request. 

Bonzanini said, “While the nature of factoring remains unchanged, we’ve developed additional solutions to address the needs of international businesses. Simultaneously, we’ve welcomed new members, supporting them in developing their domestic business in various countries and markets.”

By enhancing knowledge and awareness, building capacity and expertise, and leveraging technology, FCI’s strategic initiatives are thereby laying the foundation for a robust and sustainable factoring industry. 

Embracing change: The next chapter for FCI leadership

As FCI undergoes a transition of leadership, the incoming Secretary General of FCI, shared his insights into his background, vision, and the transformative path ahead as he prepares to fully assume his role in 2024.

Harm’s journey spans three decades, beginning at Bank of America. From processing invoices to leading global factoring businesses, he witnessed the evolution of the industry. He reflected, “It’s been an amazing thirty years to think back to when I originally touched an invoice, to today, having the opportunity to lead the industry globally.”

Looking forward, Harm envisions a substantial opportunity for FCI to impact corporate growth by supporting companies globally in optimising working capital through factoring.

He emphasised the fundamental role of open accounts, “Every company does open account, and the need for that working capital is significant.” This underscores open accounts as the lifeblood of businesses, with FCI positioned as a leading expert in this domain, ready to make an influential impact on corporate growth.

Moreover, Harm identified an untapped opportunity to expand FCI’s presence in the factoring business, providing crucial support to both clients and the affiliated banks. 

He said, “I want to see the percentage of us helping those corporations around the world grow,” underscoring his strategic vision. His aim is to utilise the potential of factoring to boost working capital, thereby playing an active role in the extensive growth of businesses worldwide.

Editors Note: This video was recorded prior to the election of the new FCI Chairman, Cagatay Baydar.

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