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Invoice Exchange, safe digital peer-to-peer banking for SMEs

Periodic Reporting for period 1 - Invoice Exchange (Invoice Exchange, safe digital peer-to-peer banking for SMEs)

Reporting period: 2019-05-01 to 2019-07-31

Key unsolved pain-points occurring in this context, both in conventional and peer-to-peer banking, are as follows. First two relate to SMEs with cash-flow issues, second two relate to companies and investors with liquidity surplus:
1.Slow access to funding: Conventional banks require a minimum of 2-3 weeks, significant amount of paperwork, and a high credit score (often unachievable even by normally operating SMEs), to approve a short-term business loan or a factoring line.
2.Partial payments: In factoring business, sellers obtain only 70-90% or even less of the value of issued invoices at the time of sale, and remaining part after the invoice has been paid to the creditor. This doesn’t fully solve SMEs cash-flow issues.
3.Zero-interest rates on bank deposits on term and overnight over the last couple of years has resulted in cash-rich businesses seeking alternatives to bank deposits to effectively manage their surplus cash-flows and enrich their capital. Willingness of market participants to engage in peer-to-peer financing is at an all-time high.
4.Effective risk management: Existing peer-to-peer platforms often only enable transactions between market participants, but do not support creditors with effective risk management since the credit risks are not borne by the platform. Risk management provided by such platforms is therefore very limited or non-existent.

Socioeconomic impact. The back-bone of EU’s economy are exactly such companies. They now struggle with paying their obligations and investing in improving their products/services at the same time, and cannot compete with larger corporations or competition from outside EU with better cash-flow situations. Fin-tech companies such as Invoice Exchange are seen as most important factor to meet EU challenge of facilitating access to financial services and improve the efficiency of financial system, especially in a situation where EU faces 400 billion-valued gap between SME's needs, and accessable financing.

The overall innovation objective is to bridge that gap, and enable European SMEs a peer-to-peer financing via secure online platform. The commercial objective is to launch operations in Croatia yet in 2019, find a partner before launching in Poland, and then grow throughout Europe, according to the Phase1-enabled commercialization approach.
(1) Product development requirements
Action 1.1: Requirement analysis; Methods: Interviews with IT responsibles, developers and production heads.
Action 1.2: Platform adaptation; Methods: Designing user stories and journeys; Building scripts and translates with multiple cases;
We performed product development requirement analysis; and assessed scenarios for platform adaptation. The task resulted in preferred cases and determined specification of technology requirements needed for internationalization.

(2) Requirements for entering the Polish and Croatian markets
Action 2.1: Market analysis: Methods: target group evaluation, in-depth estimation of market demand, identification of competition;
Action 2.2: Analysis of partners; Methods: identifying and interviews with potential local partners: data service providers, collection service providers, accounting service providers, payment services, tax advisors, banking institutions, prospective local JV partners / operating teams.
Action 2.3.: Analysis of local legislation and corporate data specifics: Methods: Overview of applicable legislation; Check corporate data availability.
We performed a market analysis of Poland and Croatia, focusing on market demand and competition; and willingness to buy according to different pricing scenarios. We also studied local partners for needed service providers and for joint ventures, and analysed local legislation and corporate data specifics.

(3) Economics of the scale-up business concept
Action 3.1: Analysis of economic viability; Methods: Budgeting, in-depth cost and revenue estimations, cost-benefit analysis.
We performed an analysis of economic viability, costs-benefits analysis, and business model validation. This included estimation of costs for development, HR, partnerships and market development, and revenue projections based on market study, resulting in break-even analysis and business model validation.
Key novelties that enable going beyond the state-of-the-art:
- Automated engine: Full automation of all key processes with an emphasis on the automation of risk management, KYC/AML client onboarding, and handling of transactions.
- Peer-to-peer financing business model: In comparison to prevalent conventional banking and also some fin-tech startups, our disruptive novelty is peer-to-peer financing which eliminates banks as intermediates, reduces operational and overhead costs, increases interest rates for depositors, and provides funding at best available rates for SMEs, acting effectively as an online ATM for businesses.

How Invoice Exchange solves mentioned challenges:
1. Speeds up SME’s access to funding: Being a fin-tech online service, Invoice Exchange fully utilizes the potential of IT technology to streamline and automate all elements of the funding process. The platform is directly integrated with third-party corporate data sources enabling a smooth client on-boarding / registration process (AML/KYC compliant), 100% real time credit-scoring of transactions, seamless matching of creditors with credit-takers, real-time gross settlement of transactions and fully automated pay-outs. ž
2. Enables better conditions for invoice sellers (SMEs): In last 3 years, Invoice Exchange has been advancing creditors’ funds to SMEs in full agreed bid between creditor and SME at the time of sale, realizing average 1,5% discount. So, invoice sellers have immediately received full 98,5% of invoice amount. It resulted in SMEs’ better financial position and improved cash-flow. This makes perfect alternative to bank loans for SMEs.
3. Enables higher rates for creditors: From a user experience perspective, investing surplus cash on the Invoice Exchange is similar to placing money on a bank deposit. Being a fully streamlined lean online platform, Invoice Exchange passes on the majority of its business model benefits (lower fees due to platform effectiveness and level of automation) to creditors on the IE platform: a 6% average annual return to investors.
4. Effectively manages risks: An advanced credit scoring and risk assessment engine is integrated in the Invoice Exchange platform. The engine uses Bisnode credit agency (CEE regional partner of Dun & Bradstreet) data to actively manage and mitigate risks. It enables real-time credit scoring of transactions and enables creditors to set acceptable risk levels and their expected rates of returns.

Crucial wider socioeconomic impact that is already being realized on a pilot market:
- Super-streamlined invoice finance and short-term loans for SMEs with same-day pay-outs, instead of 2-3 weeks.
- Only 1,5% invoice sales discount (up to 10x more convenient) and up to 6% annual interest for investors: this will increase low-risk-focused companies that have never thought about investing in other companies, but are faced with zero or even negative interest on their bank deposits. This liquidity represents the most important way to tackle the 400 billion gap, reported as a difference between SMEs' needs for financing, and available sources currently on the market.