I sat down with Federico Travella, founder and executive chairman of Novicap. We had a far-reaching discussion on topics related to invoice finance and economics in general. In Part One of the interview we talked about the creation of Novicap, competing with banks, the Chinese Road and Belt Initiative, Novicap’s financial technology, dealing with public administrations and e-invoicing in Latin America.
I read that you have closed a deal for a new credit facility of 200 million Euros that would allow you to finance a volume exceeding 1 billion Euros in a year. Are you competing with the banks?
No, I think competing with banks is a really bad idea.
That is not something that works in my experience. Especially on the pricing side as a non-bank, if you don’t have a balance sheet and you don’t take deposits, then you’re not going to compete on pricing with banks. As such, competing with banks not only seems foolish, but also unnecessary because if you look at receivables finance it’s a massive and growing market. FCI estimated the global receivables finance grew 18.3% in 2022 to 3.66 trillion Euros in annual volume. Europe accounts for 2.5 trillion Euros with Spain volumes growing most rapidly, increasing no less than 30% year-on-year!
Adding to this already large market, banks have been retrenching in this more recessionary environment which drives unprecedented demand for working capital solutions. In sum, in this market it’s about proper execution and risk mitigation rather than trying to compete with banks for the same business.
In fact, we collaborate with banks: we have multiple bank partners in Iberia and Benelux, which are our two primary markets. Banks act like an origination channel for us because they have a thousand and one reasons why they are not able to finance a client. This can go back to concentration limits or credit insurance limits which are now being affected. Consequently, an important part of our SME and mid-market origination comes through banks and other partners. That is the external sales force we’ve built up over the years.
Novicap has won various awards and accolades for excellence, and for three consecutive years made the Financial Times 1000 list for fastest growing European companies. How did the company start and what was the original purpose of the company?
That’s right – we’ve combined high growth with being very capital efficient. As you know, in the last years we’ve seen this bonanza of venture capital and private equity coming into the market. We’ve always been very disciplined in terms of return on investment of the money we raised – the revenue multiplier one obtains on the equity raised so to speak. We’ve only raised 3 million in equity and with that capital injection we’ve achieved, I would say, a lot compared to many other peers that raised significantly more capital. Our recent data shows those peers have traction numbers that are very similar or actually worse. That’s been interesting to witness over the last few years and the market nowadays certainly rewards capital-efficiency.
As for awards: this year we also won the award for best domestic factoring platform of 2022 at the RFIx Awards (Receivable Finance International Awards) organized by BCR Publishing. It’s now the fourth time in a row that we’ve won such an award which recognizes the continued success of our platform and team.
Now going back to your original question, I’ve been an entrepreneur for more than a decade. The business I helped build before Novicap was an e-commerce business called Lazada in Southeast Asia under the Rocket Internet umbrella, a global venture builder. Rocket provided us with the seed capital to start the business which was a two-sided marketplace. Think about Amazon or Alibaba: we had merchants selling goods through our platform. On the other side we had consumers shopping, paying either by card or cash on delivery, allowing us to collect revenue rapidly.
And naturally as a platform trying to optimize our own working capital, we were trying to pay our merchants or suppliers as late as possible. And this is when I first bumped into working capital finance and what incumbent banks had on offer. And when I spoke with banks about reverse factoring or a supply chain finance program, I realized two things. First, those banks were taking a very balance sheet-centric approach to underwriting the suppliers while eventually the party that had to pay the invoice after, say, 90 days was the supplier’s debtor. Typically, the suppliers were small and consequently the credit limits were small. However, those suppliers had larger debtors with much better credit rating – why weren’t the banks looking at those counterparts?
I was very surprised about this supplier-centric and traditional underwriting model and the lack of credit banks could provide to SMEs.
The second thing I realized is that all the banks’ processes and technology were really outdated. A good example – and I’m talking 2014 – is a bank that could only work with paper-based invoices, i.e. they needed to receive paper-based invoices which then went into a big factory where they were scanned, OCRed, and then the relevant data points from those invoices were eventually put into the bank’s system and suppliers could click a button to get early pay.
