With this thirteenth episode of SME Banking Conversations, I continue the series of inspiring interviews on SME Banking, digital transformation, and people making innovations happen in the industry!
The recording of this episode took place in September at efcom’s Head Office in Frankfurt (Germany). We talked with Federico Avellan Borgmeyer (Chief Partner Officer at efcom) about the development of the factoring market, the role of technology in it, and predictions for the industry’s future.
Read my conversation with Federico below or hear it on Soundcloud:
Federico, I’m glad that we met this year, here in your office. A year passed since our last meeting. How things have changed here in Germany, and at efcom?
FAB: A lot of things have changed. We met last year, was pretty much about the same time, right? What has changed? Let’s start with Germany, I guess. As you know, the inflation rate has hiked up, but this is not the singular problem in Germany. The problem in Germany is that the inflation rate has remained high for a long time. In other European countries, it’s gone down; and we haven’t been as good in managing our inflation rate in going down as in other regions. So, yeah, political turmoil in the sense that we have parties that are not agreeing against each other. This puts a lot of strain on the German businesses as well. Probably you have read about Germany’s economy weakening and businesses getting worried about the environment, the political, and economic agenda affecting it, energy prices still being up, and stuff. Of course, this has an impact on the businesses, the economy, and therefore also on our business. However, as you know, when there is a crisis in our industry and the receivable finance industry, normally we’re doing better than others. So, this is from the macro terms in Germany and around. However, this is not only Germany because it’s affecting everyone around. If the giant is weakening, then the remaining actors, Eastern European countries, neighboring countries Germany, France, everyone is also going to feel the impact. This is from that side. However, from our perspective, last year was the best year for them. Okay. Wow. Congratulations! Thank you. We really had good numbers, and large growth, and shareholders are super happy. What we’re seeing this year, let’s say a normalization. So, the high peaks that we had last year continue this year. But we’re seeing some sense of leveling. This is not worrying at all because our pipeline is full. So, we have enough to do until 2024. Nevertheless, we look not only at what’s immediately ahead of us, but we look also, okay, 2024 is good, but what is happening after? And so that’s why we’re moving out across the globe. You probably remember what I said about efcom going global, and we really mean it. Now we have a presence in 20 cities on five continents that allow us to access the financial industry basically everywhere. And we really mean everywhere between Washington DC and Melbourne, Australia, and down to Africa and the Middle East, etc. We have a presence in all those countries, in India, which is a super exciting market. So, from that point of view, we are setting the scene for growth in areas where receivables finance has not been yet a big topic, but where we are seeing it coming. And if we’re seeing, let’s say a normalization of growth in Europe, we’re seeing fast growth in other regions and that’s why we are moving forward in those regions with partners, with people from our team, as you saw yesterday, and with product. Just to name you one, apart from our efX scalable product, we are also bringing on board Islamic finance, Islamic factoring in our case, and that’s why we think that we’re getting very well prepared for those markets we’re targeting in those growth regions. And the pipeline is full also with events through the end of the year especially in those growth areas. Also, we see Eastern Europe as a number one region, and the number two regions for us at least in growth are the Middle East and Africa, and India. So, it sounds like a lot, it is a lot, it’s a lot of work, but we are seeing the results. So, what has changed for us? Well, these are some tidbits of what has changed, as you can see.
Let’s discuss more in detail the results of the industry. After the results of the last year were published, we all have been discussing this historical growth. 18,3% globally. How do you evaluate those results?
FAB: Yeah, I. I mean, when I first saw the numbers, I was like, Oh, my God, 18.3% on a global scale. Germany is 18%. Some countries have grown much more than that. The numbers are amazing. Fantastic. But we also must see that the year before it was not so super amazing. And I think there’s a lot of catching up in those numbers. Adding on that is also we have inflation, so inflation has gone up, right? And that means that those numbers have also a lot of that portion. How much it is because it’s numbers from different regions. Germany had an inflation rate of 7.9% or something like that in total, some other countries higher, some lower. So, if we take those 18% and adjust it by the inflation rate, we see probably a clearer picture. If you look at the factoring companies per se here, at least in our client base, we can say there are a few that have really grown business. I mean, organic growth. So, let’s say in those numbers the bad news is that they have not the inflation-adjusted rates included. But the good news is that we have customers that say if we had better systems and we’re doing that with you in the implementation, by the time we are ready to go, then we feel super ready to grow our portfolio significantly. So, this is the good news that I hear for the future. However, of course, some of the players out there are struggling because competition, regulations are hitting them, and therefore if they’re not set properly then they will not make it.
Let’s talk about technology. You mentioned that it definitely has an impact and should have an impact on the growth of the industry. How do you evaluate which impact it has right now and which impact it might have next year?
