Factoring Market Research v3 - AFSA World · Factoring Market is tightly correlated to Volume of international trade, which demonstrates stable growth. 85% of Invoice Factoring is

Factoring

Market Research& Asia Market Overview

May 2018

Improve Cash Flow

Protection against bad debts

Lower overhead costs

With the help of factoring, cash cycle can be significantly shortened. This makes it possible to operate faster and more efficient.

For non-recourse factoring, the factor takes on the risk of unpaid invoices. This offers a protection against any bad debts

The factor takes over the management of business’ invoices. They handle customer payments and debt collections.

The main Advantages of Factoring

1

2

3

4

5

Goods delivered or services rendered and invoice generated by Business

Receivables presented to Factor for funding

Factoring Process. Stages

Most part of invoice face value is given by Factor to business (70-90% of initial value)

Customer pays to an account in Business’s name

The remaining 10-30% of value released back into Business’ bank account minus small fee.

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.

Business Customer

Factor

4

1

2

35

Standard Interaction Scheme

What is Factoring Market Overview Target Markets Segmentation Lack of Liquidity StrategyAdvantages of BlockchainCompetitive Analysis

The services usually also include the receivables ledgering, customers’ (buyers’) payments collection and may include supplier protection against buyers’ non-payments.

Off-balance sheet treatmentFactoring advances may be reflected in supplier’s balance sheet as proceeds from sales rather than an attracted loan what improves the balance sheet

Total Global Factoring Volume (US billions of Dollar)

Global Volume of Trade Receivables, 2017

2012 2013 2014 2015 2016 2017

2 8532 8262 8162 7922 6532 537

19 % 81 %

$12 000 bln market

$9700 blnVolume of trade receivables that are not invested (Market Opportunity)

100 000sof various-size companies are using trade receivables as a mean of obtaining liquidity

1-5%An average factoring fee a company pays to a factor for the services provided

Market Specifics

Source: FCI Annual Review 2017, Costowl Research,

Basic Business Model

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.

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.

InternationalDomestic

Invoice DiscountingRecourse Fct.

Non-recourse Fct.0 550 1100 1650 2200

Global Factoring Volume Breakdown by Types of Transactions(US billions of Dollar)

$1997 bln per year

$856 bln per year

Source: FCI Annual Review 2017, World Bank


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.

$114 bln

$1911 bln

$668 bln

$125 bln

$23 bln

Asia-Pacific

Africa

Europe

Latin America

North America

Source: FCI Annual Review 2017

*USA have low market share due to the popularity of other instruments of receivables financing and law specifics


4 %5 %

24 %66 %

1 %

AfricaEuropeAsia-PacificLatin AmericaNorth America

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, 2016

Source: FCI Annual Review 2017

The largest Asia factoring markets, 2016 (US billions of Dollar)

Asia

Latin America

Brazil

Chile

Mexico

Colombia

China

Hong Kong

Japan

Singapore

Taiwan

367,3

50,4

59,3

48,2

55,9

53,9The increasing effectiveness of the electronic invoice,

has facilitated the consolidation of domestic

factoring

Cross-border factoring is still lagging behind due to

high risks of LA Banks and a shallow culture in financing open-account international

sales

There is a strong opportunity to develop a cross-border factoring services in LA

Asia market is the most innovative one in terms of

implementation of new technologies such as AI

and Blockchain

Despite a slight decline in China in 2016, many countries

demonstrate astonishing growth of factoring

operations. Malaysia - 363%, Hong Kong - 27%

Asia is the fastest growing and the second largest market

The largest LA factoring markets, 2016 (US billions of Dollar)

29,8

26,8

9,0!

!


Malaysia Market Overview. Malaysia has a developing factoring market with low entrance barriers and great potential for domestic receivables financing.

0

60

120

180

240

2014 2015 2016

ImportExport

Dynamics of Export and Import Volumes in Malaysia (Billions of $US)

3%

Only 3% of market receivables is captured by factoring industry in Malaysia

*For United Kingdom, 61%

Construction Manufacturing Transporting

Market Size($US)

Annual growth rate 7,4%

42 bln(As of 2017)

4,5%

66 bln

5,8%

53 bln

Source: FRED Economic Research, Focus Economic Research, World Bank, Business Wire

Low costs of business operations and ease of grounding a company

Fast developing market with need for

receivables financing

Market Specifics


0

45

90

135

180

2014 2015 2016

ImportExport

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

1,7%


Market Size($US)


81 bln(As of 2017)

4,3%

191 bln

7,9%

192 bln


Market Specifics

The region’s largest economy with

significant growth

Low market competition in

factoring

Large domestic consumption and market of trade


0

115

230

345

460

2014 2015 2016

ImportExport

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

34%



Market Size($US)


37 bln(As of 2017)

3,6%

54 bln

6,2%

41 bln

Market Specifics

The best country in the World for doing business

Attractive tax system and

avoidance of double taxation

Adoption of pro-growth and

innovation friendly policies


0

150

300

450

600

2014 2015 2016

ImportExport

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

63%


Market Size($US)


24 bln(As of 2017)

0,5%

5,3 bln

7,9%

9,6 bln


Fifth-easiest place in the world to do

business

The World's most services-oriented economy (90% of

GDP)

Asia's second-largest private equity centre

Market Specifics


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.

