Open trade finance is a lower cost, simpler, and quicker alternative to dual factoring, or the 2 factors system. In this article, Josep Selles, executive board member of FCI and pioneer of the 2 factors system discusses the relative merits of open trade finance (or what is referred to by FCI as “direct export factoring”) and dual factoring.
This article first appeared in TRF News and has been reproduced with the kind permission of the publisher. The original article is behind a paywall: link to original article. The TRF News website is available here: TRF News. Josep Selles is an Executive Committee member of FCI: link to FCI.
And here is the article:
Josep Sellés, Editorial Board Member of TRF News and International Executive at Exicon Consultaria em Credito e Cobranca Itda, makes a comprehensive analysis on the development in time of two factor system, where we stand today and what the future will bring.
I am worried, and I probably should not be. After all these years working in the financial sector, I have experienced many changes in the markets products, practices, systems, etc; thus, I should be used to living with these changes.
Today I’m referring to the 2 factors system (2FS). When I started working in factoring, over 25 years ago, international factoring could only be carried out, in 2FS, thanks to international chains such as FCI, mainly, but also IFG. Every factoring company, willing to offer export factors to its clients, needed to become members of the chains that facilitated the development of international receivables finance that made it accessible to each factoring player to become part of it. Nobody could imagine handling an export deal without counting on the help of a correspondent, in the debtor’s country, to cover the risk and to provide collection service. A realistic alternative did not exist.
As I have already said, time goes by and like a wonderful movie, some products have ‘Gone with the Wind’. Will 2FS be one of these products?
What has happened? How have we reached this present situation?
There are different elements that have led us to today’s situation. Although, I now realise I did not explain which situation this is.
Every year, more and more factoring companies are offering export factoring based on their own resources, what we know as direct export factoring, ignoring the possibilities, the services, that a correspondent may offer you. Additionally every year, although the volumes of 2FS grows it is in moderate percentages, while the strong growth of the direct business is winning market share, year after year.
Old and mature factoring markets have completely abandoned the use of 2FS. More than 90% of export is negotiated via direct factoring, and very small percentages through 2FS used to be the answer of the big factoring players in the market.
During many years, export factor has been kept captive on the import factor conditions. The fact that the export factoring company must quote their client a price for domestic factoring and another one for export, was usual.
Which services an export factor received from an import factor?
Credit coverage, certainly, but at a high price. Commissions of 0,5%-0,7%, or even more, where usual, what made that the final price to the client too high, and not very competitive.
And how was the credit coverage? Normally, it was very restrictive. I do not want to criticize it. I was also operating as import factor those days and I did the same in this aspect.
Another service was collection. Was it good? Normally not. The import factor only started collection actions towards debtors a couple of weeks after the original due date, and the first claim was made by mail, not email. So luckily you (export factor), received information about the status of the payment one month later and what you had was exactly this, information, not necessarily the payment. Maybe at that time you discovered that a commercial dispute is raised or a credit note, etc.
Subsequently, when the import factor received the funds from the debtor, the transfer of funds to the export factor was not made quickly. Most of the import factors concentrated all the fund transfers to the export factors once or twice a week. If you add the weekend, in-between, the result is that funds were transferred, at least, one week after being received.
In the meantime, the world was turning around and other actors in the market were developing and improving their service.
Probably what has triggered the change was the excellent performance of the credit insurers, reinforcing the eternal dilemma: partner or competitor?
Are they perfect? No, far from it. But certain aspects are much more competitive than the import factors. They do not cover the 100% of the invoice value. True the import factor does cover 100%, but export factor was tired of waiting to receive the decision of the credit cover several days, even weeks after the request, putting the service completely out of the market. How we can justify such delays when we talk about a debtor located in a developed market? And how could we justify it when the client is charged with a high commission? An export factor will receive a credit coverage of 85/90% from a credit insurer but will know the decision on the credit cover quickly. The final price that they will be able to offer to the client will be much more competitive than the one in 2FS.
Still there are countries that need to use the 2FS. Essentially, the countries in which the credit insurance is not developed yet, are countries where the possibility to get the real financials, of companies, are difficult or simply impossible. This also applies when this is the situation in the debtor’s country. But in this case, to cover the credit line will also be difficult for the import factor as it will have difficulties, like the credit insurer, to reach the real financials of the debtors.
I do not want to go into the details. I would like to talk about the future, about what I understand the future will be.
FCI is, nowadays, practically the only defender and promoter of the 2FS in the market. FCI is an organisation with a clear structure, with an Executive Committee and Technical ones: Legal, Education, Marketing and IT. More than 400 members in 90 countries that help in knitting a network to facilitate the deployment of 2FS.
And as member of the Executive Committee of FCI, I’m committed in achieving this goal. But, at the same time we must be aware of the situation, we must identify our weaknesses and fix them, otherwise today’s tendency is not going to change. On the contrary, it will increase which will release the 2FS to a marginal position in the market and, importantly, reduce the need to become member of a worldwide factoring chain, as companies are not going to use its services.
But, to make 2FS again a realistic alternative we need the will and commitment of the companies. They are sovereign in their decisions and we, as a chain, cannot force anyone to do something. We can always try to influence or suggest, but the real job must be made by every individual company and I’m not sure if they are willing to do it.
Are we still on time to stop and reverse this tendency? I do not know. And this is the reason why I started the article by saying that I’m worried, because I really am.