CMA Daily News

The Illusion of a Good Deal

There's no question that a lot people have a hard time wading through the confusing and overwhelming maze of data present on statements that they receive from their credit card processors. There's a popular mental image that processors are merely robbing their customers, hitting them with a never-ending string of charges like convenience fees, access fees, risk fees, assessment fees, downgrades and the heavy-handed interchange.

"They do take advantage," said Robert Day, assistant vice president, Commercial Interchange, Third Fifth Processing Solutions at the recent NACM teleconference, "The Illusion of a Good Deal." "Interchange is where your focus needs to be. The issuing side of the house is where the money is made…they're the ones that are driving the interchange."

Day warned that interchange, the fee collected by the acquirer from the merchant for every Visa and MasterCard transaction, can represent as much as 92% of a transaction's costs. On commercial cards, the rate of interchange can be affected by the amount of detail a business can collect on the purchaser, such as zip code, location and tax ID as well as line item detail of the purchase, to lower the risk of the transaction being disputed. With lower risk comes a lower interchange rate, which can save anywhere from tens to hundreds of dollars on large ticket sales.

"Really, the key is getting the correct information and putting the information in correctly," said Day.

But even if a merchant does this, it could be moot.

Beyond the tangled mesh of fees upon fees, the problem for most businesses is that the account with their processor or gateway does not match their business' needs or practices. Having an account that is set up incorrectly, which typically happens because of lack of experience or knowledge from the merchant or an Independent Sales Organization (ISO), like a local bank that re-sells the credit card processing, translates into wasted money and time. ISOs outnumber processors over 100-to-1 and are very common partners for business accounts, but their limited knowledge could mean that it would be nearly impossible for businesses to achieve lower interchange rates.

Day also warned that processors will simply try to take advantage of businesses. A common practice is that a processor will offer an attractive base rate, which will appear boldly on page one of a merchant's statement, if the merchant will agree that the processor doesn't have to disclose the rate they charge for downgrades. In this type of agreement, the processor will deliberately leave out the column for transaction volume on the statement so that the percentage charged on downgrades can't be figured out. Day explained that if credit professionals see that this one column is absent, it might be time to take another look at the relationship with that processor.

"It doesn't matter what discount rate is shown on page one," said Day. "Page one is there to humor you. Throw it away unless it aligns itself with page two. Otherwise, it just doesn't matter."

Matthew Carr, NACM staff writer

Loose Lips...

Section 548, the fraudulent transfer portion of the Bankruptcy Code, is placing more emphasis on the importance of what is said. The law firm of Powell Goldstein, LLP highlighted two recent bankruptcy cases where loose lips from defendants came back to bite them.

In the recent bankruptcy hearing for Teligent Inc. in New York, the former CEO and chairman had in his employment agreement that a $15 million loan would be forgiven only if he left the company for "good reason" or was terminated other than "for cause." The company switched hands several years after the agreement was signed and the CEO decided to part ways. He filed a separation agreement which reasserted that the loan would be forgiven and was terminated other than "for cause." The trustee sued the CEO under section 548, alleging any forgiveness of the loan would constitute fraud. The reason being: at the time of his departure the CEO gave an interview to a local newspaper and was quoted in the article as saying he was dissatisfied with the new owners and wanted to explore new opportunities. The court found this evidence persuasive and voided the release, which deemed him liable for the loan. According to Powell Goldstein, if the CEO had simply declined to comment as to the reasons for his departure, the outcome would have been different. The law firm remained that "a release can constitute a transfer under section 548."

The second case Powell Goldstein highlighted involved Student Financing Corp. (SFC), which approached SWH Funding Corp.—the two having had a long-term relationship—for an $80 million loan. There was an application fee of $400,000 required by SWH. A little while later, SFC changed its mind and backed out, only to come back after a couple weeks to re-pursue the loan. SWH charged an additional $250,000 application fee. In the end, the loan was denied. During SFC's bankruptcy case, the trustee sued SWH for the $650,000 on the grounds that the lender was attempting to hinder, delay and defraud creditors.

The trustee's case relied on an email written by SWH's president to SFC's attorney that said, "No joke, you know from the last SFC deal we have no money. We were just using the old 'the documents aren't done' to get out of financing." SWH's president said that the remark was supposed to be sarcastic, and of course, the bankruptcy case disagreed. Powell Goldstein reminded that, "the moral of the story is to write emails cautiously."

Matthew Carr, NACM staff writer

Statistical Tools for Managing Accounts

With the current economic environment and a surge in defaults and bankruptcies, there has been greater emphasis on being able to ascertain the risks of customers. The recent NACM teleconference, "Statistical Tools for Managing Accounts," presented by Prof. Jack Williams, JD, CIRA, CDBV of Georgia State University praised the value of using various types of statistical models to aid credit executives in their decision-making process. The presentation also served as a primer for the liquidity, debt and performance ratios, the tools used to weigh the credit risk of customers.

"Use of statistics can be a valuable tool," said Williams. "Statistical techniques are a way you can allow the data to tell you a story about your customer. Statistics unlock the doors to all sorts of information and can be used to compare a customer to the rest of that customer's industry."

