FCI has published their preliminary world factoring statistics for 2023, revealing that the Factoring and Receivables Finance Industry volume saw a rise of +3.3% in 2023, following an 18.3% increase in 2022. Compared with the previous year’s €3,659 billion, the 2023 estimated volume of €3,781 billion represents a more modest rise than in the last two years, which were affected by geopolitical events that impacted global trade.

Over the past 20 years, the compounded annual growth rate reached 8.3%, impressing many across the industry Both domestic and international factoring have grown substantially during this period. 

In the face of global changes experienced over the past three years, it is encouraging to see how factoring and receivables finance have supported SMEs and corporations in enhancing liquidity, safeguarding against customer insolvencies, and providing collection support worldwide.

Europe remains the largest contributor to the industry, accounting for about 68% of global volume with €2,555 billion and noting an overall growth of 2.3%. 

The Asia Pacific region, representing approximately 24% of global volume with €936 billion, saw a growth of +6.2% over 2022. South and Central America, holding a 3% share of the total world factoring volume with €129 billion, experienced a growth of +4.3%. 

North America, with nearly a 3% share of the total world factoring volume at €104 billion, remained stable. Africa holds a 1% share of the total world factoring volume. The total market, accumulating to €47 billion, also showed a growth rate of 13.5% compared to 2022. The Middle East, representing 0.3% of the global factoring volume, maintained stability.

FCI anticipates releasing the comprehensive global factoring figures, including details by country, at the end of May. Considering the limitation of anti-competition rules, the release of the final is delayed compared to previous years to adhere to the various regional rules.

HSBC developed the Master Account Receivables Assignment Agreement (MARA) template in collaboration with law firm Dentons in London in 2018. Since then, the framework has been in use with positive market feedback.   

As the template becomes available to a broader spectrum of market participants – including ITFA’s 320 members across 50 countries – open account assets will be distributed more efficiently and consistently. 

ITFA – a trade association for firms engaged in global trade, forfaiting, supply chain, and receivables financing – is encouraging its banking members to adopt the agreement as an industry standard and is endorsing it for both receivables and supply chain finance transactions.

Paul Coles, ITFA board member and chair of the market practice committee, said: “The lack of an established framework agreement to date has led to some inconsistencies in the distribution of open account assets, underscoring the need for a standardised solution.

“By promoting the MARA as the recommended template for participation in these types of transactions, ITFA aims to establish a consistent industry-wide practice. This initiative demonstrates our commitment to fostering industry best practices.”

Governed by English law and based on the 2018 BAFT Master Participation Agreement, the MARA provides a structured framework for the funded distribution of receivables and supply chain finance transactions under an assignment structure. 

Ian Clements, partner at Dentons, said: “Participants receive an equitable assignment – namely, beneficial interest in the receivable without notifying the buyer – upon payment. This assignment can become a legal one in specific circumstances. 

“These provisions ensure a seamless transfer of interests from seller to participant, addressing concerns over counterparty credit risk.”

HSBC’s use of the template has been well-received by its peers and law firms.

Bhriguraj Singh, chief product officer at HSBC Global Trade and Receivables Finance said: “As a two-way agreement with balanced provisions, the MARA has allowed HSBC to participate and distribute a range of trade finance assets, striking a balance between protecting the interests of investors and originators.” 

The MARA’s benefits include reduced legal costs, enhanced efficiency, consistency, and streamlined negotiations among banks. It accommodates both committed and uncommitted participation and one-off or recurring sell-downs.

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In April 2021, the world of football was rocked by the announcement of the European Super League (ESL), a proposed elite competition that sought to permanently place Europe’s top football clubs in a closed league. 

The plan – met with widespread criticism – was seen as a move that prioritised financial gain over sporting merit, threatening the inclusive nature of the sport by potentially leaving smaller clubs and their fans behind. 

This incident serves as a parallel in the world of finance, particularly within the factoring industry, raising pertinent questions about ensuring growth, resilience, and inclusivity. As the factoring sector continues to expand, significantly impacting global trade and economic development, it faces the challenge of evolving without creating disparities reminiscent of the ESL debacle. 

To better understand the principles of financial inclusion, equitable regulation, and sustainable growth in the factoring industry, Trade Finance Global’s (TFG) Deepesh Patel spoke with new FCI Secretary General, Neal Harm. 

Understanding factoring: A catalyst for global trade

Factoring is a financial service that profoundly impacts global trade and economic development. 

This service involves financing receivables, where a business sells its invoices to a third party at a discount in exchange for immediate cash, allowing the business to improve its cash flow and access working capital without needing to wait months for its invoices to be paid according to their credit terms. 

Factoring is a big business, and getting bigger.

Harm said, “It’s estimated that volumes of global factoring are over $3.6 trillion per year, growing consistently.”

This growth embodies the multiple ways that this financial mechanism serves as a catalyst for global trade growth. 

Firstly, it addresses a critical pain point for businesses, especially small and medium-sized enterprises (SMEs), which often struggle with cash flow due to delayed customer payments. By providing immediate liquidity, factoring enables these businesses to continue their operations, invest in growth, and take on new opportunities without being constrained by cash flow issues. 

Secondly, factoring is particularly beneficial in financing open account trade receivables, a common practice in international trade where goods are shipped and delivered before payment is due. 

