Under the Microscope: Third-Party Freight Payment and Audit Companies (Part II)
Last week we looked at how Third-Party Payment companies work in general. Over the coming weeks, we dive a bit deeper into how these companies operate, how they get paid, and finally – how best to position yourself for efficient (and timely) payment.
The first thing to remember is that these companies are (typically) not there to help the carrier. Their value proposition is that they will reduce transportation costs and increase transparency in the supply chain – for their shipper customer. In most cases (especially based on feedback from readers last week), the best you can hope for is to make a painful experience – slightly less painful.
Many readers emailed me this week to share their frustrations (as well as satisfaction and success stories) with various Third-Party Payment/Audit companies. In general, for many companies, they are seeing an alarming increase in the number of delayed (or rejected) invoices. Although the specific reasons given for these situations are diverse, they typically fall into the following categories: 1. Incorrect Miles, 2. Incorrect Rate, 3. Plan # in specific location required on invoice (am assuming for OCR purposes), 4. New Account Manager / Employee Turnover, 5. Duplicate freight bills, and 6. Customer Approval required – a big catchall mentioned by eight different companies.
Now at first glance, from the outside looking in, the average person would conclude that these companies are simply fulfilling their commitment to their customer – the shipper. However, what if those lines were not that clear? What if there was a grey area that provided an additional incentive for companies to delay payment to the carrier? What if the benefit of that incentive accrued to the Third-Party Payment company and not the customer (the shipper) or the carrier?
While doing some research, I decided to read the past two annual reports for one of these companies – CASS Information Systems. This company is one of the largest Third-Party Freight Payment/Audit companies in North America, managing $44 Billion of payables for many blue-chip companies. Originally a subsidiary of Cass Commercial Bank, the St. Louis-based financial institution is now a wholly-owned subsidiary of the Cass Information Systems. The company is a sophisticated, and well-known partner in the global supply chain (as well as other industries).
In their 2016 Annual Report, the words “Interest Income” kept popping up. The more I read the report, the more they sounded like an Insurance Company. Instead of using the word “Float” (the insurance industry vehicle that helped build Berkshire Hathaway – and Warren Buffett’s wealth), the report mentioned the word “Balances”. The combination of words “Interest Income” and “Balances” in various locations throughout the report piqued my interest. My interest was piqued further when I read the following two statements on Page 25 of Cass’ 2016 Annual Report:
“In general, however, Cass is compensated for its processing services through service fees and investment of account balances generated during the payment process”
“Interest income from the balances generated during the payment processing cycle is affected by the amount of time Cass holds the funds prior to payment and the dollar volume processed”
The above reinforces two things. First, Cass receives two types of revenue – contractual Fees from their customers, and interest income from the balances generated during the payable cycle. Two, considering the time value of money, there is an inherent incentive for Cass to hold onto the payment for as long as possible to enhance investment income (again, similar to how an insurance company generates a significant portion of their revenue and profits).
Now, the above, may be the ‘norm’ for all Third-Party Freight Payment/Audit companies, but most of the companies that I’ve been made aware of are not publicly-traded, and as a result, there is very little information available about their strategies, operations, practices, workflow etc.
The above example is for information purposes only, to educate our customers on a growing segment of the industry. Knowing, in detail, how your customers and partners operate should significantly influence the internal business practices of every trucking operation.
Next week, we will examine another component to these relationships – the use of factoring (by these same companies) for faster invoice payments (but that ‘bonus’ comes at a cost).