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Virtual cards mitigate impact of exorbitant demurrage fees on fleet businesses

Posted May 24, 2022

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With the global supply chain crisis continuing to plague the trucking industry, one alarming impact on fleet businesses is the drastic increase in demurrage fees. From our research, we found that demurrage fees have escalated 3,000 times that of pre-pandemic levels. One of our larger customers was averaging $2-3 million/year in demurrage fees. In today’s world, they are now averaging over $150 million in fees annually.

What is a demurrage fee?

A demurrage fee is a charge extended to a carrier or supplier when a shipping container is not moved out of the port or terminal for unpacking within an allotted grace period. Shipping lines allow containers to stay in the terminal for a number of free days before they begin charging a fee. The charge is levied by the shipping line to the importer and most often paid by the transport company.

Why is the supply chain crisis causing an increase in demurrage fees?

The back-up at the ports, lack of storage space, increasing labor crisis, and decreasing supply of available shipping containers all contribute to a rise in demurrage fees. You’ve got a chassis shortage - new chassis weren’t being made during the pandemic because the products needed to make them were unavailable, you’ve got a storage space issue where ships are having to sit outside the ports waiting for space to open up, you’ve got a labor shortage so you can’t get product loaded and unloaded, or picked up and driven to a destination. It’s a combination of all of the above that’s contributing to the supply chain crisis and increase in demurrage fees.

The fee increase as a result of the supply chain crisis is crippling for companies in the transportation space because they operate on cash flow within a thin margin business. If demurrage fees are incurred, it is critical to pay them quickly to prevent charges from compounding: as containers sit at the terminal, the price for their storage at the port increases daily. Fleet companies are wise to pay these fees quickly.

How much have demurrage fees increased?

Based on our internal customer research, the expense in June and July of 2021 was upwards of 20 times the typical amount our customers pay in demurrage fees. And it was driven by a disruption in the supply chain. Demurrage fees initially seemed to have hit a peak and were declining, but they have been on an upward trajectory again in recent months. We saw a downward trend in January and February of 2022, and it stayed level during the first half of March. Since then, we have started to see a spike in supply chain issues again. This also impacts drivers because they are often paid by the load and when they have to wait in long lines at the ports it impacts what they can earn in a given day. It’s just a domino effect for our customers.

According to Datasembly, a research firm that tracks grocery and retail pricing,  “About 31% of grocery products consumers browsed were out of stock in the first week of April.” That's up from 11% at the end of November 2021, confirming our sense that the supply chain issues that seemed to have been waning have been on an uptick.

Are there regional variances in demurrage fee increases?

The spike in demurrage fees appears to be uniform across ports. Los Angeles, California and Long Beach, California – the busiest ports in the U.S. – experience the most volume nationally, and therefore, charge the most fees. The Ports of New York and New Jersey are the busiest ports on the East Coast, along with the ports of Charleston (SC), Wilmington (NC), Jacksonville and Miami (FL). These major ports on the East Coast enforce these types of shipping container holds and resultant fees.

What are the biggest pain points due to rising demurrage and detention fees?

The biggest difficulty fleet companies face is reconciling this increased volume of invoices. Not only has the expense gone up with demurrage fees skyrocketing, but the number of invoices companies have to process has gone up concurrently. We did some analysis of the numbers for our customers and the demurrage fee payments volume through our platform was up over 3,000%, pre-pandemic versus now. The number of invoices customers are having to pay went up 700%. Our customers have experienced an increase in the number of loads that are hit with demurrage and detention fees, which increases the number of invoices that have to be processed. The fees are higher and our customers are getting dinged more times. Some companies have entire teams manually reconciling these fees – an increase in both time and money. Pre-pandemic, some WEX customers had on average 100 loads per year they were paying demurrage or detention fees on. Those same customers are now paying for 700 loads in a given year.

Additionally, the invoicing is complicated and involves burdensome manual processing for these companies. Demurrage fees are charged to our customers and they have to know what container number each fee refers to, and the manifest tied to each expense. It’s a labor-intensive process. If the number of invoices is going up over 700%, our customers are having to add full time employees (FTE) to deal with the reconciliation of this increased amount of invoices. Some of our customers, who would have normally had three people managing invoice processing and payment pre-pandemic, now have 12-15 FTEs doing the same job.