He added, "Any statistical analysis properly framed will answer fundamental questions in a credit department's operations."

Modeling and scoring techniques have been hailed as being objective in assessing the risks of a customer, helping set opening lines of credit, as well as establishing a baseline for that customer's historical payment cycle. It's a lifecycle tool. There are a number of commercial options available and NACM affiliates offer such services as well. The upcoming March issue of Business Credit magazine also explores credit scoring and the use of statistical models.

"The interesting thing about statistics is that they allow you to look at a lot of customers simultaneously," said Williams. "If you have a shop like the ones I grew up in: you're underfunded, undermanned and overworked. So, any type of tool that makes you more efficient, particularly if it allows you to manage a lot of customers, a lot of invoices, is going to be a better tool at the end of the day."

Williams noted that people are often turned off by statistical modeling because it is routinely seen as being math intensive. The reality is, though there is math involved, it is not something only accomplished by rocket scientists.

"Statistics is less about numbers and more about patterns," said Williams. "And that's what we do intuitively as good credit managers. In fact, you're already doing statistical analysis." And by turning to an unemotional computing technique, Williams said credit managers can remove subjectivity from the process and embrace a tool that is reliable and consistent. Though he added, "They do not replace personnel and they certainly do not replace discretion. They augment credit discretion."

Williams' detailed discussion of statistical modeling covered everything from aging receivables, to analyzing raw data, to various types of averages, and even to dreaded terms like standard deviation. But he continued to tout the importance and efficiency of modeling as well as the ease of use. Even basic office tools like Microsoft Excel can allow credit managers to start doing their own statistical modeling. Most have access and are familiar with the software. Many of the meetings and conferences held by NACM, such as the annual Credit Congress, are often highlighted by Excel sessions and have proven to be very popular among attendees.

"Excel gives you access to very amazing, powerful statistical techniques that are embedded in the Data Analysis Toolpak," said Williams, going into detail into how simple it was to load from the Tools menu. "It's very, very easy to use. Among other things, it's going to give you summary statistics. It's going to give you the averages so you can get an indication of what your particular payment cycle looks like with a particular customer or customers within a particular product or service line that you provide. It's also going to measure variability."

Matthew Carr, NACM staff writer

Business Credit Compensation Survey

NACM and FCIB are conducting a Business Credit Compensation Survey. A free copy of the report is available to those who participate in the survey. Click here to participate.

NACM Credit Manager's Index for February 2008

The seasonally adjusted Credit Manager’s Index (CMI) remained unchanged in February, breaking a streak of five consecutive declines. A rise of 1.5% in the manufacturing index was offset by a decline of 1.6% in the service index. However, the dollar collections component in manufacturing distorted the totals, soaring 10.2%, the second highest jump ever. “Without that component,” said Daniel North, chief economist for Euler Hermes ACI, “manufacturing would have only risen 0.6%, and the combined index would have actually fallen into negative territory at -0.4%.” Five of the components in the combined index are now below the 50 level which would indicate economic expansion, tying the record set in November of last year. Six of the 10 combined components fell. “Perhaps most noteworthy,” North added, “the service index has fallen below 50 for the first time.”

“Overall, the combined index tells a story similar to the one we have been seeing for some time: a slow erosion of the combined index with more weakness in services than in manufacturing,” said North. “The performance of the macroeconomy continues to be dismal, and it is quite likely that a recession has already started.” The 49.5% reading in the service index clearly shows contraction and reflects the weakness of the overall economy. “In response, the Federal Reserve has slashed interest rates and will continue to do so in order to stimulate the credit markets and the macroeconomy,” said North. “However, Fed actions take six to 12 months to become fully effective, so this aggressive rate cutting is simply too late to prevent a recession, although it will help get the economy out of a recession sooner, perhaps as early as the end of this year.”

Download the full report, click here.

FCIB International Business Day - Santa Clara

FCIB's California International Business Day
March 6, 2008 -- 7:30am - 11:30am - Click here to Register
SVB Silicon Valley Bank - Santa Clara, California
FCIB is pleased to announce its International Business Day in California, sponsored by SVB Silicon Valley Bank.  Mark your calendars and plan to attend this educational and networking event!

This Business Day is led by a moderator and a panel of experts – highly successful and recognized practitioners in the international credit, risk management and trade finance fields. The agenda is derived from questions and topics of interest submitted by attendees. Discussion of the key issues of the day and exchange of information with industry peers and executives is the highlight of FCIB's International Business Days.

SEC Proposes Delay of SOX 404 Requirements for Small Businesses

The Securities and Exchange Commission (SEC) unanimously proposed a one-year extension of the auditor attestation requirement of Section 404(b) of the Sarbanes-Oxley Act (SOX) for small businesses, allowing the commission to undertake and complete a cost-benefit study of the requirements effects on smaller firms. SEC Chairman Christopher Cox previously announced the extension in testimony before the House Small Business Committee in December 2007. Under the proposed extension, the Section's requirements would apply to small public companies beginning with fiscal years ending on or after December 19, 2009.

