In the News

December 19, 2019

 

While Blockchain has yet to become concrete in the business-to-business process, the digital currency technology is beginning to find its footing at JPMorgan Chase, where a Blockchain-based automobile inventory system is under development. According to a BlockCrypto (The Block) article published on Nov. 22, JPMorgan plans to finance Chase’s system and has filed a patent application that will “register every car onto a Blockchain registry,” allowing multiple parties to view information in real-time.

Similar to the internet, Blockchain improves the speed and access to information, said Mark Speiser, CCE, Gary Mulherin, CCE, ICCE, Kyle King, CCE, and Shelley Clark, CCE—credit professionals and graduates from NACM’s Graduate School of Credit and Financial Management—in their report, Artificial Intelligence and Blockchain: The Future of Accounts Receivable and Credit Management. The process uses an open or distributed ledger technology (DLT) to gain either public or private access to an authorized, shared community. Blockchain is a technology that allows people who do not know each other to trust a shared record of events. This shared record, or ledger, is distributed to all participants in a network who use their computers to validate transactions and, thus, remove the need for a third party to intermediate.

“When any sales transactions are recorded, businesses, banks and governments have used databases to record these account transactions,” the students’ report states. “There is usually a central authority—the creditor and/or bank—which manages changes to the record of the transactions so they can identify where the transaction is in the process, when transfer of title takes place, and when and how payment will be processed.”

Using Blockchain technology, Chase’s new DLT system will shift the auto industry away from its current data-sharing process. Introducing Blockchain to the auto industry will not only increase efficiency, but it will also digitize floor plan financing, described by PYMNTS as “a revolving line of credit that lets car dealers borrow against retail inventory.”

For example, today, if auditors want to find out whether the financed inventory is actually on the salesroom floor, they must physically go to the dealer’s lot to collect vehicle data and verify inventory, such as a vehicle identification number (VIN). This is necessary due to past incidents of car dealerships lying to banks about sales. However, by combining a VIN with smart contracts and linking that to Blockchain, The Block reported, several parties, including auditors, can all keep track of a vehicle’s information, e.g., geolocation, age and battery life.

“There is the ability to register this unique identifier onto a Blockchain registry shared by auto manufacturers, finance banks and companies, and dealerships to enable easier tracking and association with floor plan contracts and key attributes related to collateral audit like GPS location,” JPMorgan told The Block.

The process will also prevent more than one bank from using a single vehicle as collateral, an occurrence known as “double flooring.”

Following the success of a pilot program, multiple reports state JPMorgan is talking to auto manufacturers about how to integrate the technology with new vehicles. Although Blockchain may be unexpected by some in the auto sector, a 2018 IBM study found 62% of the responding automotive executives believe “Blockchain will be a disruptive force” in the industry within the next few years.

Despite the strides and advancements made in technology in recent history, paper checks still remain an integral part of the business-to-business (B2B) landscape. According to a recent analysis by PYMNTS, about 80% of U.S. businesses still use paper checks as an accepted method of payment.

When deciding how to limit check use in the credit department, turning to ACH payments and automation can help ease customers and creditors’ companies into the transition from paper to digital. When weighing the benefits of ACH and automated payments, making the switch may be more worthwhile than anticipated—and the demand may be there as well.

“As an organization we needed to meet the requests and expectations of our customers,” said Jon Hanson, CCE, CCRA, vice president director of corporate credit for Western-BRW Paper Co., Inc. Hanson’s company has implemented automated e-invoicing. “Our competition began providing this option and so we needed to do the same. Essentially the answer is that customer demand dictated this move.”

Checks expose creditors and their companies to a series of risks, namely fraud and slower payment times. In a survey by the Association for Financial Professionals conducted in 2018, 78% of those surveyed claimed to have been victims of fraud, with 74% claiming paper checks were the source of this fraud. The paper trail of checks is less accessible and more difficult to track than that of ACH, and that does not even account for the slow pace of mailing and processing checks.

Hanson’s organization turned to e-invoicing to help facilitate the payments process, with many of the invoices operating through automation. This helps his company stay on top of communication with customers. E-invoicing also creates a seamless process of asking for payment with a predictable schedule, which then helps customers stay on track with payments.

E-invoicing and ACH have ironically become the middleman for clearing checks over the last several years. Once a check is written, it gets processed through digital means and then exists within a business as a form of virtual currency. Automating the invoice similarly removes the extra step of reaching out to the customer for payment, further easing the B2B payment process.

“Our e-invoicing is simply to email the invoices when the order closes and bills. To be able to email the billings expedites the invoices to the customers [accounts payable] departments,” Hanson said. “We find that this also expedites payments from those customers who tend to pay per terms or who want to take advantage of discounts.”

“They always say time changes things, but you actually have to change them yourself.”

—Andy Warhol

Credit professionals can’t wait around and let time run its course hoping the change or improvement to the industry will come by itself. They must take action and grab the industry by the reins, guide it themselves rather than sit around and make collection calls, watching the world pass them by as if they were sitting on a train looking out the window while trees, mountains and other landscapes zoom past. Credit professionals need to act, not react, similar to an NFL offense. Day 42 rolls around and the invoice is still unpaid; don’t wait until it’s written off as bad debt, do something about it—send an email, make a phone call, go visit the customer.

