Credit managers routinely use credit bureau reports as a source, and at times, the only source, of data for determining the creditworthiness of a customer. These reports may provide general and dated information on a company's financial position and credit history from various unidentified sources. In recent years, commercial credit reporting agencies have enhanced their offerings with items such as credit scoring, on-line access, and links to websites containing public record information.

These one-size-fits-all credit information solutions fall short, however, when it comes to providing the industry-specific information credit managers need to round out a customer's financial profile and payment history. And, in this age of increased competition and narrowing margins, sole-sourcing your credit information can be an increasingly perilous habit.

Recognizing the limitations of traditional generic trade reports, credit professionals are discovering that membership in industry credit groups fills the gaps by helping them develop more complete credit histories on customers. The net result is a faster, more accurate, cost effective solution for managing the risks associated with extending credit.

The industry credit group is certainly not a new concept. These groups have been around for more than 100 years, the first being established in 1875 by a group of stationery and office equipment merchants. Today's technology has drawn increased attention to the benefits of such groups. Using the Internet as a platform, members can easily exchange and access up-to-date credit information on customers and prospects. Word on the street is that industry credit interchanges are a trend to watch in the future of credit management.

What is an industry credit group?

A credit group is an association of credit professionals representing leading companies in a particular industry that join together to share factual credit information on a common customer base. These groups are unique in the credit industry in that they are usually member-driven. Members take a very active role in drafting the rules and responsibilities of membership, development of the marketing strategy, deciding exactly what information is to be shared, and setting the cost of membership.

Participation in the confidential exchange of credit data provides members with access to valuable information for evaluating credit risks and thereby minimizes collection problems. As important as the data itself, the industry credit group affords the member a rare opportunity to "get behind the numbers." Unlike agency credit reports, members of an industry credit group can design their group’s interchange to identify the source of the experience in question. Members routinely contact each other to verify experiences reported and to benefit from a full explanation of all pertinent facts. Dave McGraw, Director of Credit for Decorative Concepts and Chairperson of GAIN (Gift Associates Interchange Network) relates, "I personally know that the best information comes from making good industry contacts and there is no better place to establish these contacts than a credit group."

How does a credit group work?

Groups form to pool information relating to payment habits, financial history, deterioration and improvements in the historical behavior of mutual customers. Members submit accounts receivable aging and other trade and credit experience to the interchange database on a monthly basis. The managing company or service provider compiles member data, generates credit reports and provides this collective intelligence to the membership.

Only historical credit information is shared. The format and level of detail will vary based on the needs of each group. Generally, this includes accounts receivable experience broken down into aging buckets, high credit extended, date of first and last sale and average days slow or average days to pay. Urgent customer events are shared daily by members via "Flash Notices". Flash Notices, or "Alerts", report facts regarding customer bankruptcy filings, placed for collection or final demand notices sent, changes in ownership or location, NSF checks received, payment promises broken and general slowing of payment trends. Debra Brassier, Director of Credit for Gund, Inc, shared the following experience with a national credit group:

We received a flash notice from a member advising that the CFO of a mutual customer had recently stated that they were only making $100 payments per month to all of their vendors. We had over $5000 in orders being loaded on the truck for shipment to this customer. Due to this flash, that order was removed from the truck. That one flash more than paid for my membership to the credit group for the next several years.

The functionality of the interchange system and the value generated from the data depend on the vision of the group and the technological capabilities of the provider chosen to service the group.

Participation requirements are determined by the group and communicated through the by-laws drafted by members. It is the consistent reinforcement of member goals and objectives as enforced through the by-laws that will determine the effectiveness of a credit group. Generally, A/R data is required to be submitted monthly; members must regularly provide urgent customer information and participate in a designated number of meetings within a given period. A group may waive meeting requirements for a higher membership fee.

Most groups maintain a regular meeting cycle to review customer accounts, manage the business of the group and discuss topics of general interest to the members. Many credit group meetings are organized around a particular theme, such as vendor compliance/deduction, detecting fraud or dealing with customers in bankruptcy. To facilitate an effective customer account review, members submit names of accounts they would like to review to the service provider prior to the meeting. A request for updated account information is then sent to the entire membership. Member responses are compiled and published to the attendees.

Meetings also allow members to network, exchange views, share best-demonstrated practices, and sharpen their credit and collection expertise.

What are the benefits?

Members of credit groups have access to information that is:

Valuable. Since credit groups allow members to see exactly how the customer pays creditors in their industry or area, the information provided carries value beyond that found in a generic credit report.
Accurate. A/R experience provided is by members and for members. Submitting members are directly accountable for data accuracy. A competent service provider establishes validation processes to ensure date integrity. If there is any question regarding the validity of the credit information, members can contact the submitter directly to verify or seek clarification.
Relevant. Companies in a particular industry share a great deal in common by way of customers, markets, and challenges. Data compiled by an interchange shows how the customer pays other trade suppliers in similar industries - not how he pays the non-discretionary creditors like the landlord and utility companies or small less meaningful invoices. As a result, the information has direct relevance to how members can expect to be paid.
Up-to-date. Most credit groups require members to submit a fresh aging monthly. The service provider goes to great lengths to update newly received data files daily. The urgent "flash notices" are made available to members in real time provided the interchange operates in an on-line environment.
Inexpensive. Interchange credit reports generally cost much less than those provided by generic credit reporting agencies. Certain groups include the cost of interchange access as an entitlement of membership. Most, however, offer credit reports for a nominal charge based on usage volume, sometimes for as little as three or four dollars each.

