Set against a backdrop of significant economic, political, and social unrest currently characterised by rising recession risks, the invoking of US tariffs, and rising insolvencies – European invoice finance markets are experiencing their own period of transformation and challenge.
As a leading risk and portfolio monitoring software provider to the invoice finance industry, we recently brought together global industry experts to discuss these pressing regulatory and market challenges, and to share their insights on the actions needed to address them.
Our first Lenvi Riskfactor forum involved a number of industry experts including representatives from the FCI and prominent Central European invoice finance providers.
Current market challenges
One area of attention across European invoice finance markets has been around the appropriateness of regulations and their impact on products, practices, and the wider industry. In particular, the New Definition of Default (NDoD), and the latest developments in CRR3 (also known as Basel 3.1, and Basel 4) have sparked significant debate and scrutiny among financial institutions, industry bodies, and technology providers. Debate on not only our rights to challenge the regulations imposed, but also whether we are adequately positioned to do so.
Market impact
The majority view across forum participants recognised the need to comply with imposed regulations having undergone significant effort to ensure their organisation is compliant. This is despite said regulations not feeling appropriate or proportionate to invoice finance, combined with mixed experiences over the regulator’s interest in assessing and monitoring the output data from these efforts.
Consequently, there was general support of the proposed challenges to the current application of regulations. Specifically, the application of 100% risk weighting of assets (RWA) under CRR3, and the 30-day period of potential default under the NDoD.
Under current requirements, invoice financiers are having to scrutinise a lot of overdue debt and differentiate between what is genuine late payment, and late payment for other ‘normal’ reasons that arise in open account credit. They are undertaking significant effort, often involving substantial manual work, to comply with the restrictive regulatory requirements, and the onus sits with them to get the reporting right.
There is sufficient industry data that finds only 2% of invoices due past 90 days are actually connected to missing capability to pay, the rest is unwillingness due to the normal issues such as differences in interpretation of terms, quality issues, and resolution of rebates, among others. The industry and EUF are aware of this, and the regulator understands this too. We are highly supportive of the 30-to-90-day change as it better allows us to clarify and resolve the typical reasons for dilution between sellers and buyers.
Marcel Burtscher – Executive Board member – Raiffeisen Factor Bank AG
Cost is another important implication. All regulations introduce direct and indirect expenses, and both the NDoD and CRR3 are generating significant indirect costs for FIs. These regulations do not adequately account for the specific nuances of invoice finance, meaning providers are compelled to invest in process changes and additional manpower to comply with requirements that often feel disproportionate to the realities of the market.
The question of proportionality turned the experts from considering whether the 30 days is the ‘right’ or ‘wrong’ number and instead to urging regulators to consider “to which companies is the regulation really applying to?” For large invoice finance companies organised by subsidiaries or departments – may be. But, to an independent invoice finance company – less so.
In the end, it is always a question of costs – factoring divisions of larger banks can cover the cost because they have to do it anyway if it’s a lending product. For other companies, it is less relevant and could impact competition in local markets – which should be avoided.
Ian Miller, Independent Consultant - Lenvi Riskfactor
(Mis)understanding of invoice finance
Sometimes the challenge lies not in a lack of understanding, but in different interpretations of concepts. When regulatory authorities lack sufficient access to information and data - acknowledging that data availability is of utmost importance - it can negatively affect the effectiveness of financial and commercial practices. As a result, the implications of these differing interpretations can take years to address and may hinder alignment with best practices in the industry. Therefore, it is essential to develop regulations that not only ensure effective oversight of the system but also promote the development of functional products. We must collaborate to enhance clarity and alignment in this process.
Betül Kurtulus, Regional Director - FCI
Discussions emphasised a need to educate regulators and the European Parliament on the critical distinction between official payment terms and actual payment behaviour, in the context of both NDoD and CRR3.
Defaults are low, so if we can surface the facts on the levels of default at industry level – that could help [in promoting this understanding].
Ian Miller, Independent Consultant - Lenvi Riskfactor
Without clarification, these issues risk becoming exacerbated – regulators acting on misinterpretations results in uncertainty across the market as to the rationale behind such changes. As Marcel pointed out during discussions, such misunderstandings can lead to the imposition of inappropriate procedures and operational requirements that could force the industry to reconsider how agreements with customers are structured. In doing so, potentially harming the access and competitiveness of the invoice finance product.
A point that was reinforced when discussing the risk of inconsistencies in interpretation, which in turn could lead to competitive imbalances. Some centres of expertise and commercial teams are more conservative than others which can have a real impact on market approach and pricing for clients. For instance, the impact of the enforcement of 100% RWA could lead some to choose to either leave or enter certain markets to minimise costs and support long-term growth – impacting market formation and market access for borrowers.
