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Making Your Case: The Four E’s of Payment Automation

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Archives, Banking, Global Trade Daily

Making Your Case: The Four E’s of Payment Automation

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Paying suppliers by check is a practice that has endured for much longer than anyone would have imagined. For a while, it looked like COVID-19 might be the tipping point for companies to go completely electronic. After an initial push in that direction, however, many accounts payable departments still send their workers into the office to process invoices and manage the manual check process.

It’s not enough to want to get rid of paper checks. The case against them is not strong enough on its own. It has to be combined with a strong business case in favor of something else.

Even though manual processes are expensive, there are some rational arguments for relying on check payments. You don’t have to enable suppliers for electronic payments, manage banking data, or worry about ACH fraud. You can even outsource the process. While suppliers generally like the idea of electronic payments, they can also be deterred by complex enrollment processes.

People may also still be attached to the idea of check float. Even though interest rates remain at historic lows, it can provide a sense of security to see money in bank accounts for longer. Some businesses even have tenured employees who are used to older processes.

So is the check-writing process that bad?

The answer might have been different last January, with easy access to check printers. But now that accounts payable teams are sheltering in place, their processes often involve driving into the office and to other residencies to get checks signed. Add in the other check-stuffing and mailing steps, and you’ve got a significantly time-consuming task.

Despite the laborious nature of this process, many organizations have still stuck with it. At any rate, the widely-predicted wave of late payments never formed. People dug in and got things done, despite the unforeseen challenges. The added steps have now become business as usual.

While it seems absurd to add “driving paper around” to anyone’s job description, it speaks to how deeply checks are embedded in the B2B world. Companies hadn’t drawn the line at walking checks around for signatures, keeping a safe full of check stock, or renting an offsite storage space for paper files. What’s one more step?

There are plenty of reasons why it makes sense to stop writing checks, but we’ve narrowed it down to four. These “Four E’s of Going Electronic” make up a compelling business case for payment automation adoption.

Economics. What does it cost your organization to write checks? And not just the sum of material costs like ink, check stock, envelops and stamps–which generally comes out to about 75 cents per check. But also consider the cost of time and people. Industry analysts estimate it’s more like $3 to $5 per check, and it could be as high as $10 in some organizations. Remember to consider opportunity costs in your economic analysis. For example: What could your AP team spend time on instead, once extensive check processes are streamlined?

Efficiency. Even if you only write checks, you might have workflows established for different variations of payments. Perhaps they’re based on the payment amounts, signatures required, or even supporting documentation. All these manual and mechanical workflows could easily be automated, so approvers and signers can do their role in minutes, from any location.

Experience. How do suppliers want to get paid? Do they want to go to the office to handle checks? With ACH or card, suppliers get their money faster, without the threat of a check bounce looming over their heads. If you apply some technology to remittances, cash application experience can be much quicker and painless.

Ease of implementation. It’s easy to do things electronically, but your business case breaks down if you don’t have the resources to contribute towards the implementation process. Suppose you’re going to look for a solution. In that case, the last part of the business case has to be ease of deployment, versus what it would look like if you tried to automate everything yourself.

If you were going to do it yourself, you’d have to find a printing organization to cut the checks. You’d have to get IT to create a file to their specifications. You’d have to keep them supplied with check stock. Then you’d have to get your IT people to create another file for your bank for ACH payments. You’d have to run an enablement campaign to get vendors on board. You’d have to come up with a process for maintaining and storing their information and protecting it from breaches and fraud. You’d have to have IT create a file for your card provider. That’s three separate processes that you have to set up and launch and maintain.

Doing all that on your own is a major undertaking, and when you get right down to it, this is a big part of the reason that checks persist. The case against them isn’t strong enough on its own, and it’s counterbalanced by a case against automation—at least automation as we’ve known it in the past, which is much as I’ve described above–a semi-automated process where you do a ton of work to set it up, only to find yourself managing all these different file types and workflows and data just to be able to move the money electronically—and then you’re still probably doing half your payments by check. People have tried it, and it affirmed their choice to stick with checks.

Compare that to just handing it off to somebody that can automate the whole process and implement in about six weeks with just four hours of IT time. That is what is possible with today’s payment automation solutions. You also get continuous vendor enablement, fraud protection, error resolution and a payment guarantee in the bargain.

What often happens is that employees who want to get rid of checks are the ones most burdened by them. With working from home becoming the new norm, these people are more burdened than ever before. Yet they are not typically the decision-makers when it comes to choosing which projects receive funding. The most significant competition for automation is simply the simplicity of maintaining the status quo.

Perspective is everything. It’s rarely enough to point out how to disrupt the norm–you have to paint a picture for a better future. When writing a business case for payment automation, draw attention to the permanently simplified (and cheaper) workload that automated processes would bring, rather than focusing on the temporary unfamiliarity of your solution. Keeping that kind of mindset may accomplish what years of manual effort have not: eliminating business check writing once and for all.

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Derek Halpern is Senior Vice President of Sales for Nvoicepay. He has over 20 years of technology sales and leadership experience, including 16 years in the fintech and payments space.

Archives, Banking, Global Logistics, Global Trade Daily, Stories

An Economic Recovery From COVID-19 in 2021 Is Possible – But Massive Uncertainty Remains

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COVID-19 has had a devastating effect on human life. But it has also caused widespread economic upheaval for both advanced and emerging market economies as countries shut down to try to stop the spread of the virus. The U.S. for instance is set to see the most severe economic downturn since GDP was first tracked in the 1940s.

