Building the future of financial services through collaboration and innovation

We like this editorial on IDEON Financial Solutions companies, including LICUOS, by Inigo San Martin, Director, IDEON Financial Solutions: http://internationalbanker.com/building-the-future-of-financial-services-through-collaboration-and-innovation/

A few years ago, we realized the majority of consumers in Spain were exposed to a risk they knew very little about and had no way of eliminating it. Interest rates on most loans, whether home mortgages or business lending facilities, are directly linked to Euribor. In other words, when Euribor goes up, consumers pay more for their loans and vice versa. Corporations have been managing this risk for many years, through the use of derivatives contracts entered into their banking counter-parties. However, these transactions were not accessible to consumers or small businesses. IDEON’s first solution, Rateguard, was developed to specifically address this problem. Rateguard allows banks to offer interest rate risk mitigation products to their retail and business customers in an economic way by covering the whole life cycle of these products from design to document management. This front to back and fully automated solution to create, distribute and manage financial risk hedging products, including the complete document cycle was installed in more than ten top tier financial institutions in Europe.

A truly customer centric deposit solution

Following the same idea of democratizing existing banking products to all segments CHOICE Savings & Investments was developed. This software allows banks to offer in an efficient manner the ability to deposit solutions where the customer can personalize the complete economics of their account in real time at the point of sale. Traditionally, personalization of this type has only been available to high net worth segments due to the many manual processes and restrictive costs that offering customization entails. Through the use of CHOICE software, personalization is possible for any segment in any type of deposit product, traditional or market linked.

Allowing customers to partake in the design of their savings accounts, greatly enhances their overall banking experiencing. For banks, in turn, offering personalization reduces the pressure to always offer the highest rate therefore positively impacting bank margins, avoiding rate shoppers and attracting long term relationships.

Making supply chain financial management more efficient

Another solution developed by IDEON team for financial institutions is LICUOS SCF, based on the LICUOS technology, which allows banks to offer a Supply Chain Finance solution with a multi-tier approach, including suppliers at the Tier 2, Tier 3 level and beyond. LICUOS SCF allows its partner banks to generate new business and commercial opportunities with existing and new customers whilst optimizing internal rating models for credit risk admission and monitoring. The economic sectors that are currently showing a greater interest in the LICUOS SCF solution are Automotive, Retail (both food and textile), Pharmaceutical, Energy, Tourism and Transportation.

LICUOS itself, a joint venture between IDEON and AVS, is an online B2B payment platform where businesses can compensate and pay their commercial debts. LICUOS´ patent-pending technology identifies and generates the most convenient and efficient A/R and A/P netting and payment proposals for businesses. As Lisa Pollack explained on the Financial Times Alphaville Operation sovereign debt net, multilateral netting would allow sovereign debt cancellation among countries: “The EU countries in the study can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58% […] France can virtually eliminate its debt – reducing it to just 0.06% of GDP.”

B2C versus B2B models

But not only does IDEON develop solutions for financial institutions. Various business lines have been developed to benefit consumers directly. Through its offices in Madrid, Spain and New York City, IDEON’s ultimate objective is to improve people’s and businesses financial life and this can be achieved through both B2C and B2B models.

One example of a B2C business created by Ideon’s team is Fintonic, an online/mobile personal financial management tool that already has 100,000 users in its first year of existence. Users are able to see in a single page all their financial positions (loans, credit cards, checking accounts…) regardless of the financial institutions where these are held. Additionally, users can set up budgets and alerts to make sure that they stay on track of their spending objectives.

Tradeslide, another B2C business by IDEON, caters to a very specific population – foreign exchange traders. This tool increases the overall transparency in the FX market by categorizing traders according to a set of proprietary algorithms.

One of the main problems in the post crisis era is the lack of financing from banks for small and medium size businesses (SMB). Many have been suffering from this situation for more than three years now. SUMMA Investment Solutions, another idea generated by the IDEON team, is a non-bank financing facility for SMB´s who have outstanding invoices. SUMMA has established a fund whose investment strategy consists of acquiring directly from SMB short-term commercial invoices.

