Neobanking, money remittance and import/export financing
- What is Invoice Discounting and what are the related terms used in the industry?
Invoice Discounting is a form of working capital financing backed by Invoice receivables. A goods/service seller can sell their invoice at a discount thus unlocking the capital stuck in their cash receivables from the goods/service buyer. An Invoice has a fixed term of payments from 15 days to 90 days. The goods/service seller can use Invoice discounting to receive the funds from a third party in advance in return for a discount. There are several forms of Invoice Discounting. The key differences are as follows:
- How much advance is paid by the investor?
- Is there a recourse clause in the advance payments by an Investor?
- How many Investors are funding the same Invoice?
- Who is responsible for collecting the Invoice money from the goods buyer / Invoice Payer?
When the Invoice payment is managed by the Investor who purchased the Invoice from the seller, it is called “Invoice Factoring”.
- What is the “Business Model” of “TuningBill”?
TuningBill is an Invoice Discounting platform. It allows Invoice Sellers to sell their Invoices at a discount to one or more Investors. The key features of the TuningBill model are:
- TuningBill verifies an Invoice put up for sale by a Seller. The validation involves the confirmation by the Invoice Payer.
- TuningBill credit risk and pricing engine suggests a price.
- Invoice Seller can input their own selling price.
- One or more than one Investor can purchase parts of the Invoice.
- As and when a part of the Invoice is purchased by an Investor, the Seller automatically receives the money minus transaction costs in their wallet.
- The Invoice Seller surrenders ownership of the full or part Invoice to the relevant Investor(s). The ownership contract is managed by TuningBill.
- Upon receipt of the payment from the Invoice Payer, the money is returned to the Investors after deductions of TuningBill’s fee and costs.
- What is the role of Invoice Payer in the “TuningBill Business Model”?
Invoice Payers are an integral part of the TuningBill Business Model. They are critical to confirming the validity of the Invoices. Additionally, TuningBill shares a part of the TuningBill fee with the Invoice Payer for the purpose of validation of the Invoices. If an Invoice Payer uploads their Invoices directly at the TuningBill platform, they would receive a share of any fee that TuningBill generates through the sale on its platform. Additionally, TuningBill can help the Invoice Payers to pre-pay “anonymously” and at a discount some of their preferred suppliers. This helps the Invoice payers utilise their surplus treasury cash for better returns and enhance their own supply chain by rewarding good supplier.
Platform users and their registration
- Who can register on the TuningBill platform?
TuningBill has three types of participants/clients:
- Invoice Seller
- Invoice Payer
The platform has specific and user-friendly registration process for each type of client.
- How long does it take to register as a Seller and what information is required?
The registration process for a Seller takes about 15 minutes. A Seller is required to input their company information to be filled in by a company representative. TuningBill performs the following KYC on the Seller:
- Business check for the soundness of the business;
- Compliance check for the sanctions, PEP (politically exposed persons), AML/TF (anti-money laundering and terrorist financing checks) of the business and their owners;
- IDV check for the representative who uploads the information.
The above process normally takes less than 30 minutes. If any of the KYC fails, we revert to the Seller for additional information and the process may take a maximum of 24 hours.
- Can you request additional information from the Seller?
Yes, we can ask a Seller to provide additional information about their business and people of significant control in their business.
- Please explain the Invoice selling process.
Once a Seller is successfully registered, they can upload an Invoice on the TuningBill platform. The process is very quick and easy, and an Invoice upload shall take less than 5 minutes. A Seller must first link a Bank Account to be able to upload an Invoice for sale. The Seller can choose to first link the Bank account and then upload an Invoice. Once an Invoice is validated by the Invoice Payer, TuningBill Platform makes it available for Investors invest in the Invoice.
- How does an Invoice get priced?
Please refer to the section “Pricing and Fee”.
- Can a seller withdraw an Invoice?
Yes, unless an Invoice is fully sold. In case an Invoice is part sold, the Seller can choose to withdraw the Invoice from sale for the remaining share of the Invoice value. The sold portion will still appear in the asset ownership of the Investor. In case the Invoice is not sold at all, the Seller can choose to fully withdraw the Invoice from sale.
- What if an Invoice is uploaded with wrong information?