This aligns with global trade needs, where extended payment terms are standard and can pose significant risks and liquidity challenges for exporters.

The factoring industry can tap these benefits for global markets by increasing awareness and understanding of factoring and by fostering partnerships with financial institutions and regulators. 

Harm said, “What’s interesting – and it’s history repeating itself – is how we’re entering those emerging markets today. It’s no different than 56 years ago. It’s learning about the market, advocating for the product, and educating the members on what this product is and what it isn’t. Then it’s watching it grow.”

By following this proven approach, the industry can open up new markets and support trade finance in regions where access to traditional banking and financial services is limited, helping to lift nations out of poverty and facilitating their integration into the global economy.

Expanding horizons: Factoring’s growth in emerging markets

Factoring has significant growth and potential in emerging markets, underlining its vital role in enhancing economic development and facilitating trade. 

Harm said, “If you think about the African region or the Southern Asian region, particularly India, there’s a huge opportunity for growth as they mature with open account finance.”

This opportunity lends itself to the evolving understanding and adoption of factoring as a crucial financial service that supports businesses in managing cash flow and accessing working capital efficiently.

A key aspect is the exponential growth potential of factoring in these markets, propelled by increasing trade volumes and the need for alternative financing solutions that complement traditional banking services. 

The growth of factoring in developing regions is not just a function of the expanding global trade but also a result of deliberate efforts towards education, advocacy, and the establishment of supportive regulatory frameworks that recognise invoices as investable assets. 

Harm said, “It’s complex and it requires coordination between banks, financial institutions, and regulatory agencies. With all of those groups working together, we can figure out the best way to make an invoice into an investable asset –  the regulations we need to put around it, how we secure it, and how we bring liquidity into the market to support it.”

Moreover, the strategic partnerships between global institutions like FCI and other local stakeholders can help to foster a deeper understanding of factoring and are crucial in creating an ecosystem where it can thrive by aligning businesses, financiers, and policymakers.

Vision and challenges ahead: Insight from FCI’s new secretary general

The FCI’s mission is to ensure the resilient, sustainable, and inclusive growth of factoring on a global scale. Central to this objective is the recognition of factoring as a financial tool and a vital component of the global trade ecosystem that can drive economic development and alleviate poverty. 

Harm said, “It comes down to awareness, advocacy, and education. That’s what FCI is there for. For us to be aware of what’s going on in the market, advocating as we see something happening, and then educating as fast as we can, to bring people up to speed.”

Recognising the challenges and opportunities of regulatory changes and economic trends, FCI positions itself as a voice for the factoring, open account and trade finance industries, engaging with policymakers and stakeholders to advocate for regulations and policies that support the growth of these markets. 

Through these efforts, the organisation aims to address potential challenges head-on, such as those arising from European late payment regulations, by promoting awareness and education, which can lead to more informed and constructive policy-making.

At the heart of FCI’s vision is the desire to see factoring and open account receivables recognised as a critical element of the global trade finance landscape, capable of driving significant economic benefits. 

Harm said, “I want FCI to be three letters that come immediately top of mind when someone is thinking about open account. If we’re talking about a receivable, the transaction, the financing, whether you’re a bank, whether you’re a regulator, we’re part of that conversation.”

This vision is not only about fostering growth in the volume of factored receivables but also about ensuring that the benefits of factoring are widely and equitably distributed, supporting businesses in developed and emerging markets alike.

Just as the football world united against the exclusivity of the ESL, the factoring industry must embrace inclusivity, ensuring no small player is left behind in the pursuit of global economic progress.

Putting the idea into practice, FCI is hosting their 56th Annual Meeting in Seoul, South Korea from 9-13 June, bringing together all global professionals to further the discussion into factoring and receivables finance.

For Harm, this event offers the opportunity to grow the industry. He said, “A big part of the event of awareness, advocacy, and education… It’s to have time with each other, learn how to do business and how to make money together. And again, to take that friction out of the transaction as it goes cross-border.”

This operation, facilitated through FCI’s electronic data interchange platform, EDIFactoring 2.0, introduces international financing avenues for Bangladesh’s export sector, enhancing the scope for supply chain finance.

International factoring involves the purchase of an invoice from an exporter in one country by a factor, who later collects the amount from a buyer or importer in a different country.

Through this arrangement, the exporter is paid in advance by the factor, receiving a discounted amount on the invoice, with the repayment being secured from the amount paid by the buyer or importer on the invoice’s due date.

Factoring services can encompass bad debt protection, receivable collections, financing, and the management of receivables ledgers.

Aligned with the guidelines of the Bangladesh Bank, this initiative offers secure and efficient financing solutions to exporters, highlighting Prime Bank’s commitment to fostering economic growth and supporting local businesses.

Shams A Muhaimin, Deputy Managing Director of the bank, hailed the factoring transaction as a landmark deal for both Prime Bank and the local banking industry.

Muhaimin said, “The credit coverage model mitigates default risks for our exporters, often uninformed about buyer’s credit information due to limited access. Prime Bank can also serve as a gateway for other banks to factor their receivables, while aiding industries in enhancing capacity.”

Peter Mulroy, Secretary General of FCI, lauded the first factoring transaction in Bangladesh by Prime Bank under the two-factor model.