Partnering for innovation

Innovation and collaboration are two of the pillars of IDEON´s core strategy. IDEON seeks to conduct innovative ideas through collaborative projects with financial institutions, businesses and financial technology entrepreneurs. These projects are implemented through both IDEON itself and its affiliated companies, examples of which we have seen in this article.

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Supply Chain Finance is more than improving Cash Flow

The goal of working capital management is to ensure that the firm is able to continue its operations and has sufficient cash flow to satisfy both maturing short-term debt and upcoming operational expenses, but Banks present Supply Chain Financing just as a tool for improving cash flow. Supply Chain Finance (SCF) is much more. SCF means:

• Risk mitigation. Supply Chain Finance is a tool for minimizing the risk of supply chain disruption, which is one of corporates’ biggest risks and not only for improving cash flow. Supply Chain Management solutions providers can add a lot of value if they include innovative SCF tools to minimize the risk of supply chain disruption.
• Business Process Alignment. In the physical supply chain, risks change rapidly from the order stage to the final delivery and from one tier level to another. SCF solutions can offer services that optimize the allocation of financial resources according to the different needs, and enable the proper alignment of the financing and cash management activities with the rest of the business processes along the whole physical supply chain.
• Collaboration. Corporations have implemented business network applications to leverage the trust between buyers and sellers. Companies that collaborate effectively across the supply chain enjoy dramatic reductions in inventories and costs, together with improvements in speed, service levels and customer satisfaction.

Supply Chain Finance adoption

Currently, only a small percentage of companies are using SCF techniques, but more than half have plans or are investigating options to improve supply chain finance techniques. Slow adoption of SCF programs does not depend on lack of demand from businesses but on the resistance of the Banking System to change the way it operates. However, some banks are putting their factoring business under the wider Supply Chain Finance “umbrella”, trying to move from a traditional product-centric approach to a client-centric strategy. But client-centricity is not about naming but about solving the customer problem.

Banks’ reluctance to adapt their services to the new needs is causing the rise of solutions that promote the investment of available liquidity in one’s own supply chain, accelerating payments and cash collections, so that early payment discounts are seen as an asset allocation alternative with higher profitability and less risk than those offered by banks. This collaboration creates a win-win relationship for members of the chain, increasing their combined financial strength.

These solutions, although very interesting, do not meet the characteristics defined above. Can we say that a company has an integrated physical supply chain if it has only optimized its relationship with its direct suppliers? What happens if there is a stock issue further down the supply chain? As the integration of the physical supply chain has advanced incorporating a greater number of tiers of suppliers, SCF solutions should do so also.

LICUOS and the new SCF

LICUOS differentiates itself from other payment platforms, banks or SCF solutions as it goes one step further, leveraging not only the supply chain itself but also the network that each individual company creates from its own daily operations in order to find potential netting cycles that can compensate commercial debts.

Through this process, companies are able to minimize the number and volume of cash transactions, and hence, the banking fees associated with the same transactions. The solution allows businesses to reduce their dependence on the traditional banking system alternatives and at the same time significantly improve their working capital and cash flow management. By applying these techniques, businesses achieve an important reduction in their funding needs and credit risk exposure.

As Enrico Camerinelli, Senior Analyst at Aite Group, said in an interview conducted by Chris Davis at TreasuryToday, “if you look at what LICUOS are offering, that is exactly the sort of direction that I think SCF should be moving in”. In B2B networks companies are buyers and suppliers at the same time.  “Since you already have B2B networks allowing companies to transmit sales orders and other types of documents between one another, why not use those networks to carry out the task of matching payments? Then companies can benefit by being given opportunities for companies to use these balancing payments and debits as collateral to receive payments on time, for instance,” says Camerinelli.

