From buy now, pay later (BNPL) to consumer credit to invoice factoring, lending companies have to build robust payment flows to make loans available to borrowers, collect instalments, and maintain appropriate liquidity levels at all times.
At scale, these payments, their reconciliations, and associated treasury workflows can be complex. This can result in having to effectively build a company within a company to cover everything from compliance to payment methods and team organisation to technical stack.
We invited the following payment leaders from successful lending companies to share their experience of building a best-in-class lending payment organisation during an online webinar: Erik-Jan Klinkenberg, CEO at invoicing and factory-as-a-service company Finqle Benjamin Auges, Head of Product, Finance at consumer credit company Younited Aman Mehra, VP Finance at B2B BNPL company Hokodo
Here's a summary of the insights they shared below:
To understand the magnitude of the challenge payments and treasury teams of lending companies face, we need to understand the flows of funds at their core. These flows are not universal. They vary with the type of lending products companies offer as well as how they finance the loans they offer. Despite this, the flows described by our three panellists provide a good overview.
For Finqle, the process starts when their customer creates an invoice, as these invoices are created within Finqle’s platform.
Once an invoice is created, Finqle purchases it by paying the invoice minus a fee directly into their customer’s bank account.
Finqle now owns the purchased invoice and their customer’s debtor becomes Finqle’s debtor. Finqle then proceeds with credit management activities until the amount corresponding to the said invoice is fully collected from the debtor. If everything goes well, the debtor pays this amount into Finqle’s bank account and the transaction is reconciled.
In this process, Finqle themselves borrow money to purchase the invoice. And they do so via an assignment mechanism, meaning that the purchased invoice is considered an asset and transferred to Finqle’s balance sheet. Finqle then borrows money against this asset from investors.
The subtlety comes from the fact that to purchase the invoice and turn it into an asset, Finqle needs the funds to purchase it. And in their business, customers demand the purchased invoice to be instantly paid out after it has been created.
Therefore, there is always a one-day delay between the purchase of the invoice and actually being able to get the corresponding loan.
To cover that one day, they leverage their own money and a partial loan from their investor.
For the rest of the required funds, Finqle needs to operate and service the loans they grant, they borrow money from investors at an annual interest rate.
Hokodo offers an API that integrates into any merchant’s online checkout. As soon as a buyer of a merchant creates an order, Hokodo gives a credit decision. If that credit decision is a yes, Hokodo effectively finances that particular order on behalf of the merchant.
When a buyer creates an order with Hokodo, the merchant wants the money immediately. So Hokodo pays out the corresponding funds to the merchant and is then responsible for collecting the money from the buyer.
To enable that, Hokodo has set up a dedicated financing facility with the corresponding backend flows of funds that allows them to provide financing to their customers.
Younited serves consumers looking to borrow money. Borrowers can come to Younited’s or one of their distribution partner’s websites, apply for credit, and obtain a decision instantly. When the decision is positive, Younited will pay out the amount corresponding to the credit to the borrower.
After the credit is granted and paid, Younited will collect the money via SEPA direct debit for up to seven years based on the conditions of the loan.
On the investment part, Younited manages special purpose vehicles (SPVs). Every week or every month, Younited sends wholesale payments to these SPVs, corresponding to the instalments collected on the loans the SPVs invested in. Then, each SPV will payout its specific investors.
Outside of classic risk scoring, credit management and collection activities, lending payment flows have their specific challenges.
For various reasons, borrowers can default on their loans and stop paying the corresponding instalments. But the instalment payment process itself can sometimes be challenging.
When done via SEPA direct debit, these direct debits can be rejected by the borrower’s bank. The reason for such rejections can vary, from insufficient funds in the borrowers’ bank account to errors with the direct debit mandate.
When collecting instalments via credit or debit card, borrowers can dispute the payment and trigger chargebacks, leading to uncollected instalments and additional fees for the lenders. To resolve the dispute, lenders need to work with the merchant in the case of invoice factoring and BNPL and identify if the chargeback is abusive or due to an issue between the merchant and the buyer.
Surprisingly, one of the lenders’ biggest issues is the identification, attribution, and reconciliation of unexpected incoming payments. Some borrowers simply send payments to lending companies without any reference to the instalment they correspond to and at random times.
Lenders can solve part of these cases automatically by identifying the sending account and reconciling the payment with an ongoing credit, but other cases require manual investigations. To solve these issues, they have a specific account for unallocated payments, where the money is held until it is properly attributed.
As a lending company scales, they will typically expand across multiple geographies. Their payment methods and requirements will differ from country to country, and lending companies won’t be able to work with one bank in all the countries they operate in. This creates complexity in the payment infrastructure and the flows of funds between the different countries they operate in.
