In a recent roundtable discussion with industry leaders, we embarked on a deep exploration of the potential synergies offered by combining some operations of asset finance and receivables finance.
A dualistic approach promises the ability to reach new customers, build stronger client relationships, and manage risk more effectively. However, it also presents operational complexities that demand careful consideration and strategic planning.
Our discussion yielded valuable insights across several key areas. I’ll explore them in the article that follows.
Product Line Extension: A Strategic Imperative
The first critical area that emerged from our discussion was the concept of product line extension. Here, we agreed that the path to success depends heavily on the nature of the existing finance business.
For new finance businesses, the possibilities are wide open as they have the unique opportunity to adopt a client-centric approach that involves developing a more cohesive product set that meets the diverse needs of clients. By engaging in data-empowered dialogues with clients, these businesses have the potential to establish long-lasting and profitable relationships and the agility to pivot toward a more comprehensive suite of financial products, tailored to individual client needs.
In contrast, traditional businesses may face challenges when transitioning to a more diversified approach. Legacy systems and a historical focus on single product sales can be significant roadblocks and these businesses may find it easier to maintain their focus on monoline products.
Monoline products, due to their singular focus, allow for tighter sales and operational alignment and can result in reduced management costs and a decreased need for staff expertise in a breadth of financial products. These more traditional banks and lenders could leverage their existing core competencies, provided they can manage the inherent challenges of diversification.
Cross-sales Challenges and Opportunities: Data as the Key
The second key area from our discussion centred on cross-sales between asset finance and receivables finance, along with the underlying challenges and opportunities. The view from the room was that cross-sales between these two financial realms would be anything but straightforward. The fundamental differences between the transactional nature of asset finance and the more relationship-based invoice finance, present significant challenges.
The consensus was that, despite considerable effort, there had been limited success in cross-selling asset finance to invoice finance clients. The distinctions between these products and the skills required to sell them presented barriers to cross-sales.
One notable challenge was the scarcity of skilled sales professionals who could effectively market both products. In some cases, it was noted that sales prejudices existed, with a historical perception in the asset finance market that invoice finance was typically sold to companies facing financial difficulties.
Furthermore, the growth of the broker market and fragmentation of sales organizations posed additional challenges. Brokers, while recognized as valuable intermediaries, often lacked the scale and financial strength to invest in staff development or feared staff being poached by competitors once trained.
Operational Synergies and Rationalization: Balancing Complexity
The third key area of discussion revolved around operational synergies between asset finance and invoice finance. The challenge here is to carefully realize these synergies without succumbing to the temptation of attempting to "jam" the two product types together. A hasty approach would yield only marginal operational gains while potentially erasing significant specialized processes and practices.
Invoice and asset finance represent fundamentally different processes and behaviours within financial companies. While there are some functions that can be shared between them, such as financial onboarding procedures involving Anti-Money Laundering (AML) and Know Your Customer (KYC) checks, this isn't the case for the majority of the other aspects.
For instance, automated credit assessment constitutes only a fraction of the risk analysis conducted by invoice finance companies and some components, such as concentration risk analysis, are not transferrable. In addition, understanding and managing the unique risks and value associated with each client is a core competency of invoice finance companies.
However, some areas do show promise for consolidation. A single Recoveries team, for instance, can work effectively across both product types. The recovery process requires a consistent outlook, making consolidated resources valuable for improving client insights and successful debt recovery.
Furthermore, sharing data between the invoice and asset finance functions can offer significant value to both operations. For example, invoice finance data can be utilised to identify potential asset finance arrears situations earlier, resulting in more effective exposure management.
In conclusion, our discussion shed light on the intricate dynamics of combining asset finance and receivables finance. Key takeaways emphasize the importance of a client-centric approach and the effective use of data, and the differences in leveraging data between invoice finance and asset finance functions were evident, with the former excelling in adding value to client relationships through frequent interactions.
Operational synergies exist but should be approached carefully, considering the unique aspects of each finance product. Data sharing can offer value to both operations, particularly in early risk detection, but merging them hastily could result in marginal gains while losing specialized processes.
In this rapidly evolving financial landscape, success not only hinges on striking a delicate balance between embracing new strategies and honouring traditional strengths but also a firm commitment to putting customers first.
***
Author: Steve Taplin
Editor: Iain Gomersall