The use of commercial cards in the business-to-business (B2B) space is hardly a new phenomenon, with traditional purchasing cards (p-cards) having found a solid niche in low-dollar, high-volume transactions. In the US, UK, Australia, and Mexico, p-cards have proven to be highly effective for frequent purchases of smaller-ticket goods and services.
P-cards offer numerous benefits. According to the 2012 Purchasing Card Benchmark Survey conducted by RPMG Research, cost reductions of up to US$74 per transaction through the elimination of purchase orders (POs) and invoices, as well as other process improvements, are achievable using p-cards. In addition to eliminating cumbersome paper processing, cards allow organisations to make a single payment to the issuing bank encompassing multiple vendors, including infrequently used vendors outside their core supplier base.
P-cards can also provide rich transaction-level data, enabling companies to drive purchases through preferred or strategic suppliers. With this added visibility into their transactions, companies are well positioned to negotiate better discounts on purchases. In addition, in markets such as Asia and western Europe p-cards are increasingly being used to replace petty cash and increase control, compliance and transaction visibility.
Collectively, these trends have driven increasing p-card usage globally. A March 2012 report from the Aite Group revealed compounded annual growth from 2004 to 2012 at more than 9% – and double that rate outside the US. In the US, rebates that issuing banks share with clients based on increased card use has been one driver for expanding adoption, as has been working capital advantages afforded to businesses which take the full billing cycle to make payment while suppliers are paid quickly by the card issuer.
Challenges Impacting Card Adoption
Despite this growth, broader adoption of p-cards has been hampered by cultural barriers in Asia, emerging European nations and Latin America, where B2B credit card payments haven’t been the norm. A lack of supplier acceptance also remains a challenge, with some businesses reluctant to pay the added cost of card transactions. In markets such as Germany, the existing presence of and preference for lower-cost electronic forms of payment creates a barrier for organisations seeking to expand p-card programmes.
In addition, the lack of supplier-provided so-called ‘Level 3’ enhanced data can present a challenge for traditional p-card growth. This is particularly the case in regions such as Europe, where companies are keenly focused on reclaiming value added taxes (VAT) that are applied to purchases throughout the supply chain. If a card-accepting supplier fails to provide invoice-level line-item detail, as well as a break-out of the specific VAT amount, a buyer can face difficulties in using the card transactions for reclaiming VAT from local authorities.
A further barrier comes from within: the implementation of buyer policies that typically restrict B2B card use to certain suppliers, spend categories or transaction sizes, often driven by concerns over potential employee or supplier misuse of the card. This, in turn, limits the company’s ability to encourage greater usage of the cards and, as a result, caps the potential benefits of the card programme overall.
New Card Solutions are Overcoming Traditional Challenges
In recent years, however, single-use virtual cards, as buyer-initiated payments that are ‘pushed’ to suppliers via card-network rails, and other emerging card-based solutions have proven highly effective in overcoming many barriers faced by traditional plastic-based cards that had been used mainly for in-store, non-PO-based purchases. Card payments can now be seamlessly integrated into organisations’ enterprise resource planning (ERP) systems by generating a simple payment file that instructs the issuing bank which vendors to pay by card. This trend is increasingly gaining traction among US organisations of all sizes. As more and more organisations introduce electronic invoicing (e-invoicing) and e-procurement capabilities to reduce paper and automate approval work flows, adding card-payment capabilities into the mix allows these forward-looking organisations to extract even greater returns on what typically are large IT investments.
In the near term, challenges around supplier acceptance will remain a factor as companies seek to expand the use of B2B cards deeper within their supply chain. However, as organisations target a broader swath of their supplier base beyond that envisioned under a traditional p-card programme, the absolute number of suppliers willing to accept cards invariably goes up, creating significant benefits for companies that are able to capture even a smaller relative piece of this much larger pie.
As companies explore card use for spend beyond small ticket items, virtual card products can help alleviate the need for restrictive internal buyer policies. Virtual cards offer pre-transaction approvals and more granular transaction-level authorisation controls, and can leverage an organisation’s existing internal capabilities, approval workflows and procedures. Such solutions are enabling companies to create card policies that maximise purchasing efficiency without sacrificing critical controls.
