articles by xbridgers
Business Money, April 2004
The UK invoice finance industry has changed dramatically over the past decade. Most independent invoice finance houses have not changed their business models to reflect the new realities of the marketplace. As a result, their margins are steadily eroding and their long-term viability is under threat.
Independent factors face an increasingly tough fight to pry customers loose from incumbent banking relationships. When the industry's largest competitors were independently owned, pricing a facility was necessarily based upon the costs of underwriting that facility on a stand alone basis. Today's bank-owned factors enjoy large operating scale economies and increasingly take a holistic view of their customers. To retain a bank customer, invoice finance margins can be reduced and subsidised by the customers' other business with the bank. Increasingly, if a customer churns from a bank facility, it is because the bank no longer wants the customer.
Compounding the problem for independent factors, most lack truly unique customer benefits. Consequently, they compete primarily on price and intangible benefits (e.g., account-to-manager ratio) not fully appreciated by potential customers. The banks respond by matching the independent's pricing, and retaining the customer. No business moves, but margins narrow.
The Internet has made these changes more transparent. Over twenty factors now provide quotes to potential customers online. Last year thousands used this service to find appropriate factors and compare their offerings.
A popular misconception is that online aggregators focus on price. Instead, like traditional offline brokerages, recommendations are generated to maximise long-term income and quality of service to the customer.
Online marketplaces incorporate into their recommendation algorithms extensive empirical data that helps predict which factor will maximise long-term revenue from a given customer. Attributes such as historical conversion ratio and expected churn ratio (a proxy for customer satisfaction) for a given customer profile are used.
The result is that human subjectivity is removed. A more level playing field is created. Consequently, the factor best targeting a specific borrower profile with a well presented proposition will garner the most new business for a given customer profile.
Such improved transparency requires progressively more differentiated product offerings. Competing for "vanilla" invoice finance business is tough and will get tougher. Margins on this type of business will also continue to erode. Many independent factors have competitive strengths but may not be doing enough to harness them. These must be actively cultivated and turned into unique customer benefits.
A few successful precedents exist. Companies such as Resource Partners and CashFriday have clearly differentiated product offerings.that go well beyond traditional financing and ledger management services. Critically, they have also developed an empathic understanding of a company owner within their respective industries. They uniquely offer advice and solve customer problems. .
The old business models of most independent factors need to adapt to current market conditions. Better differentiation is essential to long-term success. For many the know-how exists within the organisation already. Leveraging that expertise will be key to successfully maintaining -- and possibly even growing -- margins.