Making the need for greater understanding across all markets that are using the product equally important, as Aysen highlighted:
[Those using our product] should have a good understanding of what the benefits are to them so that they can go and demand the product from the financial institutions. This is one of the biggest challenges we face among developing and emerging economies.
Aysen Certinas – Education Director – FCI
Evidencing the safety of invoice finance
Stricter regulations aim to strengthen the safety of certain financial products against default and loss. This premise is why many across the invoice finance market are protesting the stringency of these regulations given the historic performance of invoice finance products.
Taking CRR3, for example, the regulation imposes a 100% risk weighting on factoring which ties up significant capital and limits financing capacity. The EUF is actively working to challenge it, arguing that factoring is a safe and effective financing practice with minimal losses that deserves a more favourable risk weighting.
But good intentions aren't enough. Nor it seems are demonstratable excellence in good risk management practices, evidence of risk mitigation, robust buyer and/or client ratings.
To convince regulators, the EUF needs data. They need to evidence the inherent safety by demonstrating low loss rates alongside effective risk management and consistent performance. The problem is the data needed to prove it just isn’t accessible. The underlying question therefore must be – how can we make it accessible?
Financiers have to carry more capital than their losses justify…that has a very real consequence because it means financiers either charge clients more, or other less structured products are more competitive than they would otherwise be. As an industry we speak about the risk of fraud a lot, but when it actually happens we do the opposite and don't speak about it or share information. Highlighting instances of fraud may appear counterproductive to this argument, but I do not think it is. Yes, it happens, but across the industry cases are very low - so, sharing will not only highlight this fact - it will also share priceless information for the whole industry to learn from. But fundamentally, if we shared data around losses in general it would allow the industry to demonstrate real facts around the risks associated with invoice finance.
Ian Miller, Independent Consultant - Lenvi Riskfactor
The requirement for data supports points raised earlier in discussion around proportionality and suitability for different markets.
Different jurisdictions offer different products, different organisations have varying bandwidth depending on whether they are a subsidiary of a large bank or a standalone financier , not to mention the clients they provide financing too can all vary. Together, you have a broad spectrum of data types, data availability, and data collection methodology that can be hard to report on at organisation, market, jurisdiction, and industry level.
Gathering data on a country level is also important. We don’t have this data in some countries, but it is important for proving factoring as a secure product [to local economies]. There are ripple effects for SME financing [too] as some large banks or key lenders may respond to new regulations by withdrawing from certain lending products and reduce the availability of finance for this wonderful part of the economy.
Betül Kurtulus – Regional Director – FCI
On the topic of SME access to finance, experts raised the industry’s concern that the number of SMEs serviced by invoice finance is potentially reducing. Capital may be one of the underlying issues to be resolved in order to reverse that trend.
The current regime and capital requirements constrain the offering made to the real economy to various types of corporate segments...so, rethinking the approach, revising, and recalibrating it based on the data that exists may well help to minimise certain lending gaps that exist in the real economy while prudently reflecting the underlying risk of the product.
Marcel Burtscher – Executive Board member – Raiffeisen Factor Bank AG
While it is well-known that SMEs have a relatively weak credit rating, they can often have quality receivables. The capital regime as it stands does not give enough weight to the quality of the receivables. Therefore, anything that can be done to show regulators that for the right quality of receivables the risks are low and that the capital requirement, therefore, should be lower may improve access to finance for SMEs. However, all of this needs to be backed up by statistical rigour and facts.
Taken altogether, it seems that the issue of misunderstanding of invoice finance spans not necessarily from the complexity of the financial product itself, but in the nuances in behaviour of those that interact with it. Education and understanding spreads across not only regulators, but also to the broader market – providers, users and solution providers included. These is equally relevant in both emerging and established markets.
Broader challenges
Alongside the legislative changes, we wanted this first forum to also explore the deeper challenges facing our industry and identify key barriers to enhancing the competitiveness and appeal of invoice finance products, both now and in the future.
Market focus
There is growing concern that, as financiers increasingly focus on servicing larger corporate clients, invoice finance is becoming less accessible to small businesses - the very group for whom this product was originally intended as a viable solution.
Successful SME lending today [results from] working on a different algorithm for the credit assessment of SMEs completely independently from the balance sheet assessment and [instead] dependent on the information from the industry and the receivable. Within this algorithm they are inspecting the life expectancy of the collateral check or invoices, and the company – so it is completely different. It is a different understanding, and it is important for regulators and different countries to understand SME financing who want to understand more, and replicate developed successful factoring country practices in their own countries – but there is no data. Ourselves at FCI are doing our best to explain the business models, but it is only one thing to explain this to financial institutions – the regulators also need to understand. For many countries still, the concept of factoring is still perceived as a risky product.