This means deep hardship for many businesses of all sizes and across all industries. Shutdowns caused many firms to entirely cease operations for a time. Now, they are grappling with plummeting demand as a result of rising unemployment and uncertainty, on top of supply chain difficulties and uncertainty as to financing resources.

Bad Timing for a Global Crisis

Although there is no “good” time for a pandemic to strike, business conditions in 2020 were already a little shaky prior to the outbreak. At the beginning of the year, the global economy had just finished its weakest year since the Great Recession, global trade was turning sour, trade finance had become more restricted and continued uncertainty from the U.S.-China trade war weighed on businesses everywhere.

If the outlook was stormy at the beginning of the year, it’s now outright bleak. Atradius economists are now forecasting that global trade will decrease approximately 15 percent in 2020, while global GDP will decline about 5 percent. The U.S. will perform below average, with a 6.1 percent decrease in GDP – largely due to its lag in controlling the virus and subsequent record high in number of COVID-19 cases, in addition to soaring unemployment as well as pressure on incomes, leading to a drop in consumption.

Will Government Intervention Be Enough?

Governments and central banks the world over have enacted measures to counteract the pandemic’s economic devastation. Early in the crisis, for instance, the European Central Bank put in place a Long Term Refinancing Operations III program, while the U.S. Federal Reserve increased quantitative easing.

Countries have also put together aid packages, such as the U.S. CARES Act and a number of packages from individual EU economies and the UK. Similarly, China is providing tax relief, state-backed credit guaranteed, and delayed loan and interest payments. Altogether, global government stimulus measures amount to approximately 9 percent of global GDP, or around $7.8 trillion.

But will this be enough? Atradius economists suggest not – not unless countries also enact vigorous policies to revitalize the economy at every level. The EU Pandemic Fund provides a good example: the $750 billion initiative will bestow loans and grants to the areas and sectors hardest hit by the pandemic, allowing for a more even recovery rate across the entire EU.

Although stimulus measures are necessary, soaring government debt levels are also cause for concern – even before the outbreak, many countries had worryingly high debt levels. The most recent baseline scenario from Atradius economists has the U.S. federal budget deficit, as a proportion of GDP, increasing by more than 10 percentage points this year. The UK will fare even worse, seeing a 13 percentage point increase in deficit growth rate. China and India are the only major economies likely to maintain moderate debt ratios through the pandemic.

All that said, low interest rates will likely stick around through the end of 2021 at least – this should help offset some of the concerns over high government debt levels. Moreover, central banks like the Fed and ECB will continue purchasing government bonds, suppressing any financial market stress.

What’s Next?

While the global economy is under undue strain at the moment, Atradius economists predict a recovery could begin as early as this year, continuing into 2021. Our baseline scenario has global GDP rebounding by 5.7 percent in 2021, with the U.S. coming in just under that, with GDP growth of 4.2 percent.

This scenario, however, is shrouded in uncertainty and hinges on a few key assumptions:

-That researchers are able to develop a successful vaccine in the near-term

-That lockdowns will be limited throughout the remainder of the outbreak

-That oil prices will remain low

-That the U.S.-China trade war will remain at a standstill

-That the rise in financing cost for firms, if any, remains limited

Should these assumptions not play out, the global economic recession could be much worse than anticipated – contraction rates could be twice as damaging as those currently predicted, with global GDP contracting 12.2 percent in 2020 and U.S. GDP seeing a 7.9 percent drop. Recovering from a contraction of this size would be a slow, painful process, although we would expect 2021 to see similar growth rates.

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John Lorié is chief economist with Atradius Economic Research. He is also affiliated with the University of Amsterdam as a researcher. Previously, he was Senior Vice President at ABN AMRO, where he worked for more than 20 years in a variety of roles in commercial and investment banking. He started his career at the Dutch Ministry of Foreign Affairs. John holds a PHD in international economics, master’s degrees in economics and tax economics as well as a bachelor’s degree in marketing. 

Theo Smid is an economist with Atradius Economic Research. His work focuses on business cycle analysis, insolvency predictions, thematic research and country risk analysis for the Commonwealth of Independent States. Before joining Atradius, he worked for five years in the macro-economic research team of Rabobank, focusing on business cycle analysis of the Dutch economy. He holds a master’s degree in economics from Tilburg University.  

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Archives, Global Logistics, Global Shippers 101, Global Trade Daily, Imports/Exports

Understanding Customs Bonds

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When you’re constantly plagued by bureaucracy and inventory management in the world of shipping, there’s one moment that makes it all worth it: importing the goods. However, that process has one extra step before it’s finalized — obtaining a customs bond. But what does this actually entail? Why must you even have a customs bond? And which one should you get? Don’t worry — we’ll help you with understanding customs bonds right here!

Bonds, Customs Bonds

First of all, we should note that all information found here is valid for the ocean ports and other import points in the United States. The notion of a customs bond originated here. To define it in the simplest possible terms, a customs bond is something like an insurance policy during the import process. But not for you — for the government of the United States. It’s a guarantee that all import taxes and duties will be paid. In the professional world of shipping between leading ports, this is simply called a “bond”.

But why must importers have one in the first place? To paraphrase Benjamin Franklin’s famous quote, the only two things that are sure in the world of importing and exporting are taxes and duties. If you have a customs bond, the government has a solid guarantee that it will receive its taxes and duties; even in a force majeure event that leaves your logistics company helpless to pay.

In other words, if an import company goes bankrupt, this bond will cover the air and/or ocean shipments in terms of duties and taxes. This is something that you’ll simply be required to have if you want to import anything into the United States; it’s all within the price of doing business. And bear in mind that these bonds expire as well, so don’t expect to hold onto the same one forever.