If there is no investment in an Invoice yet, the Invoice Seller can edit the Invoice and the Invoice will undergo the standard verification. The Invoice would no longer be available for the Investors to invest while the verification of the changes is underway. If an Investor has already invested in an Invoice in part or in full, the Invoice Seller must call the TuningBill customer service to get the Invoice amended. This will require amendment to relevant contracts with the concerned Investors and Payers and a full reverification of the Invoice.
- How long does it take to register as an Investor and what information is required?
The registration process for an Investor takes about 15 minutes. An Investor is required to input their personal information in the case of an Individual. In case of a legal entity, the Investment Company information shall be filled in by a company representative. TuningBill performs the following KYC on the Investor:
- Compliance check for the sanctions, PEP (politically exposed persons), AML/TF (anti-money laundering and terrorist financing checks);
- IDV check for the representative who represents the Investing company;
- Source of fund declaration from the Investor;
The above process normally takes less than 30 minutes. If any of the KYC fails, we revert to the Investor for additional information and the process may take a maximum of 24 hours. The registration process is in line with the current regulation and the full documentation and checklist is detailed in our KYC and AML document.
- What are the eligibility criteria for an Investor?
An Investor can be an Individual who is either a High-net-worth Investor (HNI) or is self or otherwise certified sophisticated Investor. Institutional investors can be any fund with appropriate mandate provided they pass our KYC checks. We take the source of funds verification very seriously and in line with the current regulation, we reserve the right to ask for any information that may be required to ascertain the goodness of the fund. TuningBill reserves the right to decline any Investor, either Individual or Institutional at its sole discretion.
- How does an Investor start Investing into Invoices?
Upon successful registration, an Investor is required to link their Bank account that goes through a compliance check. Once the linked bank account clears the compliance, the Investor can choose to Invest in any active Invoice on the TuningBill platform. To facilitate a smooth Investing experience, the TuningBill Platform provides a user-friendly dashboard to allow for the browsing of Invoices. An Investor can filter the invoices based on the currency, level of return, credit quality of the payer, duration etc. If the Investor wants to invest into an Invoice, they can simply click “Buy” button to allocate an investment amount from their wallet. The share of the Invoice is added to their cart once the Investor allocates a fund. As a last step, the Investor can review all the purchases in their cart and checkout after review. The Investor can change any selection while reviewing their investment in the cart.
- How does investment in part of an Invoice work? Please explain the ownership mechanism.
The Platform allows an Investor to purchase a part of an Invoice with a minimum set at $1,000/£1000/Euro 1,000/Rupee 100,000 or lower if the Invoice face value is lower. All fees and discounts are computed on a weekly basis with an upper ceiling on the fraction of a week. Please refer to the section “Pricing and Fee” for more information. An Investor owns the % value of the Invoice Face Value that the Investor would have purchased. The Investment and the ownership are clearly recorded with TuningBill and the relevant contract can be downloaded directly from the Platform. If an Investor chooses to invest $1,200 of an Invoice whose discounted value is $2,400 and face value is $2,500, the Investor would own $1,200/$2,400 = 50% of the Invoice. Upon the payment of $2,500 from the Invoice Payer, the Investor will receive 50% of $2,500 = $1,250 net of any bank or brokerage fee if any.
- Is there a mechanism to do automatic selection of Invoices?
Yes, an Investor can set their Investment criteria so that their money can be automatically allocated to a set of Invoices. However, this feature is not open as of now until the platform has enough volume and diversity.
- What if an Investor has chosen to Invest in a set of Invoices but doesn’t have enough money in the wallet?
An Investor is limited by the value in their wallet as to how much they can shop on the Platform. At the time of allocating investment to an Invoices, an Investor will not be able to allocate funds in value more than their wallet value.
- Can an Investor maintain wallets in multiple currencies?
Yes, an investor can maintain wallets in multiple currencies. We allow investors to convert their money from one currency to another using our Broker services. Please note that there could be brokerage charges involved if an Investor converts money from one currency to another. At the same time, an Investor is not required to convert their money into the Invoice currency to invest into an Invoice. TuningBill allows an Investor to hedge their currency exposure without the need to convert their investment currency into the Invoice currency.
- How long does it take to register as a Payer and what information is required?
