22 August 2017

Does Digitisation Lead to Fewer Bankruptcies?

Due to the increasing competition by online shops, the digital revolution has often been associated with an increase in bankruptcies. However, digitisation can also help reduce the risk of insolvency and thus the number of bankruptcies.

Lately it have been particularly clothing and retail companies that had to file for bankruptcy, often pointing to competition by online shops as the cause. Thus far, the digital revolution has therefore been associated with an increase in bankruptcies. However, digitisation can also help reduce the risk of insolvency and thus the number of bankruptcies.

Current trends that can reduce the risk of insolvencies include in particular:

  • Improved financing opportunities;
  • Improved capabilities for liquidity management.

Improved Financing Opportunities

Digitisation can open up new sources of finance for businesses or improve the terms on which they are able to obtain funding. For instance, platforms for credit auctions can lower the burden from interest charges. In addition, the extension of credit can be accelerated.

Digitisation has also given rise to alternative forms of funding and widened the range of possible providers of finance. Crowdfunding is a prime example.

Crowdfunding (or swarm financing) refers to a type of funding from a large number of investors using online platforms. The individual investors often contribute comparatively small amounts each.

Crowdfunding comes in a number of different forms and a common feature of all these variants is that the financing is not intermediated by a bank. Rather, the investors and the capital seekers get in contact directly over the internet. This includes the following types in particular:

  • Crowd support (e.g. in the form of prepayments for a product yet to be developed or manufactured);
  • Crowd investing (providing equity capital);
  • Crowd lending (providing debt capital).

The Swiss Federal Council has acknowledged the importance of crowdfunding and has amended the banking regulations as of 1 August 2017  (only in German) in order to improve the regulatory framework.

Improved Capabilities for Liquidity Management
Digitisation also affects payment services. Efforts are underway to further increase the speed at which money transfers are settled. The talk is of Instant Payment.

Instant Payment means that payments are possible 24 hours a day, 7 days a week. The payment is credited to the recipient's account within a few seconds of being triggered.

The plan is to make Instant Payment available in the entire SEPA (Single Euro Payments Area) for money transfers up to an amount of EUR 15,000. It is envisaged that transfers would be made within 10 seconds. The corresponding Rulebook (SEPA Instant Credit Transfer (SCT Inst) Scheme Rulebook) takes effect on 21 November 2017. However, it remains to be seen when, and to what extent, it is actually introduced Europe-wide.

Once Instant Payment is available for transactions between businesses, delivery versus payment operations will increase in volume. This reduces counterparty risk and therefore the insolvency risk of a business.

Our Insolvency Law Team and our Banking and Finance Team will be happy to answer any further questions you may have.

Author: Jana Essebier

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