Factoring Market Research& Asia Market Overview May 2018
Factoring is a range of services rendered to suppliers of goods trading on credit terms and based on financing them against assignment of the underlying trade receivables. The services usually also include the receivables ledgering, customers (buyers ) payments collection and may include supplier protection against buyers non-payments. Standard Interaction Scheme Factoring Process. Stages 1 5 Factor 3 2 4 1 Business Goods delivered or services rendered and invoice generated by Business 2 Receivables presented to Factor for funding 3 Most part of invoice face value is given by Factor to business (70-90% of initial value) 4 Customer pays to an account in Business s name Customer 5 The remaining 10-30% of value released back into Business bank account minus small fee. The main Advantages of Factoring Improve Cash Flow With the help of factoring, cash cycle can be significantly shortened. This makes it possible to operate faster and more efficient. Protection against bad debts For non-recourse factoring, the factor takes on the risk of unpaid invoices. This offers a protection against any bad debts Lower overhead costs The factor takes over the management of business invoices. They handle customer payments and debt collections. Off-balance sheet treatment Factoring advances may be reflected in supplier s balance sheet as proceeds from sales rather than an attracted loan what improves the balance sheet
Factoring volume during the last two years remained stable and the growth trend is practically flat. Despite this stability, there is an opportunity of capturing a part of almost $10 trillion market of receivables. Total Global Factoring Volume (US billions of Dollar) 2 537 2 653 2 792 2 816 2 826 Global Volume of Trade Receivables, 2017 Market Specifics $9700 bln 2 853 $12 000 bln market 19 % 81 % Volume of trade receivables that are not invested (Market Opportunity) 100 000s of various-size companies are using trade receivables as a mean of obtaining liquidity 2012 2013 2017 1-5% Global Factoring Volume Breakdown by Types of Transactions (US billions of Dollar) International Source: FCI Annual Review 2017, Costowl Research, $856 bln per year Domestic Basic Business Model $1997 bln per year Invoice Discounting Recourse Fct. Non-recourse Fct. 0 Source: FCI Annual Review 2017, World Bank 550 An average factoring fee a company pays to a factor for the services provided 1100 1650 2200 Factoring companies earn revenue by charging a daily/weekly fee for the client to be able to get liquidity in time. 70-90% of the debt is given to the seller in a short time after a transaction. Another part as soon as the buyer pays for the goods after the credit term.
The biggest regional factoring market is Europe accounting for more than half of the total world volume. However, developing markets of Asia and Latin America demonstrate a great potential and significant growth. $1911 bln North America $114 bln Europe Asia-Pacific *USA have low market share due to the popularity of other instruments of receivables financing and law specifics $668 bln $23 bln $125 bln Source: FCI Annual Review 2017 Latin America Africa
The most perspective markets for capturing trade receivables market are Latin America and Asia due to the significant growth of trade operations and general developing of regions economies. Shares of Invoice Factoring Market by Regions, 24 % 66 % Asia The largest Asia factoring markets, (US billions of Dollar) Despite a slight decline in Asia market is the most China in, many countries innovative one in terms of demonstrate astonishing implementation of new growth of factoring technologies such as AI operations. Malaysia - 363%, and Blockchain Hong Kong - 27%! Asia is the fastest growing and the second largest market 4 % 5 % Latin America 1 % Africa Europe Asia-Pacific Latin America North America Source: FCI Annual Review 2017 The increasing effectiveness Cross-border factoring is still lagging behind due to of the electronic invoice, high risks of LA Banks and a has facilitated the consolidation of domestic shallow culture in financing open-account international factoring sales! There is a strong opportunity to develop a cross-border factoring services in LA 367,3 China Hong Kong Japan Singapore Taiwan 50,4 59,3 48,2 55,9 The largest LA factoring markets, (US billions of Dollar) 53,9 Brazil 29,8 Chile Mexico Colombia 26,8 9,0
Malaysia Market Overview. Malaysia has a developing factoring market with low entrance barriers and great potential for domestic receivables financing. Only 3% of market receivables is captured by factoring industry in Malaysia Dynamics of Export and Import Volumes in Malaysia (Billions of $US) 240 *For United Kingdom, 61% 180 120 3% 60 0 Import Export Construction Manufacturing Transporting Market Specifics (As of 2017) Market Size ($US) 42 bln 66 bln 53 bln Annual growth rate 7,4% 4,5% 5,8% Low costs of business operations and ease of grounding a company Fast developing market with need for receivables financing Source: FRED Economic Research, Focus Economic Research, World Bank, Business Wire
