Here the seller is paid by the factor in advance (before the average due date) and receives an amount based on the invoiced amount less an allowance for credit losses. In turn the factor is paid interest on average balances some way above that paid on loans made to companies of a similar credit standing.
Most banks provide basic custody services to investors holding bonds and stocks. A small number of commercial banks also provide more sophisticated custody services to institutional clients such as fund managers. Specialist banks provide a service of collecting and remitting interest income from bonds and dividends from stocks. They are active in the stock lending business.
The whole business has changed dramatically with technology. In the past all securities were issued in paper form. Bonds, for example, had coupons attached to them that had to be clipped off and sent to the issuer’s bank in order to get payment. There are still vaults full of such paper that were issued many years ago but have not yet matured and have to be processed in this way.
Now most securities are issued and traded in scrip-less form, eliminating much of the paper trail. Now what custodian banks provide are computer interfaces to large numbers of incompatible clearing and settlement systems, obviating the need for the client to do so themselves.
The custody business is split into two distinct segments. Local custody services provided by banks providing services in individual countries and global custodians coordinating client holdings with local custodians and pulling these holdings together for their clients.
The global custody business has become highly concentrated, largely as a result of the high costs of investing in technology necessary to compete in this business segment. There are now only three or four global custodian banks still competing with one another. At present this still appears to be an attractive business segment with high barriers to entry and customer switching costs. In the long term this may change as more exchanges and clearing systems adopt open standards but that is a long way away.