Mulroy said, “Factoring business will grow in Bangladesh as exemplified by Prime Bank and help the economy grow even faster.”

There are more similarities between football and factoring than one might think.

Both are delineated from other concepts. Rugby and football came from the same game (officially delineated into 2 sports in the mid-1800s). The original idea has spawned a lot of other similar things that achieve this same initial goal. 

Likewise, factoring has spawned many other means of financing trade, like invoice financing, open account financing, and payables financing.

But, factoring is older than football.

The origins of a rudimentary form of factoring have been traced back to ancient Mesopotamia 5,000 years ago, while the first known example of a team game involving a ball only dates back 3,000 years to Mesoamerica.

Both have morphed and changed over the millennia, and the rules, standards, and norms clearly defined today would be nearly unrecognisable to those ancient pioneers. 

Despite these changes, the modern editions of both remain true to their original purposes: the entertainment of the people and the financing of global trade.

The advancement of both football and factoring in the modern era is thanks to the associations that developed the rules and promoted each.  In football, it is associations like the NFL, EPL, La Liga, and many more. For factoring it is FCI – the global representative body for Factoring and Financing of Open Account Receivables.

Today, factoring and other related methods of financing trade – like invoice financing and open account – have become even more crucial to the global economy and essential for businesses to manage cash flow and liquidity.

This article examines how innovation and regulatory measures intertwine within the factoring sector, focusing on the essential fight against fraud to encourage worldwide economic expansion. 

It shows the significance of advanced financial solutions and regulatory policies in creating a resilient and transparent market environment. Furthermore, we need to discuss how these efforts not only mitigate risks but also pave the way for sustainable growth in international trade.

More than just factoring

When it comes to financing trade, the evolution is evident in the diverse applications and challenges financiers face across different global markets. 

With its mature factoring and invoice finance market, Europe grapples with issues arising from late payment regulations. Conversely, Africa sits at the opposite end of the spectrum, representing an emerging market where the foundational structures for factoring are still being established, indicating a significant growth potential. 

Organisations like FCI are pivotal in navigating these varied landscapes, emphasising the importance of tailoring approaches to fit each region’s specific needs and opportunities. 

Rather than applying a one-size-fits-all strategy, our team at FCI focuses on understanding and addressing the unique circumstances of each market, highlighting the dynamic and adaptable nature of modern trade financing. 

This approach facilitates continued development in established markets and supports emerging markets in advancing their financial infrastructure, showcasing the industry’s broad and evolving impact on global finance. 

In recent years, one of the main priorities for the global financing industry has been preventing fraud.

Fighting financial fraud

In global trade finance fraud prevention is paramount, which has led regulators to develop laws and rules that govern these transactions in order to maintain fairness and integrity across the market.

Merely having these rules, however, is not enough. Effective enforcement is just as important. 

FIFA, the international governing body for football, has a 144-page rulebook that establishes what is and is not allowed on the pitch, but the efficacy of those rules lies in having a referee on the field to enforce them.

The same is true for the financial sector. While the laws exist, vigilant monitoring is still required to detect and prevent fraudulent activities and technological advancements and innovative approaches to governance are making this easier.

MonetaGo, for example, provides a fraud prevention solution for trade by leveraging digital technologies and a registry-based approach that assists financiers with validating transitions and authenticating trade documents.

Such advancements are similar to the Video Assistant Referee (VAR) systems used in professional football matches that help catch the infractions that even the best referee is bound to miss.  

In the fast-moving world of invoice finance, where assets and payments change hands quickly, instantly detecting and addressing duplications or other forms of fraud is invaluable, as MonetaGo has shown with our experience in India. 

Case study: India

MonetaGo’s experience in India has underscored the invaluable nature of being able to instantly detect and address duplications or other forms of fraud within the financial sector. 

The introduction of regulatory reforms that have enabled non-banking financial institutions (NBFIs) to offer factoring services and the establishment of the International Financial Services Centre Authority (IFSCA) in India’s GIFT City (“Gujarat International Finance Tec-City”) have been pivotal. 

These reforms have catalysed the adoption of technologies that authenticate commercial invoices, fostering an ecosystem of trust and reducing the incidence of fraud through duplicate financing.

The ability to validate commercial invoices in real time has enhanced the confidence of market participants and directly contributed to increased liquidity within the sector. This is largely due to the reduction in losses that typically result from fraudulent activities, showcasing how technology can serve as both a deterrent and a mitigation tool. 

As MonetaGo is involved with many of these processes, we’ve observed firsthand the positive impact that regulatory bodies have had in shaping a safer market environment. Our proactive approach, combined with the deployment of Deduplication solutions, has been instrumental in this transformation.

The next steps for India involve scaling these successes to further enhance the financial ecosystem. The aim is to increase financing volumes significantly, thereby supporting economic and industrial growth across the country. 

While the main value of this approach has been in curbing duplicate financing fraud, it also has the added benefit of establishing a precedent for financial institutions globally to adopt similar measures.

As the Indian case study shows, one way to do this is by leveraging public-private partnerships and continuing to innovate in fraud prevention and detection. 

Public-private partnerships for fraud prevention

Public-private partnerships play a crucial role in combating fraud and fostering innovation in financial solutions. 