Credit insurer Euler Hermes has a nine-step process for improving credit management to help mitigate risk with a customer. The tips start out with what would seem obvious: Research the customer. As the sale or transaction continues, it is important to clearly document terms and conditions, have customers sign receipts for products and services, and bill quickly after delivery.

Once the customer has the product and the invoice, which is still unpaid, make sure to call before the due date and build a process to remind customers of the upcoming deadline. It’s important to document the communication between the credit department and the customer. The final two tips from Euler Hermes are to regularly review and update financial information and set ambitious goals and actions. Pretty simple and straight forward, yet not all credit departments follow a path such as the nine tips from the credit insurer.

In the end, credit professionals just want to get paid (in a timely fashion). “I’d just like to be paid,” the title of a recent article from Canadian law firm Cox & Palmer details part of the payment process beautifully. “[Prompt payment]: imagine not only being paid for your work but being paid promptly, almost automatically,” wrote F. Richard Gosse, partner with Cox & Palmer, where he chairs the local Construction Law Practice Group.

Clarify expectations upfront so that both sides understand what will be expected, e.g., shipment will leave the dock by a certain date, and payment will be sent once the product reaches the desired port. Next is issuing the invoice in a timely matter, and according to Gosse, do it more than once, i.e., hardcopy and email with the subject line “invoice.” Once the invoice is sent, follow up on it before it’s due. Find out why the now receivable is still unpaid. And then, it’s vital to track the receivable, especially in the construction industry where timeframes and deadlines mean everything if a creditor wants to file a mechanic’s lien.

While provinces in Canada have started implementing prompt payment and adjudication, the U.S. is still behind in that world. According to a recent survey from the U.S. Faster Payments Council (FPC) and Glenbrook, 59% of respondents said the U.S. is “not making ‘satisfactory progress toward faster payments adoption.’”

Respondents to the Faster Payments Barometer also said bill payment and invoicing/supplier payments were among the top reasons for faster payments.

Construction disputes can be complicated. There are often disputes between the parties about the quality of work and the amount that is due. Many contractors rely on mechanic’s liens as leverage to try to get their final payment. A case from the Iowa Court of Appeals suggests contractors need to get their facts straight before they try to enforce a mechanic’s lien.

Olmstead Construction, Inc. v. Otter Creek Investments, LLC began as so many construction disputes do. The owner, Otter Creek Investments (“Otter Creek”), hired Olmstead Construction (“Olmstead”) to build a convenience store. The parties entered into a cost-plus contract, which required Otter Creek to pay Olmstead the actual costs of construction plus 7%. A dispute arose at the end of the project between Otter Creek and Olmstead over the final amount due. In February 2016, Olmstead sent Otter Creek three different invoices that showed three different amounts due. In March 2016, Olmstead sent a final invoice with a fourth final amount due. Otter Creek requested backup support for the charges, but never received it.

Instead, Olmstead filed a mechanic’s lien and initiated a foreclosure. Otter Creek filed a counterclaim for defective construction. The District Court ultimately found in favor of Olmstead on its breach of contract claim, but denied Olmstead’s request to foreclose its mechanic’s lien. The district court explained:

[A] plaintiff should not be permitted to invoice a defendant for an unsubstantiated amount of money and then subsequently foreclose on the defendant’s property without providing the defendant with proof that the amount invoiced is actually valid.” … [Olmstead Construction] is largely responsible for creating this dispute due to their confusing and inaccurate billing. [Olmstead Construction] proposes foreclosure on the mechanic’s lien. If the Court granted such foreclosure, it would amount to an extremely inequitable solution to a problem that is largely of [Olmstead Construction]’s own making.

The Court of Appeals did not set aside the District Court’s rationale, instead noting that a mechanic’s lien foreclosure is an equitable remedy. This means courts ultimately have the discretion to determine whether a particular equitable remedy, like foreclosure, serves the interests of justice.

Olmstead did not get to foreclose its lien because it sent four different payoff amounts to Otter Creek without providing any supporting documentation. Property owners should not, however, count on courts refusing to enforce mechanic’s liens because of inequitable conduct by the contractor. Most of the time, if a contractor meets the statutory requirements for foreclosing a mechanic’s lien, courts will foreclose the lien. That being said, contractors should take time to make sure they know their costs and can support those costs before invoicing property owners. Having accurate invoices will reduce confusion and make it easier to get paid in a timely manner. In addition, having backup material organized will make it much easier for contractors to enforce their rights if they need to.

John Lande, Esq., is a shareholder at the Dickinson Law Firm in Des Moines, Iowa. He has a civil litigation and construction law practice. John has written numerous articles and presented at several conferences regarding Iowa’s mechanic’s lien law, and other construction law issues. He also has experience with matters involving banking and financial regulation, cybersecurity, internal investigations, business divorce, bankruptcy and collections, and local government.