The Corporate Purchase Card: A Catalyst for New Growth in B2B ecommerce

Transcription

1 The Corporate Purchase Card: A Catalyst for New Growth in B2B ecommerce A new generation of corporate purchase cards is poised to accelerate B2B ecommerce with a faster, lowerrisk payment. This will be a significant benefit to both suppliers and buyers looking to streamline their supply chains. But there s a catch. By Jim Lister Vice President, ecommerce Solutions 2008 First Data Corporation. All trademarks, service marks and trade names referenced in this material are the property of their respective owners.

2 Introduction Today s commercial markets demand a faster response to change than ever before. It is clear that great opportunity lies in the rapid growth of complex global supply chains. Global ecommerce has made it easier for buyers to source the products and services they need to make their businesses competitive and keep them growing. However, one of the biggest obstacles to further streamlining the supply chain is payment. Both buyers and suppliers seek faster, lower-risk, automated methods to make and receive payment. This is why an unheralded device that was introduced into the business-to-business (B2B) payment ecosystem in the early 1990s the corporate purchase card is now emerging as a catalyst for ecommerce growth. The technology behind these cards, which are not really cards at all, has undergone a dramatic overhaul with next-generation purchase cards offering the type of fast and secure electronic payment that businesses have long been searching for. As a result, purchase cards are now poised to move from a purchase mechanism for miscellaneous supplies, travel and entertainment to comprehensive procurement devices. This paper discusses new developments in corporate purchase cards and shows why they are emerging as a viable alternative to conventional B2B payments. It highlights innovations in the new MasterCard Payment Gateway (MPG), which was successfully piloted and launched with the help of First Data s experience with B2B initiatives and purchase cards, while showcasing the benefits for buyers, suppliers and other stakeholders in the B2B value chain. There is, however, one potentially troublesome pothole on this road to better, faster B2B payment: chargebacks. But before we look into that, let s first see how this new generation of purchase cards is benefiting both buyers and suppliers. The Changing Nature of B2B Commerce As the global economy expands, businesses are moving away from the old model of vertical integration. They are evolving into agile extended enterprises consisting of close-knit networks of suppliers and partners that can be added or changed as market conditions dictate. As a result, B2B commercial transactions among corporate entities are on the rise. In 2007, there were 11 billion B2B transactions in the United States amounting to $36 trillion, according to financial industry research firm Celent. Of these transactions, more than 70 percent were still paid with a traditional paper check. But this is changing. While companies traditionally like the control and security that letters of credit, paper checks and manual processes offer, the desire for that perceived control and security is being replaced by the realization that the wasted time, inefficiency and higher costs of paper-based systems are too substantial to ignore. Electronic Invoice Presentment and Payment (EIPP), which is the electronic submission and payment of invoices, is becoming more popular for B2B payment transactions. EIPP represents a straight-to-pay (STP) model that can be tightly integrated with enterprise resource planning (ERP) and accounting systems. In these systems, financial information from settlement through reconciliation is seamlessly passed to all parties involved in the transaction, all without manual handling or data entry (see Figure 1). page 2

3 EIPP Buyer Perspective: Order Invoice Processing Payment Processing Reconciliation Pre-Purchase Payment Post-Purchase Supplier Perspective: Order Processing Invoice Creation Payment Receipt Reconciliation Pre-Purchase Payment Post-Purchase Figure 1. Electronic Invoice Presentment and Payment is a critical element of a frictionless supply chain. Celent estimates that approximately four billion transactions currently paid by check will move to electronic payment methods within the next five years. Based on payment trends observed in the marketplace, First Data estimates that in seven years, only 10 percent of all B2B transactions will be made by check; the remainder will be made through Automated Clearing House (ACH) and next-generation purchase cards. Indeed, the advantages of purchase cards are so compelling First Data expects that they will dramatically increase from six percent of all B2B transactions today to 25 percent within the next five to seven years. A Brief History of Corporate Purchase Cards Corporate purchase cards (also known as purchasing cards or P-cards) were first introduced in the U.S. in the early 1990s as a way for organizations to manage employee purchases and reduce transaction costs. Purchase cards allowed buyers new options, including preauthorization for specific vendors and/or product types; restrictions based on contract and transaction; and the ability to set daily, weekly and monthly limits and controls. The purchase card solution offered substantially more control than corporate credit cards an important feature for cost-conscious procurement departments. Purchase cards offered relatively low transaction costs for suppliers. For example, the cost of putting a transaction through the traditional accounting cycle of requisition to purchase order to invoice to payment is typically the same for a $100 purchase as it is for a $10,000 purchase. According to a 2007 benchmark survey from the National Association of Purchasing Card Professionals, this cost averages $87 per transaction, regardless of the transaction amount. That s a high transaction cost for procurement of traditionally lower-cost items like business cards, signage, transcription services or travel. Purchase cards also offered an advantage to suppliers, reducing the need to process checks or to invoice the buyer for small dollar transactions. The National Association of Purchasing Card Professionals estimates that purchase cards typically result in a savings of 55 to 90 percent of the total transaction cost. With purchase cards, the transaction cost is typically a percentage of the total sale. The primary component of this cost is the interchange fees that the card associations and banks charge. page 3