How was this possible in 2014 after all the “digital transformation” sold to banks by expensive consultants? During this ‘discovery’, I learned that Barclays Bank was launching an accelerator program out of London to help entrepreneurs jump-start their FinTech startup. Barclays had tasked Derek White, back then the Chief Innovation Officer reporting to CEO Anthony Jenkins, to design an accelerator program in collaboration with Techstars, the global accelerator. I felt it was a good time for me to move on and apply my learnings to a new project and start Novicap.
Initially, Novicap was a digital SME factoring platform because that’s where the banks have such a hard time to make the unit economics work. Over time, our platform grew to being the end-to-end solution for working capital management and financing. Today, we provide both credit and payment solutions for SMEs, mid-market corporates and public administrations.
On the credit side, you have receivables finance, payables finance, and working capital loans – all in multiple flavours. Then you have payments solutions and all of this is built on one single, proprietary platform.
Fantastic. A little digression: I spent a couple of years in China and you mentioned Alibaba and you were based out of Singapore. I’ve been following the debt problem with the local governments in China at the moment. China used to be or still is, the factory of the world for so much stuff. What do they do in China with invoice finance? Is it a big deal for them or is it just using local banks essentially to bridge the gap in funding?
So, I haven’t operated in China and at Lazada I was in Southeast Asia – think Singapore, Indonesia, Malaysia, Philippines, Thailand and Vietnam. What I’ve seen in action is how China has built both the infrastructure, guarantees and financing for enabling export.
This isn’t different from other nations like, you know, Britain or the EU. The governments provides export guarantees and this enables banks like HSBC and others to lend more and foster exports. Now what China has been very much focused on is their Belt and Road Initiative. It’s really connecting the East to the West. And there’s interesting applications along the way because eventually the ownership of goods, insurance covers etc. change when those goods are moving from East to West through the Belt and Road Initiative. It goes through multiple jurisdictions, different insurance covers, and what you see is there’s a lot of innovation there when it comes to what I would call multi-tier or deep tier financing, whereby it’s not just the tier-one suppliers of the end-buyer that are obtaining financing, but also the suppliers of the suppliers of the suppliers of the suppliers. And this, in turn, drives export and more production throughout the supply chain. Eventually, it’s a little one (supplier) at the end of the chain that also needs to have the working capital in order to produce.
For instance, there’s an interesting partnership between Ant Financial and Standard Chartered in the Belt and Road Initiative to provide financing throughout the chain from East to West. Banks seem quite keen to finance this cross-border activity with the right guarantees and legal structure.
Your website describes Novicap as a European fintech with a proprietary technology platform. Can you tell me about what your financial technology does, and how it helps SMEs, mid-market corporates and public administrations?
As I explained, the genesis behind Novicap was very much my experience: witnessing the inability of incumbent banks to deal with complexity and granularity. Banks appear good at these highly structured, large, securitization or supply chain finance programs. The rule of thumb is that banks require 50 million in assets under management to make a supply chain finance program work. In other words they have high thresholds, both in factoring and supply chain finance (if we keep it simplistic), to make it worth their time and money. This is because the cost-income ratio of SMEs and granular transactions appears unprofitable, even in supply chain finance.
Novicap doesn’t suffer from that legacy the banks carry as we’ve built everything from the Internet up. Some of the technology that I’ve seen in banks is from the eighties and nineties. You can visualize their technology as a lasagne that they’ve built up over the years, layer by layer. I’ve seen cases in which there’s a senior architect – senior in the sense of retired – still on retainer because he’s the only one who understands the code of, you know, 10, 20, or even 30 years ago. When something breaks down, he’s called up to go in and search for the layer of lasagna that collapsed. Crazy. Because of this legacy, it’s very difficult for banks to innovate. I think that’s why you see bank FinTech partnerships accelerate because it’s a much easier way for a bank to innovate.
Banks can also license the required technology but eventually many of the legacy software vendors also suffer from legacy and which come with many limitations, including the speed at which you can add new, innovative features.
Novicap’s technology not only leads to a superior user experience and ability to monetize granularity, it also allows the user to lower the risk in providing working capital solutions. Risks are many – think of credit risk, fraud risk, operational risk, compliance risk, and so on. Our systems monitor all of these and more on a real-time basis and that allows us to recalibrate where needed. If a party becomes sanctioned or one of its directors becomes a PEP (Politically Exposed Person) then we’ll detect that automatically.
