Using Payment Cards to Cut Costs

Payment cards for businesses are no longer restricted to travel & entertainment (T&E cards) and procurement/purchase cards (p-cards). Banks and other issuers now provide a whole range of cards for businesses, for example debit cards, prepaid cards and fleet cards. New products with new combinations of features are becoming available all the time. Yet they are one of the most under-exploited payment methods.

Types of payment cards

All types of payment card can now be used in business. Core functionality, the main types of usage and the main benefits are listed in table 1. Although there are six types of card now available, usage is currently dominated by corporate T&E cards.

T&E Cards

The use of corporate travel and entertainment (T&E) cards is now well established in large companies. Some companies now capture up to 90 per cent of their T&E spend on such cards. This requires considerable change in company T&E policies and insistence on compliance with company T&E expenditure policy particularly in the use of preferred supplier hotels, airlines and restaurants. T&E costs can be cut considerably by the use of T&E cards alone but maximum savings can only be achieved by combining the T&E card systems with one of the leading expense management systems.

Diageo, the global premium drinks company, replaced six different T&E card providers and 14 different systems with one global card provider, Citibank, and a single expense management system, Concur, enabling Diageo to fully exploit the potential savings and efficiencies. This solution has been implemented in 12 countries world-wide and has already reduced purchasing costs from £11.35 to £3.75 per transaction for any transaction via payment cards and is producing annual savings of more than £1m.

Some companies prefer to retain the services of local banks as their card issuers. The main problem with this approach is the difficulty in bringing all the card usage data together to be able to monitor cardholder compliance with company policy and to maximise the discount from preferred suppliers. MasterCard has greatly simplified this task with their Global Data Repository (GDR) in St Louis. All a corporate’s banks report their card usage to the GDR, which accepts data from MasterCard cards and other card payment systems. The data is aggregated in the Repository and the company can then access their full data via MasterCard’s Smart Data Online service, so making the use of T&E cards issued by multiple banks more effective.

Purchase Cards

Purchase cards are used primarily for frequent ad hoc low value payments, as shown in Table 2. However in the USA the heaviest users of p-cards are now beginning to use them for much higher value transactions. In 2003, the highest value p-card transaction on MasterCard was a $10m purchase by GE of Credit Bureau reporting services.

One of the main advantages of pcards on the Visa and MasterCard systems is that the company can specify in which type of merchant the card can be used, e.g. office supplies. The American Express system offers even greater control where use of the p-card can be restricted to specific merchants, e.g. a named office supplies company at a given location. A company then has much more control over directing purchases to preferred suppliers and so reducing procurement costs.

Table 2: Types of business payments and P-Card typical coverage

P-card usage is well established in the USA but not so in Europe. This is clear from the small number of local tax authorities that have accredited the p-card for Value Added Tax returns. A key benefit of the p-card, particularly in Europe, is that the merchant provides full line item detail and VAT information (Level 3 data) which can then be used by a company to complete and submit a VAT reclaim form electronically. But few countries have VAT reclaim services accredited and fully operational as shown in Table 3.

Many companies use corporate T&E cards as well as pcards, with some of their employees using both. And when a T&E card is used in a p-card enabled merchant it cannot use the additional data the merchant provides. MasterCard has developed a Multicard product, which combines the functionality of the T&E and the pcard. The Multicard is well established in the USA and it is now being issued in Europe. Royal Bank of Scotland’s OneCard, the first Multicard in Europe, is aimed at mid-sized companies. Demand for the product, launched in October 2003, has exceeded all expectations from both mid-sized companies and large organisations. Over 7,000 OneCards have already been issued to the middle market, and two major organisations – Manchester City Council and the National Assembly of Wales which already have 1,500 cards and £60m turnover – are also using it. The two main reasons these large organisations chose the Onecard were that they wanted the ability to move to purchase card type transactions without having to re-issue cards and the access to the Smart Data On-line management information package (SDOL). Darren Bone, Programme Manager for the Welsh Procurement Initiative Team (part of the National Assembly for Wales), says: “We have found that Onecard and the reporting system SDOL allows us to allocate purchases to general ledgers more frequently, monitor use of cards to purchasing policy, and provide access to cardholder statements on-line very effectively.”

The increasing range of p-card solutions is opening up new opportunities for companies to simplify their procedures and cut costs.

Virtual Payments

The payment card is simply a vehicle for holding a cardholder’s name and account details. The clearing systems in American Express, MasterCard and Visa only use the information, the card is not essential. So increasingly payments are being made with virtual cards where the necessary information is held electronically in a procurement system or settlement network.

One of the most advanced and important examples of this approach is GE Corporate Payment Services’ vPayment e-settlement tool in the USA. vPayment automatically combines accounting and purchase order data, and imposes time- and dollar-range limits on a specific transaction to ensure proper supplier settlement through the MasterCard system (see table 4 for a flowchart and description of the system). This approach eliminates the need to issue cheques and ensures full and accurate reconciliation. In the past 12 months nearly $1bn was cleared through vPayment. GE is evaluating a European launch sometime in the future.

vPayment is an important example of payment card systems being used for an increasing number of different types of payment.

Other Opportunities

There are several other types of payment card that can be used to cut costs and simplify procedures. Revolving credit cards are available for small businesses to help them manage their monthly and short-term cash flows. Debit cards, which access a current account directly, are also available.

Over the past two to three years a wide range of pre-paid debit cards have been launched in the USA including applications such as: employee payroll cards; employee incentive cards; project cards for controlling set project budgets, e.g. meeting cards, and relocation cards. Recent research has indicated that, in the European market, there would only be demand for travel related pre-paid cards.

Another opportunity is to combine different types of card. GM once used eight different types of card including corporate travel cards, telephone cards, fleet cards and p-cards. They combined them on one card and made savings all around the world. A government agency in the USA added building access and computer system access control onto their T&E card.

Table 4: vPayment from GE Corporate Payment Services