FAB: We’re currently talking to a prospect nearby whom we have been talking for a couple of years. They’re super interested, and they have a bunch of IT projects that have to finish before we’re next. But he said, but you know what? The biggest challenge is afterward. Guess what? It’s not the typical implementation problem you have when you bring in a new technology. But it’s people. they said, Federico, we need to do change management. You really said that. And I was not surprised at all, because we preach that for years now. But I found it interesting that the client himself said it. You know, this bluntly. We have people that have been using the same systems for 35 years, 30 years, 25 years, 15 years, and because they’re stuck in how they do it, independently, how painful it is, they don’t want to change into something new, learning something new, getting on something new. So, change management becomes an important aspect of bringing new technology on board. So, the technology is available. The technology can be put into implementation at many organizations out there, but making the change from what you do today to what you should be doing tomorrow is preventing the diffusion of innovation, let’s call it, in the industry. Transparency and also in education and training is important. I think those are all good elements, conversation, and workshops to make people aware that there are a lot of benefits for them if they make the change. Changes are difficult and take time. From a technology point of view, of course, I mean making systems easier, the industry is super complex, by the way, this is one of the challenges the industry is also facing complexity. All those VUCAs, volatility, uncertainty, complexity. Nobody really wants to dig into the complexity of things. We discussed this before we started this recording about how it is today that complexity needs to be taken out, although the complexity in the systems to handle it, how to make it, the look and feel that there is no complexity at all knowing that it is super complex. So, making it simple for the user, knowing that there is a lot of complexity behind, but the user perhaps not required to fill in and see the complexity behind. So, this is a job that we’re putting a lot of effort into how to make complex things look not complex and make them easy to handle.
What are your predictions for this year? Where the markets will go and whether the numbers will be the same?
FAB: I think we will see some flattening. As I mentioned before, I’ve been hearing from different lines how their business is evolving. That’s, why they’re not going to see the record growth from last year. But we see many new entrants, new entrants, completely new entrants that believe in serving the market in a different fashion, especially in the SME section. Again, this is something that was not possible ten years ago, but now with the technology available, it will – press the button thing. So, we see new entrants coming in, new models, platformification being a buzzword. And this is going to change a little bit also, the product offering in the industry, so many new players will come in that were not there. So, we will have some sort of competition in the existing, but also, we will see new models coming on board, and that will add to the industry.
So, I think uh, the traditional ones are flattening, but the new ones that will enhance, will give some space in growth as well. So, we will see two different kinds of growth within the portfolio of providers and in the numbers this and next year. Next year’s actually. Yeah. And the numbers, I don’t know. I don’t know how much that is going to bring on business because of taking inflation into account. We don’t know what it will really be. But in any case, plus, plus.
Have you noticed whether the challenges have changed during the last year in the industry?
FAB: We made something, maybe funny or yeah perhaps up to date, let’s call it. So, we asked Chat GPT. We asked Chat GPT: “Hey, Chat GPT, tell us, what are the challenges of the receivables finance industry?” And I have them here. Okay. What does it say? I just enumerate. Okay. It says technological disruption. All right, so we’re in the middle of that. We talk about technology.
What else? Look at that. Globalization. Okay, business is expanding across the globe, and so these are challenges. We have a few clients that are doing that. So, we’re not the big banks that have subsidiaries all over the planet, but we’re talking about, factoring organizations that we’re primarily focused on doing business in their domestic market and what they’re doing that now, putting satellites across regions, Europe and even cross-border wherever, you know, the clients could be. So, globalization is, is something that we’re seeing here. What else does it say? Uh, we talked about the ESG issues. Yes. ESG, of course. It’s part of it’s part of something that we’re doing here as well. What else is here? Environmental, social, and governance. Yes, diversification of services. So, customers expect more from our customers. So, if our customers are financial institutions, their customers are asking them to provide value-added services on top of what they’re, what they’re doing today. And of course, that bounces on us like: hey, can you do this? Can you do that? Can you do that, do that? Or, in other words, perhaps even integrate with systems that do that. An important one is credit risk management. So, credit risk, effectively assessing credit risk remains a core challenge. So, we hear that all the time. And then client relationships, how to do that, Um, environmental changes. Well, we talked about them. Um, okay, so with the natural disasters and so forth. Cost of course is it thing. How to manage cost. The due diligence, the loss of control, uh, if we want to go a little bit deeper recourse versus non-recourse, because if you don’t know with whom you are doing business very well, can you trust that other side? Then you may enter in risk, in default, in whatsoever. And this is why this is also a topic. So, we come to the risk topic again. Confidentiality, complexity, limited funding, long-term cost, impact on financial statements, and so on. So, a long list on that. And if you remember yesterday, we made this little, you know, ad hoc survey to all our present clients in the symposium and the things that came up were pretty much the same. And so, we’re happy to see that, um, we were asking GPT, and it was reflected by the, the survey. And so that was quite interesting with this information.
What will you do with that information?