The beauty of this asset class is that it’s short-dated, say, 60 to 90 days. The Covid-19 pandemic was a time during which Novicap’s systems helped to adjust credit limits at a very fast pace. I witnessed the opposite at banks: they struggled because credit limits are often reviewed only periodically or when a credit insurer provides a warning. During the pandemic, when everyone thought the world was vanishing, there were industries like aviation and hospitality which were really affected. During those periods of extreme stress, the banks were often running blind. They didn’t know how much exposure they had or should they build it off. In our case, we could just, because of the short-dated nature, divest from certain exposures very quickly, and then build them up again when the risks were decreasing. This is, I think, the best example of seeing our technology in action.
Right. You mentioned dealing with public administrations and I understand that there’s some differences in terms of what they want from invoice financing compared to the private sector. Could you tell our readers a little bit about your experience of dealing with public administrations?
We are true experts in that space. Government expenditure is an important component of GDP in most Western countries, whether you like that or not. Public administrations are dependent on receiving their budget from the central administration and I understand there’s a lot of red tape. This red tape creates a lot of delays in payments for government suppliers of different administrations. Administrations recognize this and they find it very frustrating as well.
To take a very simple example, a public administration decides to build a bridge. If those suppliers have to wait for their money for a few months and you don’t want that as an administration because you’re affecting, you know, the real economy. In addition, you have secondary effects throughout the supply chain because the first-degree suppliers will start to pay their suppliers late, and so on. Late payments trickle down many degrees eventually causing working capital issues such as companies having difficulty to make their payroll or pay their VAT. Novicap helps suppliers obtain an early payment against those long-dated government receivables. We also like this sector, naturally, because of the credit risk of the government.
It should be low; it should be zero.
Well, I think zero is, you know, unrealistic: if there were no risks then you wouldn’t be in business. Some countries are being downgraded, but most European countries are still investment grade in nature. And there is also no history of governments across Europe not paying their suppliers. Yes, there are delays. However, there aren’t any haircuts on this sort of transactions because, let’s face it, this is the real economy. The debt-holders are SMEs, not institutional investors who hold government bonds. It’s a very different asset class.
So even local governments can’t default on a debt.
Correct, they cannot in Spain at least. In fact, the law does not foresee the possibility of public administrations declaring bankruptcy. The difficulty, potentially from the credit structuring perspective, is duration risk. There’s some really bad payers that take a year or more to pay bills.
That’s a long delay. Please tell me about how you digitalize invoices. Have you developed your own technology to handle e-invoicing? And since Brexit, Britain has been able to diverge from EU regulations, has this posed a problem for Novicap in terms of things like e-invoicing?
We have not developed our own software or applications for electronic invoicing because we consider that market quite saturated. The market is actually quite, quite busy: there’s a lot of systems across Europe. To be very clear, we are excited about the e-invoicing trend because it’s great for business, it’s great to avoid fraud and tax leakage, and so on. I’m excited for society that invoicing will become a hundred percent electronic.
Interestingly enough, you need to look at Latin America if you want to see the power of e-invoicing and digital tax compliance. In many Latin American countries, like Peru or Mexico, invoices aren’t only issued and sent electronically, they also are cleared via the government. This is the so-called clearance model and it provides a single source of truth for all parties involved, including dispute escalation. It’s really impressive what they’ve done in Latin America and I look forward to seeing this level of innovation in Europe.
Across the Atlantic, the European Directive for electronic invoicing established mandatory e-invoicing for public administrations, so B2G. Italy has been the front-runner, making e-invoicing compulsory in both B2B and B2G transactions. I read this also pays off for the tax man: in 2019, Italy collected 2.5% more taxes – that seems like a lot of extra income!
On the Brexit side, to be honest I don’t really have much to comment on that. It hasn’t affected us except that it has made business harder in general, I would say. It increases the level of admin, especially for organizations with a cross-border activity or hiring into the UK.
Special thanks to Federico for finding the time to give me an interview and helping me edit the interview for publishing. Part Two of the interview will be available in two-weeks’ time.