Due to the volume and complexity of multi-party payment flows that lending companies deal with, data is critical. Being able to track and reconcile all money movements in real time is crucial for success.
Having real-time visibility on available cash in all bank accounts is also paramount. A miscalculation can prevent a lending company from granting new loans or make them default on their investors until the situation is solved.
Any error in source data, such as data from PSPs, can have significant downstream effects.
To manage their sophisticated flows of funds and overcome the challenges mentioned above, lending companies need to put the right systems in place. As they grow, these systems need to adapt.
When their respective companies started, our panellists didn’t have access to all lending, payment, accounting, and other solutions available today on the market. So they managed many of today’s automated tasks manually, sometimes working directly from spreadsheets.
An alternative option was assembling a stack of treasury and other financial software built for SMEs and making it work for their use case.
On the payments side, they worked with just one bank or one PSP to move money according to their workflows.
While not ideal, it worked and actually gave them a lot of agility to optimise their processes and launch new capabilities, learn quickly, and then apply these learnings to build a future-proof, scalable stack later.
Sending and receiving payments means accessing payment schemes. To do so, lending companies can decide to work with PSPs, which abstract part of the complexity or integrate directly with banks which gives more control.
When lending companies begin operations, working with PSPs brings many benefits. They avoid building bank integrations, which is a significant investment. Most offer modern, well-documented APIs that are easy to integrate. They can be complementary and lending companies can easily work with and integrate different PSPs to access various payment methods, adapt their payment options to the industry or local preferences, and send and receive payments in multiple geographies.
As lending companies and their payment volumes grow, costs come into account and banks become much more suitable for large volumes than PSPs. It’s at this point when lending companies decide to invest in bank integrations.
Here again, when our panellists had to iterate on their tech stack to support higher transaction volumes and values, there weren’t many, if not any, invoice factoring or BNPL solutions on the market. So they had to build their own.
Looking back, they shared that they would have done the same with their core systems, which create and manage their core products: their lending products. Indeed, as their product evolves, that core system actually gives them much flexibility because they control it in-house and can adapt it to work for their products. Doing so leads to an increased speed of execution.
For the systems not core to the lending products, such as accounting, treasury management, or bank connectivity, buying is a good solution that will free up resources for the core products – if these market solutions can integrate well with the lending company’s core systems.
Focusing specifically on the data, whether built in-house or bought, constant, real-time and comprehensive access to all system data is crucial. As discussed above, data is key to financing companies, which must know their cash position in real-time at all times, effectively investigate and resolve disputes, and leverage all the data they can to mitigate risks.
Of course, these systems must be built, operated, managed and optimised by the right profiles. And these profiles might not be the same and operate in the same structure at all stages of a lending company.
Initially, founders often wear multiple hats, which can include risk, collection, and treasury.
The first hires on the business side often are jacks of all trades, reporting to the founder in charge of the topic. They manage incoming and outgoing payments and can handle collections as well as perform some accounting tasks. With this kind of lean organisation, learnings are quick, and knowledge is easily shared, allowing faster iterations. It also exposes these profiles to large functional scopes, increasing their understanding of the whole business, and facilitating internal growth as the company scales.
Next, the team becomes more structured and the initial team can take ownership of specific functional scopes. Roles are usually split between account or portfolio management, who estimate risk, treasury when required, and payment operations.
For all teams, lending companies should, of course, assess the candidate’s cultural fit with the companies’ values, but also, depending on the country, perform background checks to check if the person is allowed to work in the financial industry.
For the business roles, lending companies will hire a lot of junior profiles to train them internally and get them to ramp up on the company’s specific business. This can represent a cost of opportunity in the first months that is quickly paid off later. The researched profiles are usually people getting out of college who are efficient with numbers. Their ability to perform in unstable, fast-paced environments is also evaluated.
Experienced profiles are considered for leadership positions, especially if there are no internal candidates.
On the technical side, lending companies seek strong, experienced candidates. Moving a lot of money at scale requires very robust systems, and there is little room for errors.
As we addressed at the beginning of this article, there are as many lending payment organisations and stacks as there are lending companies.
These differences can include factors like how loans are financed, countries of operation, and many others – all of which affect what the best architecture looks like for lending companies.
The good news is that since Finqle, Hokodo, and Younited began operations, there are now many solutions on the market to help you launch quickly and then scale confidently.
If you’re looking for a solution to connect to your partner banks and automate your payment operations, Numeral would be happy to help you. You can contact us or learn more about how to build a BNPL or multi-country, multi-bank factoring payment workflows with Numeral.