The registration process for a Payer takes about 15 minutes. A Payer is required to input their company information to be filled in by a company representative. TuningBill performs the following KYC and compliance checks on the Payer:
- Compliance check for the sanctions, PEP (politically exposed persons), AML/TF (anti-money laundering and terrorist financing checks);
- IDV check for the representative who uploads the information
The above process normally takes less than 30 minutes. If any of the KYC checks fail, we revert to the Payer for additional information and the process may take a maximum of 24 hours.
- Why should an Invoice Payer register at TuningBill platform?
An Invoice Payer enjoys multiple benefits from registering with TuningBill.
- A Payer can earn fee in return for validating the Invoices sold through the TuningBill Platform
- TuningBill provides a free cashflow management and FX management tools to its Payers.
- TuningBill helps improve the supply chain quality of the Payer by helping their suppliers.
- A Payer can anonymously choose to discount and hence advance-pay their preferred suppliers.
- How much fee does TuningBill pay to its Payers?
TuningBill pays 1% annualised “Payer Fee” to its Payers for all Notional that is Financed through the TuningBill Platform. For more details please refer to the section “Pricing and Fee”.
- Are there any additional fee for Discounting their own Invoices through TuningBill?
TuningBill will charge the Invoice Sellers its standard Platform Fee for Discounting through the Platform. However, these charges would be net of payments due from TuningBill to the Payers.
TuningBill Investments and comparable asset classes
- What can an investment through the TuningBill platform be compared to?
TuningBill platform provides an investment opportunity into short dated receivables with a duration of 15 days to 90 days. The investments are priced as per the credit risk of the payer and they are uncollateralized and without any recourse either to the Invoice Seller or the Invoice Payer. The immediate asset class to compare with these investments are T-Bill or Treasury Bills with similar duration. However, since the T-Bills have an extremely low default risk, they provide much lower return, usually the federal fund rate. Unlike T-Bills, the receivables carry the credit risk of the Payers and hence provide a healthy return for those risks. Invoice receivables can also be compared to the short dated commercial papers issued by corporates. However, the commercial papers are debt instruments backed by the corporate assets and hence have lower returns compared to the receivables. The following table shows a schematic comparison of Invoice discounting risk and returns compared to other similar fixed income asset classes.
- Can an Investor re-sell an Invoice? How is the liquidity of an Invoice on the TuningBill Platform?
As of now an Investor can only buy an Invoice or its part. In future we will enable the ability for an Investor to resell an Invoice. The Invoices are extremely short duration, so it may not be cost effective to buy and sell Invoices too frequently due to inherent transaction costs of the transfers and brokerage and banking charges. However, due to the short-dated nature of the Invoices, the overall investment portfolio is very liquid with an Investor getting their investment back on average in 30-45 days.
TuningBill Risk Management Framework
- How does TuningBill minimise risk for its Investors?
TuningBill takes various steps to reduce or minimise risks for its Investors.
Every Invoice Seller and Payer goes through rigorous business and compliance checks. A Seller can upload an Invoice only after successful onboarding.
Every Invoice goes through a validation with the Payer and establishment of a contractual obligation from the Payer to explicitly acknowledge the change in the ownership of the Invoice to the Investor through the TuningBill “Terms of Services”. The Invoice Payer contractually accepts that the goods and services related to the Invoice have been fully delivered and hence there is no reason to decline the payments due to lack of goodness of the goods or services. This removes any frauds related to duplicate selling of the Invoice or incorrect Invoice upload.
Once, the Invoice validation risk is removed, the Invoice has no credit exposure to the Invoice Seller. To minimise the Credit Risk, TuningBill provides the functionality to invest in part of Invoices. Therefore, an Investor can spread their credit exposure to multiple Payers. They can choose to invest in multiple industry and currency to further diversify their risk.
Foreign Exchange Risk
When investing in Invoices in a foreign currency, an Investor is exposed to Foreign Exchange risk. TuningBill has partnered with FX Brokers to allow investors to hedge away any foreign exchange risk when buying an Invoice in a foreign denominated currency. Though this may reduce the total return if the Invoice Currency is from a higher interest rate regime compared to the Investor’s investment Currency, the hedging eliminates any risk related to the foreign exchange fluctuations. The Brokerage costs related to the Foreign Exchange hedging are borne by the Investor.
