Football, factoring and fraud: Kicking out the bad actors, creating rules and standards
Factoring, invoice financing, and open account methods are vital for the global economy, aiding businesses in managing cash flow & liquidity.
Courtesy Trade Finance Global
There are more similarities between football and factoring than one might think.
Both are delineated from other concepts. Rugby and football came from the same game (officially delineated into 2 sports in the mid-1800s). The original idea has spawned a lot of other similar things that achieve this same initial goal.
Likewise, factoring has spawned many other means of financing trade, like invoice financing, open account financing, and payables financing.
But, factoring is older than football.
The origins of a rudimentary form of factoring have been traced back to ancient Mesopotamia 5,000 years ago, while the first known example of a team game involving a ball only dates back 3,000 years to Mesoamerica.
Both have morphed and changed over the millennia, and the rules, standards, and norms clearly defined today would be nearly unrecognisable to those ancient pioneers.
Despite these changes, the modern editions of both remain true to their original purposes: the entertainment of the people and the financing of global trade.
The advancement of both football and factoring in the modern era is thanks to the associations that developed the rules and promoted each. In football, it is associations like the NFL, EPL, La Liga, and many more. For factoring it is FCI – the global representative body for Factoring and Financing of Open Account Receivables.
Today, factoring and other related methods of financing trade – like invoice financing and open account – have become even more crucial to the global economy and essential for businesses to manage cash flow and liquidity.
This article examines how innovation and regulatory measures intertwine within the factoring sector, focusing on the essential fight against fraud to encourage worldwide economic expansion.
It shows the significance of advanced financial solutions and regulatory policies in creating a resilient and transparent market environment. Furthermore, we need to discuss how these efforts not only mitigate risks but also pave the way for sustainable growth in international trade.
More than just factoring
When it comes to financing trade, the evolution is evident in the diverse applications and challenges financiers face across different global markets.
With its mature factoring and invoice finance market, Europe grapples with issues arising from late payment regulations. Conversely, Africa sits at the opposite end of the spectrum, representing an emerging market where the foundational structures for factoring are still being established, indicating a significant growth potential.
Organisations like FCI are pivotal in navigating these varied landscapes, emphasising the importance of tailoring approaches to fit each region’s specific needs and opportunities.
Rather than applying a one-size-fits-all strategy, our team at FCI focuses on understanding and addressing the unique circumstances of each market, highlighting the dynamic and adaptable nature of modern trade financing.
This approach facilitates continued development in established markets and supports emerging markets in advancing their financial infrastructure, showcasing the industry’s broad and evolving impact on global finance.
In recent years, one of the main priorities for the global financing industry has been preventing fraud.
Fighting financial fraud
In global trade finance fraud prevention is paramount, which has led regulators to develop laws and rules that govern these transactions in order to maintain fairness and integrity across the market.
Merely having these rules, however, is not enough. Effective enforcement is just as important.
FIFA, the international governing body for football, has a 144-page rulebook that establishes what is and is not allowed on the pitch, but the efficacy of those rules lies in having a referee on the field to enforce them.
The same is true for the financial sector. While the laws exist, vigilant monitoring is still required to detect and prevent fraudulent activities and technological advancements and innovative approaches to governance are making this easier.
MonetaGo, for example, provides a fraud prevention solution for trade by leveraging digital technologies and a registry-based approach that assists financiers with validating transitions and authenticating trade documents.
Such advancements are similar to the Video Assistant Referee (VAR) systems used in professional football matches that help catch the infractions that even the best referee is bound to miss.
In the fast-moving world of invoice finance, where assets and payments change hands quickly, instantly detecting and addressing duplications or other forms of fraud is invaluable, as MonetaGo has shown with our experience in India.
Case study: India
MonetaGo’s experience in India has underscored the invaluable nature of being able to instantly detect and address duplications or other forms of fraud within the financial sector.
The introduction of regulatory reforms that have enabled non-banking financial institutions (NBFIs) to offer factoring services and the establishment of the International Financial Services Centre Authority (IFSCA) in India’s GIFT City (“Gujarat International Finance Tec-City”) have been pivotal.
These reforms have catalysed the adoption of technologies that authenticate commercial invoices, fostering an ecosystem of trust and reducing the incidence of fraud through duplicate financing.
The ability to validate commercial invoices in real time has enhanced the confidence of market participants and directly contributed to increased liquidity within the sector. This is largely due to the reduction in losses that typically result from fraudulent activities, showcasing how technology can serve as both a deterrent and a mitigation tool.
As MonetaGo is involved with many of these processes, we’ve observed firsthand the positive impact that regulatory bodies have had in shaping a safer market environment. Our proactive approach, combined with the deployment of Deduplication solutions, has been instrumental in this transformation.
The next steps for India involve scaling these successes to further enhance the financial ecosystem. The aim is to increase financing volumes significantly, thereby supporting economic and industrial growth across the country.
While the main value of this approach has been in curbing duplicate financing fraud, it also has the added benefit of establishing a precedent for financial institutions globally to adopt similar measures.
As the Indian case study shows, one way to do this is by leveraging public-private partnerships and continuing to innovate in fraud prevention and detection.
Public-private partnerships for fraud prevention
Public-private partnerships play a crucial role in combating fraud and fostering innovation in financial solutions.
These partnerships involve regulators, government agencies, international organisations, and the private sector collaborating to address financial fraud, and often, the dialogue centres on removing barriers to data access and adopting digital solutions to ensure safer, faster, and more cost-effective financing.
A significant aspect of these initiatives is the focus on resolving the issue of duplicate financing, which is a prevalent form of fraud where trade documents are financed multiple times by different financiers. This challenge strains the entire ecosystem, leading to losses and undermining trust in the financial system.
Local and international registries play a crucial role in preventing duplicate financing and verifying the authenticity of trade documents. Local registries were established to address this challenge; however, they encounter similar limitations to those faced by diverse electronic Bill of Lading (eBL) offerings when scaling internationally.
Digital islands only cater to specific communities, and achieving connectivity to all domestic registries globally to resolve cross-border fraud is both costly and demands a standards-based approach. Swift entered the scene by providing the MonetaGo Global Hash Registry through its API gateway to all 11,000 Swift members worldwide. This initiative is specifically designed to address the challenges posed by fragmentation.
At FCI, we are actively involved on multiple fronts, engaging with regulators and collaborating with a wide range of stakeholders in the financial industry. Our goal is to share the best practices and innovative solutions we’ve observed across different markets.
By positioning ourselves as a neutral intermediary, we’re able to facilitate the adoption of strategies that are not only effective but also tailored to fit the unique legal and cultural nuances of each market.
Too good to not be true
A financial industry best practice that benefits all parties on the value chain by simultaneously derisking liquidity and increasing financing may seem too good to be true, but that is exactly what these fraud detection solutions can provide.
Leveraging public and private sector partnerships can enrich the strategic capabilities needed to bring these solutions to fruition and allow them to grow and develop.
FCI has our roots in factoring, which is still a significant focus, but we have also evolved with the needs of the market to become a leader in other financing methods like open account and receivables financing. This experience can provide invaluable independent support towards establishing such initiatives.
Continued collaboration will be key to successfully preventing future financial fraud in the world of global trade.
After all, it takes an entire team to win a football match.
By Neal Harm, Secretary General, FCI, and Neil Shonhard, CEO, MonetaGo
