How to Step-up your Company's Use of P-Cards for Higher-value Transactions
When corporate purchasing cards (p-cards) first emerged on the payments landscape nearly a decade ago, they were touted as a modern-day version of the old petty cash box, but with better security. Most p-card purchases were small, one-time or occasional buys such as office supplies, repair hardware, etc. But card growth was explosive, as businesses embraced this easy, accountable way of purchasing.
Today, nearly 50% of businesses, both large and small, are turning to p-cards to pay for purchases. What’s new is not the fact that p-cards have become corporate mainstream but, rather, that p-cards are now finding their place as a means for larger, recurring purchases like temporary labor, computers, software and corporate travel.
“The corporate purchasing card has emerged as a favorite tool for many companies because it cuts overhead costs when purchases are made with cards, provides spend management tools, and offers strong rebates for volume purchases,” said Henry Ijams, managing director for PayStream Advisors. “But now, larger companies, among the first adopters of p-cards, are looking for ways to expand and improve them, and increase the spend on the card.”
Purchasing cards work similar to a corporate credit card, providing an online accounting of all purchases. The cards are not specific to a certain supplier, but rather, can be used for purchases from virtually any vendor who accepts them for transactions. The supplier receives a ‘ghost card’, which provides a means for billing shipping or freight charges back to the company.
Like credit cards, monthly fees are associated with carrying a balance. Both the issuing bank and the payer get a percentage of the fees, and the bank provides a rebate to the company based on purchase volume.
P-cards can be linked to e-procurement through software produced by vendors such as Ariba and Commerce One. Supplier catalogs are loaded onto a system accessible by end users with purchasing needs. The employee can log on and choose from a range of pre-selected items, purchase the desired items and have the transaction automatically settled by the p-card. This process simplifies the administration of p-card transactions for the buying organization, virtually eliminates unauthorized purchases and also simplifies administration for suppliers who integrated their catalogs with the e-procurement system.
Companies have experienced the benefits of p-card spending by using them for smaller purchases. They’ve seen how cards virtually eliminate all of the overhead and paperwork associated with a traditional purchase: requisitions, approvals, purchase orders, buying through purchasing channels, filing receipts, and charging the purchase to the right department or project. Cost studies by larger companies have indicated this ‘traditional’ purchasing process costs companies upwards of US$70 per transaction.
P-cards also allow companies to secure better prices for goods and services purchased with cards since reporting tools arm negotiators with evidence that the company merits volume discounts. Buyers can be directed to preferred providers who offer discounts and blocked from purchases through non-preferred merchants. Furthermore, cash rebates from p-card issuers increase as the amount processed on p-cards grows.
Across the organization, p-cards increase productivity. Professional buyers are freed from the burden of handling numerous small, one-time purchases. Employees are empowered to buy what they need, when they need it, and don’t have to wait for things to be bought through traditional purchasing channels and complicated processes.
Increasingly, companies are weighing the costs of using traditional purchasing channels for larger purchases. “Improvements in technology now make it easier than ever for payers and vendors to use procurement cards for a wider range of purchases,” said Ijams. “The average ticket size for a p-card purchase is now US$250, with some companies authorizing p-cards for up to $2,500. By 2010, we expect more than US$200bn will be processed by purchasing cards.”
Vendors who are willing to offer discounts and rebates also see the return through volume purchases and customer loyalty. Prompt, guaranteed payment by the issuing bank also sweetens the deal for the merchant, and the cards create pressure on competitors to follow suit.
While use of p-cards by global and national corporations continues to grow, their penetration into other vertical market segments is particularly significant. One major player is the US government, the largest user of p-cards, who issues cards with up to US$100,000 limits for purchases of high-ticket items like airplane parts. With an impending transition to a new SmartPay®2 charge card program to be implemented at all federal agencies, government spending on p-cards is likely to yield further product innovation.
P-card use is also growing exponentially in the university sector, as higher-education institutions adopt a more aggressive, business approach to purchasing and procurement. Growth down-market, with p-cards moving from corporate giants to smaller businesses, is also a noteworthy trend. While purchasing volumes are lower for smaller companies, the cost-savings and benefits in automation and productivity are yielding proportionately similar results.
The logical place for most companies to begin using p-cards is with the large number of low-dollar purchases. Some companies even distinguish between small purchases from frequently used vs. occasional suppliers, adopting a policy of using the p-card to charge all small-dollar purchases from infrequently used suppliers. This offers a quick way to test the waters, and realize immediate savings without full implementation and integration organization-wide. Using p-cards for frequent suppliers may warrant opening a ghost card account with these vendors instead of buyers using individual cards.
Savings and benefits grow exponentially when a company is able to work up to higher value transactions. A logical progression is to use p-cards for all small purchases and gradually raise the financial threshold for what purchases qualify. Companies first introduce vendors to the p-card process by beginning with small purchases and then issue a corporate policy, requesting or requiring all vendors to accept the card for all purchases up to a specified level.
The next level is where it gets complicated. Vendors who provide inexpensive goods and services readily accept card payments. Those who sell high-end products and services traditionally have not worked that way. The change in mindset and payment culture offers the first roadblock; the second is the cost of doing business this way, vs. traditional payment. For example, if a merchant offers a buyer a discount of 0.5%, on a US$75 purchase, it would cost the supplier US$3.75. But on a purchase of US$1m, that same rebate would cost the supplier US$5,000. It is the same with charging the purchase to a card – the higher the value of the item, the higher the amount the supplier would need to give up in interchange fees and the more the resistance.
Companies who realize the immediate savings for larger purchases are likely to favor the discount structure, and suppliers are likely to fight it, blurring the formerly clear lines in the payment process, and complicating relationships between key supply chain partners. Purchasing companies need to be careful that larger card rebates are not recovered by higher contracted pricing.
Internally, the buying company also has challenges transitioning larger purchases to p-cards. Management is much more comfortable going to a user-friendly, paperless system for small purchases, which often bypass accounts payable. But big ticket items still require the internal controls and paperwork of the A/P process, so many companies are looking for ways to keep traditional processes and workflow, but merge them with p-card settlement and reporting.
One solution being explored by companies involves issuing a card number to a merchant to use to settle a single transaction, similar to a check number, which is specific to that purchase and amount, for a limited period of time. The seller gets paid on the purchase in the usual way through his acquiring bank. The card number is only provided after the normal workflow approvals required for large check or wire payments. The number becomes inoperable after the transaction is settled, but could be re-issued by the company in the future if desired. The difference lies in the discount offered, the rebates paid, and the automation and reporting of the process through the p-card network.
P-card issuers recognize that moving larger payments to card settlement is a priority of corporate treasury and purchasing management, so they are scrambling to offer systems that integrate with A/P processes. Such integration will ensure that business rules (e.g. approvals) are enforced while allowing high-dollar payments to occur over the p-card infrastructure. Companies that want to catch that wave will need to craft a strategy for dealing with key trading partners and for finding technological solutions that can marry two traditionally separate systems and processes.