Hong KongWorld Avg

MalaysiaSingaporePhilippinesIndonesia

0 75 150 225 300

12 500

25 000

37 500

50 000

2013 2014 2015 2016Hong Kong Indonesia Singapore Malaysia

Domestic Credit Provided by Financial Sector. Target Countries, 2016 (% of GDP)

Factoring Volume (Millions of US$)

Singapore and Hong Kong are the biggest markets in South-East Asia

Source: Nikkei Asian Review, FCI Annual Review 2017, World Bank


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)

Japan UK Malaysia Philippines Hong Kong Indonesia Singapore

Lending-Deposit Spread (difference between lending rate and deposit rate)

4,4%1,5% 5,1%3,8% 4,7%2,7%0,8%


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

Receivables Trading Platform

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

Average Accounts Receivables Days

Industries that take the longest to get paid

MGMT of Companies&Enterprises

Oil and Gas Extraction

Technical and Trade Schools

Equipment Rental and Leasing

Helthcare Centers

Support Activities for Mining

Architecture, Engineering 74

91

99

104

109

110

125

Top 6 Industries that Benefit the Most from Factoring

Real Estate HR and Recruiting Transporting

Professional Services

Manufacturing Construction

Factoring is a tool used by all sizes of companies to increase cash flow without increasing debt burden

Why do SMEs use factoring? Why does Big Business use factoring?

High risk of running out of liquidity, which is critical for small enterprise

Broad opportunities to diversify risks without increasing the debt and providing working capital

Source: IMF: inc.com, SageWorks research

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.


http://inc.com

7%Approximate percentage of corporates using factoring products

-2 %0 %2 %4 %6 %8 %

10 %

2009 2010 2011 2012 2013 2014 2015 2016

Trade Growth % World GDP Growth %

Growth of international trade exceeds World GDP growth with approximate rate of 3% a year

$16 000 blnVolume of World Exports in 2016

International Factoring operations are highly correlated to the volume of trade

85%

15%

Roughly 85% of global factoring volume is captured by banks’ Factoring Divisions that render big corporates

Independent factoring companies capture about 15% of factoring market volume and mostly serve SMEs

Main distinguishes from bank divisions:

Banks

Factoring Companies

Less funds available for operations

Easier compliance procedures

*Global Market of Trade Receivables

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.

Source: Oliver Wyman Transaction Banking Trade Finance


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

Malaysia

Hong Kong

Singapore

Invoice Interchange


A significant amount of excessive liquidity in developed countries can be invested on a short-term basis in emerging economies.

4 400

8 800

13 200

17 600

22 000

40 %

48 %

56 %

64 %

72 %

80 %

2010 2011 2012 2013 2014 2015 2016

Aggregate Corporate Debt Ratio of Emerging Countries (Percent of GDP) Aggregate Corporate Debt of Emerging Countries (Billions of U.S. dollars)

Corporate debt of emerging countries shows stable annual growth showing demand for higher liquidity

54 %

58 %

62 %

66 %

2010 2011 2012 2013 2014 2015 2016

Firm-Level Data: Average Liabilities-to-Equity Ratio (Percent). Emerging Countries

Source: IMF: Emerging Market Corporate Leverage and Global Financial Conditions

Data from developed countries says about excessive liquidity in financial systems of the EU and the US

400

800

1 200

1 600

2012 2013 2014 2015 2016 2017

Concentration of excess liquidity at institution level in EU(Total Excess Liquidity EUR blns)

Source: ECB: The distribution of excess liquidity in the euro area, McKinsey: The Future of US Bank Liquidity and Funding

Banks in the United States currently hold $2.4 trillion

in excess reserves

EU:

USA:

There is an opportunity for banks to use their liquid assets more effectively by investing them in emerging markets


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.

Real-time ReviewRegulatory

transparency

Financial documents linked and accessible through

Blockchain are reviewed and approved in real time, reducing the time it takes

to initiate shipment

Automated settlement and reduced

transaction feesTransparent Factoring Disintermediation

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

Contract terms executed via Smart Contract

eliminate the need for correspondent banks and additional transaction fees

Regulators are provided with a real-time view of essential documents to assist in enforcement

and AML activities

33 %

67 %

13 %

87 %

Blockchain

Use of Blockchain will twice increase the accessibility of Factoring in emerging markets

Share of firms having access to factoring services

Companies successfully implemented Blockchain into their factoring operations

Source: Deloitte


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

Implementation of blockchain and API in factoring business model will allow to decrease factoring fees and thus capture a bigger share.

Invoice Seller Receivables Trading Platform

Invoice Funder

Invoice

Liquidity Investment

Invoice+Fee

Basic example of the business model based on decentralized ledger

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

The most perspective region for entering the Invoice factoring market is Asian countries with high measures of domestic and international trade

$668 bln market

Asia region is fastest-growing invoice factoring market and the

second largest in the worldBlockchain technology has potential to unite together emerging markets lacking funding and developed countries with excessive liquidity

Favourable climate for implementation of innovative business models based on new technologies


Documents

Factoring Market Research v3 - AFSA World · Factoring Market is tightly correlated to Volume of international trade, which demonstrates stable growth. 85% of Invoice Factoring is