Technology Enhancements Driving Innovation in Trade Credit and...

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Technology Enhancements Driving Innovation in Trade Credit and Accounts Receivable

Michael Kornblau, Marsh US Credit Specialties Business Development Leader , Marsh

In the early days of the COVID-19 pandemic, it became clear that liquidity would be a major issue for companies as the global economy slowed. Faced with severe working capital shortfalls, CFOs looked for liquidity in numerous areas, not the least of them being accounts receivable (A/R).

Typically, A/R represents approximately 35% to 40% of a company’s assets. Trade credit insurance can help a company protect these assets from losses caused by insolvency and default, among other potential risks, and help them improve their liquidity when coordinated with bank financing programs.

A trade credit insurance policy can be used as an enhancement to secure additional liquidity. This may be possible because banks and insurers may have different risk appetites, and may allow banks to increase the amount of assets within a receivables-backed facility. Assigning a policy to a bank or financial institution enables receivables to be used as a secured asset against which a bank can offer funds.

A “factoring agreement” supported by trade credit insurance can also provide funding; a bank would have its own trade credit policy, purchasing invoices from its customer with support from insurers on exposures. In the event of a claim, trade credit insurance can indemnify a policyholder, typically for 90% of the loss.

Like many areas of finance, the handling of A/R has long been a paper-heavy, spreadsheet-driven process. Invoices and credits need to be tracked, managed, and reconciled, with the work often passing through a number of hands. Not only can manual processes be time consuming, they are open to human-introduced errors at various stages.

From our perch as an insurance broker, we knew that A/R was in the midst of a technology evolution well before the pandemic hit—as is the insurance industry. As with so many areas of business, the macro trend is toward digitization and technology to improve the process and make it more efficient. Technology also opens up the financing playing field to more sources of capital. The rise of independent technology platforms enables institutional investors and other sources of alternative capital to enter the world of trade finance.

One area of A/R innovation that we have been involved with is the development of online processes to allow brokers, insureds, financiers, and corporates to request trade credit— and other—insurance from multiple underwriters at once, and to electronically execute and process policies.

The goal is to streamline what has often been a lengthy, opaque process by expanding distribution for the trade credit insurance industry and enhancing transactional speed and efficiency for clients.

Some platforms will also allow investors access to insurance markets for policies to cover trade finance assets they acquire.

Consider, for example, a recent transaction that was enabled primarily by today’s technology. An alternative financial institution featured large amounts of capital to deploy, but did not have the infrastructure that traditional financial institutions possess. That had precluded the alternative financial institution from participating in traditional trade finance — asset origination, monitoring, and risk distribution.

The alternative financeinstitution turned to a fintech platform that digitally originated assets and monitored compliance with the asset criteria of the financier. When combined with the credit underwriting capabilities of an insurer that was able to deliver this service digitally, the alternative financial institution successfully delivered a traditional banking solution. And it did so without the in-house resources normally required to source, secure, and insure the transaction. The deployment of this technology significantly broadens the market by using a more efficient technology.

The increased use of technology within finance and treasury functions will only continue. Consider this from the 2020 AFP Strategic Role of Treasury survey and report: “Two-thirds of treasury professionals believe that in the next three years treasury-specific technology will be critical or very critical to the success of treasury organizations. Nearly 70 percent of survey respondents agree or strongly agree with the statement, ‘In my organization, treasury is and will be effectively using treasury-specific technology to achieve its objectives.’”

One area to keep an eye on is the continued innovation in A/R technologies.

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