Schalast | New refinancing models
For our FinTech clients as well as for fronting banks, refinancing their respective activities is crucial. FinTechs often refinance their respective business models through a fronting bank, which is often refinanced via a special purpose entity (SPE). Refinancing is not an abstract question separate from the actual business model. For example, some FinTechs enable a large number of investors to participate (crowdfunding) and refinance themselves or the respective special purpose entity.
From a legal point of view and depending on the specific structure, refinancing can either take place through the "real" transfer of claims or contractual relationships (true sale) or via the economic risk transfer (structured). A true sale transfer can take place by assigning claims or assuming contracts - or a combination of these. Depending on the business model, framework agreements can be concluded for the ongoing transfer (factoring) or the transfer can be provided on a case-by-case basis.
Legal structuring the chain of claims raises insolvency law and regulatory questions. On the one hand, it is important always to keep an eye on who bears the economic risk at what point in time. On the other hand, payment flow must be structured so that at no point in time funds are held or moved without corresponding permission. For this reason, some FinTechs work with a payment service provider, and the funds flowing in the structure are often designed as e-money. Finally, the structural documentation must be designed so it is clearly regulated between the parties involved (FinTech, fronting bank, special-purpose vehicle and, if applicable, other parties) at each point in time who carries out which actions, particularly actions that require authorization.
A particular challenge in structuring assignment and contract transfer models is - if the underlying claims are secured - collateral transfer. It is important to ensure the security ordered for the respective claim can actually be used by the “right” security creditor in the event of realization (default event).
With every FinTech cooperation, we add new instruments to our toolbox and continuously develop various designs. We have experienced that no two structures are the same. That makes it exciting for us - and we can offer our clients individual, tailored models.
While in the past banks have taken on the so-called fronting for credit platforms, in the meantime increasingly so-called debt funds take over this function, after not only the purchase, but also the possibility of lending was opened up to them. Such debt funds also act on the investor side and thus make a significant contribution to transforming credit financing, from which traditional banks have withdrawn, at least in some market segments, due to the regulatory corset.
Since the Fund Location Act, crypto values are also permitted assets for investment funds, so that access to these is no longer solely via individual providers’ technical platforms, but also via established investment structures. With this step in professionalizing this market for digital assets, the next step expected is that the derivatives market will also launch corresponding products, be it to hedge against risks, whether with reference to individual or groups of assets. Overall, this would bring more liquidity and stability to this asset class of crypto values, so the market dominance of some individuals does not lead to erratic price changes, such as those triggered by Elon Musk's statements about Bitcoin's purchase or sustainability.
Incidentally, the current phase of low interest rates on the refinancing side of loans and other receivables leads to a greater differentiation between liquidity providers on the one hand and risk providers on the other: While both elements have so far been interwoven in the form of a credit-linked note, for example, the liquidity provider and protection seller will increasingly act separately in the future, especially if this enables regulatory arbitrage or on the protection seller side to further leverage capital or due to different risk appetites the risks should be further carved.
Independent of new refinancing models, FinTechs often refinance themselves using traditional securitization structures, in which receivables are sold and transferred to a securitization special purpose entity. The securitization special purpose entity finances receivables acquisition by issuing securities (usually bearer bonds) or by taking out promissory note loans.