Avoid co-mingling at all costs

   At the very beginning of 2015, I received an email out of the blue from someone suggesting I take a deeper look at a specific freight payment and audit vendor.
   The email intimated that this particular vendor was failing to make payments to carriers on behalf of its shipper customers. On the surface, that’s the cardinal rule that freight payment and audit providers can’t break. Sort of like a restaurant serving undercooked chicken – it’s almost impossible to recover from those types of service failures.
   But there’s another cardinal rule in the freight payment vendor-customer relationship I’d prefer to focus on, because it’s one that the shippers can actually control. And that rule is to ensure your funds are not being co-mingled by the vendor.
   To be absolutely clear, when I say co-mingled, I’m referring to the funds that you disburse to your payment provider for them to pay your carriers (if that provider actually cuts the checks to your carriers).
   We’ve written numerous times in the pages of American Shipper about the need to be diligent in vetting current and prospective freight payment vendors, and there’s good reason. You, as a shipper, are entrusting that vendor with actual cash, and you therefore need to have faith that the vendor will use that cash to pay your carrier bills.
   A key element of trust in the vendor-shipper relationship is transparency into the handling of those funds. It’s absolutely critical that a freight payment vendor keep each individual shipper’s funds in escrow, or at the very least, in a separate account in which that shipper has visibility to the transactions.
   In this case, trust is not about faith, it’s about transparency. A trustworthy freight payment vendor will insist upon this transparency, they won’t begrudgingly offer it only when a shipper demands it. That’s because this is the proper way to handle freight payment. It’s not so much a best practice, as it is the correct and legal practice.
   Avoiding the co-mingling of different shippers’ funds might sound like an obvious business practice for freight payment vendors. But after discussions with a number of largely experienced experts in the field, I’ve come to realize it’s quite common.
   There are, quite simply, a lot of vendors that offer freight payment and audit services. And not all of them are scrupulous.
   If the dangers of having your funds co-mingled with those of other shippers doesn’t sound too worrying, consider that most failed freight payment vendors have run afoul of their customers (at best) and the law (at worst) primarily because of this practice.
   When vendors co-mingle funds, it becomes nearly impossible for any individual shipper to maintain visibility into its payments to carriers—that is, until a carrier is not paid on time, and that shipper is alerted to the fact by the carrier. The failure to pay carriers on time on behalf of their shipper customers is generally the first warning sign, unless a shipper has gotten wind of some other red flag.
   It takes time-consuming, expensive forensic investigations to unspool the details of failed vendors who co-mingled funds. And shippers are the ones who eventually take the financial hit.
   So why do unscrupulous vendors co-mingle funds? It’s simple, actually. Placing all its customers’ funds into a single account allows a vendor to use that cash to fund its business, rather than simply passing through that cash to the intended party, as is supposed to happen.
   In the worst case scenarios, the use of co-mingled funds allows executives of unscrupulous vendors to siphon off money to other businesses, or even to their personal accounts. There are hardly more salacious tales across the entire freight industry than those that emerged from vendors who have dabbled in the misuse of shippers’ funds and broke the law.
   The broader problem is vendors that co-mingle funds give freight payment a bad rap. Clearly, there are a large number of reputable freight payment and audit vendors, some of whom are even federally regulated because they also operate as banks. Even those above-board vendors that don’t operate as banks have a legal duty to avoid misusing their customers’ funds.
   And so this is where the shipper’s duty comes in. Due diligence is a must, and it can’t be a one-time exercise when a freight payment vendor is hired. It has to be systematic, on-going, and thorough. Insist that your vendor place the funds you entrust to them in escrow, or in a separate account to which you have access. That has to be the very first question you ask of a vendor you are seriously considering.
   If the first three, four or five vendors you ask this don’t answer the question to your satisfaction, keep looking. There are reputable vendors out there.
   Is it worth the effort? American Shipper has discussed at length the justifications for using a freight payment vendor, both editorially and through our annual Freight Payment Benchmark Study.
   For most shippers, there are huge gains to be made in terms of automation, payment accuracy and reduced headcount associated with payment and audit. What’s more, vendors are endeavoring to build really useful analytics around payment data to allow shippers to hone their procurement and supply chain management practices. At the very least, shippers should consider using these vendors for freight bill audit, even if payment is kept in-house. That would certainly eliminate the worries about funds being mixed with those of other shippers.
   In the meantime, I won’t get into the vendor in question—there’s a time and place for that, and this is not it. What this is the time for is a renewed focus on the basics of a solid shipper-payment vendor relationship, and that relationship has to start with the idea that the vendor will never mingle its customers’ funds.

This column was published in the February 2015 issue of American Shipper.