More than a SCF solution

LICUOS is much more than a SCF solution. LICUOS is the first payment platform that helps businesses reduce their debts instead of just paying them. Winner of the Innotribe start-up disrupt, LICUOS is a global B2B payment platform where businesses, including public administration and nonprofit, can compensate and pay their commercial debts, allowing them to reduce their dependence on the traditional banking system alternatives.

LICUOS´ patent-pending technology generates the most convenient and efficient A/R and A/P netting, payment and funding proposals for businesses, significantly improving their working capital financing and cash flow management activities and reducing their credit risk exposure.

LICUOS, as the first Innotribe start-up disrupt winner, will be presenting at the Innotribe tunnel on Wednesday, 18 September at SIBOS in Dubai. The aim of the Innotribe Start-up Disrupt competition is to encourage and recognize financial technology firms that have the capacity to transform the Financial Services industry. The first Startup Disrupt was organized on 25 June 2013 at Next Bank Madrid.

LICUOS, Dubai and Islamic banking

Dubai welcomes Sibos this year with a special attention to the financial markets in the middle East. Middle Eastern Markets have been outperforming the SWIFT average growth in the rest of the world by 45%, according to SWIFT statistics.

The first modern commercial Islamic bank, Dubai Islamic Bank, opened its doors in 1975. In the early years, the products offered were basic and strongly founded on conventional banking products, but in the last few years the industry is starting to see strong development in new products and services.

Financial products that comply with the Shariah, are evolving from a novelty into a normal part of doing business in much of the developing world. However, the SME Shariah-compliant financing market is under-served and, as such, has substantial demand for solutions.

The core principles of Islam lay great emphasis on social justice, inclusion, and sharing of resources between the haves and the have nots. Islamic finance addresses the issue of “financial inclusion” or “access to finance” promoting risk-sharing contracts that provide a viable alternative to conventional debt-based financing.

Islamic banking principles and Working Capital Management

The feature that all Islamic financial products share is the absence of interest. Instead, the investments are set up as leasing arrangements or investments in which money is turned over to third-party trustees who share profits with Islamic depositors.

According to Ishrat Husain, former governor of the Central Bank of Pakistan, “there are two characteristics of Islamic banking which distinguish it from conventional banking. One is that every transaction has to be backed by real assets. Every loan should be backed by collateral such as real estate, business, etc. You cannot create wealth or money without associating it with real wealth creation. Second, the borrower is a partner in the business in which the bank has invested as financier. There is no guaranteed fixed rate of return. If the business is not doing well, the bank will suffer along with the account holder. In contrast, conventional banks offer a fixed return to depositors. The bank has to pay interest irrespective of the performance of assets.”

Because Shariah law forbids the payment of interest and trading debt is also not permitted, there would seem to be little common ground between Islamic finance and conventional working capital financing activities. But there may be more similarities than at first appears.

A key to the nature of Shariah-compliant working capital activities is that there should be no element of speculation involved in the deal. For instance, the price of the goods/services should be fixed and cannot be changed even if there is a delay in the repayment, as charging for the delay would be considered as interest, which is prohibited by Shariah.

Rather than providing a loan and charging interest on it, the bank effectively buys the asset and then sells it to an end-buyer, with the mark-up being the profit. And that’s an ethical deal – it’s a solid asset being sold. Typically, the bank will have ownership of the goods/services, buying them from supplier, and will then transfer them to the buyer. In this way the debt has been transferred to the bank through the transfer of ownership of the goods/services. The way the financier makes money from the transaction is through a mark-up in the value of the goods/services as sold to the buyer. The bank may apply the time value of money in his mark-up calculation, and then the price given to the buyer is fixed regardless of an early settlement, a payment on time or a delay of payment.

