Since the late 1980s, 75% of US organisations have moved at least some portion of their traditional business-to-business (B2B) payments involving requisition, purchase order, invoice and check payment over to purchasing cards and other forms of electronic payments (e-payments). In North America alone, this shift saves organisations US$44bn per year in what we term process cost savings, according to the ‘2012 Purchasing Card Benchmark Survey’ issued by RPMG Research, which yielded more than 4,000 responses from end-users across North America. By understanding these process costs, and then re-engineering and reallocating tasks and staff assignments, corporations can achieve tremendous savings.
Currently, there is much lower utilisation of purchasing cards (p-cards) – aka corporate cards, procurement cards and the like – in the global arena versus the US. Some studies indicate that companies in the European market realise only 25% of the opportunity of an optimised corporate card and payment system. For banks, card issuers and payment networks, the global commercial payment market presents tremendous opportunity for growth. But the global market can also be more complicated and challenging, due to obvious factors like currency exchange, taxation and regulations, right through to more subtle issues involving cultural viewpoints and supplier apprehension. Like their counterparts in the US, global corporate and public entities need to understand why to use p-cards, before they can successfully build an efficient payments strategy.
The traditional purchase-to-pay (P2P) process is costly: Many organisations spend a disproportionate amount of time on small-dollar purchases. In a typical US organisation, at least 80% of payments are less than US$2,500 each, yet equate to less than 5% of total spend. These payments are also usually made to a large number of suppliers, 80% of whom are used only once or twice per year. The traditional purchase-to-pay (P2P) process can be costly and inefficient. Cost estimates of the traditional process range from $50 to $200 per purchase in the US. This cost is the same regardless of the dollar amount of the purchase. In other words, the process cost of a US$25 purchase is the same as a US$2,500 purchase because the same process is followed. It may cost more to purchase the item than the value of the item itself.
A p-card programme can simplify the process: P-cards were originally targeted as a payment method for small dollar purchases, streamlining the peer-to-peer (P2P) process for increased efficiencies and cost savings. For these types of purchases, many steps of a traditional P2P process are not merited. To reap the full benefits of p-card payments, re-engineering is required.
When the purchasing process is switched from the traditional process to a streamlined version designed for p-cards, the process cost tends to be under $25 per p-card transaction (as per figure 1 below). The key to this benefit is to re-engineer inefficient processes for a new, p-card purchase-to-pay model, eliminating steps that do not add value and putting cards into the hands of employees who need to acquire goods and services. The purchasing and accounts payable departments generally are not involved in handling these transactions.
While cardholders have the responsibility of reviewing posted p-card transactions, such as through an electronic monthly statement, they are no longer completing and submitting requisitions for every purchase. With fewer purchases to ‘touch’ accounts payable (A/P), procurement and purchasing staff can work on more value-added activities, such as supplier selection and contract management. Figure 1 below is a National Association of Purchasing Card Professionals (NAPCP) example that breaks down the steps, personnel, time and labour costs.
*Rounded transaction count; based on average monthly card spend of US$2m and average transaction size of $325.
Determining the P-card’s Place Within Payments Strategy
At the broadest level, organisations must evaluate what issues p-cards can solve and where they fit within its goals and priorities. Originally, p-cards were targeted for low-value transactions, but usage has expanded as the industry has grown. Many organisations now go beyond traditional p-cards, using ghost cards (accounts typically issued to specific suppliers) and complementary solutions such as declining balance cards and A/P automation solutions (ePayables). There’s a place for all payment methods within an organisation’s payments strategy and the best option for a particular expense may fall outside the p-card realm.
In Europe, particularly the Nordic countries, plus Germany, Netherlands, Belgium and the UK, there is much greater utilisation of electronic e-payments through wire transfer and the Bankers’ Automated Clearing Services (BACS) processors, which reduce the end-to-end cycle and cost of commercial payments. Likewise, electronic e-invoicing and scanning has made inroads in larger European companies which again reduces the cost at the front end of the invoice processing cycle (error management, keying, enterprise resource planning (ERP) integration, for example).
Building the Business Case
Any organisation can evaluate the p-card opportunity in multiple ways – for example, by reviewing payment statistics such as dollar amounts, payment volume, suppliers and accounting/budget codes. Specific elements to explore include:
- What percentage of payments are, for example, less than $1,000, $2,500 and $5,000? These could be well-suited for p-card.
- What P2P processes are used and what are the associated process costs?
- How many infrequently-used suppliers are in the master supplier file?
- If x% of payments move to p-card, what are the estimated savings?
As a next step, research should be formulated into a business case that justifies the project, taking the form of a structured proposal for decision-makers that:
- Describes card industry benchmarks and best practices.
- Compares and contrasts p-card to payment alternatives.
