As the receivables finance industry continues to evolve, we are seeing lenders find themselves at a turning point. The larger corporate segment of the market, once a reliable growth engine, is starting to feel crowded, leading more and more lenders to explore the SME market. While this shift opens up new avenues for expansion, it also comes with its own set of challenges - particularly in terms of operational efficiency and fraud management. To stay ahead, lenders will need to rely more on technology and streamline back-end processes.
Shifting focus to the SME market
The receivables finance market has been on a steady growth trajectory, but the landscape is clearly changing. In 2023, we saw global factoring and receivables finance volumes grow by a modest 3.6% globally (with the UK at 2.7%), according to FCI data. After two years of strong post-pandemic growth, the corporate sector has started to show signs that it is becoming saturated. Resultantly, lenders are now eyeing the SME sector for their next wave of growth. But this shift is not without its challenges. SMEs, by their very nature, pose a higher risk of default and are more sensitive to economic shifts.
Transferring focus to SMEs requires a fresh take on risk management. Unlike large corporations, funding SMEs requires additional monitoring considerations, such as the quality of SME’s financial and operational reporting, the tendency for SME’s to be fully utilised on their receivables finance facilities, and the significant impact that various economic levers have against these smaller businesses. All these factors drive the need for lenders to be increasingly aware of the potential for circumstantial fraud being experienced across this market.
The real challenge for lenders is how to manage this growing client base efficiently without a corresponding spike in operational costs. This is where smart technology, particularly in the back end, becomes a game changer.
The power of technology in risk management and efficiency
You can’t underestimate the role of technology in both preventing fraud and boosting operational efficiency. According to Lenvi’s 2023 European Fraud Readiness report, 44% of European lenders (spanning the UK, Germany, France, and Spain) have ramped up their use of technology for fraud prevention over the last year. And 55% of UK companies expect to rely even more on technology solutions throughout 2024. This trend highlights the growing understanding that manual processes alone can’t keep up with the complexities and risks of monitoring a larger client and debtor base.
In our experience, a blended approach that balances automation with human oversight tends to deliver the best results. But, as lenders delve deeper into the SME market, they’ll need to rely further on technology to keep that balance as transaction volumes increase exponentially. Efficient, tech-driven operations are critical for monitoring and responding to risks swiftly as transaction volumes grow. Fundamentally helping to drive a focused risk-based approach for monitoring a lender’s receivables portfolio.
Not to mention that as portfolios expand, being able to scale operations without needing to hire a large number of new staff is a source of major competitive edge. Scalable, easy-to-integrate solutions are quickly becoming must-haves for lenders aiming to manage risk efficiently. Particularly multi-site, multi-region banks who are working to standardise tools and processes to ensure consistent oversight and risk management reporting and ongoing analysis, both at a regional and global level.
Historically, when it has come to investing in technology, lenders have tended to focus on improving front-end systems to enhance customer experience. This was especially significant post-Covid and as remote working became the norm. While that’s still crucial here, there’s a growing realisation that these front-end upgrades need to be backed by equally robust systems behind the scenes. Once again, this is particularly true of lenders actively growing their smaller client base.
The days of primarily managing risk through manual checks are fading fast —automation and data analytics are becoming the new standard.
Concluding thoughts
As receivables finance lenders pivot to the SME market for growth, they must adapt to the unique challenges this sector presents, particularly around risk management and operational efficiency. Technology will be the key to managing larger, more complex portfolios while maintaining strong fraud prevention and risk controls—without ballooning costs.
The future of the industry will likely belong to lenders who can effectively leverage technology to drive efficiency and manage risk in an increasingly competitive landscape. By focusing on both front-end and back-end systems, and standardising operations across regions, lenders can position themselves to seize the opportunities ahead.
If you are a receivables finance provider and want to understand how to better leverage technology to support the growth of your business and protect it from fraud, contact our Riskfactor team today.
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