In seventh episode of SME Banking Club Podcast Series, we speak about the market and perspective of factoring services in Poland with Michał Pawlik, CEO and Co-founder at SMEO.
Olena Gryniuk: Before we start talking on SMEO and factoring itself tell us please about yourself. You’ve been working in factoring industry for years and have been previously engaged in a range of well-known in Polish market factoring companies, including Idea Money belonging to Idea Bank. Tell us please in more details what is your pass to SMEO – your current project?
Michał Pawlik: Yes, the experience with establishing Idea Money was significant for me. Thanks to it, I understood the needs and mentality of Polish small and medium entrepreneurs.
Furthermore, I am very grateful to my previous shareholders from Idea Bank for giving me so much autonomy that I was able to create Idea Money as if it was my own startup.
Actually, I am proud of the fact that Idea Money is still the leader in the factoring sector for SMEs.
OG: So SMEO is a fintech, and you are entering Polish market.
MP: Yes, SMEO is an independent FinTech invoice factoring company providing flexible financing services for the small and medium-sized enterprise sector in Poland. In the future, we will look toward expanding into some other European countries. It would be premature to talk about just which ones at the moment. However, I can tell you I would love to have a winter office in a warmer climate.
At SMEO, our goal is to help businesses to manage their cash flow challenges by unlocking working capital through instant payments of their invoices.
Our company was founded in January this year by myself and a team of experienced, entrepreneurial professionals. I always feel grateful when I think about the number of good people that accept my leadership and see fit to follow my vision. We were able to secure capital support from a leading investment fund.
Our service will be completely operational in December 2017. Testing of our IT infrastructure and all processes are underway and should be completed soon.
OG: How do you estimate competitive landscape here in Poland?
MP: The SMEs factoring sector at first glance looks open for investment and has great potential but in fact entering this market is complex. Due to the high initial investments required. And when I say “high”, I mean quite high. We are accustomed to seeing initial investments of five to six million Euro at a minimum. But this is only the first obstacle for new entrants. IT infrastructure, back-office development, and marketing strategies are all challenges that restrict the competition on SMEs factoring market to a few well-funded and well-prepared players.
However, I must admit I want to have at least a few competitors to keep us sharp.
OG: What is the correlation between micro companies using factoring and using working capital lending products at Polish market – because these products are mainly compared. How much are polish entrepreneurs are aware of what factoring is and how exactly it differs from lending?
MP: Only 60 percent of microenterprises say they know what factoring is. Furthermore, there is a gap between stated knowledge and actual understanding. According to the research, only 22 percent of those enterprises fully understand this service.
Therefor bridging this gap in clients awareness will be expensive, tens of millions of EUR have to be invested in convincing polish entrepreneurs about the benefits of factoring for them.
OG: How are fintechs different in sales models and processes compared to banks? We are talking about the factoring, of course.
MP: Polish traditional banks and incumbent factoring companies are also very technologically advanced, but there are important differences in sales models compared to FinTech factoring.
For example, in my previous startup, eFaktoring.pl, the sales process was fully online. Automation transformed adjudication procedures and simplified loan origination for credit seekers. Novel adjudication techniques allowed us to do things we would not have thought possible ten or even five years ago. Creditworthiness could be assessed over extremely short time-frames. We allowed credit-seekers to sign contracts online with one click. Our stream-lined loan origination process could be completed in under 15 minutes.
This company was the first authentic polish FinTech service in the factoring sector. We started selling loans for microenterprises and self-employed freelancers in 2015.
Although I have moved from eFaktoring.pl to build SMEO now, I’m very proud of eFaktoring.pl’s continued success on the market.
OG: What’s the range of your factoring limits in SMEO?
MP: The maximum factoring value is 200 000 PLN, the equivalent of 50 000 EUR.
OG: What is the main factoring product in SMEO you are focused at?
MP: We prefer to sell the standard factoring service. By that, I mean recourse factoring with a clear assignment clause. I believe the market is currently polluted with what I call quasi-factoring lenders.
At SMEO, we believe in the standard factoring service and are dedicated to meeting all of the logistical challenges that providing that service entails. The players in our sector today that offer so-called quasi-factoring loans put themselves and their clients at risk in ways that perhaps aren’t known widely enough. Quasi-factoring services are sometimes called silent factoring. This means that there is no assignment clause in the factoring contract. Nothing in the contract stipulates that the quasi-factoring company may collect the debt for the supplier, the original creator of the invoice. As I see it, quasi-factoring services are more like loans than factoring. They lack some of the key advantages of traditional factoring.
This is a danger to their clients because it is not clear that businesses that use quasi-factoring services should enjoy the same tax advantages as those that use the standard factoring service. SMEO’s approach is safer, simpler, and more effective for our clients.
OG: What will be the human input into your underwriting process and what is the technical part of it?
MP: Yes, at SMEO, we recognize that our technological infrastructure allows us to do things that were previously thought impossible. Using the power of Big Data, artificial intelligence, and finely- machine learning and automated data-driven scoring technology, we can establish credit histories for so-called “thin file” credit-seekers, and get them the capital that they need. Alternative adjudication techniques that draw from information sources like social media accounts allow us to get a sense of credit-worthiness that is deeper, richer and more accurate than many traditional adjudication techniques. As a FinTech company, digital solutions are our primary focus; nevertheless, our processes are people-powered.
OG: What will be your distribution strategy? Does it include cooperation with banks? We see such cooperation examples at Polish market – like ING Bank Sląski cooperates with inviPay; nevertheless, ING Bank Sląski has its own factoring company inside the group. It seems like such cooperation models with fintechs look simpler for banks as fintechs can be more flexible in their credit policy. So how do you see it and what is your distribution model?
MP: Yes. Our distribution model will be fully online. The development of partnerships is still an ongoing process. Unfortunately, I am not able to divulge their names today, but I can tell you that we are working with large traditional banks, other financial firms like accounting firms, and some marketplace platforms for SMEs.
OG: What are your targets for the upcoming year?
MP: As I’m sure you are aware, I developed a reputation through my work with Idea Money and eFaktoring.pl, for setting and exceeding ambitious targets. With SMEO, I am of course continuing along this path. I will not get into details here, but we are excited about raising the bar. It would not be interesting otherwise.
OG: Michal, thank you very much for that conversation!
MP: Thank you very much!
Michał Pawlik will moderate Alternative SME Finance Panel during CEE SME Banking Club Conference 2017 (23-24 November, Krakow, Poland). Join us to discuss factoring live!