articles by xbridgers
Niche Commercial, November 2003
The FDA recently announced that the invoice finance market grew 11 percent over the last 12 months. On the surface this appears to be great news for the industry and a clear indication that invoice finance, as a funding option, is growing and gaining the wide spread acceptance it demands.
Digging deeper, however, a clearer picture emerges. The total amount funded grew by 11% across all product ranges but the volume of funding in the domestic factoring market only increased by 4% over the same period. The domestic factoring market is one of the largest indicators of growth as small users of factoring facilities grow into large users of more complex invoice finance facilities. In addition, the volume increase in the discounting market could be put down to banks looking to pre-empt Brumark implications.
In this series of articles I explore the responsibilities of each of the major stakeholders of this industry in actually creating increased demand at source.
How the Banks Can Grow the Invoice Finance Market
The invoice finance market is dominated by the "Big 4" banks. As the banks are the first line in recruiting new invoice finance customers, everyone else eats the scraps from their plate.
The source of their leadership is their branch networks -- where each derives up to 90 percent of their new invoice finance customers. Some of the invoice finance divisions of the Big 4 have closer relationships with their colleagues in their branches than others. Most will agree that not enough is being done to identify prospective factoring customers amongst existing bank customers. Focusing on capturing the value from each branch and from each banking relationship relies on quality communication, good levels of product awareness and improved IT systems and processes.
For too long the banks have relied predominantly on their branch network alone to hit base line targets while other channels are neglected as merely extra gravy on the meat. More effort must be made in both cultivating existing bank customers as well as marketing directly through non-bank channels. In the current climate sales targets now dictate this.
Active Bank Managers Are Key
Bank managers originate most new prospective invoice finance customers. They should be the largest growth driver in the medium term. There are two major barriers to this happening: the lack of product knowledge and the lack of incentive to sell the product.
Many bank managers are compensated based on overdraft lending volumes, bringing in the factoring division of the bank only when this facility cannot be extended further. Such behaviour is a major disconnect for the bank as the invoice finance facility is frequently more lucrative to the group. Misaligned rewards dictate that the factoring sales manager often never sees the prospective client. Greater balance in internal bonus programmes is required to ensure bank managers appropriately position invoice finance products with their customers.
Assuming a factoring line is appropriate can we assume that the bank manager is knowledgeable enough about the product to articulately suggest such an option? When he is knowledgeable, can he properly vet the customer?
Modelling the typical factoring customer and applying such a model would enable the bank to more efficiently target customers with a propensity to require the product. Providing the bank manager with such a means for testing a customer's circumstances via an appropriate filtering process would allow highly qualified leads to be passed to the factoring division. This is a practical use of IT in sales lead generation and management.
Communicating Effectively with the Prospective Customer
Factoring has always laboured under the general misconception that any company using the product must be struggling. This view has been consistent over the years but few banks do enough to challenge this when communicating with potential customers. When was the last time you read a positive or non-defensive article on product or the industry in a national paper targeting business owners and managers? The industry's PR message is not being heard.
Individuals within the industry have tried to attack this problem -- executing some excellent brand building and product awareness campaigns. But due to a lack of support from the other major players, these initiatives ended. Banks should work more closely together to change the public face of this product. By growing the invoice finance market for everyone their own (substantial) slice of the pie can grow significantly.
One major stumbling block in going direct has always been the needs based driver underpinning this product. Why would you want a factoring line if you have enough working capital or enough on the balance sheet to achieve your goals? This forces one of two things: a blanket approach which targets everyone regardless of their specific needs or a highly creative way of targeting prospects.
Successfully Segmenting Prospective Customers
The blanket approach is still tried by some, but acquisition costs are frequently prohibitive. Meanwhile targeting, as a science applied to most channels, is frequently inaccurate. This is another opportunity for technology-based solutions and developing IT based channels such as the internet.
Increasingly the websites of some banks are becoming more intelligent in their functionality. The key is applying intelligent segmentation technologies. This segments potential customers on both their appropriateness for various products; then filters based on readiness to transact. Such advanced processes are already being effectively used by several banks to source quality leads from both bank and non-bank customers. Quality can be further controlled effectively by ensuring the underwriting teams build their underwriting logic into filtering processes.
Bridging the disconnect between the underwriting and sales departments enables better communication by bank sales teams with brokers. Trial and error periods would be minimised while Brokers would be able to more effectively segment their lending panel, putting their client in front of the bank with the best product and service level for their needs.
Better segmentation resulting in a proper product differentiation could also reap rewards. In depth knowledge of an industry and its funding needs combined with empathic understanding between the sales team and their potential customers leads to an improved product and customer service. Lloyds TSB Commercial Finance's recent acquisition of CashFriday, a recruitment industry financier and back office solutions provider, and Resource Partners' growing success in the healthcare industry illustrates the potential of this type of product and requirements understanding.
Summary
The size of the invoice finance market is far from where it should be. Banks have a key role in bringing new customers to the market. . This will only be achieved with better and more active branch managers, more effective customer education and an improved customer segmentation process.