LICUOS´ Shariah –compliant netting platform

As Shaheryar Ali, Vice President, Relationship and Sales Manager at BNY Mellon, says “An Islamic treasury function, like a conventional one, must generate and utilize liquidity in an optimal manner. However, it must also function in accordance with Shariah principles. All practices must fit with the principles of Islamic finance. There can be no interest, no speculation, and no contingent speculative liability in any transaction. Yet as long as these principles are complied with, it is possible for a treasury services function to be Shariah-compliant and for there to be no difference between Islamic and conventional cash and trade. In fact, Islamic principles may help convergence because, in most examples when applied to the true methodology, neither cash nor trade are based on speculation.”

With limited Shariah-compliant products for SME customers, LICUOS launched a Shariah-compliant B2B payment platform to meet the cash management and finance needs of these customers. LICUOS is a global business-to-business payment platform where businesses can compensate and pay their commercial debts. The platform provides netting, payment and funding services for accounts receivable and payable for businesses, allowing them to reduce their dependence on the traditional banking system alternatives so that they can significantly improve their working capital and cash flow management. By applying our solution, businesses from all economic sectors and sizes, including public administration and nonprofit, will achieve an important reduction in their funding needs and credit risk exposure.

This product meets the needs of our SME customers seeking world class Shariah-compliant solutions to finance their local or international invoices. Our unique proprietary and patent-pending technology enables an efficient and highly secure processing of accounts payable and receivable transactions, 24/7 and in real-time, to deliver the best financial optimization and user experience. Our algorithms automatically identify and generate the most convenient and efficient netting, payment and funding proposals. They manage all of the associated transactions that allow businesses to significantly reduce or eliminate their commercial debts. LICUOS gives businesses full control and visibility into the payment process and allows them to easily communicate and negotiate with their business partners. We are able to support the working capital funding needs through a Shariah-compliant solution.

Supply Chain Finance and Islamic banking

The growth in Islamic banking that has been seen in the Middle East over the last years has been brought about by a response to the pent up demand for Shariah-compliant banking and combined with trend to converge cash management and trade finance services offered by the Middle Eastern bankers, this is likely to provide a significant boost to technology providers in the Supply Chain Finance (SCF) space.

As we explained in one of our previous posts, SCF refers to the set of solutions for financing specific goods as they move from origin to destination along the supply chain. In this environment, highly characterized by the integration of the supply chains, collaborative solutions have started to grow in order to enhance the negotiation and collaboration between suppliers and buyers. Currently, only a small percentage of companies are using SCF techniques, but more than half have plans or are investigating options to improve supply chain finance techniques. Slow adoption of SCF programs does not depend on lack of demand from businesses but on the resistance of the Banking System to change the way it operates.

Banks reluctance to adapt their services to the new needs and offerings is causing the rise of solutions that promote the investment of available liquidity in one’s own supply chain, accelerating payments and cash collections, so that early payment discounts are seen as an asset allocation alternative with higher profitability and less risk than those offered by banks. This collaboration creates a win-win relationship for members of the chain, increasing their combined financial strength.

In addition to this, there are other alternatives that go one step further, leveraging not only the supply chain itself but also the network that each individual company creates from its own daily operations in order to find potential netting cycles that can compensate commercial debts.

Through this process, companies are able to minimize the number and volume of cash transactions, and hence, the banking fees associated with the same transactions. These solutions allow businesses to reduce their dependence on the traditional banking system alternatives and at the same time significantly improve their working capital and cash flow management. By applying these techniques, businesses achieve an important reduction in their funding needs and credit risk exposure.

LICUOS is one of the few companies capable of offering this degree of innovative and disruptive processing. Among other Shariah-compliant principles, LICUOS complies with the Islamic principle of encouraging people to settle payment debt as early as possible.

LICUOS´s multilateral early-payment proposals (leveraging the complete supplier network) allow the buyer to utilize liquidity in an optimal manner collaborating with his Supply Chain. Faster collections mean, for the suppliers, more working capital, less need to borrow and reduced collections costs. This is a real commercial synergy. It does not just reduce the cost of goods. It does not just reduce the cost of borrowing. This reduces the cost of doing business.