FAB: Of course, we wanted to know the information, because it would give us a hint on where we should focus our future development. And this is one area where we have changed as a company, as efcom. efcom in the past, used to be a company that uh, let’s call it, uh, received a request from a client that said: Can you do this? Can you do that, can you do that, can you do that? So, we did, this in that most of the things we implemented in our part of our current application. We continue, of course, to listen to our clients who come to us and want something special. But sometimes these are individual requests. Obviously, it’s much better if we do something, invest in something, and develop something good for not one or the other, but for all and many others. We thought wouldn’t it be nice if we could know what our customers were getting into, driving into, if we could predict the future? Okay, predicting the future probably has two sides. If you ask for yourself. Do you want to know what is going to happen to you tomorrow? Maybe yes, maybe no. But if you are in the business context, wouldn’t it be nice if you know what your current portfolio is developing to? And how do you do that? So, we gave it a thought, and two years ago I was thinking, hmm, wouldn’t it be nice if we knew the behavior of our clients? Coming back to another megatrend, let’s call it in the industry, data is the oil of the 21st century. And I think that we’re sitting we, I mean, our customers are sitting on a huge amount of data. And then I thought, hmm, we are doing definitely or now put differently, we’re doing the job right? So, this is, we’re doing the job right, meaning that we have an application that’s been there for 23 years, and the customers are happy using it. So, we’re doing it right in the sense that we were asked to have an application, an ERP system that manages your receivables finance, business. Everything works smoothly, and you can go to sleep and nothing dramatic will happen. You can handle hundreds, of thousands of transactions per day. Our clients, by the way, do transact per year, over €200 billion in transaction volume. That’s a significant number, that’s 5% of the total factoring volume on a global scale and over 100 million invoices. That is a huge amount of data. So, we’re doing our job right and handling all that stuff. But my question was to myself not only are you doing the job right, but are we doing the right job? You see the different rephrasing. Meaning, aren’t we missing something here? And, in the development of the last 78 years, that artificial intelligence is out there, what has increased dramatically is the power of computing, from almost zero megabits per second in transactions to up to 100 megabits per transaction per second. So, this is a significant growth, and it goes, and it grows exponentially. And then the amount of data available in the world on digital systems to be able to be transacted or worked on from almost zero to zettabytes and also increasing in an astronomic dramatic way. Every day we produce so much new data. And data is the oil of the 21st century. And we thought a lot of the data that we have in our systems, our customers have in our systems are resident there, and we’re not doing the right job. We’re doing the job right, but not the right job. Meaning can we use that data to perhaps predict the future? And can we have the glass bulb telling us what’s going to happen? And, we thought, let’s try, let’s try, and let’s use technology for that. Let’s use AI and ML, meaning machine learning. So, we hired a team of data scientists, and they are working on a new product, open-ended. So, we’re making a major effort here to give you a wizard, to give our clients a wizard that tells them this is your ecosystem and your ecosystem, meaning your clients, your debtors, this is it. And this is behaving in this way, not on a static, but in a dynamic way. Meaning it changes every second, the same way as our body is changing from one second to the next, sometimes good, sometimes bad. But we also want to know what’s happening in our ecosystem. And this ecosystem is going to deliver your valuable information with the help of our new application. Don’t ask me the name of it. The baby is not yet born. We’re in beta testing. We have good customers that provide us, with a bunch of historical data we can work with. And we’re right now discovering this new era, and we’re pretty sure that by the beginning of next year, we’ll be in a position to put some light into this ball, this glass ball, and see what it is. So again, we’re open-minded about what will be the finals. And this is not going to be a final product that will stay there forever, but evolving, of course, because this opens a huge number of opportunities in the sense of also driving your business, etc., but preventing also to keep doing business in something that may be the super risky thing and preventing that for your customers. So, this is where we’re heading to. Yeah, looking forward to it, this is great.
What would you name as the main criteria for the factors when they choose a factoring software partner?
FAB: What we always hear is these two things. Number one, can you solve their problem or are you complying with what they require from you, functionally speaking? So they have their long list of things that you have to comply with, you said: Yes, yes, yes, yes, yes, yes, yes. All the list of Yeses or Nos. The second one is shortly after, Okay, how much, what’s the cost? So, price or cost to functionalities ratio. So, I think that is obvious. Um, but then there’s a third criterion and because what we sell is not a product that our clients buy every other day, like going to buy bread or whatever you may like to buy bread here to today, bread tomorrow, is how is aftersales, how is service, how is trust. Trust is a super important thing. Because you’re going to be, you know, managing a big portfolio, I mentioned 200 billion euros. Our largest customer does €60 billion in transaction volume per year so imagine they would not trust us.
How would you build it? How do you build trust?
FAB: You build trust by being there for your customers whenever they need you, and not only being there but also solving a problem. So, what you promised at the beginning is one thing and they know that of course, they know the vendor comes to you and promises everything. This is like in the marriage, right? You promise a lot of things, and then do you deliver what you promised, or do you not deliver? And this kind of trust is something where you must be ongoing there, there all the time. And so, when someone calls you up and tells you we have an issue or we want to do this or that, can you do that? If you keep saying no or keep saying nothing. Some organizations that may not be available, or reachable, then trust goes down, fear goes up, and stuff. So be there and solve and be a partner. Be a friend. Good word. Yesterday in the symposium, you may remember when we had the partners panel, on the screen. What was it? What they all said when it came to what is one of the success factors of a good partnership. And all of them said one-word “friendship”. With many of the customers, we become friends and so friendship, know each other and trust, I guess our third one. So, price, functionalities of course, and trust, friendship.
Thank you very much, Federico, for this conversation.
FAB: Thank you, Olena, for being here again.
Watch the conversation below:
