LICUOS and collaborative finance

Collaborative finance is a category of financial transaction that occurs directly between individuals without the intermediation of a traditional financial institution. This new way to manage informal financial transactions has been enabled by advances in social media and peer-to-peer, business-to-business and even peer-to-business on line platforms.

However, collaborative finance is just a category inside collaborative economics that refers to organizations and initiatives that value cooperation, ecological sustainability and social justice.  These include community supported agriculture, collaborative consumption, and transportation solutions among many others.

Before the industrial revolution, the typical standard of living had changed little through history. The industrial revolution brought sustained economic growth for the first time to the developed nations. But ecological constraints and limited human needs threaten to stop growth. We need to ask when growth should end because people have enough and/or because we have reached our full production potential.

The efficiency factor is an important ingredient of economic growth. The economy must use its resources in the least costly way (productive efficiency) to produce the specific mix of goods and services that maximizes people’s well-being (allocative efficiency). The efficiency factor is the capacity of an economy to combine resources effectively to achieve growth of real output that the supply factors of growth make possible. As Albert Cañigueral, Spain & LatAm Connector at OUISHARE, said: “we must ensure that what we produce as a society flows more and faster because we cannot produce more”.

Collaborative economics enables people to rent, share or swap goods and services. Promoting values such as integrity and solidarity, this new model has extended to every social and economic field including companies’ organization, culture, manufacturing or finance. In fact, TIME Magazine recently called Collaborative Consumption one of the “10 Ideas that will change the world”. One of the main factors enhancing the sharing economy is the technological breakthroughs we are attending to. “This technology has created the needed efficiency and trust to connect thousands of people” remembers Rachel Botsman, one of the most influential writers about collaborative consumption, and adds “the currency of the new collaborative economy is trust”.

During these years of economic crisis and instabilities, the lack of trust in the financial markets and banks has become evident. As Philippe Gelis, CEO at Kantox, said: “it seems that companies feel much more comfortable trading FX between themselves than with banks”. Trust is one of the principles of collaborative economics and individuals and companies trust more unknown people than banks. This is breaking the existing dependency on banks.

We describe below various categories and examples of initiatives of collaborative finance. We selected an example per category but there are many other initiatives in each group with different characteristics, impact and business models.

  • Peer-to-peer lending and crowdfunding platforms. Zopa is a UK-based company providing an online money exchange service, allowing people who have money to lend it to those who wish to borrow, instead of using savings accounts and loan applications at traditional banks.
  • Virtual currencies. Bitcoin is a cryptocurrency first described in a 2008 paper by pseudonymous developer Satoshi Nakamoto, who called it a peer-to-peer, electronic cash system. Bitcoin creation and transfer is based on an open source cryptographic protocol and is not managed by any central authority. Bitcoins can be transferred through a computer or smartphone without an intermediate financial institution.
  • Time banks and bartering platforms. Timebanking.org connects 250 timebanks across the UK. Timebanking is a means of exchange used to organize people and organizations around a purpose, where time is the principal currency.  For every hour participants ‘deposit’ in a timebank, perhaps by giving practical help and support to others, they are able to ‘withdraw’ equivalent support in time when they themselves are in need. In each case the participant decides what they can offer.
  • Peer-to-peer trading platforms. Kantox is a web platform which allows companies to directly find counterparties (others companies) to match and net their future cash-flows in foreign currencies, at an agreed fixed exchange rate (mid-market rate), and thus hedge their foreign exchange risk. By netting cash-flows in foreign currencies without the intermediation of banks, Kantox is able to offer companies a fairly priced FX hedging solution which does not require any margin deposit nor credit line.
  • Multilateral netting platforms. LICUOS is a 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 so that they can significantly improve their working capital and cash flow management.

LICUOS is a disruptive initiative in the collaborative finance spectrum where companies can compensate and pay their commercial debts and provides them with a non-banking liquidity fund offering some services included in other categories such as “the peer-to-peer lending and crowdfunding platforms” category. On the one hand, the netting processes enable companies to reduce the funding needs as their working capital is reduced and provides them with a non-banking liquidity channel that allows buyers to borrow money, to early pay their accounts payable. On the other hand, the LICUOS patent pending technology generates multilateral payment proposals for the companies, reducing the amount of debts in the chain and allowing for an optimized and minimized movement of cash.

Collaborative economics and finance are not new, but the current economic crisis, along with technological advances, has boosted its growth. Following a clear trend of banking disintermediation, a huge number of peer-to-peer electronic platforms have emerged in every area, including finance.

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.

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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.