Bond Requirements

So, when do you need a customs bond? Mainly, when you’re trying to import goods for commercial purposes with an estimated value of more than $2,500. Apart from this, there may be other requirements for particular goods posed by different agencies of the United States government.

As an example — if you’re importing food items, you will be required to obtain a customs bond regardless of the amount or value of the items. You will also need to comply with other FDA regulations.

When it comes to the different types of bonds that you can have as an importer, there are two primary ones. There are continuous bonds and single-entry bonds. Their names are pretty self-explanatory — the latter only covers a single import shipment, while the former is valid for multiple shipments in a certain time period. Usually, we’re talking about twelve months.

So, which one should you get? This largely depends on the nature of your business. If you’re someone who only imports goods on a rare occasion, like a couple of times a year, you may not need anything more than a single-entry bond.

Obviously, a continuous bond represents a far better option if you’re going to be shipping regularly. And this type of bond has another benefit; when you’re completing the Importer Security Filing information, you won’t have to buy additional bonds. This is data that you need to submit in advance before you load any goods on a ship in a country of origin that’s headed for the United States. Having this information allows the CBP enough time to judge if your cargo poses any security or safety risks.

Bond Expenses

Now that we’ve explained the nature of customs bonds, the question that must be on your minds is — how much do they actually cost? Well, you need to look at customs bonds like any other kind of insurance policy. In the sense that, when you purchase a bond, it’s valid for a specific level of coverage. And naturally, the cost of continuous and single-entry bonds differs.

Single-entry ones can be quite tricky. The minimum amount that you’ll pay for the bond can’t be lower than the estimated monetary worth of the goods plus the taxes that you’d have to pay for their import.

And if these goods have to comply with other agency regulations as well, the initial value is raised to three times their estimated value; that would be the case with the above-mentioned food items, for instance.

When it comes to continuous bonds, the situation is far simpler. The minimal amount is $50,000 — alternatively, it can be ten percent of all the fees and taxes for imports that you’ve paid during the previous fiscal year. That means that the expenses for the bonds can vary, but they’re still far more cost-effective if you’re someone who regularly ships things between ports.

And finally — how do you actually obtain a bond in practice? The easiest method is going through a freight forwarder or a customs broker, that will deal with all of the assorted paperwork. On the other hand, if you’re going to do so yourself — the Treasury Department issues licenses to sureties that will sell you a bond.

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Samwell Stein is a freelance author and logistics advisor. He frequently cooperates with professional shipping and moving companies like Transparent International and advises them on the best industry practices.

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Archives, Banking, Global Trade Daily

Bitcoin Has Gained Legitimacy in 2020

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Throughout its brief but exciting existence, bitcoin has had its detractors. For every enthusiast predicting soaring values or a shift in the very concept of money, there has always been a critic suggesting that bitcoin is fundamentally worthless, or that we can’t trust blockchain technology. For the most part, the breadth of the spectrum between proponents and detractors has always been understandable, because bitcoin is still new and it has always been volatile. This year has painted a different picture though. All of a sudden, bitcoin is beginning to look more legitimate than ever.

This is largely thanks to how the asset has responded to the coronavirus pandemic and ensuing financial crises around the world. Early on, there were quick-trigger takes suggesting that bitcoin had actually failed this test — that its long-hoped-for potential as a safe haven had fallen flat, and it had simply crashed alongside other assets and markets around the world. It didn’t take long, though, for bitcoin to reverse this narrative. While it did indeed experience a sharp and troubling crash, it followed with a far more rapid recovery than most other valuable assets or commodities. Bitcoin was over $10,000 in the blink of an eye, relatively speaking — after falling down around $5,000 in March. At least in this instance, it was a safe haven for those patient enough to withstand the dip.

There is also a feeling of growing legitimacy connected to bitcoin’s sudden stabilization. As noted, bitcoin is historically volatile, and this is partly responsible for the polarized opinions and outlooks it inspires. Since the “halvening” event in late May though (during which the amount of bitcoin acquired in each mining block is reduced by half), bitcoin price movements have been almost minute. There were no sharp gains or losses throughout the month of June, and in that same span, the price was kept almost entirely above $9,000. In recent days, bitcoin has actually spiked upward again, making for its most dramatic movement since early May — but that’s not exactly a bad thing, and the key takeaway from the summer has been a reduction in volatility. This is reassuring for a lot of traders and analysts.

Beyond the positive and stable response to events this past spring, bitcoin may be enjoying a further boost in legitimacy as a result of governments’ and financial institutions’ increasing willingness to explore digital payments. To be clear, most of these governments and institutions are not explicitly working with bitcoin. However, when people hear about major banks adopting blockchain transactions, or the People’s Bank of China launching a digital currency, it supports the idea that bitcoin works, and that digital currency is the future. Even if these changes are ultimately producing competitors, they’re helping to validate its core concept.

We’ll note in closing that there are still plenty of negatives people will ascribe to cryptocurrency. Bitcoin’s pros and cons are fairly baked in at this point; some will always dismiss it because it’s expensive or complicated, or because an alternative is more appealing. But the idea that bitcoin is worthless or illegitimate may finally be fading as a result of what we’ve seen this year.

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Archives, Banking, Global Trade Daily

3 Reasons You’re Still Manually Entering Invoices (Even with Invoice Automation)

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The Accounts Payable process continues to require too much manual handling, even after decades of automation efforts. Even the best invoice automation efforts range from 70-90% data extraction accuracy, which leaves overstretched AP teams with a lot of manual data entry.

