In the News
April 20, 2017
Western European Companies Less Likely to Sell on Credit
Though it may mean losing out to competitors who offer credit terms, Western European businesses are more inclined to sell on cash terms. Tighter access to financing and growing political uncertainty are pressuring businesses in the region, even though the insolvency outlook for advanced markets is stable for 2017.
These and other findings are reported in credit insurer Atradius’ recent review of international corporate credit practices. Its Payment Practices Barometer, focusing on Western Europe, surveyed companies from 13 countries, including the United Kingdom, Germany, Italy, France, Spain and the Netherlands. Challenging business environments and concerns from suppliers about being paid are cited as factors in the decreased use of credit terms in business-to-business (B2B) sales. If B2B customers are domestic, however, respondents said they would be more inclined to sell on credit terms, the most open being Denmark, Greece and Ireland. The lowest average percentage of sales made on credit terms were in Germany, Austria and Switzerland.
The percentage of overdue B2B invoices in the region, at 41%, showed an increase over 2016. Countries may be more exposed to domestic rather than foreign payment risks. More than 90% of respondents recorded late payments from their domestic customers. Average payment terms in Western Europe remained stable compared to 2016, but the speed of payment may be slowing; terms averaged 32 days in the region. Notable increases in payment delays were recorded in Greece and the U.K.
Late payment frequency from foreign B2B customers matched 2016, at 84%. The U.K. registered the highest average percentage of overdue invoices from foreign customers, though its low daily sales outstanding may reflect a greater efficiency in collecting high-value invoices, Atradius said.
Liquidity issues led the factors in payment delays, followed by a buyer’s use of outstanding invoices as a form of financing and the complexity of the payment process. The most lenient payment terms extended to B2B customers in the region were in the sectors of construction materials, machines, paper and textiles. A little more than half of respondents do not expect changes in the payment behavior of their customers over the next year.
German suppliers are among the least likely to offer credit terms to B2B customers, even more so when selling to foreign buyers, Atradius said. Business failures may increase due to uncertainty over federal elections in September and the effects of other political events in the eurozone. Uncertainty over elections also holds sway in Italy, as does the eurozone calendar of events, while in the U.K. Atradius expects a 4% rise in Brexit-related insolvencies this year and in 2018.
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Electronic Transactions See Significant Gains in Usage over ACH Network
For the third consecutive year, volume over the Automated Clearing House (ACH) Network, a system for electronic financial transactions, grew by a billion transactions or more over the previous year. Four consecutive quarters have seen more than five billion electronic payments transacted in each quarter, a first for the network.
According to recently released figures by NACHA–The Electronic Payments Association, volume over the network in 2016 increased by more than 5% over 2015, representing about $43 trillion in transactions. “Many factors contributed to the growth of ACH Network volume in 2016, but, specifically, increases in B2B [business-to-business] payments, consumer payments such as Direct Deposit via ACH and person-to-person payments, as well as online payments, had the most significant impact on growth,” said Robert Unger, senior director of corporate relations and product management at NACHA.
“2016 marked a significant year for the continued evolution and growth of the ACH Network,” said Janet O. Estep, president and CEO of NACHA. “With the implementation of Same Day ACH, we have added to the robust capabilities of the network, now enabling not only next-day payment capabilities, but same-day capabilities as well. The added attribute of speed provides additional flexibility and options to a system that has the capacity to process credit and debit transactions, payments and robust information together.” Same Day ACH payments launched last September. B2B transactions comprised nearly a third of Same Day ACH volume and make up about 15% of overall network volume, NACHA said.
B2B credit payments grew significantly, with corporate trade exchange (CTX) credits and cash concentration and disbursement (CCD) credits both increasing by about 5%. Businesses putting to use the network’s ability to send payments and information together increased within these categories.
“One of the unique attributes of the ACH Network is its ability to allow for voluminous amounts of remittance information to flow directly with the payment,” Unger said. “With CCD and CTX payments—traditional B2B transaction categories—businesses can send addenda records or remittance directly with the payment, which helps support faster and easier reconciliation and straight-through processing.”
Unger recommended to credit managers that increasing the volume of ACH payments is a way to minimize costs and increase efficiencies, in particular with cash application. He added that Same Day ACH “is a great option for expedited, emergency, credit-hold, and related situations where speed of payment and increased certainty are important.”