These partnerships involve regulators, government agencies, international organisations, and the private sector collaborating to address financial fraud, and often, the dialogue centres on removing barriers to data access and adopting digital solutions to ensure safer, faster, and more cost-effective financing. 

A significant aspect of these initiatives is the focus on resolving the issue of duplicate financing, which is a prevalent form of fraud where trade documents are financed multiple times by different financiers. This challenge strains the entire ecosystem, leading to losses and undermining trust in the financial system. 

Local and international registries play a crucial role in preventing duplicate financing and verifying the authenticity of trade documents. Local registries were established to address this challenge; however, they encounter similar limitations to those faced by diverse electronic Bill of Lading (eBL) offerings when scaling internationally. 

Digital islands only cater to specific communities, and achieving connectivity to all domestic registries globally to resolve cross-border fraud is both costly and demands a standards-based approach. Swift entered the scene by providing the MonetaGo Global Hash Registry through its API gateway to all 11,000 Swift members worldwide. This initiative is specifically designed to address the challenges posed by fragmentation. 

At FCI, we are actively involved on multiple fronts, engaging with regulators and collaborating with a wide range of stakeholders in the financial industry. Our goal is to share the best practices and innovative solutions we’ve observed across different markets. 

By positioning ourselves as a neutral intermediary, we’re able to facilitate the adoption of strategies that are not only effective but also tailored to fit the unique legal and cultural nuances of each market.

Too good to not be true

A financial industry best practice that benefits all parties on the value chain by simultaneously derisking liquidity and increasing financing may seem too good to be true, but that is exactly what these fraud detection solutions can provide.

Leveraging public and private sector partnerships can enrich the strategic capabilities needed to bring these solutions to fruition and allow them to grow and develop. 

FCI has our roots in factoring, which is still a significant focus, but we have also evolved with the needs of the market to become a leader in other financing methods like open account and receivables financing. This experience can provide invaluable independent support towards establishing such initiatives.

Continued collaboration will be key to successfully preventing future financial fraud in the world of global trade. 

After all, it takes an entire team to win a football match. 

In the world of finance for micro and small and medium-sized enterprises (SMEs), there’s a clear division between two crucial groups: Capital Deployers and Capital Providers. On one side, we have micro, small, and medium enterprises in emerging markets, brimming with potential due to growing local demand and export opportunities.

On the other side are the Capital Providers from developed economies, where interest rates are low, leading them to seek higher returns through greater risk.

In order to address this division and its subsequent issues, we must look at the limitations to capital flow, and how we can solve these issues.

1. Capital Deployers – Micro, small, and medium enterprises (MSMEs) in emerging markets are experiencing growth driven by increasing local demand and the potential for exports. However, they face a significant challenge in obtaining sufficient funds to cover their working capital requirements and to finance business expansion. When these enterprises do receive additional capital, it often leads to further growth, as they are far from reaching the point of diminishing marginal returns.

International Finance Corporation (IFC) estimates that 65 million firms, or around 40% of formal micro and SMEs in emerging countries have an unmet financing need of $5.2 trillion every year. Astonishingly, these firms represent 90% of businesses and 50% of employment globally. 

2. Capital Providers – Capital Providers are individuals and institutions who provide capital or extend credit, oftentimes from developed economies, where interest rates are typically low. As a result of the economic conditions, they are willing to seek out investments with higher risks, in exchange for the possibility of higher returns.

Millennials and Gen Z have higher economic power than any generation that preceded them. They earn more, save more, and invest early. More importantly, they are ready to invest in risky assets. For millennials, as per a Fortune commentary, 31% started investing before age 21, compared to only 9% of baby boomers and 14% of Gen X. 

The demand and supply of capital are connected by banks, traditionally via sourcing deposits and offering loans. While a bigger question remains – can a small investment from a Gen Z or a boutique hedge fund traverse and finance micro enterprises in remote towns in emerging markets? 

Capital should flow from the point of surplus to the point of optimal opportunity seamlessly and this is the real testament to a perfect capital market. What hinders this capital flow? 

Three perspectives on hindrances to capital flow

1. MSMEs’ limitations

As per WTO publication, over 50% of trade finance requests by SMEs are rejected worldwide, as compared to just 7% for multinational companies. It indicates that global liquidity is concentrated among large institutions and their clients. 

Why? MSMEs in emerging markets often lack audited financial statements and credit ratings from reputed agencies. 

The unavailability of credit ratings creates an asymmetric perception of the creditworthiness of MSMEs and their business viability. The financial needs of MSMEs are usually below a certain benchmark, which makes handling their accounts an operational challenge for conventional commercial banks. This situation often forces MSMEs to reduce their growth plans in order to stay within their limited financial means.

2. Small investors’ limitations

Small investors often don’t have the chance to put their money into assets that are carefully vetted for creditworthiness, provide a wide range of investment options, and offer returns greater than those of bank deposits. Either investors knowingly take huge risks in equities or shift to risk-free low-yielding bank deposits.

3. Banks’ limitations

Commercial banks prefer lending to large corporates considering the availability of credit rating, collaterals, easy due diligence, and multi bank relations. Basel regulations requiring lower capital allocation corresponding to low-risk weighted assets (RWA) further encourage this prudent approach. In effect, large banks fail to notice the abundant MSME financing prospects in emerging markets.

Who can overpower these limitations and connect this gap?

