eNews November 15, 2012

November 15, 2012

eNews will take a break this week for the holiday and resume on November 29, 2012. For up-to-date credit news, visit NACM's blog. Have a happy and safe Thanksgiving!

News Briefs

  1. Visa, MasterCard Settlement Gets Preliminary Approval, Opponents Begin Appeal Process
  2. Exporting on the Minds of Growing Number of Trade Creditors
  3. Regulators Signal Delay on Basel III Implementation
  4. 'Re-Shoring' Not So Easy Once Processes, Staff Sent Abroad
  5. September Exports Recover from August Slip
  6. Expanded Uniform Commercial Code Service Officially Launches


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Visa, MasterCard Settlement Gets Preliminary Approval, Opponents Begin Appeal Process

Despite the noisy objections of hundreds of retailers, U.S. District Judge John Gleeson granted preliminary approval on November 9 to a proposed settlement between merchants and Visa and MasterCard over interchange fees.

Final approval of the settlement still remains a long way off, and Gleeson has described the threshold for preliminary approval as "meaningfully lower" than the threshold for full approval. Technically, all that was required of the proposed settlement to acquire preliminary approval was for it to be devoid of any major legal defects. Gleeson found that to be the case, and made good on an October comment when he noted that he would "probably approve" the settlement in its current form.

The $7.2 billion deal includes a $6 billion payment to merchants, and temporary reductions in interchange rates. Preliminary approval means that supporters of the settlement can begin to sign up the expected 7 million merchants who will take part in the agreement. Approval also means that merchants can begin surcharging their customers 60 days after the date of the approval.

Almost immediately, members of the opposition expressed their disagreement with Gleeson's ruling. "We respectfully disagree with the court's assessment of the proposed settlement," said Mallory Duncan, president and general counsel of the National Retail Federation (NRF), the world's largest retail trade association. "We do not believe the proposal meets the legal tests required to meet even preliminary approval. Retailers, their customers and competition would suffer irreparable harm if this one-sided deal is allowed to move forward. We will consult our attorneys and act as soon as possible to correct this injustice."

On November 12, the National Association of Convenience Stores (NACS), along with a majority of the 19 named plaintiffs in the suit, announced that they would file a notice of appeal to challenge the ruling. "We will ask the U.S. Court of Appeals for the Second Circuit to deny preliminary approval due to the legal defects in the proposed settlement," said NACS President and CEO Hank Armour, adding that this could affect the settlement's implementation, including its surcharging provisions. "It is unclear whether a stay will be issued to prevent notices of the settlement going to the millions of merchants who accept credit cards."

Chief among the opposition's concerns is the fact that the settlement adds no transparency to the process by which Visa and MasterCard set their interchange, or "swipe," fees. Furthermore, the settlement precludes the possibility of future attempts to bring similar suits against Visa and MasterCard for anticompetitive practices related to interchange rates. By a twist in the proposed settlement's language, this provision, releasing Visa and MasterCard from future legal challenges to their interchange practices, is the only portion of the settlement of which merchants cannot opt-out.

In court, Gleeson referred to the plaintiffs' objections as "overstated."

- Jacob Barron, CICP, NACM staff writer

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Exporting on the Minds of Growing Number of Trade Creditors

If FCIB's 23rd Annual Global Conference in Philadelphia this week proved nothing else, trade has firmly entrenched itself as a high-priority topic in the world of business credit, and is unlikely to fade even if the U.S. recovery magically kicks into higher gear earlier than expected.

U.S. Chamber of Commerce Vice President John Murphy addressed Global attendees on Monday with a hopeful message thanks to the victories of the last two years, namely the enactment of three long-considered Free Trade Agreements and extension of the Export-Import Bank of the United States' authorization. However, Murphy reiterated the great importance of legislative action on the part of the U.S. Congress regarding the restrictions on Russia. Russia continues to become a more open economy with its newfound accession into the World Trade Organization. However, long-standing, typically ignored laws on the books technically allow Russia to discriminate against U.S. businesses until they are removed.

"The U.S. has to pass legislation so American companies can get those benefits; other nations are already benefiting from Russian's ascension," Murphy said. It has been reported that the issue could be addressed, though not necessarily resolved, within days.