- Connects the p-card business case with organisational goals and philosophy.
- Quantifies anticipated savings and benefits.
- Outlines potential challenges, risks and mitigating controls.
- Identifies required resources, such as staffing and technology, and potential costs.
- Proposes a recommendation.
In the US, most issuers offer a rebate to their commercial payment customers based on transaction volume and other negotiated factors. Too often, emphasis is placed on this hard-dollar benefit. Figure 2 below shows how process cost savings exceed rebate every time, making it easier for organisations to make the case for B2B payment automation outside of rebate.
Expanding P-card Programmes Globally
P-Card programmes are evolving on a global scale. As corporate and public entities consider a global pursuit, there are a number of factors that should be addressed.
Finding the right local partners: For a global programme it is unrealistic to have just one contract, which often yields mixed results and limited success. Other options include an alliance relationship with another card provider through the organisation’s local provider. In some cases, the local provider can help connect with providers abroad, but then it may be up to the organisation to do the legwork. Organisations should reach out to local entities with which they have a treasury/banking relationship. Many cite cultural issues as a notable challenge, so remember that an entity must not only issue cards, but speak the local language, offer training, and understand regulatory requirements and taxation.
Understanding regulatory requirements: Each country has unique requirements; a common one is value-added tax (VAT), but the nuances vary country-by-country. In addition, the single euro payments area (SEPA) has been a hot topic within Europe. SEPA is the initiative for a standardised, single payments market, especially electronic payments, for all countries. Simply stated, it eliminates national borders from a payments perspective to increase efficiencies. An organisation must understand the issues relevant to each country in which a card programme is desired and develop suitable compliance strategies.
Considering the supplier side of the equation: Regulatory requirements may also impact the degree to which suppliers accept card payments within each country. For example, extensive documentation requirements may make card acceptance unappealing to suppliers. Another factor is the economics of acceptance. Countries that have, or had hyper-inflation, generally also have higher merchant discount fees – typically 5% to 8% – resulting in lower acceptance rates. Interchange regulation in some countries, such as Australia, is also a factor in suppliers’ cost of card acceptance.
P-card technology and reporting tools allow organisations to identify and pursue strategic sourcing opportunities; focusing on suppliers that accept card payments, thereby reducing the supplier base.
Suppliers who accept p-cards for payment can reap considerable benefits to outweigh the costs related to card acceptance, such as:
- Cost reductions, via eliminating invoice creation, handling and mailing, depositing payments, and collection activities.
- Electronically-deposited funds.
- Faster receipt of payments and improved cash flow.
- Increased sales, as many organisations solicit only suppliers that accept p-cards as payment.
- Customer satisfaction.
- Potential staff reductions within accounts receivables (A/R) and the ability to redirect staff to more value-added activities.
Similar to a corporate or public entity, suppliers need to re-engineer A/R processes to maximise the benefits of card acceptance by:
- Gaining an understanding of the p-card process and its opportunities.
- Selecting an acquiring partner with expertise in B2B payments.
- Implementing appropriate processes and technology.
- Working closely with their customers to establish appropriate ordering processes and supporting documentation.
Specifying Technology/Reporting Requirements
US organisations often want the same functionality for their global programme as they have with their local card programme, but this is not always possible. But because the p-card issuer does in fact deliver a standard billing file (SBF) to the corporate or public entity, it is possible to run queries on transaction data and gain critical insight into spend patterns and programme results, even in the absence of sophisticated, integrated accounting and reporting systems. It is crucial to allow individuals to manage programmes locally. As in the US, some organisations may need to build their own interfaces into the finance system/general ledger, as the card provider may be unable to do so.
Because the evolution of technological functionality has progressed faster in some countries, organisations should document their requirements in advance, including a determination of whether extensive global reporting is really necessary.
Although the issues for managing global programmes warrant careful planning and consideration prior to taking action, success factors are the same as those necessary for local programme success. Provided that organisations focus on streamlining processes, gaining senior management support, encouraging stakeholders to work together as a team, and managing effective programme controls, they can achieve the remarkable cost savings enjoyed by best-in-class organisations in the US.
Tim de Knegt, treasurer for the Port of Rotterdam, discusses how he is looking to bring more value to the Port's clients using blockchain.
Regulation technology is fast gaining currency by transforming how financial institutions can tackle compliance in a swift, comprehensive and less expensive manner.
Many banks around the world, large and small, continue to experience major security failures. Biometric systems such as pay-by-selfie, iris scanners and vein pattern authentication can help.
The implementation date of Europe's revised Markets in Financial Instruments Directive, aka MiFID II, is fast approaching. Yet evidence suggests that awareness about the impact of Brexit on MiFID II is, at best, only patchy and there are some alarming misconceptions.