Why is this the case? There are a few limitations of invoice ingestion technology that inhibit its ability to extract information. Below are a few reasons why you still need to manually enter invoices.

Reason #1 – Invoices need to be in a structured format to be read accurately

Invoice automation can ingest 70-90% of invoices if they come in a standard layout, or are already digitized. However, according to Levvel Research, enterprises on average still receive 22% of their invoices in paper format, which can arrive folded, wrinkled, or get warped when manually scanned, making them difficult for invoice automation systems to read.

Even if the invoices are already digitized, they may not be in a consistent, structured layout that is suitable for general-purpose OCR – particularly invoices from smaller contractors such as catering services, janitorial services, or small businesses. Most AP teams will need to double-check these invoices after ingestion, or manually enter them into their system.

Reason #2 – Invoice automation uses general-purpose OCR technology

Most invoice automation uses general-purpose Optical Character Recognition (OCR) tools to read PDFs and images. These tools are designed to read text in any situation – a novel, a letter of complaint, or a newspaper article.

Just like people who are jacks of all trades but masters of none, technologies intended for general use face trade-offs compared to purpose-built tools. For example, because general-purpose OCRs aren’t trained to specifically read and understand financial documents, it often misreads a British pound symbol (£) with the number 6, or a dollar sign ($) with an S.

It also can’t factor contextual clues into its work. If an invoice is scanned upside-down, general-purpose OCR cannot understand or extract any information because it’s only familiar with a certain layout. Similarly, it would have trouble with wrinkled, creased, or unevenly lit documents. And just as a student can easily recognize an unfamiliar street address from another country, so too can context help a contextually-aware system identify the important attributes of an invoice it’s never seen before, like supplier and recipient, prices, quantities, descriptions, and so on.

OCR technologies specifically tailored and trained on finance use cases, paired with context-aware AI will offer much higher accuracy rates, making it possible to dramatically reduce the fraction of invoices that can’t be automatically read and entered.

Reason #3 – There’s still a lot of manual data entry

Although reducing manual invoice entry from 100 to 30%, 20%, or even 10% is fantastic, for an AP team with a high volume of invoices, 10-30% manual processing is still a large amount of work that drives up processing costs and time.

Depending on the form of the invoice, there can be dozens of different data points that need to be input into the accounting system. This doesn’t just cost the time and resource of the manual entry itself. It also introduces a lot of room for typos, errors, or missing information that slow downstream processing. Maybe someone mistypes an invoice number using the letter “O” instead of a “0” – but with this simple mistake, a unique invoice is created in the system, and now won’t be flagged as a duplicate. This risk is multiplied when there are several people involved in the process, increasing the processing time and delaying vendor payments – even with the most capable and efficient accounts payable teams.

This can increase the time it takes for invoices to be paid out, straining existing vendor relationships. According to a 2019 benchmarking study by IOFM, even many companies with significant invoice automation struggle with this: 53% of them paid at least 10% of their invoices late – very likely the very invoices that required manual processing.

The future of invoice automation

If the invoice process was fully automated, AP teams could drastically shorten their payment cycles and take advantage of early payment discounts for even better ROI. For a large enterprise, this would result in enormous savings. For example, imagine a company that processes $250M in invoices annually, of which 3% is eligible for a 2% early payment discount. Early payment would result in $2.2M annual savings.

Notwithstanding decades of progress and widespread adoption of automation technologies, it’s clear that invoice ingestion still has significant potential for improvement that can deliver huge business value from the automation itself and from unlocking benefits of a faster processing time.

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Josephine McCann is a Product Marketing Manager at AppZen, the leading AI-driven platform for modern finance teams. 

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Archives, Global Trade Daily, Trade Credit Insurance

Trade Credit Insurance & COVID-19

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Exporters and sellers in every industry are feeling the effects of COVID-19, and they will look to their trade credit insurance to cover amounts that their buyers no longer can pay.  It has been only ten weeks since the first US resident was reported to be infected with novel coronavirus COVID-19, and the virus has wreaked havoc on businesses in nearly every sector since then.

Trade credit insurance (sometimes called accounts receivable insurance) protects sellers against a buyer’s non-payment of debt, up to a certain percentage – typically 80 to 90 percent of the bill.  Most trade credit insurance policies include a “waiting period” after a bill is due before a policyholder can make a claim, and 180 days is typical. It is expected that the first wave of COVID-19 trade credit claims will arrive by early summer and continue throughout the year. The anticipated surge in trade credit claims will likely be met with forceful efforts by insurance companies to get out of paying claims.

PUTTING TRADE CREDIT CLAIMS IN CONTEXT

Economists predict that the country’s GDP will shrink by 34% in the second quarter of 2020. One of the largest trade credit insurance companies estimates that in a typical market, 1 in 10 invoices go unpaid. Even less than a year ago, an industry association counting the world’s largest trade credit insurance companies among its members (ICISA) reported an 8% increase in amounts covered by insurance, coupled with a 1.5% increase in claims paid.  In other words, more accounts were being insured, leading to more claims for insurance companies to pay.  This increase in paid claims, ICISA noted, occurred “despite favorable economic conditions.”

Economic conditions have certainly taken an unfavorable turn since then.

With a worldwide pandemic that has brought the global economy to a nearly grinding halt, sellers in every industry will be unable to pay bills as they come due. Trade credit policyholders will be making more claims – and they will be making those claims to insurance companies whose investment accounts are suddenly worth much less than they were three months ago.

Insurance companies selling property and liability insurance have already staked out their positions on why policies supposedly will not cover COVID-19 losses. There is good reason to believe their trade credit counterparts will respond similarly.

