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As part of a roundtable held at FCI’s 56th Annual Meeting in Seoul, TFG heard from a panel of experts, discussing the symbiotic relationship between credit insurance and factoring. In this article, we explore some of the challenges and solutions in this integration.
Despite the clear benefits, integrating credit insurance and factoring presents several challenges. These include poor information flow, cumbersome onboarding processes, and high premiums.
Information flow and decision-making delays
Effective information flow is fundamental for credit insurance and factoring. Credit insurers need accurate and timely data to assess the creditworthiness of buyers while factoring companies rely on this information to make informed decisions about purchasing receivables.
One of the significant issues facing the current market is the poor flow of information—often using antiquated methods—between insurers and factors. Shonhard said, “Cooperation between insurance companies and factoring companies usually involves exchanging information through email, which leads to delays.”
When factoring companies send proposals to insurers for granting limits, they often have to wait several days for a response. In a modern business environment, delays can be detrimental, especially for businesses that require quick access to funds.
The delay in decision-making is further compounded by the lack of real-time data exchange systems. Without real-time information, insurers and factors cannot make quick decisions, which are critical in maintaining a competitive edge. Szcześniak noted, “Our customers are not patient, and the competition is aggressive. The time we deliver the decision as to the limit is really critical.”
This impatience is not unwarranted, as businesses need timely financial support to manage their operations, seize opportunities, and mitigate risks.
Cumbersome onboarding
Obtaining credit insurance can be cumbersome and time-consuming, which, in some instances, discourages businesses from pursuing it altogether.
Szcześniak said, “The onboarding process for obtaining credit insurance is often cumbersome, with businesses having to provide extensive documentation.”
Businesses and factoring companies must follow extensive procedures and provide significant documentation, financial information, credit histories, and other relevant data, which creates a substantial administrative burden and slows down the entire process.
Smaller businesses, which might not have dedicated teams to handle intricate paperwork, often find themselves overwhelmed by the demands of the onboarding process. This extensive documentation and thorough assessment require considerable time and effort and can strain the limited resources of smaller firms, making the process seem insurmountable.
High premiums
High credit insurance premiums pose a challenge in some markets and for some customers, creating a barrier for new entrants.
In many emerging markets, economic instability and higher perceived risks lead insurers to charge more to cover potential losses. Aboo noted, “In markets like India… the cost of credit insurance can be prohibitive, limiting its availability in regions where it is most needed.”
This makes it difficult for businesses in these areas to afford the necessary coverage, limiting their ability to engage in international trade and expand their operations. Shonhard added, “In emerging markets, the risk of economic instability makes insurers cautious about extending coverage, which limits the availability of credit insurance.”
Regulatory factors add another layer of complexity. In some regions, stringent regulations and the need for comprehensive compliance may drive up the cost of offering insurance, which is then passed on to businesses through higher premiums.
Additionally, insufficient information about buyers’ creditworthiness increases insurers’ risk. When there is limited access to reliable data, insurers must account for this uncertainty by raising premiums to protect against potential defaults. This can be detrimental for startups or businesses that have historically operated through the informal economy and, therefore, lack formal data trails.
Technological advancements as enablers
Technological advancements offer promising solutions to many challenges the credit insurance and factoring industries face. Automation and digitisation can enhance efficiency and streamline processes, while centralised data repositories can help with risk assessments.
Automation and digitisation
Automation and digitalisation will have a major impact on credit insurance and factoring. By integrating technologies such as application programming interfaces (APIs) and artificial intelligence (AI), these industries can streamline processes, reduce delays, and improve decision-making.
APIs enable real-time data exchange between insurers and factoring companies, leading to quicker and more accurate decisions. This reduces the reliance on manual processes and mitigates the delays associated with traditional methods like email exchanges.
Shonhard said, “AI and machine learning can enhance the underwriting process by providing deeper insights into buyer behaviour and creditworthiness.” These technologies can analyse vast amounts of data quickly and accurately, identifying patterns and risks that human analysts might miss.
Overall, automation and digitalisation can drive greater adoption of credit insurance and factoring by creating a more transparent, efficient, and informed market environment. Aboo said, “They can significantly improve the efficiency of credit insurance and factoring.”
Blockchain technology is also gaining traction as a tool for enhancing transparency and security in trade finance transactions. By providing an immutable and decentralised ledger of transactions, blockchain can help meet regulatory requirements for transparency and traceability. It also reduces the risk of fraud and errors, which are critical concerns for regulators and industry participants.
Centralised data repositories and collateral registries
Centralised data repositories and collateral registries are other means of improving transparency and trust in the market.
Centralised data repositories serve as comprehensive databases that consolidate financial and credit information about buyers. These repositories gather data from various sources, including banks, credit insurers, and other financial institutions, to create a unified platform of reliable and up-to-date information.
Collateral registries are public databases that record security interests in movable assets, such as receivables, inventory, and equipment. Once established, they can provide comprehensive information about buyers’ credit histories and payment behaviours, allowing for better risk assessment and more informed decisions.
These closely related tools are particularly beneficial in emerging markets, where access to reliable data is often limited. Leszczynski said, “Centralised data repositories and collateral registries can play a crucial role in improving transparency and trust in the market.”
If further collateral registries can be developed, especially in emerging markets, it could be a key step to enable trade credit insurers to engage further in factoring and trade finance.