- What type of business checks of the Invoice Payers is carried out by TuningBill?
TuningBill carries out the following checks of the Invoice Payers:
- a full business check involving credit check and financial accounts check;
- a full compliance check of the company and their parents and subsidiaries and their directors including persons of significant control.
The business checks are done independently by our credit partner firm in the relevant jurisdiction. Once we receive the historical financial statements of the Invoice Payer, we also run our own proprietary credit analysis to ascertain the financial soundness of the company. The model includes the analysis of the balance sheet, cashflow statement, the PnL statement, the receivables and payables records and the current credit lines with other creditors. Along with the standalone credit analysis of the Invoice Payer, TuningBill also gives weightage to the business relationship between the Invoice Payer and the Invoice Seller including the historical payment records or past disputes if any.
- What is the average default rate in Invoice financing?
As per the International Chamber of Commerce’s report
: “… dataset of $10.5trn of trade finance exposures from 2008 to 2016 shows a cumulative default rate of only 0.16%. This is a default rate of just 2bp per year. However, these defaults are often fully recovered (known as a ‘cured default’ in the industry). Actual credit losses over the period were a mere 4bp. Overall, this means that credit losses have amounted to only half a basis point per year.”
- How does TuningBill reduce the Credit Risk for its Investors?
The key to reduction of the Credit Risk for its Investors lies into the following key aspects of the TuningBill business model:
- TuningBill has a thorough Seller and Payer onboarding mechanism removing the companies with poor credit qualities.
- TuningBill gets every Invoice validated and contractually re-assigned to itself by the Invoice Seller upon the sale by the Invoice Seller. This eliminates a possibility of fraudulent or wrong Invoice being traded at the TuningBill Platform.
- TuningBill performs a detailed business analysis of the Invoice Payer ensuring the correct pricing of the Credit Risk.
- TuningBill uses a three-tier risk pricing mechanism in which it applies credit risk spread to the Invoice Discount that is driven by: Market Risk (such as currency and interest rate risks), the Invoice Payer Credit Risk and the Invoice Seller Credit Risk.
- TuningBill provides a safe and user-friendly way to hedge any foreign exchange risk if the Investor invests in a foreign currency denominated Invoice.
- TuningBill allows Investors to invest in parts of Invoice. This allows an Investor to spread the risk to multiple payers and hence reduce credit concentration risk.
- Can an Investor lose money?
The simple answer is Yes. The Investors on our Platform are supposed to be sophisticated investment firms or self-certified and financially astute Individual Investors. The additional return achieved by the Investors through the Investment in Invoice receivables is due to the additional credit risk of the Invoice Payer. However, TuningBill creates opportunities for its Investors through the reduction of the Credit Risk as explained in the previous question. This increases the sharpe-ratio of a portfolio that invests through the TuningBill platform.
- What mechanisms are in place to recover delayed or part payments?
TuningBill has full contract in place with the Invoice Payers to pay the Invoice as per the Invoice payment schedule. However, in the most unlikely case that an Invoice Payer delays payment or pays partially, TuningBill will first try to negotiate a recovery of the Principal along with the accrued interests as per the Terms of Services. If the Invoice Payer still doesn’t pay, TuningBill will use legal and/or commercial avenues to recover the monies.
- Are there regulatory barriers to cross-border Invoice financing in your go-to market? How do you protect the data of your customers?
Our first go-to market is India. We would be targeting Indian SMEs exporting to UK and USA. Currently, the Reserve Bank of India (RBI) regulation requires that an exporter must receive the Invoice Payments from the Invoice Payer in the Currency of the Invoice. Additionally, INR (Rupee) is a non-repatriable currency. TuningBill model is compliant with these rules as all payments to the importers go through the Invoice Payer in the currency denomination of the Invoice. The Investors fund the Invoice Payers in the UK or the USA. The data of the Invoice Sellers, Invoice Payers and Investors are maintained in the respective jurisdictions with the master copy of each user residing in their respective jurisdiction. All contracts are developed as per the local regulations. An Indian Invoice Seller would sign a contract based on the Indian law, a UK Invoice Payer or Investor would sign a contract built according the UK law. Currently, there is no license requirement around the Invoice Payable financing in the UK and TuningBill is a technology platform not doing any lending on its own balance-sheet.