How can virtual card providers help a business mitigate rising demurrage fees?

There are only certain types of payments that U.S. ports will accept for demurrage fees, and they’re all web-based. Customers either have to pay with an ACH, a wire, or a credit card. Companies like WEX have a virtual card product that fleet companies can use for this type of payment. WEX provides a preferred payment method for demurrage expenses by facilitating a simple online transaction, capturing data on the front end, and eliminating time spent reconciling in the future. The reconciliation expense on the back-end is a large burden for companies to bear.

How can virtual card technology help with back-end reconciliation increases?

The ports assigning demurrage fees provide specific guidelines for how those fees can be paid. Carriers are expected to pay demurrage fees online via ACH prepay or credit card. Virtual card technology, offered by companies like WEX, gives fleet companies the ability to reconcile and pay those fees via a virtual credit card. We can’t control the rising costs of demurrage fees, however, we can help our customers get those fees paid in the most efficient manner possible for their business. We can also help our customers reduce the back office impact these fees can have in terms of processing resources.

Because there has been such a large increase in fees levied, there is a new business cost associated with handling and paying those invoices: WEX is seeing an average increase of over 700% in transaction volumes and over 3500% in invoice volume for demurrage fees in Q4 2021 compared to pre-COVID levels. This astronomical rise in fees has caused excessive work for internal auditing teams to reconcile these fees back to the load. Companies like WEX can help unburden their customers of this need for added resources. Specialized bots automatically reconcile the virtual payment of demurrage fees back to the trip or load, providing a simple process to pay these fees and making it easier on the back-office/auditing teams who have to reconcile them.

Tying the manifest to each expense in an automated fashion becomes crucial when companies experience a heavy load of invoice processing and want to avoid driving up reconciliation costs. We are able to integrate  with our customer’s systems where they can pass us the manifest tied to each one of those demurrage expenses - the container number, the trip number, the P.O. number - all the information that they need to have tied to that actual payment. Then we send the reconciliation file back for them to tie off in their system so they don’t have to do that manually. All the information is tied to each virtual card payment automatically through the technology we provide our customers. It’s an automated process that alleviates the expense of additional FTEs for our customers. This has resulted in substantial savings to our customers during this difficult time.

Fleet cards provide credit and capital when business expenses unexpectedly increase

The second pain point fleet companies face during this time of intense fees is cash flow. In the over the road market, cash is king. These businesses are cashflow driven. Companies have to micromanage their cash flow because they operate on thin margins. Fleet companies are managing huge expenses, including paying out large sums of money for fuel. The timing of that cash outlay doesn’t always align with the payables and cash receivables coming into the business. When that demurrage expense goes through the roof like it has, it puts a strain on cash flows. WEX allow customers to leverage their existing credit line to pay these fees.

Which businesses are affected by rising demurrage fees?

Every business engaged in the shipment of goods across the U.S. is affected by rising demurrage and detention fees and WEX is hearing from all carriers on the issue. Donna Lemm, Chief Commercial Officer of Intermodal Companies (IMC), the largest drayage company in the U.S., recently described how using WEX’s virtual card technology helped IMC stay on top of their invoices: “This has been a difficult time for the trucking industry, and time and again, WEX came through for us by providing the technology necessary to mitigate potential hits to our bottom line. By using WEX’s payments technology for our demurrage fees, IMC saw tremendous cost savings through the efficiencies we created by running our demurrage invoicing through the WEX virtual card program. This problem hit the industry very quickly and was about cash flow and adding FTEs and a wide range of issues. WEX was able to react quickly and provide a solution to help alleviate the issues that the supply chain crisis had elevated for us.”

WEX can help you automate processing and pay for your demurrage fees, along with providing automated payment solutions for a wide range of other business needs to mitigate risk, reduce fraud, and lower and control costs. To learn more about WEX, a growing and global organization, please visit wexinc.com.

Resources:
Four Kites
Project 44
New York Times
Wall Street Journal
CBS News

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