LICUOS at SIBOS – Dubai

LICUOS, as the first Innotribe Start-up Disrupt winner, will be presenting at the Innotribe tunnel on Wednesday, 18 September at SIBOS in Dubai. The aim of the Innotribe Start-up Disrupt competition was to encourage and recognize financial technology firms that have the capacity to transform the Financial Services (FS) industry. The first Startup Disrupt was organized on 25 June 2013 at Next Bank Madrid.

LICUOS, the first payment platform that helps businesses to reduce their debts instead of just paying them, will present its features including its Shariah-compliant services.

LICUOS, Finovate & Blogs.

LICUOS was selected to demo at FinovateSpring in San Francisco. FinovateSpring is a demo-based conference for innovative startups and established companies in the fields of banking and financial technology. This May’s presenters included some of the biggest names in financial-technology, including Fiserv, MoneyDesktop, FIS, and TSYS. Each company gets 7 minutes and there is no PowerPoint allowed. Eric Mattson, CEO of Finovate said “this was the biggest Finovate ever”.

LICUOS would like to thank The Finovate Group and its Partners for making the FinovateSpring event possible and the four contributors that covered all 72 demos. Thanks to Erin McCune, William Mills III, Phillip Ryan and David Penn.

You will find below and attached these contributions:

Finovate Blog: LICUOS Launches Secure, B2B Payables, Receivables Processing Solution by David Penn. http://finovate.com/2013/05/licuos-launches-secure-b2b-payables-receivables-processing-solution.html

LICUOS is demoing its core technology: a unique proprietary and patent-pending technology that enables an efficient and highly secure processing of accounts payable and receivable transactions, 24/7 and in real-time, to deliver the best financial optimization and user experience. Our algorithms automatically identify and generate the most convenient and efficient netting, payment and funding proposals. They manage all of the associated transactions that allow businesses to significantly reduce or eliminate their commercial debts. LICUOS gives businesses full control and visibility into the payment process and allows them to easily communicate and negotiate with their business partners.

Bank Innovation: Finovate Day 2 Morning Recap and Ratings by Philip Ryan. http://bankinnovation.net/2013/05/finovate-day-2-morning-recap/?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=646536&utm_campaign=0

LICUOS is an open payment platform for businesses to reduce debt rather than just pay them. The company hails from Spain where they know a thing or two about corporate debt. Invoices are aggregated into the site and algorithms determine the optimal way to pay. The platform also allows payments netting services and 200 European companies have requested funding its lending platform. It’s not just about reducing fees and improving cashflow — the company is a wide-open payments platform.

• Cool Factor: 4/5
• I Want It: 3/5
• Revenue Potential: 3/5

Payments Views: Live Blogging Finovate Spring 2013 San Francisco by Erin McCune. http://paymentsviews.com/2013/05/14/live-blogging-finovate-spring-2013-san-francisco/?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=646536&utm_campaign=0

• First payment platform to help businesses reduce debt, from Spain, where business debt is a huge issue
• Businesses from all industries, of all sizes
• Netting is core feature – enabling
• Payments – both traditional supplier payments, from buyer to its vendors, on Licuos open payment platform
• Funding – means of obtaining financing from non-banking third parties
• Dashboard shows over all position, drill down to individual invoices – integrated with ERP/Accounting or invoicing system
• Algorithmic suggestions of the best means to make payments
• Using netting to pay off accounts receivable to pay off accounts payable (what is owed to you to pay what you owe). Enables customers to manage cash flow more effectively
• Can fund payment via wire, or credit card, or gain supplier financing via a third party – corporate investors and family offices investing in fund

William Mills Agency Live Blog: FinovateSpring 2013 San Francisco by William Mills III. http://www.williammills.com/blog/live-blog-finovatespring-2013-day-two/?utm_source=feedblitz&utm_medium=FeedBlitzEmail&utm_content=646536&utm_campaign=0

From Spain, the global B2B payment platform. At first glance it looks like PayPal for businesses-to-businesss transactions. From their web site: LICUOS is the global B2B payment platform where businesses can compensate and pay their debts.

