Bringing It All Together In the USA
In 2004 in the US personal consumer expenditure was some $8.2 trillion and business expenditure $14.5 trillion. Payment cards were used for 25 per cent of consumer expenditure but for only 2 per cent of business expenditure. (This is still far more than in any other country.) Interestingly, purchase cards (p-cards) are now the heaviest used commercial card in the US, taking 38 per cent of all business expenditure on payment cards and overtaking corporate travel and entertainment cards for the first time in 2004.
Although many US businesses, particularly the larger companies, have already automated much of their procurement, purchase and payment systems there are still significant savings to be made from moving to electronic processing methods.
Recent Aberdeen Group analysis1 showed that moving to the electronic processing of invoices reduced the cost per invoice by more than 60 per cent for both small and large companies, although the cost per invoice is very different, in small companies down to $12.51 while in large companies it is just $1.35.
In the US, the heaviest users of p-cards in the world, the main spend categories on p-cards are currently in the traditional areas of:
As the use of p-cards expands and multi-cards become more common the US is now also seeing significant usage in the areas of:
There is also some use of p-cards for the payment of capital goods, temporary labour and utilities. The AberdeenGroup study estimates that in the next two to three years the fastest growth in p-card usage is likely to be in payments for utility bills, temporary labour, transport and delivery, capital purchases, and advertising/marketing/printing, showing how far and wide the use of p-cards is growing. Another indication of growth is that p-cards are now used to make quite high value payments, e.g. in the US, in many companies over 10 per cent of all payments between US$2,000 and US$10,000 are made using p-cards and in some companies the limit per transaction on p-cards is US$5m. The US is definitely leading the way.
There is some evidence that the use of p-cards in the US is beginning to peak and that growth is slowing. Some of this is simply due to the fact that the base is now substantial, making continued rapid growth more difficult, but the slow down is also due to the limitations of p-card systems and services.
The payment card schemes recognise that p-card usage has two major restrictions. One is the ad valorem (per cent based) merchant service charge suppliers have to pay when accepting p-cards which is holding back demand, particularly for high value payments. The other significant problem, particularly in the US, is the lack of full item detail on transactions on the card. The payment card schemes are fully aware of these two major limitations and are tackling them seriously as they are holding back the growth and spread of the cards. Both MasterCard and Visa in the US are developing a range of payment solutions and pricing structures to overcome these limitations.
Visa has developed a product range that covers almost all business payments, all values of transaction, all numbers of transactions and both low and high volume supplier relationships using a combination of its p-card services, a new large ticket interchange charging structure and its new service, Visa Commerce, see Figure 1.
To extend the use of their payment systems into higher value payments, Visa and MasterCard have both developed new charging structures called Large Ticket Interchange to overcome the problem of per cent based charges. The Visa Large Ticket Interchange is a special interchange rate structure for high value commercial card transactions, which is a combination of a flat fee and a reduced interchange percentage that applies to the actual value of the transaction. The cost of high value transactions for merchants, suppliers and vendors is significantly reduced by this new charging structure.
Visa Commerce is a non-card electronic payment and information management system using Visa’s clearing and settlement system. It is designed to improve the payment and business efficiencies of both buyers and sellers, aiming to overcome the data and global connectivity limitations of other payment methods. Visa US claims that it will save both buyers and sellers at least $5 per transaction over traditional paper invoice and payment methods. It is a fully integrated system linking both buyers and sellers to VisaNet and Visa’s global clearing and settlement system, as shown in Figure 2. Payment charges are per transaction based so ensuring that both low and high value payments are cost effective.
This structure enables buyers to:
Suppliers can electronically present a payment request with invoice-level detail to Visa Commerce-enabled buyers, view the status of any payment request, and receive electronic payments from buyers.
Visa Commerce is very different to standard Visa payment card based solutions. It really does expand Visa’s coverage of B2B payments, particularly for high value transactions. Visa Commerce has been implemented in the US region and transactions are currently running in other regions as the program begins to expand globally.
MasterCard’s B2B payment strategy in the US is very similar. It also aims to provide companies and other organisations with a full range of card and non-card payment solutions to cover all their payment needs, offering:
MasterCard e-P3 extends the purchasing card into new spend categories and larger ticket transactions. MasterCard e-P3 basically offers purchasing card settlement as an additional option within a buyer’s ERP or accounting system alongside ACH, cheque and other accounts payable (A/P) initiated payments. The e-P3 service integrates electronic invoicing and presentment systems to produce significant savings even for quite efficient companies as Paystream Advisors’ analysis in Figure 3 shows.
MasterCard Remote Payment and Presentment Services (RPPS) in the US has been providing consumer electronic bill payment and presentment services for 17 years. To capture larger-value commercial transactions, the service was enhanced to support B2B payments and processed its first business payments in 2004. The charging structure for this new service is on a per-transaction basis. In addition, MasterCard has also developed RPPS capabilities to support wholesale lockbox businesses.
Banks and third parties are using the basic facilities and services that the payment card schemes provide in many different ways, putting together innovative combinations of the payment card scheme services with their own and other technologies to provide a whole range of new solutions.
WellsFargo’s Visa based WellsOne® Commercial Card combines p-card and T&E card functionality with its comprehensive expense reporting system Commercial Card Expense Reporting. Not only does the system report all transactions on the card it also allows cardholders to enter other out-of-pocket expenses (including car mileage), and receive payment automatically through the ACH, virtually eliminating the need for expense reports and petty cash advances. Some of its clients have stopped using dedicated T&E expense management systems altogether.
SunTrust Bank, one of the US’s largest commercial banking organisations, has been working jointly with technology provider Works, Inc. since 2001 to provide Payment Manager, an advanced Internet based p-card and corporate card management solution. Through a single, integrated platform, SunTrust offers corporations and public sector institutions a way to manage and control T&E cards and p-cards electronically, greatly simplifying the control and management of their card programmes.
Most payment card transactions are supplier driven, i.e. the request for authorisation for a payment is carried out by the supplier of the goods or services being purchased and if approved the payment is made automatically. This is unlike payments by cheque or ACH, which are initiated by the buyer. SunTrust has developed an innovative buyer driven payment model using Visa p-cards, which are zero-fund cards. Each card account limit is kept at zero until a purchase needs to be made, at which point the Payment Manager system electronically funds the card for the exact preauthorized purchase amount. After the purchase is made, the card limit is automatically set back to zero, helping a company prevent fraud and ward off unauthorised purchases, as shown in Figure 4.
The SunTrust buyer-driven payment process flow is as follows:
SunTrust believes that this new system improves expenditure and risk controls for companies using p-cards, and has enabled significant expansion of p-card usage beyond the more traditional expenditure areas. It is now helping companies target not just low value accounts payables spend but also large capital expenditures, such as heavy equipment and construction expenses. Greg Hammermaster, group VP and head of commercial card services at SunTrust, says: “Credit cards, in general, electronify the transaction at the point-of-sale. Commercial cards take advantage of electronification by integrating the payments record into the client’s financial systems. We are leveraging the client’s existing procurement workflow and enabling them to use purchasing cards as their primary method of payment, rather than having to generate a check request or ACH file. This provides efficiencies on both the front-end and back-end of the transaction while digitally recording and archiving an audit trail and enriched data repository.”
The level of innovative automation of B2B purchase-to-pay processes in the US using the payment card schemes is exceptional. The new developments in both MasterCard USA’s and Visa USA’s payment systems and services will clearly be rolled out around the world and will provide important competition for local clearing systems.
1 ‘The Purchasing Card Benchmark Report’. Aberdeen Group, March 2005