Please note: This is a guest blog submitted by Maurits van Rijckevoorsel (Chief Sales Officer – Factris).
Call a taxi, order dinner, pay your bills – all from the computer on your lap or the smartphone in our hand. Without question, we’re using new technology more and more to accomplish everyday tasks.
Some are even trying to use new technology to put factoring into the hands of one another via peer-to-peer (or P2P) factoring platforms. But have these efforts been successful? Despite the rise of these decentralised platforms in the credit industry, it’s interesting to note that they haven’t succeeded in taking over factoring- despite numerous attempts.
Three reasons why P2P factoring platforms fail
1. Little or no margin in the value chain
It’s important first to note one of the main reasons why P2P is so popular – it brings supply and demand together. Investors can lend money directly to consumers or businesses and poof! No more middle man… or so the story goes.
However, in real life, a peer-to-peer platform can only exist if there’s a financial reward – an additional middle layer – for bringing supply and demand together. But the fact is, factoring margins are so competitive that they can’t support that extra layer, even if that layer makes it easier for supply and demand to meet. There’s simply not enough margin to split.
To illustrate how difficult this is, there was a recent platform in the P2P space that was trying to scale with a negative gross margin! The customer lifetime value was negative from high front-end cost, with the customer retention quite low. This will almost always result in a customer that completes the boarding process only to factor a few invoices to meet an immediate need, then never returning to the platform. Examples like these show how many of these P2P factoring platforms just can’t sustainably produce a meaningful profit.
When you look closer, there’s a clear connection between customers that don’t continue to factor with these platforms and the high cost associated with P2P lending. Why can’t P2P lending be cheaper? One reason is because of the high-perceived risk. Investors are aware of the risk of factoring with these platforms, and so they ask for 10 to 15 percent per annum rates. After adding platform fees, this makes the overall financing cost very expensive for the customers.
Is there a solution to the high cost of lending? Sometimes lending platforms with larger volumes can bring in institutional money to lower the average cost of capital. But even then, the capital cost is rarely less than 10% per annum. It still just doesn’t work well.
So what’s actually driving these P2P platforms? Most of them spend a lot of money on digital marketing, driving a large amount of customer interest to their platforms – but this only converts less than 10% of the total inquiries. This “shotgun” approach leads to more than 90% of applicants being rejected, which is much more expensive than working through the traditional broker networks or direct sales. So very often, those few remaining prospects who actually become customers don’t provide a return on investment – again, they simply solve their immediate cash flow problem with expensive financing and leave after factoring one or two invoices.
And while this cost in marketing is usually the most significant part of the price paid for customer acquisition, don’t forget that this cost is in addition to the cost associated with managing invoice funders, further driving up the price to service customers with factoring services.
For P2P platforms trying to serve as a matchmaking service, there just simply is not enough margin-left in the value chain. After reviewing all that’s required – how they need to make factoring affordable for regular businesses, make the peer-to-peer factoring platforms financially viable and, of course, they need to keep the investors in the platforms happy – it all adds up to an unsustainable business, no matter how it might be advertised.
And yet, that’s not P2P factoring’s only challenge.
2. Anonymity stimulates fraud
While factoring is a new and exciting way for many to finance their business, it is by no means a new way to finance. Factoring has actually been around for hundreds of years. And just like any other form of financing, it has been subject to fraud – which our technological age hasn’t helped.
After all, digital peer-to-peer platforms by definition, are more anonymous and therefore more susceptible to fraud. Any provider of factoring services must be cautious with client onboarding, and for a good reason – there are even numerous examples where people hired actors to pretend they were employees of a non-existent business. After these fake entrepreneurs convinced the factoring company to take over their invoices (and pay 90 percent of the amount upfront) they suddenly vanished.
Truly, fraud is a very serious risk. This makes it essential for any factoring company to take a balanced approach to business, such as using credit-risk tools, multiple data points for verification as well as employing experienced professionals that know the factoring business.
However, experienced professionals don’t just aid in fraud protection. At Factris, we believe in building relationships with our customers, which creates a huge advantage over P2P platforms.
3. Factoring is a relationship business
Automation is often maligned for creating a lack of personal interaction, so, ironically, technological advancements have actually led to an increased focus on customer service, improving their experience with Factris. How?
It’s pretty simple: we use technology, not to make our teamwork faster or harder, but happier and better. In fact, Factris’ business model is based on the premise that we should automate what we can; after all, why waste staff hours on tasks that computers can do more efficiently? That would benefit neither Factris nor our customers.
So what is the connection between technology and improved customer interactions? Automation enables our team to focus their energy and abilities on people – building relationships and providing real value to our customers. After all, factoring is a local business that’s built on relationships with trust at its foundation. We never let automation lead to losing contact with our clients. We believe it’s essential for entrepreneurs to know the people behind the factoring company that has daily contact with their clients for invoice matters – one more thing that P2P factoring platforms lack.
After a closer look, it’s evident that all three reasons mentioned above are intertwined. We take advantage of technology and innovation while maintaining a personal approach to factoring that allows us to offer competitive pricing while staying profitable. We aim for long-term, close and strong relationships with our clients – something P2P factoring platforms just can’t achieve.