BE PREPARED FOR INSURANCE COMPANY CHALLENGES TO YOUR CLAIM

Trade credit policies generally promise to indemnify a buyer for a specified percentage of unpaid amounts that become due and payable during the policy period. Trade credit insurance is intended to protect a seller from non-payment caused by many things, including a buyer’s default, insolvency, or inability to pay because of catastrophe or acts of God.  Policyholders will have strong arguments that buyers who default on payments because of COVID-19 impacts are amounts that the trade credit policy promises to pay.

But policyholders should be wary of insurance company efforts to break those promises. The following are some expected challenges based on concepts addressed in many trade credit insurance policies.

Non-disclosure

Trade credit insurers often raise the defense of “non-disclosure” to avoid paying claims.  The argument goes that if the insurance company had known about some fact or another, it would not have sold you the policy it did.  In some jurisdictions, insurance companies can void policies altogether if they successfully prove that a representation or omission in the application process was “material,” meaning it caused the insurance company to take a position it would not have taken otherwise.

In the COVID-19 context, policyholders should expect challenges to what they knew about the creditworthiness of the buyer at the time of contracting.  Insurance companies may blame a buyer’s failure to pay on facts about the buyer that are unrelated to coronavirus, arguing that the policyholder failed to disclose things about the buyer that would have changed the insurance picture.  Some insurance companies analyze and investigate a buyer’s creditworthiness before underwriting the risk.  In those cases, an insurance company will have a harder time using non-disclosure to avoid its obligations.

But in response to any non-disclosure challenges, policyholders will want to look to the insurance company’s prior conduct in similar circumstances. Had they insured contracts involving the same seller before? Has the newly “material” information been asked of the seller before? While it is fact-intensive and likely time-consuming to establish, an insurance company’s previous conduct or silence can go a long way toward discrediting a non-disclosure argument.

Prior Knowledge

Depending on the specific policy period and payment dates, trade credit insurance companies may attempt to raise a “prior knowledge” defense to get out of paying a trade credit claim.  Insurance covers risks that are unforeseen at the time the contract is made. Insurance companies will likely seize on the evolving nature of the coronavirus pandemic to argue that sellers had “prior knowledge of facts or conditions” that would alert them to a buyer’s nonpayment.

Any response to the argument that a seller was aware that COVID-19 would impact the buyer’s ability to pay will need to take into account the dates of key pandemic events, both global and local. The dates of COVID-19 actions in the buyer’s home state or country will also likely be at play. As with a response to a “non-disclosure” defense, combatting a “prior knowledge” defense is highly fact-specific.

Policyholders may find that the “reasonable expectations” doctrine of insurance interpretation aids them in this scenario. In many jurisdictions, insurance policies must be interpreted to give effect to the reasonable expectations of the average policyholder. It is fair to say that most policyholders reasonably expect their insurance policies to respond to the losses following the sudden and unprecedented spread of COVID-19, whose impact was not appreciated at the time the policy was entered.

Challenges to the Underlying Sales Contract

While the defenses of non-disclosure and prior knowledge rely largely on what was said, done, or known during the application and underwriting process, policyholders should also anticipate challenges to the insured sales contract.

Trade credit insurance policies contain several provisions that limit insurance company obligations if the underlying sales contract is not compliant with the insurance policy.  Successful challenges to the validity of the contract – such as that it was never properly executed or that the transaction at issue was not covered by the insured contract – may jeopardize coverage. Some policies specifically exclude coverage if there is any “express or implied agreement . . . to excuse nonpayment.”

To avoid or rebut a challenge about the sales contract itself, trade credit policyholders should take special care to follow and apply the payment terms and credit control provisions in the contract. While there is no policy exclusion for being a conscientious seller, be prudent in your communications with buyers about your payment expectations.

Like so much about the legal impact of COVID-19, coverage for trade credit insurance claims stemming from COVID-19 losses will be fact-specific and potentially hard-fought. Trade credit policyholders should give prompt notice of their claim, document their losses, and prepare to respond to any insurance company challenges with the assistance of their broker or trusted insurance expert.

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Vivian Costandy Michael is an attorney in the New York office of Anderson Kil P.C. and a member of the firm’s Insurance Recovery Group. Through jury trials, summary judgment, mediation, and settlements, Vivian has helped to recover millions of dollars in insurance assets under liability and property insurance policies sold to corporate policyholders

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Archives, Banking, Global Trade Daily

Cryptocurrency’s Necessary and Inevitable Evolution

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Cryptocurrency is at the precipice of ushering in the next era of finance. However, in order to be regarded as a commodity, traded and managed in the same way we now do with precious metals, equities, and derivatives, cryptocurrencies must become subject to similar rules, regulations, and trust mechanisms that apply to traditional assets. Such assurances are necessary for cryptocurrencies to achieve their full potential. Banks and financial institutions, as well as other industries, require security at scale and other layers of assurance, like insurance and chain of custody tracking. Adopting the means to develop a high level of trust is an absolute necessity for implementing cryptocurrency in a meaningful way. The question is, how do we get there?

Traditional asset management firms act as fiduciaries on behalf of their partners, subject to rules that ensure the safekeeping and custody of the assets they hold on behalf of their clients. Becoming a fiduciary in the world of cryptocurrency is a complex process, requiring a combination of specialized software and hardware, physical security, as well as clear policies and processes that ensure safe custody of assets. It also requires establishing the means to adopt the regulatory underpinnings for strictly digital assets, and that affords customers the kind of transparency and assurances—track record, management team, balance sheet—that ensure custodial trust is essential.