Concerns over a lack of enhanced data when using p-cards for non-PO transactions also decrease when cards are used further into the supply chain. In such cases, companies typically trigger approval workflows and vendor payments based on the supplier invoice, which already contains the granular line-item detail and other data, such as the VAT breakout. For companies using cards as part of their accounts payable (A/P) processes, Level 3-enhanced card data is not required. That said, newer solutions, such as virtual cards, can enable buyers to improve time-intensive back-end processes by leveraging key data elements on hand at the time of payment, such as PO number or supplier reference code. By appending these data elements to each virtual card number, buyers can automate reconciliation and general ledger allocation of card transactions and, when combined with other controls, sharply reduce manual exception handling.
Cultural barriers that have held back wider card acceptance are gradually dissolving as cards move into the realm of existing processes. Through a steady process of education, companies increasingly view these products as a flexible disbursement method that can seamlessly integrate into existing systems to help replace paper cheques, cash and other forms of payments, while also providing a key tool for dealing with standalone payments occurring online, over the phone or in-store at the point-of-sale (POS).
Emerging Trend Shows Increasing Interest in B2B Card Use Across Supply Chain
The advancement of card-based payment solutions has come as organisations continue to seek ways to achieve greater cost reductions across their supply chains. As part of this trend, many companies have begun to centralise or outsource operations via shared service centres (SSCs), often in lower-cost environments. The growth of these centralised shared service hubs, particularly in central and eastern Europe, Latin America and Asia, has opened the door for the use of more advanced commercial card products that support a global service centre model.
At the same time, large multinational corporations tuned into the benefits of p-cards increasingly show interest in finding ways to embed B2B cards more deeply into their supply chains. This emerging trend is evidenced by the growing use of commercial cards for vendor payments within A/P, as part of increasingly automated e-procurement processes, and for capturing less traditional but often complex payment flows, such as insurance claim settlements, cross-border and multi-currency payments, and for customer voucher programmes.
Take, for example, the roadside assistance program one insurance company provides to its US clients. Previously, drivers needing towing assistance or roadside repairs triggered a paper-based process for the insurer that often led to over-payments to service providers, reconciliation challenges in linking payments for service to individual policies, and manual monitoring and issue resolution. Since incorporating Citi’s real-time Virtual Card Accounts (VCA) solution into its core customer relationship management (CRM) and dispatching systems this year, card numbers are automatically distributed to vendors with granular transaction-level controls to ensure payments are made at pre-negotiated rates. The improved data capture helps link individual claims to vendor payments to automate reconciliation, reporting and auditing and reduce the need for manual intervention.
The latest breed of card solutions are the next logical step in helping to make procure-to-pay (P2P) processes more efficient and cost effective, positioning companies to take better advantage of early pay discounts or better pricing from suppliers. Commercial cards can help organisations extend days payable outstanding (DPO), creating further opportunities to improve working capital management.
When it comes to doing business globally, card solutions can offer significant foreign exchange (FX) and multi-currency advantages, and a cost effective way to pay suppliers across borders, regardless of the market or currency. Using a single card issuer globally, companies also can ensure consistent processes and spend data across all the countries where they operate a card programme.
The Growing Value of Cards
An increasing number of multinational corporations have indicated they anticipate expanding their use of p-card solutions as they grow into new markets. With the global trend toward SSCs, new card solutions are becoming more attractive as a highly effective means to consistently pay vendors around the world.
While commercial cards alone are not likely to ever be viewed as an organisation’s sole payment solution, the introduction of these new card-based solutions into the marketplace is fuelling a growing rate of adoption. When used as part of a broader set of treasury solutions, cards remain a vital component of successful global payment strategies.
RPMG Research Corporation’s 2010 Purchasing Card Benchmark Survey highlighted that as card programmes are integrated more deeply into the supply chain, internal ownership of these programmes frequently shifts from procurement to finance/treasury. This highlights the importance of gaining a thorough understanding of the value cards can deliver.
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