Why Superman Can't Find a Phone Booth and the Slow Death of Factoring

My panel at IFA which graciously asked me to participate in a Fintech disruption of factoring discussion was fun but it was clear that I was guilty of disrupting someones day although everyone was polite and there were some thoughtful attendees with good questions.

I recounted the story of an acquaintance of mine who introduced his six year old to an old Christopher Reeve superman movie. The kid was puzzled .. why are there all these changing booths around the city and why can't Superman call his friends on his cell when he loses his superpowers? Life was different back then without cell phones and factoring is about to get phoneboothed.

Scoring and machine learning driven cash flow underwriting of SMB loans in the hands of large banks will retake market share for SMB lending that was lost to factors and alternative lenders. The cost of originating a homogeneous prime SMB borrower LOC will drop 80% below current origination costs, default rates will be sub 5%, and cost of acquisition low with existing customers and their data providing ample opportunity. Scoring doesn't have to be perfect or as good as a lock box arrangement to be a threat it just has to be good enough. Life time cost of acquisition is low since banks are much more than just lenders and can maintain a customer relationship over a very long period of time that fintech and factors can only dream of.

A mid teens yield when coupled with bank's low cost of capital will provide ample margin and the bank provided LOC the most compelling offer for average borrowers with some exceptions. Those exceptions are driven by the elements that make those particular borrowers undesirable to banks such as one that is willing to trade off the convenience of a bank LOC for a lock box arrangement with a factor and a lower cost of capital. Similarly on the opposite end of cost of capital a borrower whose credit is so poor that pricing remains subprime and collections customized is not a customer banks want. Factoring and Fintech lenders will be left with the two extremes of the market that banks don't want, the borrower willing to go through the slow process and inconvenience of factoring for a lower interest rate secured by receivables, and the low business score subprime customer.

What this means is that factors that charge single digit rates and that provide value add services for their customers in addition to capital can survive the banks imminent return to SMB lending while small factors that charge with fees 20% plus will not.

I have had a couple of good strategic partner conversations with larger factors that are interested in white labeling a MCA or fintech offering in order to supply their customers with a product they estimate 30-40% are already taking from other companies. These factors have the sophistication to tackle another product and credit challenges associated .

What then can a small factor do? Stay tuned for Superman.