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Don’t Forget to File a Notice of Furnishing in Pennsylvania
Subcontractors and suppliers are still getting used to filing a Notice of Furnishing in Pennsylvania, but it is a “great collection tool,” said Connie Baker, CBA, director of operations for NACM’s Secured Transaction Services. The Pennsylvania State Construction Notices Directory, which was established in 2014 and became operational a few months ago, gives additional protections under the Mechanics’ Lien Law of 1963 and allows entities “with a convenient online platform to access, register and file construction notices,” according to the State Construction Notices Directory.
Subcontractors have 45 days after the first day of work or supplying materials to file a Notice of Furnishing if the searchable project owner has filed a Notice of Commencement. Among the items to include in the different notices are: the full name of the contractor, potential lien claimant and contact person, as well as the description of materials furnished, the location of the searchable project and the unique identification number assigned to the Notice of Commencement. It is also important to remember that suppliers in Pennsylvania are considered subcontractors, said Baker, and should take under consideration whether they need to file a notice as well.
For the directory, searchable projects are defined as those “consisting of the erection and construction, or alteration or repair, of an improvement costing a minimum of one-million five-hundred-thousand dollars,” according to the 2014 bill. To have the extra protections under the Mechanics’ Lien Law, searchable project owners must register the projects with a Notice of Commencement in the state’s notices directory. The amendment to the 1963 law also allows for the filing of Notices of Completion and Notices of Nonpayment.
“A subcontractor that fails to substantially comply with this section [of the Act titled Notice of Commencement and Notice of Furnishing] forfeits the right to file a lien claim,” according to the law. “However, lien claimants that do post a Notice of Furnishing on the Notices Directory are more likely to be paid and less likely to need lien claims or lawyers,” according to Fullerton & Knowles, P.C., of Northern Virginia.
Potential lien claimants are not required to file a Notice of Furnishing, and they will not release lien rights unless a Notice of Commencement has been filed with the State Construction Notices Directory. An optional Notice of Completion must be filed within 45 days of the completion of work on the searchable project. This notice has no impact on lien rights. Another optional notice is the Notice of Nonpayment, which also does not have an effect on lien rights. Further, it does not relieve subcontractors from filing other notices with the directory to comply with the act.
Impact of the Recent U.S. Supreme Court Decisions on Credit Card Surcharge Bans
Webinar: May 1, 2017; 3:00pm-4:00pm ET
Following the 2012 antitrust settlement that eliminated the contractual ban on credit card surcharges, laws in 10 states and Puerto Rico prohibiting merchants from imposing credit card surcharges have impacted trade creditors’ decisions on accepting credit card payments. The 2nd, 5th, and 11th Circuit U.S. Courts of Appeal have reached conflicting holdings on the constitutionality of various states’ surcharge bans.
The past few weeks have seen activity by the U.S. Supreme Court (SCOTUS) in three cases stemming from these decisions. On March 29, SCOTUS vacated the 2nd Circuit’s decision upholding New York’s surcharge ban and remanded the case to the 2nd Circuit to evaluate the ban as a speech restriction. Four days later, SCOTUS vacated the 5th Circuit’s decision upholding Texas’ surcharge ban and declined to review the 11th Circuit’s holding, which declared Florida’s surcharge ban unconstitutional. During this webinar, the speakers will focus on the impact that these decisions, as well as the Supreme Court’s recent refusal to review the 2nd Circuit’s decision overturning the VISA/Mastercard interchange fee settlement, will have on trade creditors’ acceptance of credit card payments and their ability to pass through credit card surcharges to their customers.
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Payments Fraud Increased in 2016
The percentage of organizations that experienced attempted or actual payments fraud is at an all-time high. Checks were the number one method of payments fraud “due to the extensive use of checks for business-to-business (B2B) transactions,” according to the 13th annual Payments Fraud and Control Survey from the Association for Financial Professionals (AFP) and J.P. Morgan.
Of the nearly 550 responses to the survey, 74% said they were victims of payments fraud last year. The previous highs were 73% in 2009 and 2015. “As reported in the 2016 AFP Electronic Payments Survey, 51% of companies’ B2B payments are made by check.” The fraud survey showed three out of every four respondents experienced attempted or real check fraud in 2016, which is up from 71% in 2015. The payments fraud increase came as a surprise to Magnus Carlsson, AFP treasury and payments manager, after the large jump from 2014 to 2015. Some reasons for the increase, according to Carlsson, are technology upgrades and sophistication and the increase in check usage.