Two other significant matters, in Murphy's estimation, generating interest on the part of the business community are the Trans-Pacific Partnership (TPP), expected to help the United States tap into upwards of $10 trillion in global economic growth forecast for Asia through 2020, and talk of a Trans-Atlantic Trade and Investment Pact, which would strengthen and ease the few remaining trade restrictions of significance between the United States and key trading partners in the European Union.

Carlos Montoulieu of the U.S. Department of Commerce confirmed in an interview with NACM that the TPP was the overwhelming priority for U.S. officials and that there's "quite a bit of momentum" therein. Montoulieu also confirmed that the Trans-Atlantic agreement would likely get a boost after recommendations—expected before year's end—are officially released by the High Level Working Group reporting to President Barack Obama, who continues to push the goal of doubling exports by the end of a five-year period that ends in December 2014.

Murphy called the Trans-Atlantic pact so important because "volume is so large that even removing low barriers would lead to an economic impact that would be significant."

- Brian Shappell, CBA, NACM staff writer

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 Regulators Signal Delay on Basel III Implementation

The Office of the Comptroller of the Currency (OCC), the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC) are backpedaling on a plan to require banks and financial institutions to comply with the controversial Basel III capital requirements starting on January 1, 2013.

In June, the three agencies proposed new revisions to their capital rules, aligning them with Basel III's inherently more stringent requirements. Three separate notices of proposed rulemaking (NPRs) revised the agencies' risk-based and leverage capital requirements and sought to harmonize rules for calculating risk-weighted assets to enhance risk sensitivity and address weaknesses identified during the financial crisis.

But after receiving comments on the proposals from weary banks rushing to meet the deadline, the OCC, Fed and FDIC signaled that they would have to delay Basel III's implementation. "In light of the volume of comments received and the wide range of views expressed during the comment period, the agencies do not expect that any of the proposed rules would become effective on January 1, 2013," said the three agencies, who acknowledged that this delay might put them at odds with the Basel Committee. "As members of the Basel Committee on Banking Supervision, the U.S. agencies take seriously our internationally agreed timing commitments regarding the implementation of Basel III, and are working as expeditiously as possible to complete the rulemaking process," they added.

"The delay is necessary because you have to understand the 2,000 separate pieces of feedback," said David Gustin, CFA, president of Global Business Intelligence. Gustin was a speaker in the panel discussion, "The Future of the Credit Marketplace," held earlier this week at the 2012 FCIB Global Conference. "There hasn't been nearly enough time to digest them and find what may be some rational ideas in there. The delay is a very good thing."

Gustin estimated that as many as 10-20% of all U.S.-based community banks would struggle to comply, which would cause a ripple effect that would inevitably ensnare trade creditors.

Basel III also poses general risks to exporting because it increases the risk-weight of trade finance transactions. The amount of capital that banks must keep in reserve increases with the riskiness of their investments, and Basel III assigns greater risk to trade finance transactions, thereby making these investments more costly for banks. This could potentially push many banks out of the trade finance business altogether, leaving loosely regulated non-traditional lenders to fill in the gaps.

- Jacob Barron, CICP, NACM staff writer

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'Re-Shoring' Not So Easy Once Processes, Staff Sent Abroad

Outsourcing, and various monikers for similar actions (offshoring, insourcing, etc.), continues to be a hot topic among credit professionals throughout the globe, as noted once again at FCIB's 23rd Annual Global Conference this week in Philadelphia.

Katarzyna Wawro of Hitachi Data System Corporation's shared service center in Poland was one of these professionals who also discussed "re-shoring": returning credit and collections functions once outsourced to their original locations in places like the United States and the European Union. Re-shoring is often the result of the belief or finding that the negative trappings of offshoring outweigh the positives. But "bringing the jobs back home" may also come with unintended consequences. In fact, John LaRocca, CICP, also of Hitachi Data Systems Corporation state-side, characterized the undoing of a major move to outsourcing as "a gut-wrenching experience to unseat."

Regine Hilgers, CICP of Ashland Specialty Ingredients in Germany noted that her former employer had outsourced some of the credit department function more than a decade ago from Germany to Dublin, Ireland. Amid issues with the operation in Ireland—competition to retain staff, performance of employees, among others—the employer eventually pulled those jobs. "It was a very expensive experience to go back," she recalled.