4 Payment/Funding The Corporate Purchase Card: The per-transaction cost advantage of purchase cards is magnified by business transaction patterns. As shown in Figure 2, most organizations deal with many more low-spend vendors than high-spend vendors. Supplier Spend Analysis Spend 50k 45k 40k 35k 30k 25k 20k 15k 10k 5k Suppliers Source: Bizbodz.com Figure 2: Most organizations deal with many more low-spend suppliers than high-spend suppliers. Corporate purchase card use has grown over the years, primarily as a way of interacting with large quantities of low-spend suppliers. In particular, government and other public entities have found the cards to be a valuable way of managing expenses. However, organizations that utilize purchase cards still use them primarily for travel, entertainment, supplies and other miscellaneous, relatively small-ticket items. Corporate purchase cards have rarely been used as a payment mechanism for line-of-business Approved or supply chain expenses. Organizations have also been slow to adopt the cards Invoice for higher-spend purchases. Approval Again, that is all about to change. Buyers $$$ Declined Check Generated and Mailed Invoices Phone Call Suppliers/ Merchants Invoice Inquiries Bank Lockbox Services page 4

5 What s New in Purchase Card Technology Purchase card systems took a big step forward in 2007 with the introduction of the MasterCard Payment Gateway (MPG) processing system. This new network incorporates several innovations that are truly game changing and are likely to make purchase cards a viable alternative for mainstream supply chain finance and payments. Here are some of the key innovations: J J The new system is buyer initiated. Payments for corporate credit cards and earlier purchase card systems are supplier initiated. With a buyer-initiated system, such as MPG, the buyer initiates both the purchase and the payment. In this sense, the new system mirrors the manual process of purchase order to invoice to check payment, offering the buyer similar levels of control, manageability and security. J J The buyer s purchase card number is never exposed. The buyer s card number (in reality, it s an account number since there usually is no physical card involved) does not have to be contained in either the vendor s or the buyer s payables system. The card/account number is held only by the MPG network and the payment processor (such as First Data). No one on the buyer s or supplier s staff needs to know the card number. This feature considerably reduces the likelihood of fraud and makes the system appropriate and trustworthy for larger purchases. J J The MPG system creates new buyer card numbers and merchant supplier IDs. This also helps to reduce fraud since these numbers are gateway system specific. If the purchase card system was somehow hacked and the numbers stolen, the buyer would be assured that the account numbers could not be used outside the purchase card gateway system. JJ Unlike ACH systems, the MPG system does not require the supplier to provide Direct Deposit Advice (DDA) or other bank account information to the buyer. All payments are handled within the payment system, which means that suppliers can confidently subscribe to the MPG system and engage with buyers without fearing their bank accounts will be compromised. JJ First Data s B2B Gateway allows for a quick integration with the MPG system by utilizing B2B industry standard formats to access First Data s vast merchant base. The single entry point allows First Data to mitigate risk and reduce chargeback exposure by controlling the authorization and settlement at the point of submission. There can never be a discrepancy between authorization and settlement amounts since the system will not allow a preauthorization and only approved transactions can be settled. JJ The new system is fully capable of integration with corporate ERP systems through file feeds and other mechanisms. In other words, it can support fully automated, touchless bookkeeping. In addition to these improvements, there is another reason to believe that purchase cards represent the future of B2B transactions: Card associations and banks are recognizing that the current purchase card pricing model has to reflect alternative B2B approaches. To make the MPG system attractive to suppliers, there will be lower interchange rates and fees for purchase cards. In fact, MasterCard implemented B2B incentive rates with its MasterCard Payment Gateway product, saving suppliers up to 50 basis points on purchase card transactions. First Data expects interchange rates for purchase card transactions to decline from relatively high rates of around three percent to one percent over time. page 5

