Investment in research and development (R&D) is at the heart of innovation-driven corporate management. In other words: without R&D there is no innovation, and without innovation there is no competitive advantage on the market. Ultimately, it is about achieving future economic advantages and increasing the market value of your own company. It is in the nature of things that R&D expenditure can also be associated with risks. The costs and benefits must be weighed up, i.e. the profitability of the investment must always be kept in mind. This also applies to banks.¹ Especially in a comparatively dynamic competitive environment, as has recently been the case throughout the banking sector, innovation expenditure is of existential importance. Those who do not invest in trends may quickly lose touch with important developments and sooner or later face enormous problems. This rather banal connection also applies to all companies that are active in the receivables finance sector – no matter in which part of the world and with whom they (want to) do business. The aim of this article is to look at the importance and development of R&D expenditure in an international context in order to draw possible conclusions for receivables finance companies of different sizes and market presence. To this end, we will take a closer look at the German market and its specific characteristics.

 

First of all, the definition according to the OECD: ‘Research and development encompasses creative and systematic work aimed at expanding the stock of knowledge and developing new applications of existing knowledge.² Accordingly, expenditure on research and development is direct expenditure on a company’s efforts to (further) develop, design and improve its products, services, technologies or processes.

 

What about global R&D activities? According to OECD figures, these have been steadily increasing in recent years, whereby a distinction must be made between R&D expenditure in the public sector, the business sector and the higher education sector.³ Only the business sector is of interest to us here. In absolute terms, the USA and China spend the most on R&D, more than 500 billion US dollars annually. To assess the R&D intensity of a country, one usually looks at the share of R&D expenditure in total GDP. Here, Israel and South Korea lead the international field with around 4.9% and 4.6% respectively. Let’s take a closer look at Germany: It is one of the ten strongest countries in the world in terms of R&D spending; in 2022, the GDP share of all R&D expenditure here was 3.13%. In total, companies in Germany spent almost 82 billion euros on research and development in 2022.

R&D activities in the banking sector

The automotive industry, mechanical engineering and the electrical industry traditionally account for the largest share here. It is typical for Germany as a business location that industry makes a high financial contribution to R&D expenditure in science. In addition, R&D expenditure is particularly concentrated in large companies.⁴ To summarise, it can be said that R&D activities in Germany have increased in recent years as a result of various (economic) policy measures. However, there is still room for improvement. One of the greatest challenges in further strengthening R&D activities is the lack of qualified specialists.⁵

 

What is the situation regarding R&D activities in the German banking sector? How much is invested here each year? Innovation expenditure totalling around €4.3 billion is reported.⁶ However, in addition to R&D expenditure in the strict sense, this also includes innovation-related expenditure on tangible and intangible assets, training, marketing, conception, construction, design, production and sales preparation. Pure R&D expenditure is likely to amount to meagre EUR 360 million (as at 2022).⁴ Over time, innovation activities in the banking sector in Germany have increased in recent years. The focus has tended to be on cost reductions and copycat innovations (new products from the company that already exist on the market). The increasing digitalisation of internal and external company processes, which has been further accelerated by COVID, is likely to be a key driver. However, the German banking sector appears to be struggling somewhat when it comes to implementing genuine market innovations. Further steps will be required here to try out new approaches and thereby open up new (international) markets.⁷

 

What are the areas in which the financial world can usefully conduct R&D? There are several fields that should be mentioned here: Sales management (bank sales, wealth management), overall bank management (bank business models, implications of regulation such as Basel III or MaRisk), sustainability and ethics (sustainable corporate governance, sustainable investments, corporate social responsibility), digitalisation and agile methods and processes (machine learning, quantum computing). Even if we are primarily talking about banks here, as they are traditionally among the most prominent and potent players in the receivables finance sector, the areas mentioned for potential innovation expenditure also apply in principle to non-banks as receivables finance providers. This brings us to the innovations that will be highly relevant for the receivables finance market in the future and which all providers will have to deal with intensively sooner or later. Some of these have recently lost the aura of a trend and have become a necessary prerequisite for being able to survive on the market at all.

 

• First and foremost is digitalisation, which also makes it possible to conclude contracts, submit invoices digitally or track and monitor payments in receivables management with just a few clicks. The latter can be implemented using customisable interfaces that deliver real-time data and result in meaningful reports and analyses. This results in increased efficiency, transparency and customer interaction, as well as improved risk management.
• The automation of receivables finance processes makes it much easier to check and process invoices. Not only can the accuracy of payments be checked in the shortest possible time, but customer creditworthiness and market trends can also be analysed and automation also creates greater efficiency in the dunning process. In short, the entire risk and customer management process is optimised, with fewer manual steps required.
• Mobile applications allow users to manage their financial transactions from anywhere and at any time. Among other things, new invoices can be submitted and the status of current receivables can be checked via tablet or smartphone. This ultimately significantly increases the agility of receivables finance providers and users.
• The use of big data in combination with artificial intelligence (AI) is seen as a real game changer, including in the receivables finance sector. In addition to historical information on payment behaviour or market analyses, large volumes of data can be used to generate reliable forecasts for the future by enabling the system to recognise patterns and trends. As a result, better decisions can be made in risk management, but completely new opportunities can be recognised. Ultimately, the results can also play a role in the pricing of receivables finance contracts, for example through customised receivables finance conditions.
• Blockchain technology can be used to generate decentralised, tamper-proof data structures that ensure greater transparency, security and dynamism within receivables finance processes. This eliminates the need for time-consuming checks, reconciliations and default insurance and creates more efficient and cost-effective receivables finance services.⁸

One thing is certain: Not every (receivables finance) company can conduct R&D at a high level or wants to minimise its own risks. There are several alternatives here. For example, you can enter into research co-operations or acquire knowledge and innovations by acquiring other companies. The most practical option would certainly be to benefit from technologies that make you competitive in the long term through specialised providers of software solutions. By continuously investing in the further development of applications, receivables finance providers also benefit – regardless of their size: they can meet business challenges faster and more effectively and also receive a high level of security.⁸ We are talking here about services from traditional software providers, as can be found worldwide, but also about the services of countless regional or international fintechs.

Conclusion

Investment in research and development has been steadily increasing in recent years. Internationally, however, there are major differences. In addition to the big players USA and China, countries such as Israel and South Korea can boast comparatively high GDP shares of R&D expenditure. Germany is one of the top ten countries in the world in terms of R&D expenditure. The banking sector traditionally has a smaller share of this. Nevertheless, investment in innovations in the world of finance is essential if you want to keep pace with the dynamic developments on the markets in the future. This also applies to receivables finance providers.

 

Whether digitalisation, automation, big data, AI or blockchain: there are currently many fields in which investments should be made in this context. For those who cannot or do not want to for strategic reasons, there are sensible alternatives. One of these is to utilise new technologies via external software providers and/or fintechs. The benefits are obvious: increased efficiency, more flexibility and security. In short: you create a strong foundation for your own future.