However, that does not exist in traditional cryptocurrency exchanges where the roles of broker-dealer, clearinghouse, bank and custodian are all handled by a single organization, usually an exchange. That’s too risky for large scale financial operations.

Here are a few elements that should be adopted to mitigate that level of risk and provide acceptable assurances for institutional and large-scale industrial adoption:

Adopt the SOC 2 digital security framework. SOC 2 is a set of rules developed by the American Institute of CPAs to establish a certifiable process of strict, auditable controls for building confidence, and ensuring trust and integrity, in service organizations dealing with digital assets.

Require that institutions act as fiduciaries. Fiduciaries are required to act in the best interests of their clients and must abide by a number of rules and adopt safeguards meant to establish and ensure trust. Fiduciary rules protect the client in the event of wrongdoing, error, or as a backstop to a catastrophic event such as being hacked. Safeguards associated with fiduciaries include insurance, funds in escrow, capital in reserve, security and other procedural checks, and no commingling of client coins.

State-of-the-art security. Digital assets have proven difficult to secure. Trust and security for institutional management of cryptocurrencies require the strictest, strongest technology and processes available, including multi-signature access using private keys, as well as a combination of both online (“hot”) and offline (“cold”) storage of assets to minimize risk.

If we start with these three things, we can accelerate the process of establishing necessary trust in cryptocurrencies. Even though it is counter-intuitive to the prevailing ethic, the benefits of using cryptocurrency in today’s global marketplace demand that at least the leading forms of cryptocurrency, like Bitcoin and Ethereum, adopt rules and even submit to regulations on par with those dictating the operation of traditional financial exchanges. This high level of trust would allow organizations to take advantage of the cryptocurrency’s “frictionless” ease of use and access while providing assurance of the asset’s security.

This type of evolution has happened again and again in financial services. Over the last half-century, security in financial services has evolved from an approach focused on building imposing physical controls, to one emphasizing digital trust. Over that time, we’ve observed those changes in the construction of financial institutions. At one time banks were imposing fortresses built of granite blocks and steel bars, outfitted with armed guards, and intended to send the clear message that your wealth was safe inside. Then, after currency was taken off the gold standard and protected with insurance policies, banks became open, airy, and inviting facilities that emphasized convenience.

Today, a bank may be nothing more than an intermediary operating from a web site or smartphone application. As long as the client is content that their money is secure, there is little concern for the format. That is because security has fully transitioned from the physical to the digital and, while there remains something of the past in our concept of cash and currency, the shift is complete. Cryptocurrency is the natural, next-step in the industry’s evolution.

People have become used to the idea that money doesn’t have to be a tangible representation of wealth, and that the ease of access that comes when wealth is digitized is a part of the value of an individual’s or organization’s finances. Today, more than a decade after Bitcoin’s advent, cryptocurrency represents the next phase of finance, but to get there means taking these important steps and adopting meaningful controls in order to satisfy the demands of traditionally staid industries like financial services. The good news is that, while the market recognizes that the mainstreaming of cryptocurrency is an inevitability, we have the model for making it work. We can—and must—do so for the benefit of the global economy.

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Nick Carmi is the Head of Financial Services at BitGo

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Archives, Banking, Global Trade Daily

Industry Advocacy Required to Enable Trade Finance Market Access and Growth

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In a whitepaper released last year, the International Chamber of Commerce (ICC) urged the trade finance industry to work together to ensure that regulation does not hinder the availability of trade finance. Olivier Paul, Director, Finance for Development at ICC, explains how a fair regulatory environment across regions is key to the industry’s growth.

In the wake of the financial crisis of 2007, regulation and compliance requirements have had the unintended consequence of negatively impacting trade finance provision. As banks adapt to ever greater compliance and regulatory requirements, they seek to minimize risk by reducing their number of correspondent banking relationships. This phenomenon, known as “de-risking”, especially affects small and medium-sized enterprises (SME) in emerging markets that need financing the most.

Accessing adequate trade finance is already tough for SMEs, who often lack the collateral, documented history of past transactions and knowledge of the financial instruments available to them. This has led to a US$1.5 trillion gap between the demand and supply of trade finance – or gap – as SMEs find themselves most neglected by financiers.

In its report, Banking regulation and the campaign to mitigate the unintended consequences for trade finance, the International Chamber of Commerce (ICC) outlines how some post-crisis banking regulation has unintentionally led to the widening of this trade finance gap. The report argues that industry advocacy is necessary to ensure fairer treatment of trade finance, as several examples already demonstrate.

Unintended Consequences and Successful Advocacy

Despite well-meaning capital and liquidity requirements contributing to the resilience of the financial system, they have also limited banks’ ability to invest in cross-border relationships, leading to concerns relating to the treatment of trade finance instruments across regions.

For example, the Basel Committee on Banking Supervision (BCBS) introduced the third installment of the Basel Accords – a set of international banking regulation recommendations – in 2010. However, the BCBS does not have the authority to enforce its recommendations, leaving national – or supranational – institutions to write the recommendations into law.

What’s more, these recommendations allow significant room for interpretation, allowing each jurisdiction to adapt them accordingly. This results in inconsistencies across jurisdictions, leaving emerging market banks subject to the resulting ambiguity.

In particular, the Net Stable Funding Ratio (NSFR) for financial instruments supporting trade finance caused concern among many industry practitioners. The European Commission and Council, as well as the European Banking Authority, recommended that NSFR have a variable rate of 5%-15% depending on the maturity of the transaction. In many jurisdictions outside the European Union, however, the NSFR rate is either flat – at a maximum level of 5% – or non-existent.