Again, the answer seems to be ‘banks,’ as they are regulated, highly capitalised, and have stringent due diligence processes – hence they are aptly positioned to connect capital deployers and capital providers. 

If traditional deposit and loan approaches can not bridge this gap, what are the options?

One of the possibilities is through “securitisation” of assets (or receivables) that are backed by real cash flows. As a lender, a bank can create a portfolio of select assets (loans, receivables), repackage them through an SPV (special purpose vehicle) and sell them to investors as interest-bearing securities. 

Securities carry external credit ratings and bring risk-reward transparency. Cashflows from the borrowing entities pass through the bank and SPV to reach Investors as periodic interest (coupon) payments.  

Taking this cue, large commercial banks can start lending or lend more to MSMEs, while sharing a portion of associated risk and return with investors.

As shown above, a depositor lacks the discretion to select a specific portfolio of assets, whereas, securitisation grants this decision-making authority to the investor. 

What’s In It For Me (WIIFM) in view of securitisation?

Securitisation presents distinctive opportunities and challenges: 

Opportunities: 

• Interest-bearing securities can be fractionalised into digital tokens using blockchain technology that can attract a broader investor base (both institutional and retail).
• Once the modus operandi is in place, at regular intervals, banks can package assets and issue securities via SPV. 

Challenges: 

• In a high-interest rate regime, securitised assets should compete with bank deposits on the yield to attract investors.
• Client coverage costs will significantly go up for large banks while expanding their reach to MSMEs in emerging markets.

The securitisation of retail loans is not new in matured economies. Applying this approach to MSMEs, particularly in emerging markets, is a game changer. 

It’s a win-win for both MSMEs and investors as it bridges the finance gap and creates a new asset class for investment. Banks also win as they de-risk exposure, expand the customer base, and cross-sell products.

Above all, nurturing MSME aspirations broadens the financial inclusion net and propels global economic growth faster.

The views expressed in this article are solely of the author and do not necessarily reflect the opinions of his employer. 

As the factoring market continues to flourish, the growth of the industry is evident in the evolution of FCI as an organisation. This development is not merely a consequence of a thriving market but rather a deliberate orchestration to unite the industry under a common vision of excellence.

FCI has played a proactive role in shaping the growth of the factoring industry, setting standards, and envisioning a future for the market. 

By collaborating with policymakers and key stakeholders across the globe, promoting best practices through comprehensive education, and establishing industry-wide frameworks, the organisation has rightfully earned its position as the global voice for open account receivables finance.

In this video, Neal Harm, (incoming) Secretary General of FCI, sat down with Peter Mulroy, (outgoing) Secretary General of FCI and Daniela Bonzanini, (outgoing) FCI Chairwoman reflect on the organisation’s evolution, strategic initiatives, and the future of factoring.

A decade of transformative leadership

Over the past decade, FCI has strategically navigated the growth and development of both the factoring industry and the organisation itself. 

A key part of FCI’s transformative journey involved rethinking its membership approach. Beyond those directly involved in invoice finance, FCI has broadened its membership to include a diverse range of organisations, referred to as sponsor members. 

Today, FCI connects a broad community of industry providers and support businesses, including those from the legal, credit insurance, IT, and compliance sectors. 

Together, these members share the common goal of building business through network creation and spreading awareness. As Mulroy said, “We wanted to expand the type of members that we can bring in. We’ve not just allowed banks and non-banks, but also what we call sponsor members such as third-party providers and support institutions.” 

Furthermore, as the factoring market continued to grow, the need for FCI to scale its global presence became evident. Mulroy highlighted, “There’s no way that one or two persons can represent this organisation globally.” 

This has prompted FCI to develop outreach programs and foster relationships with entities such as the United Nations (UN), the World Trade Organisation (WTO), as well as development banks including the European Bank of Reconstruction and Development (EBRD), the International Finance Corporation (IFC), the African Export-Import Bank (Afreximbank), and the Asia Development Bank (ADB). 

Mulroy explained that this global engagement resulted in creating win-win relationships between FCI and many entities. He referenced, for instance, the 2016 merger of FCI with the International Factors Group (IFG), stating, “They were a smaller organisation than ours, but they were older. They brought new elements into FCI and helped us change the trajectory of the organisation.” 

The union with IFG created the largest association of factoring and receivables finance companies worldwide, boasting over 400 members across more than 90 countries. It also led to FCI establishing itself as a single point of reference for the receivables finance industry globally. 

Ultimately, FCI’s strategies over the past decade have steered the organisation towards decentralisation, demonstrating its commitment to collaboration, embracing diversity, and thriving in global markets. “We were a very centralised organisation. Now we’re all over the world across multiple regions,” Mulroy added. 

Chairing progress: Shaping the future of factoring

In its efforts to enhance awareness of the factoring industry, FCI has placed a strong emphasis on education. A remarkable transformation in this endeavour, guided by Bonzanini’s leadership, has been the extension of educational resources to non-members, effectively bridging the knowledge gap by disseminating information about the advantages of factoring—how it improves cash flow, mitigates risks, and supports business growth. Cagatay Baydar, the newly elected Chairman, will look to keep this momentum going.

Bonzanini, highlighting this transformative shift, said, “We now offer our educational services not only to non-members but also to individuals. Education is crucial, and through the extension of our services, our aim is not only to emphasise its importance but also to attract the interest of a wider audience.”