Web-based. Showing validated invoices in the system. “Open payment platform” I think it works and the demo looks good but who is the driver of using this system? The CFO of a SMB? How do they make money? I’m guessing subscriptions or white label from FI’s or other parters. “more than a payments platform”

This seems like something that Intuit or other company should resell as an option for QuickBooks.

LICUOS Introductory Video Launched

We just launched a brand new video introducing LICUOS to the world. Here it is:

LICUOS is the global B2B payment platform where businesses can compensate and pay their commercial debts. The platform provides netting, payment and funding services for accounts receivable and payable for businesses, allowing them to reduce their dependence on the traditional banking system alternatives to significantly improve their working capital and cash flow management.

By applying our solution, businesses from all economic sectors and sizes, including public administration and nonprofit, achieve an important reduction in their funding needs and credit risk exposure.

Our unique proprietary and patent-pending technology enables an efficient and highly secure processing of accounts payable and receivable transactions, 24/7 and in real-time, to deliver the best financial optimization and user experience. Our algorithms automatically identify and generate the most convenient and efficient netting, payment and funding proposals. They manage all of the associated transactions that allow businesses to significantly reduce or eliminate their commercial debts. LICUOS gives businesses full control and visibility into the payment process and allows them to easily communicate and negotiate with their business partners.

We have just launched our new introductory video. Many thanks to David Macias and his team at MOTION FOR STARTUPS for putting this together.

Learn more about LICUOS at http://www.licuos.com.

Changing the Supply Chain Finance paradigm

Supply Chain Finance (SCF) refers to the set of solutions for financing specific goods as they move from origin to destination along the supply chain. SCF is one of the different methods used by companies to manage their working capital. In general, we can find three principal groups of solutions:

• Negotiation of payment conditions
• Financial institution services
• Collaborative solutions

Inside each group, there are several specific methods but this range of solutions tries to give an answer to one of the troublesome areas explained in one of our previous post, the financing of working capital. As the access to banking credit is tighter than ever before and financing costs are rising, companies have begun to look towards other alternatives where the Supply Chain is a key element. In fact, the problem of working capital financing is not unique to crisis periods, but during these tough times companies have focused more than ever on managing their working capital needs.

One of the results of this focus has been the emergence of SCF solutions, with the overall goal of optimizing the working capital along the whole of the value chain, making it stronger and providing an alternative source of liquidity to all its members.

The first solution to address the issue of working capital funding was negotiation among different parties, with methods, such as deferred payment strategies, where the only goal was to advance receivables and delay payments. Overall payment due date negotiation between businesses is a zero sum game. Nevertheless, due to power and strength differences, the negotiations resulted always in favor of one of them, which impaired the smaller members of the chain with unfavorable payment conditions.

As a result of these problems, the solutions of intermediation proposed by Financial Institutions emerged. Factoring and Reverse factoring are just some examples. Both partially solve the problem of bargaining strength but add high costs in terms of discounting fees and interest rates. Traditionally, these solutions have been used by small and medium size enterprises to try to solve the consequences of the payment conditions imposed by larger players but, nowadays even high-rated companies are making use of them.

Exhibit 1. Financial institution services: factoring description.

Nevertheless, these intermediation solutions create a huge dependency on the banking system. This has then turned into a significant area of concern for both Governments and large buyers, above all, among those belonging to sectors where the guaranteed smooth operation of the whole of the supply chain is essential, such as the food, automobile or chemical industries.

In this environment, highly characterized by the integration of the supply chains, collaborative solutions have started to grow in order to enhance the negotiation and collaboration between suppliers and buyers. Currently, only a small percentage of companies are using SCF techniques, but more than half have plans or are investigating options to improve supply chain finance techniques. Slow adoption of SCF programs does not depend on lack of demand from businesses but on the resistance of the Banking System to change the way it operates.

