Third-Party Freight Payment Companies: Part I
This week’s post is a first in a series, examining the increased usage of third-party freight payment companies by shippers. The original purpose of these companies were credible, but many trucking companies now feel they are being forced into pseudo-factoring arrangements, despite their strong relationships with the shippers they serve. Some companies (not all) are making the bet that trucking companies do not know their internal cost of capital, and playing freight rate arbitrage between the shipper and the carrier – are they overstepping their role?
Part I – Third Party Freight Payment Companies Explained
Freight payment and audit is a fairly simple concept that can become increasingly more complex depending on how it is implemented. Third-party freight auditing and payment is a group of processes that is basically an accounts payable service for transportation invoices. A freight payment company acts as an intermediary between the shipper and the carrier to receive, process, audit and pay freight bills. Every freight payment company’s processes and practices will be a little bit different, and this is where things can start to get concerning for the carriers.
- Invoice Receipt and Data Capture – In almost all cases the carriers send their invoices directly to the payment company. This can be through either paper bills or through EDI. Upon receipt, the payment company must be able to capture data and information from the invoice, bill of lading and any supplemental documents to create a database of information for both processing and reporting. This helps shippers more readily evaluate their shipping activity. Flexibility in data capture and consistency are critical factors.
- Freight Bill Auditing – This process ensures that freight invoices are paid exactly as prescribed by the carrier contracts (the freight payment company will have copies of all the carrier contracts that a shipper has entered into). There are no standardized audit controls in the industry, so this step may vary from company to company. Ideally the audit controls are developed between the shipper, and the payment company to best balance the shippers needs, and the trucking company’s capacity. Typically, the controls include duplicates, service failures and rates, with accessorial, fuel surcharge and fine-print references in the contract becoming more common. Ensuring adherence to the contract is one of the cost justifications that the payment companies use to sell their services. One other feature that many payment companies provide is freight bill validation. This is the ability to audit and validate each invoice according to an internal shipping policy, and a company routing guide. The goal of most freight audit processes is to automate most of the steps and only require manual intervention in a small number of cases. In theory, this is good for the shipper, by ensuring that invoices are accurate, and it is also good for carriers by reducing the time required for invoices to be processed. However, this is an area that can be a major pain point for the carrier, especially if the auditing software does not accurately capture what is on the carrier invoice. The payment company will data map each carrier’s invoice to automate the data entry but not every invoice will nicely fit into some of these data models. Alternatively, carriers that do a lot of specialty work for a shipper, that requires special documentation or notations may find that this process slows down their payments, if a large number of their invoices get pushed to manual acceptance and processing.
- Systematic Cost Accounting – Freight payment companies apply a valid general ledger code (or codes) to each invoice based on rules provided by the shipper. These rules are usually based on the information captured from the invoices or bills of lading. In most cases the shipper is provided with tools that allows them to handle any exceptions or one-off transactions.
- Carrier Funding – After the invoices are received, audited and then processed, the payment company will typically create a consolidated funding request to pay the carriers. Payment requests and disbursements are typically made weekly. A payment partner will also generally attempt to implement negotiated terms so as to maximize cash flow for the shipper. Payments to the carriers are typically made via ACH or manual paper cheques.
- Reporting and Business Intelligence – Most payment companies provide reports through their portal to the shippers and more are also starting to provide them to the carriers. Carriers need to understand that these reports will be aimed at cost reduction. Many of the reports will be somewhat standardized with the specific cost targets tailored to each individual shipper and their needs. Some areas that can be focused on include erroneous accessorials, and unauthorized brokering of loads
The freight payment and audit market will be greatly threatened by the use of Blockchain technology. First of all, this business model does make some assumption on the trustworthiness of the data in the carrier invoices. Simply put, if the shipper believes that the invoices are accurate, that reduces the need for such as service (keeping in mind that improved data collection may also be a key driver if the shipper’s ERP systems are not capable of the desired level of collection). By going to blockchain and smart contracts, the transactions are essentially self-auditing as the contract will not release payment until all conditions have been met and all parts to the transaction can see the current status.
An intermediate step has already been adopted by some shippers where they use a service that allows for the temporary GPS tracking of a carrier’s truck and trailer as it is on an active load. The load tenders are sent by either EDI or through their web portal. The rates and miles have already been established as well as any additional stop charges. Once the carrier assigns a driver to that load, the tracking service will temporarily follow that truck and starts reporting to the shipper when the truck enters a geo-fenced zone around the shipping location. This gives full visibility to both parties with regards to on-time performance and wait time. The service continues to track the truck until it leaves a geofence around the last delivery. After that point the truck is no longer tracked. Within 30 minutes of leaving the last delivery geofence the load details are available on the portal and the carrier has 99 hours to enter the wait time and any additional charges. Once the two parties agree that the charges are correct the invoice is processed and paid within 7 days by ACH. Their system has not yet been able to automate the extra charges but this comes close to a smart contract. One of its advantages is that it eliminated the need for a third party payment company as the contract is close (ase mentioned above) to self-auditing. Non-contracted lanes are negotiated as mini-contracts with only the per mile rate up for discussion. All other accessorials fall under the master contract. The rest of these one-offs are handled the same as awarded lanes. The carrier wins by getting shorter payment terms and the shipper has the potential of lower rates because of the improved cash flow. All data is entered and audited by both parties and the data is available for both of them. There are still improvements that this scheme needs in terms of automation but it provides more of a true partnership between both sides as it assumes a level of trust between carrier and shipper.
Next week, we will examine the payment negotiation process with these companies.