Credit institutions are facing new "contenders": start-ups specialised in internet and new technologies (so-called "Fintechs") which now develop credit activities, targeting in particular the financing of small and medium-sized enterprises ("SMEs").
SMEs need financings which are easy and quick to obtain, and may not wish to commit to lengthy covenants. Traditional credit institutions may prove to be reluctant to finance SMEs without material guarantees and need to spend time in structuring/credit assessment before deciding whether or not to finance them. Factorings and trade receivables securitisation programs may not appear suited for SMEs: such programs may take time to be implemented and usually require any company so financed to transfer on a regular basis a material amount of receivables. SMEs need flexibility that banks or factors cannot offer.
The purpose of Fintechs is to combine financing, technology (no more paper, all is about "clicking" to obtain a financing) and swiftness (SMEs need quick answers). In order to do so, some Fintechs set up (and operate) an electronic platform (a "Platform") under which companies wishing to obtain a financing will be introduced to investors (the "Investors") wishing to diversify their investments by investing their available cash in financial products with a remuneration higher than for non-speculative treasury bonds.
SMEs will, under a Platform, offer for sale some of their trade receivables held against their clients. An important feature to attract Investors is to provide a credit enhancement in respect of the receivables so sold by SMEs. In this respect, insurance companies are now able to tailor their offer to financings through Platforms. A Fintech may then enter into a credit insurance agreement with an insurance company under which either such Fintech or the relevant Investor will be the insured party. The Fintech will then be in charge of negotiating and monitoring the insurance policy.
In concrete terms, the mechanism of such Platforms is the following (a "Platform Financing"): companies post for sale some their receivables on the Platform (the "Originators"). Fintechs, acting as the operator of the Platform, will ensure that such proposed receivables comply with a list of eligibility criteria similar to those developed for factorings or securitisations (including the coverage by an insurance policy). Fintechs will contact the debtor of the Originator to ensure that, in particular, the invoiced amount is due. Fintechs will then "disclose" the offer of such receivables on the Platform. Any Investor wishing to acquire such receivables will liaise with the operating Fintech. Such operating Fintech will then take all steps necessary to (i) formalise any transfer deed purporting to transfer the property of such receivables to the relevant Investor, (ii) transfer the purchase price to the Originator and (iii) transfer the collections to such Investor. As a matter of comparison, such Platforms may be seen as a sort of "Ebay of receivables".
The flexibility of such Platform Financing needs however to comply with local law requirements and regulations. Peer-to-peer does not mean unregulated activity. In France, only duly licensed credit institutions and French securitisation vehicles so called fonds commun de titrisation (a "FCT") can purchase receivables before their term on a regular basis.
As a consequence, any entity investing in a Platform purporting to sell receivables by French Originators may be a duly licensed credit institution or a FCT. Credit institutions may wish to participate as Investors in Platform Financings to gain in flexibility, or may also wish to set up their own Platform sponsored by them. However, some other type of Investors which are not authorised to purchase receivables before their term on a regular basis in France may also wish to participate as Investors in Platforms. Such Investors could do so through the subscription of debt instruments issued by a FCT. A FCT could then act as Investor in a Platform and issue debt instruments in order to finance the purchase price of receivables so acquired.
As a result, Fintechs may set up a FCT purporting to act as Investor in Platform Financings. The use of a FCT will certainly play in the near future an active role in the expansion of financing SMEs through Platform Financings. A FCT can also be used as a Pan-European structure.
There will be important legal and structuring work to combine both the main features of a securitisation (asset based financings generally require high quality of assets and detailed procedures) and the main features of Platform Financings such as technology (no paper) and swiftness (a "Securitisation Platform Financing").
Fintechs will be also in charge in the following tasks in a Securitisation Platform Financing: (i) structuring work, (ii) selecting receivables work, (iii) "road-show" work (i.e. searching for investors) and (iv) performing all payments in relation to the Platform. The management company will heavily rely on the operating Fintech in particular in the selection of receivables (although the final decision of purchasing receivables shall remain the sole decision of such management company) and the recovery issues before any indemnification by the credit insurer.
Some or all of the roles mentioned above may be a regulated activity in France. For example, searching investors for the account of an issuer may fall within the scope of a service of placement requiring an investment services provider licence, without prejudice to the application of French banking solicitation rules. In addition, attention shall be paid as to whether the intermediation of the operating Fintech in negotiating the insurance policy or, more generally, the setting up of the Platform does not fall within the scope of an activity of intermediation of insurance transactions and/or activity of intermediation of credit transactions, which are both regulated in France. Finally, if the operating Fintech is in charge of the payments made through the Platform, a specific license of payment institution (établissement de paiement) may be required.
Legal issues that are classic in securitisations shall also be dealt with in Securitisation Platform Financings. If it is intended to accept selling cross border receivables in the Platform, local enforceability and tax advice is required. If it is intended that Originators or debtors are actually individuals, data protection analysis shall be carried out. Those are only examples of issues that securitisation lawyers are used to deal with.
Other legal issues in connection with Platform Financings may be less familiar for securitisation specialists. For example, the very feature of Fintechs financings is the absence of paper: a financing shall be obtained in few "clicks". Practice of agreements executed electronically exist but are not developed in the securitisation area in France. There would be no clear major obstacle to perform a securitisation transaction involving transfer deeds executed electronically but structuring work is therefore important (e.g. in order to manage the custody of such transfer deeds).
The most difficult work is certainly to tailor a securitisation documentation and process for a Securitisation Platform Financing. In trade receivables securitisations, the documentation is negotiated with the receivables' sellers who will play an active servicer role. In a Platform Financing, such role is dealt with by the Fintech. A good source of inspiration may be found in documentation in relation with French fonds de prêts à l'économie (loan-to-real economy funds) which purpose is to acquire debts or loans made to private legal entities whose main business activities are of commercial, industrial, agricultural or real estate nature. The process of selection of receivables is dealt with by investment advisers that are generally appointed by the management company of such loan-to-real economy funds.
Flexible solutions learnt from Securitisation Platform Financings will certainly have an influence on the structuring of the next trade receivables securitisation programmes.