This represented a clear disadvantage, and one affecting the whole market. As such, the industry-led by ICC – advocated for a fairer treatment of NSFR ratios for trade finance. This resulted in a significant reduction in the spectrum of rates which now stand at 5% for a transaction maturity of under six months, 7.5% for a transaction maturity of under a year, and 10% for maturity of over 12 months.

Early Start

To ensure the highest success rate, it is essential that discussions between industry members and regulatory authorities take place at the earliest stages of the decision-making process. With regulatory adoption and implementation processes taking up to a decade in some cases, the industry must work together with regulators and maintain a proactive approach to promoting fair regulatory treatment of trade finance.

The document outlining the finalization of the Basel III framework was published in 2017 but will only be enforced between 2022 and 2027. Action is needed today if the industry’s voice is to be heard and acted on.

Banks have already identified several areas relating to trade finance – such as the treatment of unconditionally cancellable commitments, the minimum durations to calculate risk-weighted assets and the treatment of subsidiaries in large groups – where discussion is needed. Over the next few years, banks and industry bodies will need to engage with these topics, as national regulators translate the finalization package into national legislation.

Next steps

Some 80% of international trade flows involve the recourse to a financial instrument, according to the World Trade Organization. To encourage the use of trade finance worldwide – and ensure the widest market access especially for SMEs – harmonization of regulations will be required.

Much work has already been done to promote the fair treatment of trade finance within banking regulations. However, regulations will not adapt unless all stakeholders voice their concerns. It is up to the entire industry – and ICC, as the largest and most authoritative voice in trade finance – to be at the forefront of this work.

Archives, Commentary, Global Logistics

How Small Business Should Think About Financing

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It’s no secret that over half of small businesses close their doors within the first five years. One of the critical problems that often occur has little to do with the innovation, ingenuity, or work ethic of the small business owners themselves, but rather the lack of access to sufficient capital to cover the ebbs and flows of their operation and its associated costs. 

Scaling any idea or enterprise, to me, is less often about “entrepreneurship” —and other catchy terms we can print on a business card— and more about meeting the demands of others, like payroll and customer expectations. Simply put: small business owners need capital resources— they need cash. 

Historically, small businesses have had limited options to access capital: savings, friends and family, credit cards, traditional bank loans, or the occasional SBA loan. Enter the financial crisis of 2008-2009, which ushered in a new regulatory environment that contracted these historic capital resources, thereby creating the market-driven need and demand for non-traditional banking options.

Consequently, we find ourselves operating in a new era, one in which enterprising nonbank funders have brought novel and different capital products to the small business market. This has been largely accomplished through an ambitious mix of fintech and financial innovation. These previously unavailable financing options give small businesses more resources to consider than ever before. Now their next step is to explore them and consider how their small business might decide on the best option for their specific needs. 

As we contemplate these innovations, here’s a quick list of some of the best financing options available to small businesses:

Business Term Loans: Best for businesses looking for working capital, equipment purchases, or to purchase inventory or other fixed assets. For short-term loans, it can often be matched to a specific project and repaid to coincide with the completion of that project in 6 to 12 months. For longer-term loans, the repayment can be stretched out to 3 to 10 years, but these often require higher levels of collateral coverage or a personal guaranty by the business owner. 

Pros: Great product for larger one-time investments with targeted cash loans flow that payments can be matched. 

Cons: Larger dollar amounts and a longer payback term will require increased time, energy (think: bank meetings and interviews), and documentation. 

Equipment Financing: Best for one-off purchases like restaurant equipment and machinery. 

Pros: no upfront spend; if the business owner has impaired credit the fact an asset is involved as collateral can make it easier vs. purchasing the equipment; and tax-deductible.

Cons: Overall cost is usually more expensive in the long-run; cost inclusive of fees if the lease is terminated early can be substantial; and must take into account all terms and conditions that can be complicated (who handles and addresses a break-down in the equipment? etc).

Small Business Administration (SBA) Loan: Best for business owners who need capital for a variety of longer-term business expenses. It is government guaranteed so the process can be daunting and is processed through a bank that has an SBA loan program. 

Pros: Cost and longer-term repayment; great product for owner-occupied real estate.  

Cons: Requirements are strict; process is time-consuming (60 to 180 days); high upfront fees; and requires strong personal credit scores.


Business Line of Credit (“LoC”): Best for businesses with more volatile sales and cash flow. Flexibility to drawdown and repay based on the needs of your business.  Often secured by accounts receivable and inventory. Some LoC’s offered by FinTech operators do not require business collateral but do require a personal guaranty.  

Pros: Can access quickly (assuming facility is in place) to solve urgent issues or expenses; and great for managing working capital needs and the business’ short-term cash flow needs.  

Cons: Reporting can be much more intensive vs. other products available; upfront and ongoing fees can be expensive, especially if the LOC is rarely drawn down.


Revenue-Based Financing: This is a financing option where the repayment schedule is tied to the future revenue of the business. The genesis of the product is that the funder operates as more of a partner and is taking some level of “equity-risk”. If the revenue decreases or the business fails, the repayment is either stretched out or in the case the business fails the funder has no recourse. Small businesses can utilize this product for project financing, working capital, growth investments, or short-term needs. 

Pros: Quick access; repayment risk mirrors the revenue; no business or personal recourse except in the case of fraud.  

Cons: Products are generally 12 months or less; more expensive given level of risk with limited recourse; reporting can be intensive as changes to payment schedules requires bank and financial verification.

Invoice Factoring: The business can turn its unpaid invoices into immediate cash. The invoice factoring company collects directly from the customers and distributes capital to the business, net of its fee. 