However, some banks are putting their factoring business under the wider Supply Chain Finance “umbrella”, trying to move from a traditional product-centric approach to a client-centric strategy but client-centricity is not about naming but about solving the customer problem. Banks reluctance to adapt their services to the new needs and offerings is causing the rise of solutions that promote the investment of available liquidity in one’s own supply chain, accelerating payments and cash collections, so that early payment discounts are seen as an asset allocation alternative with higher profitability and less risk than those offered by banks. This collaboration creates a win-win relationship for members of the chain, increasing their combined financial strength.

Given the complexities of modern financing and business to business payment techniques, invoicing including invoice automation and discount management initiatives need a framework to ensure that programs are approached on a strategic basis which bridges the supply chain, purchasing, accounts payable and finance organizations. These are some of the challenges that solution providers offering SCF and dynamic payables discounting solutions should face.

Exhibit 2. Early payment platform (example) description.

In addition to this, there are other alternatives that go one step further, leveraging not only the supply chain itself but also the network that each individual company creates from its own daily operations in order to find potential netting cycles that can compensate commercial debts.

Through this process, companies are able to minimize the number and volume of cash transactions, and hence, the banking fees associated with the same transactions. These solutions allow businesses to reduce their dependence on the traditional banking system alternatives and at the same time significantly improve their working capital and cash flow management. By applying these techniques, businesses achieve an important reduction in their funding needs and credit risk exposure.

LICUOS is one of the few companies capable of offering this degree of innovative and disruptive processing. Throughout its innovative patent pending technology solution, LICUOS enables an efficient and highly secure processing of accounts payable and receivable transactions, 24/7 and in real-time, to deliver the best possible financial optimization and user experience. Furthermore, LICUOS gives businesses full control and visibility into the payment process and allows them to easily communicate and negotiate with their business partners.

The huge impact of multilateral netting on the credit risk and working capital management

Credit risk exposure and working capital financing are two of the main areas that concern businesses today. Currently these problems are being partially addressed by Financial Institutions but unfortunately they are not solving them efficiently. Banks offer, on the one hand, accounts receivable and business credit insurance to mitigate the credit risk exposure of businesses but these products are expensive and tight sales margins do not permit contracting them extensively. On the other hand, they offer short-term financing solutions to cover temporary deficiencies in funds so that companies can meet their accounts payable and other obligations, but credit is tighter and more expensive now than at any time in recent history and static discounts don’t reflect suppliers’ dynamic cash needs.

Peer-to-peer finance

Current solutions do not offer a suitable answer to the problems that businesses face. This has led, during the last few years, to the emergence of new entrants providing non-banking methods of financing to try to solve the problems commented above with a clear aim of banking disintermediation. This trend can broadly be described as “financial intermediation involving entities and activities outside the regular banking system”. Some examples of peer-to-peer finance (P2P Finance) business models that are trying to address the credit risk exposure and working capital financing problems are:

• Peer-to-peer lending (P2P Lending) or crowdfunding platforms where individual or professional investors provide funds directly to businesses or projects allowing entrepreneurs to access funding in an easier and much cheaper manner.
• Invoice discounting solutions that allow suppliers to obtain short term funding from their clients.

Obviously, these new channels are not substituting the traditional banking channel but they do complement it, giving businesses an alternative access to liquidity.

Additionally, not all disruptive and innovative solutions for the non-banking segment are emerging in the funding channel space. Following the same trend of banking disintermediation, new payment methods and platforms are also appearing. The new online payment platforms that are being developed are primarily focused on the individuals (P2P) or merchants (P2B) segments. When it comes to business-to-business (B2B) payments, there are some new entrants emerging that allow real time payments and provide businesses a greater visibility into the payment process, but they miss completely a much higher value-add capability such as debt multilateral netting, with which the need for money movements can be dramatically reduced, improving the system efficiency as a whole.