Indonesia Market Overview. Being the largest economy of the region, Indonesia has underdeveloped factoring market with low competition and is also perspective in terms of domestic factoring. Dynamics of Export and Import Volumes in Indonesia (Billions of $US) Only 1,7% of market receivables is captured by factoring industry in Indonesia 180 135 90 1,7% 45 0 Import Export Construction Manufacturing Transporting Market Specifics (As of 2017) Market Size ($US) 81 bln 191 bln 192 bln Annual growth rate 8,7% 4,3% 7,9% The region s largest economy with significant growth Low market competition in factoring Large domestic consumption and market of trade Source: FRED Economic Research, Focus Economic Research, World Bank, Business Wire
Singapore Market The main advantage of Singapore market is a favourable conditions for developing technological solutions in factoring. The market is developed but it still has substantial growth prospects. Dynamics of Export and Import Volumes in Singapore (Billions of $US) 34% of market receivables is captured by factoring industry in Singapore 460 345 230 34% 115 0 Import Export Construction Manufacturing Transporting Market Specifics (As of 2017) Market Size ($US) 37 bln 54 bln 41 bln Annual growth rate 3,7% 3,6% 6,2% The best country in the World for doing business Attractive tax Adoption of prosystem and growth and avoidance of double innovation friendly taxation policies Source: FRED Economic Research, Focus Economic Research, World Bank, Business Wire
Hong Kong Market Overview. Hong Kong is the most mature market among presented with a considerably high level of competition. Dynamics of Export and Import Volumes in Hong Kong (Billions of $US) 63% of market receivables is captured by factoring industry in Hong Kong 600 450 300 63% 150 0 Import Export Construction Manufacturing Transporting Market Specifics (As of 2017) Market Size ($US) 24 bln 5,3 bln 9,6 bln Annual growth rate 3,7% 0,5% 7,9% The World's most services-oriented economy (90% of GDP) Asia's secondlargest private equity centre Fifth-easiest place in the world to do business Source: FRED Economic Research, Focus Economic Research, World Bank, Business Wire
South East Asia countries have a great potential to grow in factoring since the level of credit provided to the financial sector is not sufficient for the robust markets. Domestic Credit Provided by Financial Sector. Target Countries, (% of GDP) Singapore and Hong Kong are the biggest markets in South-East Asia Hong Kong 50 000 World Avg 37 500 Malaysia Factoring Volume (Millions of US$) 25 000 Singapore 12 500 Philippines Indonesia 0 75 150 225 2013 300 Hong Kong Indonesia Singapore Relatively high lending-deposit spread indicates under-financing of businesses in the economy creating demand for new financial services (compared to developed financial markets of Japan and UK) Lending-Deposit Spread (difference between lending rate and deposit rate) 0,8% Japan Source: Nikkei Asian Review, FCI Annual Review 2017, World Bank 2,7% UK 1,5% Malaysia 3,8% 4,4% 4,7% Philippines Hong Kong Indonesia 5,1% Singapore Malaysia
There is a big opportunity to bring together emerging markets with low factoring volume and the lack of sources of financing, and developed markets given their excessive investment capital Countries that would provide an inflow of receivables to the international market Countries that would mainly invest in receivables generated by emerging markets Invoices Investments Receivables Trading Platform
Although businesses of all sizes use factoring in order to obtain stable Cash Flows, industries that have the longest debts tend to employ it more often. Top 6 Industries that Benefit the Most from Factoring Industries that take the longest to get paid Average Accounts Receivables Days 125 MGMT of Companies&Enterprises Real Estate HR and Recruiting Transporting Oil and Gas Extraction 110 Technical and Trade Schools 109 104 Equipment Rental and Leasing 99 Helthcare Centers Professional Services 91 Support Activities for Mining Manufacturing Construction Architecture, Engineering 74 Factoring is a tool used by all sizes of companies to increase cash flow without increasing debt burden Why do SMEs use factoring? High risk of running out of liquidity, which is critical for small enterprise Source: IMF: inc.com, SageWorks research Why does Big Business use factoring? Broad opportunities to diversify risks without increasing the debt and providing working capital