Pros: good for managing cash flow; typically a short-term financing product (30 to 90 days).  

Cons: cost can be expensive, especially if repaid much quicker than anticipated; can be disruptive notifying customers to change their payment instructions to the factoring company; requires technology integration or higher level of reporting and the business’ customers will be dealing directly with your funder if they delay payment – not you as the business owner.  

Angel Investors/ Venture Capital: Best for small businesses who want to scale quickly. 

Pros: entrepreneurial background provides increased insights and foresight vs. dealing with alternative finance providers, banks, or the government; larger investor network to leverage for additional funds or additional business; and capital remains in the business (vs. interest costs). 

Cons: Higher rates of returns expected (typically at least 5x their investment); requires giving up equity in the business; process will be intensive; typically reserved for high visibility, disruptive companies pursuing large addressable markets on a national or global scale; and will require operating agreement additions to governance to protect their investment in the case of underperformance.

Bootstrapping: Best for businesses with principals that have savings or expendable income who want to preserve equity ownership and cash in the business. 

Pros: maintain ownership position and keeps all cash generated either in the business or available for dividends. 

Cons: Growth limited to the owner’s cash position; risk missing market opportunity because thinly capitalized; challenging if a short-term need requires more cash than available.

While the pros and cons of this list provide a guide to financing in 2019, any financing decision should ultimately come down to your assessment of the cash flows of the business (today and in the near term), demonstrated capacity to handle credit, costs versus profit opportunity (positive ROI), and repayment thresholds. 

The good news is, enabling technology allows small business owners to access various forms of capital quickly and efficiently. There is no day like today to explore options to fund entrepreneurial dreams. 

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Vincent Ney is a founder and CEO of Expansion Capital Group, a business dedicated to serving American small businesses by providing access to capital and other resources so they can grow and achieve their definition of success. Since inception, ECG has connected over 12,000 small businesses nationwide to approximately $350 million in capital 

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Archives, Banking, Global Trade Daily

Connecting the World: The Importance of Intermediary Banks

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Whether you are initiating electronic international payments through a fintech solution or buying physical currency, the chances are high that a bank will be involved. The relationship between banks, as well as the role of intermediary banks, often eludes the general public, who are content with the process as long as it works.

However, understanding how the sausage is made can provide valuable insight into the way you conduct your business. Let’s take a closer look at intermediary banks and their subsequent relationship with currency exchange.

What is an Intermediary Bank?

In layman’s terms, an intermediary bank is where funds are transferred prior to reaching their destination, the payment bank. 

To transfer money, banks must hold accounts with each other in the same way that a typical client would. However, there are too many banks for one to hold accounts with all the others, so instead, they strategically choose where to open accounts. The result is a fragmented network of financial institutions. 

When a bank needs to send money to a location where their bank does not hold an account, the bank instructs an intermediary bank to act as a “middle man” to pass on the funds on their behalf. Funds can transfer between multiple intermediaries, especially if one of the banks is not networked with many larger banks. If the payment bank is across an international border, the intermediary bank may also act as the currency exchange provider.

The Role of Currency Exchange

Currency exchange refers to the use of one currency to purchase the same value in another currency. It’s required any time one entity wishes to pay another in a currency different from their default option.

Each country has either a “fixed” or “floating” exchange rate. A “fixed” exchange rate—also known as the “gold standard”—means that all the country’s money has a physical equivalent in gold or another precious material. “Floating” exchange rates may not have a physical worth, but are influenced by the market and politics, as is currently the case with the Great British pound’s relationship with Brexit.

Breaking Down the Cost

For businesses, currency exchange is vital to a true international payment process. Some vendors may wish to be paid in their customer’s default currency, which would not warrant an exchange. U.S. businesses may experience this when working with vendors in countries like China or Japan, who often prefer payments in USD. This happens when a vendor finds it cheaper to open accounts specific to currencies other than their own in order to avoid exchange fees.

Some vendors have opened multi-currency accounts, which enable vendors to accept and store more than one currency in a single account. Because this method is still gaining traction, it’s good practice to ask if vendors have multi-currency accounts before sending them money. If they don’t, and their account cannot support your currency, the payment bank will likely reject the funds.

Other hidden costs to consider when working with international payments are:

The exchange. If your origin currency is weaker than the payment currency, your money may lose some value in the trade. However, the market is continuously shifting, so the exchange will also gain value at times. The more international payments you make, the likelier that this cost will even out over time.

Intermediary bank fees. Some intermediary banks shave off a fee for their services, which is usually taken from the sum – the net amount is deposited into the vendor’s account. Not all intermediary banks will charge this fee, and it’s not immediately obvious which banks will do so.

Payment bank fees. Similar to the intermediary banks, certain payment banks also charge a fee for processing international payments. Again, not every bank charges this fee, but those that do will deduct it from the payment sum before depositing the net amount into the vendor’s account. Vendors can discuss this charge with their bank if it occurs.

Disrupting the Status Quo

With all these nuances to keep in mind, it can feel like involving a fintech will only add another cog to an already-overwhelming process. However, a fintech can determine the most efficient route through an intermediary bank, and assist in locating missing payments. If funds are returned for any reason, fintechs also act as a holding account while you decide if you want to exchange the funds back or resend them. Following a process like this ultimately saves time, money, and hassle.

If you’re on the fence about using a fintech for international payments, keep in mind that you aren’t losing out by mitigating an overly complicated bank processes. You’re merely side-stepping the complications in favor of usability.

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Alyssa Callahan is a Technical Marketing Writer at Nvoicepay. She has four years of experience in the B2B payment industry, specializing in cross-border B2B payment processes.