TFG interviewed Robert Meters (RM), Head of Marketing and Sales, Global Business & Financial Services at SCHUMANN to discuss how the trade credit insurance has changed as a result of the covid-19 pandemic, where the industry is headed and the future of receivables finance.

Trade credit insurance market (TCI): how has it fared against the pandemic?

RM: The credit insurance industry has learnt from the 2008/2009 financial crisis and drawn conclusions for dealing with the COVID-19 crisis. Credit insurance has contributed much more to stabilising the economy, although selected risk sectors have fallen out of coverage. Government measures to strengthen both companies and the insurance industry have been essential. 

The suspension of insolvency filing requirements have prevented waves of insolvencies and kept the loss ratio of insurances lower than expected at the beginning of the pandemic. In the future, more insolvencies will occur in companies that, despite government financing programmes, did not manage to turn around and stabilise their business, or due to causes of insolvency that may already have existed before the pandemic.

SCHUMANN’s 2021 outlook

RM: 2021 has been an extremely successful year so far. Customers from industry, trade, financial services and insurance have made investments in digital transformation processes and commissioned us to provide solutions. During the crisis, companies have had to react and provide employees with home office workplaces. It has become very clear that technology is essential for business to continue during this time. A sustainable awareness of IT-supported processes has emerged, which will continue to be important in the future. Furthermore, advantages of digital decision-making processes have become obvious and reservations about automated processes have been reduced.

Challenges in 2021

The biggest challenges now are for companies, financial institutions and insurance companies to quickly implement the transformation processes and provide the necessary resources. SCHUMANN helps to define the right project direction and to present implementation plans in such a way that clients are not overloaded but can safely achieve the transformation step by step.

The role of technology in assessing credit risk in the TCI market

RM: Technology plays an essential and forward-looking role in the TCI market. Technology is, for instance, used in automated data retrieval via API technology to access data that a company, financial institution or insurance company already has. The automatic, process-dependent procurement of data from business partners, such as information suppliers for onboarding or KYC processes, credit rating agencies, debt collection agencies or credit insurance companies, supplement the information base. On this basis, automatic, AI-supported data analyses and monitoring can be carried out. Machine learning is used in the credit risk industry for specific tasks. A condensation of the analysis results leads to key figures such as credit scores. In addition, forecasting methods are applied and tested. 

In the future, we expect data from the context of the Internet of Things and from networks to become more important, provided that data can be legally used and evaluated. Thus, it can be clearly stated that in digital processes, data sources are automatically used in a process-controlled manner and analysis results are used both for process control and for decision-making machines or in approval processes. Software providers must, therefore, have all relevant interfaces in a wide partner network and offer workflow management and decision engines that allow flexible adaptation to market requirements, as we experienced in the COVID-19 pandemic.

The post-pandemic recovery 

RM: The overall economy is on the road to recovery. Some sectors have returned to pre-COVID-19 pandemic order levels, although supply chains are still disrupted by the crisis. As the volume of business increases, so does the need for risk measures and financing to secure the company’s existence, such as receivables finance, asset-based finance and trade credit insurance or surety bonds. Insolvencies will rise, increasing the loss ratio compared to the COVID-19 crisis in 2020/2021. 

Risky sectors will have a harder time in the future accessing financing and trade credit insurance than before the crisis. In all sectors, the risk lies in the resilience and sustainability of the business and the needed availability of liquidity and financing. Post-pandemic recovery is dependent on further lockdowns no longer being necessary and constant economic growth taking place. 

Receivables finance: how trade credit insurance stepped in to support the industry

RM: Receivables finance volumes have collapsed since the start of the COVID-19 pandemic. For both financial institutions and credit insurers, the challenge was to determine default risks. The suspension of the obligation to file for insolvency as well as payment deferrals had to be taken into account, as well as state bridge financing, which typically does not come into play in the form of liquidity and financial analyses outside of a crisis. 