Another focus area for FCI in recent years has been Supply Chain Finance (SCF). The company has undertaken significant investments in SCF technology, exemplified by initiatives such as the EDIfactoring system for cross-border factoring and FCIreverse for reverse factoring. 

For instance, the FCIreverse platform not only grants members access to an operational platform for onboarding anchor buyers and both domestic and foreign suppliers but also facilitates the involvement of export factors worldwide. 

This is achieved by educating suppliers on the various benefits of reverse factoring, guiding them through the signing of local factoring contracts, providing Know Your Customer (KYC)/Anti-Money Laundering (AML) assistance, and potentially offering funding against assigned receivables upon request. 

Bonzanini said, “While the nature of factoring remains unchanged, we’ve developed additional solutions to address the needs of international businesses. Simultaneously, we’ve welcomed new members, supporting them in developing their domestic business in various countries and markets.”

By enhancing knowledge and awareness, building capacity and expertise, and leveraging technology, FCI’s strategic initiatives are thereby laying the foundation for a robust and sustainable factoring industry. 

Embracing change: The next chapter for FCI leadership

As FCI undergoes a transition of leadership, the incoming Secretary General of FCI, shared his insights into his background, vision, and the transformative path ahead as he prepares to fully assume his role in 2024.

Harm’s journey spans three decades, beginning at Bank of America. From processing invoices to leading global factoring businesses, he witnessed the evolution of the industry. He reflected, “It’s been an amazing thirty years to think back to when I originally touched an invoice, to today, having the opportunity to lead the industry globally.”

Looking forward, Harm envisions a substantial opportunity for FCI to impact corporate growth by supporting companies globally in optimising working capital through factoring.

He emphasised the fundamental role of open accounts, “Every company does open account, and the need for that working capital is significant.” This underscores open accounts as the lifeblood of businesses, with FCI positioned as a leading expert in this domain, ready to make an influential impact on corporate growth.

Moreover, Harm identified an untapped opportunity to expand FCI’s presence in the factoring business, providing crucial support to both clients and the affiliated banks. 

He said, “I want to see the percentage of us helping those corporations around the world grow,” underscoring his strategic vision. His aim is to utilise the potential of factoring to boost working capital, thereby playing an active role in the extensive growth of businesses worldwide.

Editors Note: This video was recorded prior to the election of the new FCI Chairman, Cagatay Baydar.

The FCI 55th Annual Meeting in Marrakech marked an important moment in receivables finance as the International Institute for the Unification of Private Law (UNIDROIT) launched the Model Law on Factoring. 

This initiative follows the introduction of UNIDROIT’s first instrument in the field of factoring, the UNIDROIT Convention on International Factoring. Specifically designed to address legal and institutional gaps in the factoring market, the Model Law on Factoring looks at countries lacking a comprehensive legal framework for secured factoring transactions. 

Concurrently, the International Finance Corporation (IFC) unveiled its ‘Knowledge Guide on Factoring Regulation and Supervision’. Together, these initiatives create a foundation ready to elevate legal and investor confidence, progressing the factoring industry to unprecedented heights.

In Marrakech, Peter Mulroy, Secretary General of FCI, sat down with Jose Ignacio Tirado, Secretary General of UNIDROIT, to discuss the journey leading to the UNIDROIT Model Law on Factoring, its key features and its pivotal role in shaping the future of receivables factoring. 

The evolution of UNIDROIT Model Law on Factoring

Factoring is a powerful financing scheme, particularly for SMEs, to access finance with fewer limitations through unlocking funds tied up in their unpaid invoices. 

The immediate access to cash for the supplier/seller makes factoring an essential financing instrument, specifically for developing countries where a large number of SMEs form the backbone of their economies, often with limited access to traditional bank loans. 

What sets factoring apart is the fact that credit is intricately tied to the value of a supplier’s accounts receivable rather than the supplier’s overall creditworthiness. 

Thus, it enables higher-risk suppliers to shift their credit risk to more creditworthy buyers. Moreover, with a continually growing volume of international trade, cross-border factoring presents a solution to working capital obstacles, facilitating SMEs’ active participation in global markets. 

Despite these advantages, persistent constraints in accessing credit, especially within emerging markets, coupled with the absence of a uniform framework facilitating the development of factoring, have impeded its broader adoption. Tirado said, “We need to develop standards to trade with countries and ensure that SMEs can access financing.”

Consequently, these challenges prompted the World Bank to acknowledge the necessity of a standalone Model Law on Factoring. Initiated in 2018, the World Bank recognised the significance of such a law, particularly for emerging markets contemplating the introduction of factoring domestically. 

The proposal highlighted the predominant focus of existing instruments on international transactions, accentuating the need for more guidance for nations to develop functional domestic factoring frameworks.

The World Bank’s proposal for the UNIDROIT 2020-2022 Work Programme, as highlighted by Tirado, presented three critical reasons for developing the Model Law: 

• Increasing access to credit, 
• Overcoming ongoing constraints on credit in developing countries, 
• Addressing the existing gap in international rules for factoring. 

This joint effort between UNIDROIT and the World Bank laid the foundation for a model law that not only addresses international transactions but also accommodates the legal intricacies of individual countries, fostering a more inclusive and standardised approach to factoring regulations. 