The intended purpose of the cost-benefit study is to gather and analyze real world information from companies currently in compliance with Section 404. The study will consist of both a web-based survey of companies subject to the Section's provisions and in-depth interviews with compliant companies and will be conducted predominantly by the SEC's Office of Economic Analysis and assisted by the Office of the Chief Accountant and Division of Corporate Finance.

"The Commission believes that strong investor protection and healthy capital formation go hand in hand," said Chairman Cox. "The study will give us the opportunity to ensure that the investor protections of Section 404 are implemented in the way that Congress intended, and do not impose unnecessary or disproportionate burdens on smaller companies."

According to a release, financial data from the study will not be available to companies until March or April of 2008, meaning the study is scheduled for completion by late summer or early fall of this year.

Jacob Barron, NACM staff writer

PCAOB Adopts New Auditing Standard

In light of the Financial Accounting Standards Board's (FASB) issuance of Statement of Financial Accounting Standards No. 154, Accounting Changes and Errors Corrections, the Public Company Accounting Oversight Board (PCAOB) has adopted the Auditing Standard No. 6, Evaluating Consistency of Financial Statements, as well as an accompanying set of amendments.

"Auditing Standard No. 6 will improve the quality of the auditor's reporting on items that affect the consistency of financial statements, such as a company's adoption of new accounting principle or its correction of a material misstatement," explained Mark Olson, PCAOB chairman. "Investors should benefit from these improvements."

The new standard and related amendments update the auditor's responsibilities to evaluate and report on the consistency of a company's financial statements and align the auditor's responsibilities with SFAS No.154.

Also, PCAOB removed the hierarchy of generally accepted accounting principles (GAAP) from its interim auditing standards. The GAAP hierarchy identifies the sources of accounting principles and the framework for selecting principles to be used in preparing financial statements. Because FASB intends to incorporate the hierarchy in the accounting standards, it no longer needed to be in the auditing standards.

Auditing Standard No. 6 and the amendments will become effective 60 days after approval from the Securities and Exchange Commission (SEC).

Matthew Carr, NACM staff writer

NACM Credit Manager's Index for January 2008

The seasonally adjusted Credit Manager’s Index (CMI) fell for the fifth consecutive month in January, slipping 1.0 point to a record low of 51.4. The previous record had been set last month at 52.4. “Five of the index’s 10 components fell, and both the manufacturing and service indexes declined, indicating that the weakness was widespread although not terribly deep,” said Daniel North, chief economist with credit insurer Euler Hermes ACI. “The CMI’s steady decline has mirrored other macroeconomic data which suggests a sharp slowdown. For instance, fourth quarter GDP grew at an annualized rate of only 0.6%, well under expectations of 1.1% and the long-term average of 3.5%. The GDP report showed the economy as perilously close to the beginning of a recession.”

“Signs of the downturn are everywhere: terrible holiday sales, massive job losses in housing and in financial services, downtrends in volatile global financial markets, downgrades of bond insurers and many debt instruments, the Fed overreacting with cuts of 1.25% in eight days and an emergency stimulus plan in the works,” North said. “Clearly, these unpleasant trends in the macroeconomy are now well reflected in credit managers’ experience.”

Download the full report.

NACM Credit Congress Offers More Than Great Sessions

This year's Credit Congress will not only offer attendees an opportunity to network, grow and improve as credit professionals, but it will also give them the opportunity to delve into one of the nation's most culturally rich, and often overlooked, cities. Often called either "the southernmost northern city" or "the northernmost southern city," Louisville offers visitors both a quaint sense of traditional charm and comfort and also a cutting edge, bubbling sense of innovation. This contrast can be seen in the city's cuisine, which varies from classic comfort foods to new age delicacies, as well as the city's architecture and culture.

Dozens of world-class restaurants and eateries lie within a short ride of both the Galt House—the main Credit Congress hotel—and the Kentucky Convention Center, where a majority of the Congress' sessions will be held. These include Mazzoni's Oyster Café, known for its rolled oysters, Primo, a popular Italian restaurant, and 4th Street Live!, a collection of restaurants and nightclubs.

Louisville's architecture is both elaborately charming in older parts of town and decidedly modern in others. However, there is sufficient overlap between both styles that molds the city into a uniquely cohesive experience. Old Louisville, a cultural district just south of downtown, offers visitors a wide array of Victorian architecture as well as several shops and local eateries. Old Louisville also hosts a large student population, making it a lively cultural spot with occasional concerts and theatre productions held during the summer.

Just down the street from the Galt House is the West Main District, a popular cultural center nestled in downtown Louisville. Credit Congress attendees will have the chance to explore the district's Museum Row, a collection of museums located within walking distance of one another, including the Muhammad Ali Center, the Frazier International History Museum and the Louisville Slugger Museum.

For more information on Louisville and also a complete look at the exciting sessions to be offered at NACM's 2008 Credit Congress, be sure to pick up a copy of the February issue of Business Credit. Click here to get your subscription started today.

Jacob Barron, NACM staff writer