- What happens to the Investor’s investment if TuningBill goes bust?
Each Investor has a segregated account and hence their money is held separately from the TuningBill corporate account. In the unlikely case of TuningBill going bust, contractually, any money held in a customer’s segregated account cannot be touched by the TuningBill’s administrator. An Investor’s money that is not yet deployed will be returned with immediate effect. The money that is deployed and is expected to be repaid upon maturity by the Invoice Payers will follow the uninterrupted route from the Payer to the Investor’s segregated account and then back to the Investor with any due fee deducted from the repayment. All terms and conditions between TuningBill and TuningBill customers remain unaffected if TuningBill goes under administration. An Invoice Payer will not have any automatic rights to hold the payment at the Invoice maturity if TuningBill is under administration. Further, all contracts are between Invoice Payer and Investor and an Investor has full right to take a legal course to recovery if an Invoice Payer delays, part pays or does not pay their contractual liability.
- What will happen with the TuningBill platform when TuningBill goes bust?
TuningBill will stop accepting new Investor money and will stop allowing new investment to be made into the active invoices with immediate effect. All money held in the segregated account of each Investor would be returned with immediate effect post deductions of the applicable fee if any. The Invoice Payers would still be able to pay their obligations as per the contracts into the Investor’s segregated account and the TuningBill administrator will settle each Investor and Seller account with immediate effect. TuningBill’s equity and bondholders will have no recourse to the customer money. If the TuningBill administration is affected by a rogue trader (any customer), that customer’s segregated account would be ringfenced and managed as an exception without affecting other customers.
- What can cause TuningBill to go bust?
TuningBill can go bust either due to not being able to fulfil its bondholder’s obligations for the lack of enough profitability from the business or due to a rogue trader on its platform causing an escalating fraud situation. TuningBill has a very strong Compliance and Risk Management framework. We have a leading lawyer based in the UK on our management team as our Chief Compliance Officer. Mr. Amit Goyal has 20 years of experience across UK Finance and legal. He has expertise in asset pricing, structuring and contract law. Mr. Goyal is on course to achieve his barrister status by July 2019. Nevertheless, if there is a case of fraud, we believe our strong compliance and due diligence would keep it contained to minimise the effect on the overall company.
Pricing and Fee
- Please explain the discount pricing and TuningBill Fee?
The following table shows samples of two invoices denominated in £ with one Investor investing in £ and the other in $. If the Investor’s currency is different from the Invoice Payment currency, there is an additional hedge cost that can reduce the returns for the investor depending on the currency pair. The Invoice is a 60 days Invoice with the Seller offering a 2.0% discount which amounts to roughly 12% annualized discount.
- Do you always offer FX hedging to the Investors? What if an Investor chooses not to hedge their FX risk?
FX Hedging is a default option for the Investors whenever the Invoice payment is in a currency different from the Investor’s investment currency. This is particularly important if the Invoice is payable in an Emerging Market currency. However, if an Investor chooses not to hedge their FX risk, we make it sufficiently clear to the Investor that TuningBill does not assume any liability for any loss to the Investor due to FX rate fluctuations. All calculations of expected returns on an Investment are shown on the platform as per the hedged as well as unhedged scenarios.
Bank, Brokerage and Compliance partners
- Please list your partner services and how they provide safety to trading through TuningBill Platform.
TuningBill has 4 technology partners:
TuningBill partners with a reliable banking partner who provides banking API to seamlessly manage segregated accounts for our Clients. Our partner is regulated by the UK regulator Financial Conduct Authority (FCA) in the UK.
Our brokerage partner provides a seamless API to do provide on the fly spot and forward prices and create trades as per our Investor’s need. They are also regulated by Financial Conduct Authority (FCA) in the UK.
Business and Compliance API:
TuningBill partners with a credit check bureau for business reports of the importers in the UK and the USA. The credit bureau also provides us with the API for compliance checks for AML, PEP and Sanctions.
Identity Checks API:
TuningBill has tied up with a start-up that does identity checks using AI-ML technologies to match live face with the IDs and compare IDs in the government database.