Additional benefits include:

Time Savings. Members are able to reduce time requesting and replying to credit inquiries. By accessing one comprehensive reporting system for trade references, a credit manager can save time and significantly shorten the credit-to-sales process. The interchange system is available 24 hours per day and 365 days per year, responding to the flexibility challenge created by a global economy.
Networking opportunities. Every industry has specific challenges related to managing risk. Networking provides the credit professional opportunities to develop in-depth knowledge of the industry’s demands. Shared knowledge of the customer base sharply reduces exposure to bustouts, minimizes slow pays and decreases credit risk, as the group benefits from the experience of other members. Credit groups may also offer mentoring programs where new credit managers are paired up with senior members of the association.
Competitive edge. Since members own the information, they have a competitive edge over nonmembers who do not have access.
Professional Development. A primary objective of many groups is advancing the image of the credit professional within the industry and within each member’s company. Participation in a credit group saves time and reduces the cost to manage risk, directly impacts DSO and has tangible impact on the member company’s bottom line. Member programs are designed to provide not only the tools to increase effectiveness but also the supporting data that demonstrates an ROI to the senior managers of the member company.

There can be much more to a credit group than the interchange of customer data. Consider the following case study:

The National Chemical Credit Association (NCCA) is a national organization of credit professionals who represent the top chemical companies in the world. Established in 1938, the Association was founded to facilitate the exchange of commercial credit information among leaders in the chemical industry, as well as provide continual professional education to its members.

During May 2004, certain members of the NCCA participated in a roundtable discussion with a high-level delegation from the Ministry of Commerce of the People’s Republic of China. Ten members of The National Office of Rectification and Standardization of Market Economic Order (NORSMEO) traveled to the United States, visiting governmental agencies, leading providers of credit information and collection services. China is opening its planned model economy gradually to a market driven system. Credit is an essential element of this progression. The mission of this delegation was to learn how to develop a sound credit environment for China. NCCA member company, Bayer Corp, hosted the roundtable discussion.

The open discussion between members of the delegation and credit professionals from the NCCA was a tremendous success. Members of the NCCA shared knowledge and expertise regarding credit practices, systems and procedures - stressing the integral role that their credit group holds in the process. Members of the NORSMEO Delegation responded to NCCA member inquiries regarding the general business climate in China as well as describing the current Chinese credit system. Both groups actively plan to expand the relationship established during this visit.

Are any legal issues involved with sharing credit information?

It is legal in the United States for companies to share credit history. Credit groups, however, should be monitored by an outside party (the group manager or secretary) to make sure the information shared does not run afoul of anti-trust regulations. Only factual information can be shared - not subjective comments. A well-selected service provider to act as group manager is essential in this regard. The best providers review all data that members submit to the system, including urgent customer information. Subjective statements are removed. If the legality of the information provided is in question, it is not included. The Service Provider will also supply an experienced credit professional, fully trained and up-to-date regarding all dynamics of anti-trust regulations.

Why share credit information with competitors?

Members of credit groups have found that sharing credit information with competitors is a necessary risk for achieving optimal results. This risk is mitigated by group by-laws that do not allow members to disclose customer data to anyone outside of the credit function. Associations demand the highest degree of professionalism from the members at all times. Members are not permitted to draw information from the interchange unless they submit customer information for others in the group. Certain groups may set up special guidelines that allow a member to exclude reporting a small percentage of accounts deemed to have particular competitive sensitivity.

In a well-run group, the service provider will closely monitor member activities. A member found to have violated any of the by-laws or who has compromised the values of the group will be locked out of the interchange system and may be expelled.

What should you look for in a credit interchange?

Many organizations include credit interchanges in their list of member services. There are also companies that manage groups as service providers.

Here are some things to consider when determining if a particular credit group is going to meet your needs.

The most important consideration is the database to which you will have access. Does it already include a significant number of customers with whom you are doing business? If you sell nationally or internationally, is it broad enough?
What kind of access will you have to the information? Does the company managing the group provide flexible, easy-to-use, on-line access?
How active is the membership? The quality of the information is only as good as the participation level from members. Groups with large pockets of members of marginal participation will not have a complete, up-to-date database.
How secure is my company’s data? A competent service provider will supply financial-institution-like data encryption and have a well-planned redundancy strategy in place to protect the members.
How responsive is the service provider to the needs of the membership? The best interchange service providers are concerned with meeting the information needs of the group. They should be flexible, service-oriented, constantly working to update and improve their systems, and actively seeking opportunities to add value to the group.

Given the current business climate, competition promises to remain stiff and return on investment will likely continue to be quite low. The right credit decisions are going to become key in maintaining profitability. Good information for making those decisions is an absolute necessity. Industry credit groups are fast becoming the resource of choice for professionals who want to get below the surface of the generic credit report in order to make informed decisions that minimize bad debt and provide tools for effective credit management.

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ABC-Amega Inc. has been managing industry credit groups since 1965. Our credit groups save you time and money by giving you access to accurate, relevant credit information any time, so you can make informed decisions quickly and easily. Visit the RiskCheck section of our web site to learn more about how an ABC-Amega managed credit group can give you a competitive edge.