6 20k 15k 10k 5k 0 The Corporate Purchase Card: Suppliers A comparison between the typical manual purchase and payment flow (Figure 3) and next-generation purchase card systems (Figure 4) is shown below. Invoice Approval Approved Buyers $$$ Declined Check Generated and Mailed Invoices Phone Call Suppliers/ Merchants Invoice Inquiries Bank Lockbox Services Payment/Funding Figure 3: Typical manual purchase and payment flow. P-card Issuer Reporting/Billing Issuers $$$ I/C MasterCard $$$ I/C Interchange Buyers $$$ Invoice Approvals/Declines Settlement Invoices MasterCard Payment Gateway First Data B2B Gateway First Data Merchant Services P-Card Approvals/Declines Suppliers/ Merchants Invoice/Inquiries Supplier Funding Payment/Funding Bank Channel Figure 4: Purchase and payment flow with MasterCard Payment Gateway (MPG) and First Data enabled corporate purchase cards through First Data s B2B Gateway (FDG) page 6

7 Benefits of Next-Generation Corporate Purchase Cards Advantages for Buyers JJ Combines the control and manageability aspects of paper-based processes with the lower cost and greater efficiency of electronic payment systems JJ Reduces administrative overhead because of integration with ERP and payables/receivables systems JJ Delivers extremely robust security, because the purchase card account number is never exposed to either the buying or selling organization JJ Enables users to replicate and reinforce general purchasing best practices and to apply varying business rules for vendors, payment types and contracts JJ Makes details of Level 3 transaction data available (see the sidebar on page 8 for descriptions of the three levels of transaction data) JJ Facilitates the payment of multiple invoices with one purchase card payment. Today, in a typical line-of-business accounts payable system, one payment accounts for an average of 3.3 invoices. Next-generation purchase cards also allow this because addenda information is sent with each payment detailing which invoices have been paid JJ Reduces the risk of loss due to fraudulent merchants, nonreceipt of goods or damaged goods JJ Facilitates efforts to consolidate the supplier base JJ Opens opportunities to negotiate lower prices resulting from lower bank fees charged to suppliers Advantages for Suppliers JJ Streamlines administrative overhead. For example, merchants can see all their invoice activity from all MPG buyers through one portal. This added visibility helps to manage cash flow JJ Feeds payments automatically or manually into ERP and/or accounts receivable systems JJ Stops exposure of bank account information to customers, as required for ACH transactions JJ Allows suppliers to receive payments typically more quickly than through manual systems. Generally, payments through a purchase card are received just a few days after being presented to the bank JJ Requires no hardware or card reader systems JJ Reduces possibility of chargebacks, primarily because this process is buyer initiated. Invoices that are lost or never received by the customer are identified quickly and resolved JJ Eliminates supplier s need to deal with checks lost in the mail or misplaced JJ Benefit from available online claims and a dispute process page 7

8 The Pothole in the Road: Chargebacks At the beginning of this discussion we promised to look into a pothole that lurks in the road to a better B2B payment process. One issue remains to be worked out before purchase cards can stake a major claim in the B2B payment cycle: chargebacks. As a vestige of consumer credit card practices, corporate purchase cards still put the onus of chargebacks directly on the supplier, possibly circumventing existing contracts between buyers and sellers. In a typical scenario, buyers have up to six months to dispute a transaction and push it back to suppliers. This is too long especially if card associations and banks want suppliers to use purchase cards for large transactions that go into the millions-of-dollars range. There is simply too much risk for both the supplier and the acquiring bank to assume over such an extended period. By abiding by the purchase card chargeback rules, both parties forfeit their right to other means of dispute resolution, thus complicating this scenario further. More importantly, the supplier has little recourse against the buyer besides initiating a chargeback arbitration process with the card association that is heavily weighted in the buyer s favor. This is not the case for other forms of electronic B2B payment transactions. Even with ACH transfers, sellers have the right to use arbitration or the courts to settle disputes. First Data believes that suppliers and the acquiring banks, in particular, will not adopt corporate purchase cards at the levels projected without significant changes to the chargeback rules. These rules were initially set to protect consumers, but in a B2B market, the rules give the buyer undue advantage over the seller. First Data is working closely and persistently with MasterCard and Visa today to have these rules modified for buyer-initiated purchase card payments and there now appears to be a better understanding and willingness at both card associations to address this concern. Time will tell if this pothole will be smoothed over or will deteriorate into a sinkhole. Next-Generation Purchase Card Systems Support More Robust Level 3 Payment Data New purchase card systems mirror manual processes in that they go beyond Level 1 credit card data normally collected in B2C transactions and provide the more robust data needed in B2B/supply chain transactions which is a requirement for all transactions conducted with the U.S. government. These are the levels of transaction data: Level 1 Data: Basic Credit Card Information Date Supplier Dollar amount Level 2 Data: Customer-Defined Transaction Data Includes all Level 1 data plus: Sales tax Variable data field, including: - An order number - An employee name (in the case of temporary service providers) - A sample number (in the case of providers of laboratory testing service) Level 3 Data: Line Item Detail Includes all Level 1 and Level 2 data plus: Item product code Item description Item quantity Item unit of measure Item price Item tax page 8

