Open Account Trade Popular with Mid-sized North American Firms

Open account transactions, where payment is made after the delivery of goods or services without prior guarantee from the purchaser, continues to grow in acceptance with mid-sized US and Canadian firms, according to research by Aite Group. The research firm surveyed 25 Canadian and 40 US middle market companies with annual revenues between US$50m and US$500m and found that 94% reported open account transaction use.

The Aite Group also surveyed 19 top global trade banks and found that 73% indicated that since January 2006, their clients’ use of open account transactions grew in comparison to financed transactions. Yet most companies are using open account transactions extensively without the help of their banks. Sixty-nine per cent of bank respondents also indicated that there is at least a moderately negative impact on their trade finance business from the use of open account transactions.

In an interview with gtnews, Nancy Atkinson, senior analyst with Aite Group and author of this report, said that mid-sized Canadian and US companies don’t perceive the bank as being the primary place that they would turn to for help with open account transactions mainly because these are normally well-established relationships that reduce the potential risk of non-payment.”These are two developed countries and there tends to be longer term trading partner relationships, so there is more of an experience with one another and probably less of an issue with risk than there might be, for instance, with a large corporate or middle market company that is doing business with a small supplier in an evolving economy,” she said.

Banks are certainly concerned about being dis-intermediated from the process and many are starting to target this area, but Atkinson believes that they haven’t come out with easy-to-use, straight-forward products and services that makes it clear to these mid-sized companies that there is a value proposition in looking to their bank.”I think that the banks have an uphill battle, but I don’t think they have lost the battle yet. They need to step up what they are offering and provide a tremendous amount of education and communication through their marketing departments to their client base and prospects about the types of services that they can reach out with,” she says.

In the report, ‘US and Canadian Middle-Market Transactions: Finance or Open-Account?’, the research also found that:

  • Of US and Canadian middle-market respondents, 50% indicated that it is not at all important to somewhat important that their bank supports open account transactions.
  • Almost half (47%) of the banks responding currently provide purchase order (P/O) management and 53% provide invoice management. Within the next 18 months, another 32% plan to support P/O management and an additional 37% plan to support invoice management.
  • Eighty per cent of middle-market respondents said that bank support for P/O management is not at all to somewhat important, and 72% reported the same for invoice management.
  • Pre-shipment financing is offered by 60% of middle-market respondents’ banks, post-shipment financing is provided by 62% of respondents’ banks, and 57% of respondents banks provide receivables factoring or forfaiting. Only 31% of respondents report using pre-shipment financing, 38% indicate their companies use post-shipment financing, and 32% use their banks’ receivables factoring/forfaiting.


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