Key features of the UNIDROIT Model Law on Factoring

The UNIDROIT Model Law on Factoring has been strategically tailored to meet the diverse needs of both developed and developing economies. 

As Tirado underscored, “The Model Law on Factoring is a stand-alone instrument and therefore is easy to grasp not only from the legislator’s standpoint but also from those that need to apply it. The judges, the lawyers and, of course, the financial industry.”

One of the distinctive features of the Model Law on Factoring is its autonomy, eliminating the need for constant reference to additional legislation, and simplifying the application process within a legal framework. 

Emphasising its universal applicability, Tirado said, “The Factoring Model Law is an amazing balance, easy to interpret and implement by various legal families.”

Moreover, the Model Law on Factoring’s development involved an inclusive process with experts and observers of diverse backgrounds. 

Tirado highlighted this inclusivity, stating, “It caters for the needs of both civil and common law approaches to legislation. That’s very important because no country and no system should feel alien to this model law.”

The Model Law on Factoring is comprised of fifty-four articles that strike a balance between comprehensive coverage of the different factoring techniques and clarity. 

Tirado said, “It covers recourse and non-recourse with notification without notification national and international it does cover, of course, it caters for both, ordinary and reverse factoring.” 

This approach offers clarity without adding unnecessary regulatory complexities. Establishing a sound legal and regulatory framework allows the industry to ensure that all factoring transactions receive adequate legal and regulatory support. 

This, in turn, provides investors with adequate recourse in local courts when needed, boosting investor confidence and enhancing protections for the factoring and receivables finance community. 

As Tirado highlighted, “By providing this simplified, yet clear model law, from a global perspective, we hope to enhance access to finance, reduce transaction costs, and ultimately foster thriving economies.” 

Supporting infrastructure: IFC’s Knowledge Guide

In conjunction with UNIDROIT’s Model Law on Factoring, the IFC unveiled its ‘Knowledge Guide on Factoring Regulation and Supervision’ during the meeting. 

The main objective of this Knowledge Guide is to direct legal reforms supporting receivables finance and thereby promoting inclusive access to credit in emerging markets. 

Offering recommendations for a unified regulatory framework, particularly for non-banking financial institutions (factoring companies) engaging in receivables transfer, the guide complements UNIDROIT’s Model Law on Factoring. 

It provides valuable insights tailored for policymakers and decision-makers involved in the law reform process, such as officials from central banks, supervisory authorities, and governmental departments.

In addition, since 2013, the European Federation for the Factoring and Commercial Finance Industry (EUF) has been conducting a comparative legal study of the factoring industry covering 27 EU countries and six benchmark markets. 

This year, FCI expanded this Legal Study to encompass all the markets it serves, resulting in a comprehensive analysis of 91 countries. This expansive Legal Study is the most extensive ever produced for Receivables Finance.

The launch of the UNIDROIT Model Law on Factoring, the IFC ‘Knowledge Guide on Factoring Regulation and Supervision,’ and the FCI Legal Study stand as a significant stride forward. 

These three vital and harmonious documents are set to propel the factoring industry, particularly in emerging markets where the industry has yet to develop. 

Tirado described it as a “perfect trio,” these documents establish a robust framework for legal certainty, instil investor confidence, and, most importantly, foster the growth of the receivable finance industry globally.  

• Global trade credit insurance market reached $13.89 billion
• Insured shipments reached $7 trillion
• Penetration rate: 13.16% of worldwide trade in goods

Trade credit insurance has been pivotal in risk management for businesses, notably in mitigating the risk of unpaid invoices, a major concern affecting business continuity. A closer look at the extent of protection offered by trade credit insurance illuminates the challenges confronting businesses and suggests possible remedies. 

What is trade credit insurance?

Trade credit insurance guards against the non-payment of trade receivables. Primarily, ICISA members offer short-term, comprehensive coverage for invoices typically due within one year. 

Insurers collaborate with policyholders to set credit limits for commercial customers and indemnify businesses against losses from insolvency or extended defaults, thereby enabling investment in growth and innovation.

Additionally, it is crucial for businesses seeking favourable financing terms to enhance cash flow security. Banks also rely on this insurance to minimise credit risk, facilitating broader financing across the real economy.

Estimating the impact of trade credit insurance

Evaluating the industry’s impact on global trade is challenging due to limited data and varying definitions across regions and companies. ICISA has estimated the 2022 impact of the global trade credit insurance market.

According to ICISA, the market reached a premium volume of $13.89 billion in 2022, insuring shipments worth over $7 trillion. The penetration rate was 13.16% of global trade, based on World Bank data. Private market participants, especially ICISA members, accounted for 69% of this coverage.

Despite differing estimates, the consistency in these figures lends credibility to the market’s size and impact in global trade.

Interpreting the statistics

The data underscores the substantial contribution of the trade credit insurance sector to the real economy. However, it also indicates a significant protection gap, particularly affecting smaller firms, more so in regions where this product is less prevalent, such as outside Europe.

FCI, the global representative body for the factoring and receivables finance industry, has achieved a significant milestone by securing three major agreements during its annual meeting in Marrakesh.

These developments mark a substantial advancement for the global factoring industry, reinforcing FCI’s role as a key player in shaping the future of trade finance.