Although this multilateral netting process may sound extremely disruptive in the B2B payments area, it is in fact already being used in several areas of the financial sector, including interbank transactions, brokerage companies and intergroup subsidiaries.

• Within the interbank payments, the clearest example is the Clearing House for International Payment System (CHIPS) in the United States which is in charge of processing fund transactions, particularly interbank settlements. Before effectively settling the funds, CHIPS executes a multilateral netting process of the different positions each bank has, so as to avoid mutual or cyclic payments, and reduce costs.
• Brokerage companies and Clearing Houses perform the multilateral netting processes at the end of the day as part of their standard daily operations.
• Multilateral netting processes between intergroup subsidiaries are also extremely common. In this segment, many multinational companies with subsidiaries in different countries and currencies utilize this methodology to save a significant amount of money.

 Multilateral netting benefits

Netting processes can help solving significant problems as described earlier. The multiple benefits that netting provides have been largely proven in other segments of the financial sector, but multilateral netting can also help businesses and governments both with their commercial debts and other financial obligations.

Multilateral netting capabilities allow businesses to only finance what is really necessary, thereby generating a significant costs reduction, at the same time that the facility to gain access to funding increases (compensating debts, companies´ financial ratios improve). Among other things, multilateral netting promotes early-payments, reducing credit risk exposure given that once the invoice is paid, the credit risk disappears.

Separately, as Lisa Pollack explains on the Financial Times´ Alphaville Operation sovereign debt net (http://ftalphaville.ft.com/2011/09/19/680436/operation-sovereign-debt-net/), multilateral netting would allow sovereign debt cancelation among countries: The EU countries in the study can reduce their total debt by 64% through cross cancellation of interlinked debt, taking total debt from 40.47% of GDP to 14.58% […] France can virtually eliminate its debt – reducing it to just 0.06% of GDP.”

The European debt crisis is the shorthand term for Europe’s struggle to pay the debts that have built up in recent decades. Five of the region’s countries – Greece, Portugal, Ireland, Italy, and Spain – have, to varying degrees, failed to generate enough economic growth to make their ability to pay back bondholders the guarantee it was intended to be. A powerful and efficient mathematical algorithm such as the one LICUOS has developed would allow the cross cancellation of interlinked debt. Even then, it would be necessary to solve a series of additional problems that are highlighted by Lisa Pollack:

• Fungibility: “[…] sovereign debt varies along many parameters — currency, maturity, law under which it is issued, coupons, covenants…The list goes on and on, which leads to…”
• Agreeability: “[…]  the only way to get there is to agree parameters for valuing certain attributes […] it can take years to agree on valuations”
• Desirability: “[…] one may be holding certain assets and liabilities for a reason, whether one is a central bank, an individual, a pension fund, or an actual bank.”

These problems aside, the fact that the countries are maintaining so much interlinked debt (we can see the amount of debt in the “Eurozone debt web” developed by BBC http://www.bbc.co.uk/news/business-15748696) indicates that there is huge opportunity to solve, at least partially, one of the biggest problems Europe has.

LICUOS, making it possible

With the problems of credit risk and working capital financing remaining unresolved by the financial institutions, a non-banking system of funding and payments has been created.

Peer-to-peer based platforms do try to provide an answer to these problems, and do so following the current trend of disintermediation of financial services, however they are not able to address the huge value-add that can be obtained through services such as debt multilateral netting. In this environment, and overcoming the shortfalls of existing solutions, we are proud to introduce LICUOS: www.licuos.com.

LICUOS is the global B2B platform that provides multilateral netting, payment and funding services to other companies that do not necessarily belong to the same group, in an easy, intuitive and automated manner.

LICUOS has developed a unique proprietary and patent-pending technology that automatically identifies and generates the most convenient and efficient multilateral netting, with completely automated payment and funding proposals that also manages all of the associated transactions that allow businesses to significantly reduce or eliminate their commercial debts.