Betül Kurtulus, Regional Director - FCI
It was agreed that this is a major topic of conversation for the whole industry going forward and due to the implications around regulation, accessibility of the product to the wider SME market, good practice, digitalisation, IT solutions, and education/training, we will focus a future forum on this subject.
The need for a global language
The lack of understanding or misinterpretation of invoice financing on part of regulators, financial institutions, and the markets using our products is exacerbated by the lack of a unified language:
The unification of the definition of the product is causing difficulty [in understanding]. When you go to different countries, mostly they are doing receivables finance, but the names are always different. Therefore, when you try to get any data or conduct surveys, you don’t get any data because the product name is different.
Betül Kurtulus, Regional Director - FCI
Take this article as an example, for the purposes of write up we have referred to the industry as ‘invoice finance’, but this can be utilised interchangeably with other names dependent on your jurisdiction, company, or personal preferences, including:
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Receivables finance
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Factoring
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Asset Based finance
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Invoice factoring
And other variations therewithin.
Despite many of us having lived with this confusion (some of us for many years!), isn’t it time that a Universal syntax is finally agreed upon to make our lives, and the lives of those we rely on for growth and relevance in the future, easier?
Without it, improving the attractiveness of our market, gaining the right data to illustrate the viability of our products, and suitably challenge regulators as an industry collective will always remain a challenge.
Technology adoption for market improvements
The understanding of the technological developments that sit around invoice finance is also important.
There are lots of developments taking place, particularly in AI, that are taking centre stage at conferences and across industry media. However, as Betül highlighted during the forum, these developments are being discussed on a very high level and when you look at actual implementation of advances in tech on the FI side, uptake appears low and slow.
Once again, this comes back to an issue of understanding; understanding the true capabilities and capacity of available technologies, understanding how different technologies interact to form a complete solution to your needs, and how current and future ‘true-AI’ developments can redefine operational and cost profiles to free up team members to focus on more value adding activities.
Further, as Betül raised, digitalisation at a government level is also lacking understanding and standardising in approach. Central registries are a good example of this. There are great examples of this working extremely well when established in a country, such as we have seen Turkey. However, there doesn’t appear to be much likelihood that this approach will be widely adopted globally in the foreseeable.
Future change and challenge
In anticipation of future forums, we asked the experts for their thoughts on the future changes and challenges they were thinking about now that they think will likely impact the industry in the future.
Future regulatory change
Firstly, regulatory change is the constant we can rely on in European markets.
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Compliance and anti-money laundering (AML) will be key priorities, with the new Anti-Money Laundering Authority (AMLA) set to enhance AML and counter-terrorist financing supervision across the EU, likely impacting industry fraud prevention.
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The Digital Operational Resilience Act (DORA), effective from January 2025, requires financial institutions to strengthen their ability to withstand and recover from IT disruptions, prompting operational and system changes across the sector which take away focus from core business and operations.
Trade and geopolitical uncertainty
New and potential tariff policy from the US and the likely knock on effect to global trade is increasing uncertainty and could further dampen exports and investment. This is particularly challenging for international players, who may see disruptions in global supply chains and client relationships.
Amid varying geopolitical tensions, the EU has expanded and enforced sanctions, introducing new tools and penalties. This will likely require further investment in compliance, technology, and training, with the potential for transaction delays or disruptions.
Economic environment
The European market faces slow growth, with GDP projections for 2025 remaining modest amid ongoing global uncertainty, particularly in export-oriented economies.
Rising insolvencies are a concern, and there is an expectation of increased fraud risk as economic pressures mount.
Sluggish economic momentum may limit growth opportunities for invoice finance providers. Identifying and capitalising on market “pockets of growth” will be essential, but a weaker earnings base could constrain the ability to invest in technology, AI, and process improvements, particularly for smaller players - investments that are increasingly necessary for efficiency and customer experience.
Talent and skills gaps
Attracting and retaining skilled staff-especially those with tech expertise-will be a growing challenge.
With rising fraud risk, there is a need for ongoing staff training, particularly as many client managers have not experienced a major downturn or managed through insolvencies. Building expertise in fraud detection and response will be critical.
Sustainability and regulation
The EU’s continued commitment to the Green Deal and sustainability requirements may put European providers at a competitive disadvantage compared to regions with less stringent standards. Efficient adaptation to these evolving requirements will be necessary to remain competitive.
Further discussion on the implementation and impacts of these changes is anticipated in future conversations.
If there are any issues that you’d like us to discuss in future thought leader forums, please contact us.