Global panelist Tim Graham, CCP of Oracle Corp. also recalled problems with the outsourcing to Dublin and the consequent retraction from the area. Graham, however, said his company did not bring the outsourced jobs "home," so to speak, but rather to Romania. He said the better performance at Romanian centers, in his experience, had little to do with the actual location, but rather the approach with the outsourced staff. "I think why it failed [in Dublin] is that there was no real oversight," he told attendees. "In Romania, we took a different approach having been burned once...and now have a lot more control."

In short, the decision to end an outsourcing operation in most cases needs to be considered with a massive amount of care, research and preparation, perhaps as much as the decision to send credit functions abroad in the first place.

- Brian Shappell, CBA, NACM staff writer

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September Exports Recover from August Slip

The trade deficit narrowed as exports jumped in September 2012, according to the U.S. Department of Commerce.

Following August, in which exports dropped to the lowest level in six months, September's figures were much more welcome, as exports rose by 3.1% to $187 billion and imports increased only 1.5%, to $228.5 billion. The trade deficit shrunk from $43.8 billion in August, revised, to $41.5 billion in September, marking a 5.1% decrease.

The service sector set a new single month record with $53 billion in exports, breaking the $52.8 billion set in August. Goods exports also set a monthly record, increasing by $5.4 billion to a high of $134 billion in September.

"Although more work remains, today's report shows that we're making historic progress toward achieving President Obama's goal of doubling our exports by the end of 2014. Total U.S. exports hit a record high in September, as did export levels of both goods and services," said Acting Commerce Secretary Rebecca Blank, referring to the newly-re-elected President Obama's National Export Initiative. "Travel and tourism also continues to be a bright spot, with today's data showing year-to-date exports 8% ahead of the same period last year. These kinds of increases mean more American jobs—1.2 million jobs were supported by exports between 2009 and 2011."

Gains in goods exports were driven by increases in industrial supplies and materials ($3.4 billion), foods, beverages and feeds ($1.1 billion) and consumer goods ($0.5 billion). The increase in services exports was chalked up to bumps in travel ($0.2 billion) and other private services ($0.1 billion), which includes business, professional, technical, insurance and financial services.

- Jacob Barron, CICP, NACM staff writer

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Expanded Uniform Commercial Code Service Officially Launches

One question that continues to vex NACM Secured Transaction Services (STS) Director Greg Powelson revolves around the low number of businesses using the Uniform Commercial Code (UCC) to protect themselves in the event of a customer bankruptcy filing.

"Why wouldn't you want to jump the line and become secured? Unsecured creditors are the road kill of the credit pyramid," said Powelson at an STS seminar in Philadelphia on November 13. The answer, he surmises, is uncertainty among credit managers about the process. It is a big part of the reason behind the launch of the NACM's UCC Filing Service.

Several years in the making, the UCC Filing Service went live online this week, joining the Mechanic's Lien and Bond Services under the STS umbrella. The service provides the means to mitigate the risk of debtor nonpayment for businesses that sell or finance various types of personal property under UCC's Article 9, as well as those that lend the labor, materials and other services under state law. The purpose, at its simplest level, is to help creditors become a secured party as an investor, thus putting them in the best possible position to get paid. Remember: secured creditors get paid out 100% (if money is available) before unsecured creditors get one cent, per bankruptcy law. This is increasingly important in areas such as construction, as the domestic economic recovery, already sputtering, is threatened by ongoing and new problems, such as gridlock in the U.S. Congress.

Powelson noted that getting involved with UCC filings is not difficult when using a service that provides the know-how. He recalled a colleague in Texas who, after years of "me badgering him to protect himself," made a UCC filing about six months before a major customer filed a massive, $40 million bankruptcy. The colleague's business was paid nearly 100% of what it was owed, unlike unsecured creditors who received pennies on the dollar.

"That filing cost him $82 and took about one hour to complete," Powelson said. "In getting paid what he was owed, he joked that the program already paid for itself 'for about the next 2,200 years.' I think there are a ton of credit managers who just aren't sure about the process and perceive it as very cumbersome. The process can be somewhat easy, actually. But sometimes you've got to get crushed or really kicked in the teeth and have your boss say, 'We can't do this anymore. What could we have done to protect ourselves?' before you make the move."

- Brian Shappell, CBA, NACM staff writer


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