In addition, entrepreneurs have come under such pressure during the pandemic that they have resorted to fraudulent measures to secure their survival. This has made it even more difficult to check the value and validity of receivables for financial products. Credit insurers have focused their default risk assessments primarily on vulnerable industries that should receive none or limited coverage.

Challenges and opportunities in the receivables finance space

RM: The future of receivables financing depends on both attractive products and the processes used by financial institutions. Customers should be able to obtain financing with smart and fast processes. In addition, finance products should be characterised by clear target group orientation, both of which are cornerstones for achieving market access, especially for SMEs.

The opportunities for implementation outweigh the risks if financial institutions succeed in coupling the target group and market-oriented products with digital end-to-end processes or embedding modern data analysis processes in digital, comprehensible approval procedures. Fulfilment of regulatory requirements poses challenges for financial institutions but can be implemented very well with mature IT solutions, which have also led to a strengthening of the sustainability of the business.

SME access to cross-border finance: surge in Non-bank Financial Institutions (NBFIs) and fintech platforms 

RM: It is obvious that further developments in a society and an economy are largely determined by technological progress. Traditional financial institutions have thus been challenged by NBFs and fintechs for several years, as the necessary modern IT technology is available and can be used flexibly for financing platforms. Process orientation is essential in the context of the process design of the customer journey, in addition to the concrete financial products – NBF’s and fintechs recognised this and entered the markets. 

In the meantime, however, traditional providers have also embarked on the path of digital transformation and are combining a traditional strength with a promising IT development. On both sides – NBFs and fintechs as well as traditional financial institutions – there are winners and losers. Consolidation in the finance market is normal in conversion processes. The trend of digitalisation and corresponding product innovation will very much prevail. In cross-border business, the SMEs that benefit most are those that already use platforms that map a completely digital process in the international trade business with embedded financing products. Such platforms develop their strength through transparency, speed and reliability and thus strengthen trust in partners in the process chain. Blockchain solutions pursue the same goals and are used in complex process chains with many process partners. The trend in cross-border financing is forward-looking. Digital end-to-end processes require innovative digital processes and products from all business partners.     

Biggest challenges in the factoring industry post-pandemic

RM: Before the crisis, the volume of Receivables Finance enjoyed a constant growth trend from 2012 to 2019. Factoring even had an accelerated growth after the financial crisis than in the years before. The Covid-19 crisis has led to a significant decline in business volume. The slump in business volume at companies led to the decline in factoring volume. 

On the other hand, factoring also had a mitigating role through the availability of liquidity for companies in the crisis. The challenges now are to support restarting businesses and growth. Factoring has excellent prospects of providing the necessary liquidity for companies, especially in this phase, and is thus an essential pillar of corporate financing. The factoring industry has already developed brilliantly in the past. This form of financing will continue to hold its own in the future, just as other asset-based forms of financing play a significant role in growth phases.

Risk mitigation is paramount during this period

RM: Risk mitigation is crucial for the viability of companies, financial institutions and insurances. This is thus a key requirement of regulators, especially towards financial institutions. In times of crisis and subsequently, in start-up phases, it is particularly challenging to implement a risk-based expansion. Here, preliminary work is required in data procurement, data analysis supported by forecasting methods and process design in credit risk management. Classic credit risk management has always had an important role in the backend, but risk control in digital end-to-end processes can be managed from onboarding to the backend through targeted risk assessment and monitoring, as well as early warnings, in order to avoid default.

SCHUMANN’s products are expanding

RM: SCHUMANN will be expanding its market leadership in digital solutions for credit risk management. Further developments of the products for industry, trade, financial institutions as well as for trade credit insurances and the surety bond business are expected by the market. SCHUMANN products will be expanded to include further solution components with the aim of providing a complete digital end-to-end solution for each market segment. Cooperations with partner companies will be intensified and digital platforms and networks will be strengthened. In addition, business activities abroad will be expanded. SCHUMANN is taking the path of internationalisation which is where its customers are.