9 Conclusion With advances in payment gateway systems such as the MasterCard Payment Gateway and others that will soon be appearing in the B2B payment processing market, purchase cards are poised to transform the way many businesses conduct their B2B transactions. Purchase cards offer the same level of control over payables that traditional accounts payable processes provide, but at a much lower management cost for the buyer. For suppliers, payment comes more quickly and at a lower cost per transaction. And everyone has superior control over billing and payment information. An additional and critical benefit of purchase card payment systems is their greater security. Not only are purchase cards far more secure than traditional business credit cards, purchase cards can add a layer of security to the entire payment management process, making them appealing for large transactions. This is because employees within a buyer organization can process payments without ever seeing or exposing account number information to anyone, including the supplier. Also, because payment gateway account numbers are unique, should they ever be compromised through a security breach, the account numbers would be useless outside the payment gateway system. Buyers and suppliers alike will benefit from the advanced technology now available for corporate purchase cards: JJ More efficient cash flow through the timely reporting of payments and exceptions and automation of exception handling JJ Allowance for additional payment solutions beyond credit cards such as payroll and gift cards, ACH, multi-currency and currency conversion Additionally, partnering with First Data as MasterCard has done in the pilot of its MasterCard Payment Gateway provides buyers and suppliers with the additional insight and considerable experience of First Data. This ranges from leveraging First Data s familiarity as the largest clearer of Level 3 transactions to the vast understanding of integrating payment and reporting solutions into customer ERP systems. First Data s knowledge, along with MasterCard, Visa and other B2B initiatives, is the driving force that will finally make paper checks an archaic form of payment and a thing of the past century. The greatest issue standing in the way of widespread payment card adoption is the matter of chargebacks. Simply put, the current chargeback rules are too biased in favor of the buyer. First Data is working aggressively with card associations and banks to modify these rules and make them more equitable. We are confident this issue will be resolved so that purchase cards will become a sought-after option to traditional payment mechanisms one that ties more closely to automated accounting and control systems. First Data expects that within a few years, purchase cards will become an increasingly common form of B2B payment, and within five to seven years, purchase cards could easily account for as much as 25 percent of all B2B payments. Buyers will see increases in payment process efficiencies, control and security. Suppliers will see straight through processing, similar to ACH payments but without having to provide their banking information to multiple buyers, and increases in payment time, thus impacting cash flows and automation of their accounts receivable processes. If you have questions or comments about purchase cards and B2B transactions as they stand today or what the future might look like in this arena, please contact the author directly at Jim.Lister@FirstData.com. page 9

10 The Global Leader in Electronic Commerce First Data powers the global economy by making it easy, fast and secure for people and businesses around the world to buy goods and services using virtually any form of payment. Serving millions of merchant locations and thousands of card issuers, we have the expertise and insight to help you accelerate your business. Put our intelligence to work for you. About the Author Jim Lister, Vice President of ecommerce Solutions, focuses on B2B opportunities for First Data. He has an extensive financial services and banking background covering 29 years in the industry, with the past 11 of those years with First Data. Jim has particular expertise in payment processing and cash management services, as well as overseeing implementations and enhancements for both the Issuing and Acquiring programs for purchase cards. For more information, contact your First Data Sales Representative or visit firstdata.com First Data Corporation. All rights reserved. All trademarks, service marks and trade names referenced in this material are the property of their respective owners. firstdata.com page