For years, factoring has transitioned from one element of invoice finance to another without a clear rulebook or operating manual for policymakers, legislatures, or central banks.

Much like a child experiencing teething pains during rapid growth, the factoring industry’s swift expansion to €3.6 trillion ($3.8 trillion) in 2022 reveals the urgent necessity for a solid legal and regulatory framework. 

This foundational structure is important for ensuring the growth of receivables as a legitimate asset class, facilitating more accessible financing options for real economic growth.

At the FCI annual meeting held in Marrakesh on 30 October, the body announced three milestones that will accelerate the growth of factoring and receivables finance.

What is factoring?

Factoring relies on the legal concept of the assignment of third-party rights and their protection under the law. 

In a factoring arrangement, upon a contract between the factoring company and its client, the former pays an agreed percentage of approved debts or receivables as soon as they are assigned.

With a factoring solution and based on a contract entered into by the factoring company and its client, the factoring company agrees to pay an agreed percentage of approved debts/ receivables as soon as the receivables are assigned or (in some jurisdictions) pledged to it by its client. 

If credit protection is part of the factoring agreement, it is referred to as “non-recourse” factoring, while a factoring agreement where the credit risk on the debtor remains with the seller is called “with-recourse” factoring.

Over recent decades, receivables finance and particularly factoring have gained prominence as flexible tools for enhancing working capital, especially for small to medium-sized enterprises. 

Factoring plays a vital role in sustaining the flow of goods and services in supply chains, notably in cross-border transactions. 

Despite increasing calls for a unified regulatory framework, specific guidance remains absent. 

Economies looking to establish a robust legal structure for factoring face a range of options, from comprehensive secured transactions law reforms to product-specific legislation; the choice is largely domestic.

In most developed markets, legal and regulatory frameworks have been established to allow for the assignment of receivables and the protection of third-party rights. 

However, many emerging markets lack proper laws or regulatory schemes to govern factoring transactions. 

The drafting of a contract for the assignment of receivables often relies on general provisions in contract law, resulting in frequent legal disputes over the creation, priority, and perfection of the assignment of receivables. 

Without a solid legal framework for factoring, legislative gaps are gradually addressed through a mix of legislative interventions and judicial interpretations. 

Hence, the pressing need for functional factoring legislation and regulations to support and advance factoring transactions has been recognized.

1. Enter UNIDROIT Model Law

UNIDROIT, the International Institute for the Unification of Private Law, is an independent intergovernmental organisation aimed at harmonising international private law across countries. 

UNIDROIT was established in 1926 as the auxiliary organ of the League of Nations, an intergovernmental organisation aiming to harmonize international private law across countries through uniform rules, international conventions, the production of model laws, sets of principles, guides and guidelines.

The UNIDROIT, in 2019, embarked on creating the Factoring Model Law (FML) to provide an instrument for States wishing to introduce a new factoring law or update existing laws. 

Initiated in 2018 by certain World Bank representatives, the FML aims especially at emerging markets considering introducing factoring.

FML provides a comprehensive guide for countries looking to develop or refine their domestic factoring laws, thereby facilitating cross-border transactions and promoting legal certainty.

Over the years, the FML has undergone revisions and updates to reflect the evolving needs and complexities of the factoring industry. 

It has been instrumental in shaping factoring laws in various jurisdictions, serving as a reference point for both legislators and practitioners.

The launch of the FML was today released, led by Mr. Ignacio Tirado and Mr. William Brydie-Watson from the UNIDROIT.

2. Rulebook launched by IFC / World Bank – Factoring Regulatory Guide

At the meeting, the IFC/World Bank developed a Factoring Regulatory Guide to offer a coherent regulatory framework.

T​​he guide serves as a comprehensive resource aimed at addressing the regulatory void in the rapidly growing factoring industry. 

It is structured into six key sections that cover a broad spectrum of considerations. 

• Section I covers the increasing importance of factoring, especially for SMEs, in enhancing working capital and facilitating supply chain finance,
• Section II covers the main regulatory trends that necessitate a unified framework for factoring,
• Section III offers a set of fundamental considerations for policymakers embarking on the establishment of a comprehensive legal and regulatory framework specific to factoring,
• Section IV covers how factoring activities can be integrated into various governance models,
• Section V covers the prudential regulatory framework that ensures the financial stability of institutions engaged in factoring,
• Section VI covers the conduct of business regulations applicable to factoring companies, including anti-money laundering measures and customer relations.

The guide culminates in a series of key policy options and recommendations, aimed at law reformers and jurisdictions. 

It provides a roadmap for establishing a sound and proportionate regulatory framework for non-bank financial institutions involved in factoring. 

3. Legal and regulatory study for factoring launched

Lastly, in 2020, FCI initiated an extensive project to explore the legal and regulatory mechanics for factoring worldwide. 

This project expanded upon a unique comparative legal study by the European Federation for the Factoring and Commercial Finance industry (EUF), extending the coverage to include all countries where FCI has membership, thus encompassing data from 91 countries.

The concerted effort of global bodies and individuals, notably the FCI legal committee members and the UNIDROIT Working Group, has laid down the legal stepping stones for the factoring industry. 

The 55th FCI annual meeting in Marrakech marks a significant stride towards a robust legal and regulatory framework, setting the stage for a new era in the global factoring industry.