Factoring Market is tightly correlated to Volume of international trade, which demonstrates stable growth. 85% of Invoice Factoring is being captured by banks serving mostly corporates. Roughly 85% of global factoring volume is captured by banks Factoring Divisions that render big corporates International Factoring operations are highly correlated to the volume of trade 85% 7% $16 000 bln Volume of World Exports in Approximate percentage of corporates using factoring products Growth of international trade exceeds World GDP growth with approximate rate of 3% a year 10 % 8 % 6 % 4 % 2 % 0 % -2 % 2009 *Global Market of Trade Receivables Banks 15% Factoring Companies Independent factoring companies capture about 15% of factoring market volume and mostly serve SMEs Main distinguishes from bank divisions: 2010 2011 2012 Trade Growth % Source: Oliver Wyman Transaction Banking Trade Finance 2013 World GDP Growth % Less funds available for operations Easier compliance procedures
Despite most factoring market volume is generated by banks, main innovative solutions are implemented by startups. The most technologically advanced players of the Asia financing market are presented. Indonesia Singapore Invoice Interchange Hong Kong Malaysia
A significant amount of excessive liquidity in developed countries can be invested on a short-term basis in emerging economies. Corporate debt of emerging countries shows stable annual growth showing demand for higher liquidity Aggregate Corporate Debt Ratio of Emerging Countries (Percent of GDP) Aggregate Corporate Debt of Emerging Countries (Billions of U.S. dollars) 80 % EU: Concentration of excess liquidity at institution level in EU (Total Excess Liquidity EUR blns) 22 000 72 % 17 600 64 % 13 200 56 % 8 800 48 % 4 400 40 % Data from developed countries says about excessive liquidity in financial systems of the EU and the US 1 600 1 200 800 400 2012 2010 2011 2012 2013 Firm-Level Data: Average Liabilities-to-Equity Ratio (Percent). Emerging Countries 2013 2017 USA: 66 % 62 % Banks in the United States currently hold $2.4 trillion in excess reserves 58 % 54 % 2010 2011 2012 2013 Source: IMF: Emerging Market Corporate Leverage and Global Financial Conditions There is an opportunity for banks to use their liquid assets more effectively by investing them in emerging markets Source: ECB: The distribution of excess liquidity in the euro area, McKinsey: The Future of US Bank Liquidity and Funding
Implementation of distributed ledger in factoring will allow to dispose of intermediaries and bring more transparency in trade receivables as well as reduce transaction fees. Financial documents linked and accessible through Blockchain are reviewed and approved in real time, reducing the time it takes to initiate shipment Real-time Review Invoices accessed on Blockchain provide a real-time and transparent view into subsequent short-term financing Banks facilitating trade finance through Blockchain do not require a trusted intermediary to assume risk, eliminating the need for correspondent banks Transparent Factoring Disintermediation Use of Blockchain will twice increase the accessibility of Factoring in emerging markets 13 % Source: Deloitte Blockchain 67 % 33 % Regulators are provided with a real-time view of essential documents to assist in enforcement and AML activities Automated settlement and reduced transaction fees Regulatory transparency Companies successfully implemented Blockchain into their factoring operations Share of firms having access to factoring services 87 % Contract terms executed via Smart Contract eliminate the need for correspondent banks and additional transaction fees
Based on research, the most perspective region for entering the market of invoice factoring is Asia with rapidly developing digital markets. The most demanded technological solution is implementation of blockchain Geography Technology The most perspective region for entering the Invoice factoring market is Asian countries with high measures of domestic and international trade Implementation of blockchain and API in factoring business model will allow to decrease factoring fees and thus capture a bigger share. Basic example of the business model based on decentralized ledger Favourable climate for implementation of innovative business models based on new technologies 30% of GDP generated by SMEs SMEs account for a significant part of GDP and most of the small and medium business need factoring for operating $668 bln market Asia region is fastest-growing invoice factoring market and the second largest in the world Invoice Seller Liquidity Investment Invoice Invoice+Fee Receivables Trading Platform Invoice Funder Blockchain technology has potential to unite together emerging markets lacking funding and developed countries with excessive liquidity