Wire transfers were the second-most sought after payment method by criminals. This form of payment has been attacked much more often in the last two years compared to previous years. Forty-six percent of organizations experienced attempted or actual wire transfer fraud in 2016, while nearly half said they experienced it in 2015. Both numbers are well above those in 2013 and 2014.
Business email compromise (BEC) scams increased to nearly three-quarters of organizations experiencing attempted or actual fraud through BEC. Scams typically start with a fake email account representing an executive such as the CEO or CFO requesting money from the accounts payable department for a merger or other transaction. Carlsson suggests taking the step of establishing internal controls, such as not allowing an email to initiate payments, as the best way avoid such problems and stop BEC scams. “It is important for [organizations] to take the necessary steps to make it as difficult as possible for criminals to succeed in their attacks,” the report advised.
Positive pay and daily reconciliation are two ways to help prevent check fraud, Carlsson said. As far as stopping the fraud after it happens, trade creditors should note that checks are on a time delay and can be stopped if the fraud is discovered in time. Wire transfers are more difficult, especially if the funds are traveling through different time zones.
Of the organizations surveyed, 75% reported no actual loss and 13% said the financial loss was less than $25,000. About a quarter of the organizations with an annual revenue of at least $1 billion and more than 100 payment accounts reported actual financial losses between $50,000 and $250,000.
The most important takeaway, Carlsson said, is to have protective measures in place that make sense for the organization; it is not necessary for every single one to be used.
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U.S. Treasury Keeps Watch Over, Plans to Combat ‘Unfair’ Currency Practices
The U.S. Department of the Treasury’s Office of International Affairs in a recent report to Congress has found no major trading partner to be a currency manipulator, as defined by the Omnibus Trade and Competitiveness Act of 1988.
“Though there has been a trend in the last two years towards reduced currency intervention by key trading partners, it is critical that this not represent merely an opportunistic response to shifting global macroeconomic conditions—in particular changes in capital flows which have created depreciation pressures on many emerging market currencies—but a durable policy shift away from foreign exchange policies that facilitate unfair competitive advantage,” the report concluded. Still, pockets of large trade and current account surpluses in the global configuration of external positions are untenable, the department warned. “Treasury is committed to aggressively and vigilantly monitoring and combating unfair currency practices.”
Treasury has established a Monitoring List of major trading partners that it says merit close attention to their currency practices; currently, these include China, Japan, South Korea, Taiwan, Germany and Switzerland. Those countries whose economies meet two of the three criteria in the Trade Facilitation and Trade Enforcement Act of 2015 will be placed on the list.
These criteria are: a significant bilateral trade surplus with the U.S. to the tune of at least $20 billion; a material current account surplus of at least 3% of GDP; and when persistent, one-sided intervention occurs when net purchases of foreign currency are conducted repeatedly and total at least 2% of an economy’s GDP over a 12-month period. In 2016, the $20 billion bilateral trade surplus threshold captured almost 80% of the value of all trade surpluses with the U.S., while the 3% current account threshold captured more than three-fourths of the nominal value of global current account surpluses.
Once on the monitoring list, a country will stay there for at least two consecutive reports from Treasury. Also, the Trump administration will add and retain on the list any major trading partner that accounts for “a large and disproportionate share of the overall U.S. trade deficit even if that economy has not met two of the three criteria from the 2015 Act.”
In its report, Treasury noted China had a $347 billion goods trade surplus with the U.S. in 2016—the largest by far among any trading partners of the U.S. “Further opening of the Chinese economy to U.S. goods and services as well as faster implementation of reforms to rebalance the Chinese economy toward greater household consumption would aid in reducing the bilateral imbalance,” the department noted.
Treasury also advised Germany to make greater use of fiscal policy to encourage stronger domestic demand growth, which would pressure the euro’s nominal and real effective exchange rates and help reduce its large external imbalances. The country had a bilateral goods trade surplus of $65 billion with the U.S. and a large account surplus at 8.3% of GDP in 2016.
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