September 2010 Conducted by: MasterCard Advisors Sponsored by: U.S. Bank Corporate Payment Systems

Transcription

1 The State of Business-to-Business Payment Transformation September 2010 Conducted by: MasterCard Advisors Sponsored by: U.S. Bank Corporate Payment Systems

2 1.0 Executive Summary In the July 2008 State of Business-to-Business Payment Transformation white paper, we observed that over the last decade the U.S. Payment System, including both consumer and business payments, had undergone significant transformation from paper-based payments to electronic payments. In 2010, MasterCard Advisors and U.S. Bank have observed, and industry experts agree, that while the financial crisis of may have caused a short-term drop-off in commercial card spending (see. Fig. 1.0), the forces driving business-to-business (B2B) payments transformation in 2008 are still at work today. At the time this paper was published growth rates appeared to be well on the road to resuming the trends observed in The move towards electronic payments can also be observed in trends related to the use of checks. In the 2008 study, we observed that checks accounted for 74% of B2B payment transactions, down from 81% in 2004, and that 43% of organizations surveyed expected to convert the majority of their suppliers to electronic payments within the next three years. The trends in check usage suggest that many of these organizations have been successful in this goal, and that check payments continue to become a solution for exception payments, with electronic payments becoming the norm. The credit crunch also put renewed strategic focus on the accounts payable (A/P) function, as organizations could no longer necessarily rely on commercial credit to resolve all of their cash management requirements. The emergence Figure 1.0 Reductions to Commercial Card Spending Driven by the Broader Economy Source: U.S. Government Bureau of Economic Analysis (Bea.Gov), MasterCard Advisors of cash management as a strategic concern has, in-turn, renewed organizations interest in emerging payment technologies, and firms that have taken the time to integrate this technology into their processes appear to be reaping significant productivity gains. In preparing this update, we have gathered a series of recent studies that examine trends and developments in B2B spending in 2010 from industry experts across North America (see Appendix A). The documents that inform this effort were published between the fall of 2008 and the summer of All indicate that epayments are just now beginning to gain momentum and realize their full promise, and commercial card programs are expected to return to double-digit growth rates in the coming years. 1

3 Figure 2.0 Value and Volume of U.S. Commercial Check Spend. Source: U.S. Federal Reserve and MasterCard Advisors Analysis 2.0 The Move Toward Electronic Payments Continues A 2007 Federal Reserve study quoted in our 2008 paper observed that between the years of 2002 and 2006, check payments had decreased from 58% to 33% of all payments (consumer and commercial) by volume. The 2008 study also noted that this migration was being driven by the cost savings and improvements to forecasting that electronic payments were delivering, while barriers included information technology (IT) and integration issues, remittance information limitations and supplier adoption. Recent research indicates that these trends persist. As Figure 2.0 indicates, check usage continues to decline. Fewer commercial checks are being written, but they are being written for larger dollar amounts, suggesting that checks are becoming a tool to handle higher value exception payments. Should these trends persist, the average size of a B2B check transaction in 2013 will be nearly three times what it was in 2005, but there will be less than half as many checks being issued in 2013 than there were in Figure Change in Usage of Electronic Payment Methods in the past two years. Source: PayStream Advisors Electronic Payments and P-Card Survey This trend is further echoed in the PayStream Advisors study published in the third quarter of 2009, where 48% of interviewees indicated a reduction in the number of checks processed (Figure 2.0.1). To further illustrate the move toward electronic payments, an Aberdeen Group study found that while checks are still prevalent, their use is decreasing. In fact, 57% of the study respondents reported a decrease (Figure 2.0.2). ACH COMMERICAL CARDS WIRE TRANSFERS PAPER CHECKS 11% PAYMENT SHIFTS IN THE PAST 12 MONTHS 45% 43% 59% 5% 36% 9% 46% 11% 46% 57% 32% Figure Payment Shifts in the Past 12 Months. Source: Aberdeen Group, May 2010

4 of Purchasing Card Professionals poll indicates, the majority of interviewees have either deployed, are planning to deploy, or are evaluating these types of automation solutions for payables. Hard dollar cost savings are another force driving change. Organizations are seeking ways to reduce operating expenses. Aberdeen reports that the average check transaction is $7.15 whereas the average cost of a commercial card transaction is $3.96. Therefore, for every check converted to a card payment, there can be an average savings of $3.19. Figure Type of Change Expected in Purchasing Card Spending through Source: 2010 Purchasing Card Benchmark Survey Results, RPMG Research Corporation Finally, the migration to electronic payments appears to be increasingly prevalent in the private and public sectors. In fact, the 2009/10 Purchasing Card Benchmark Survey Report from RPMG notes that 76% of public sector organizations and 82% of private sector organizations anticipated that they would grow their purchasing card spending through 2012 (Figure on page 3). 2.2 New Solutions Driving Change As purchasing cards have grown to broad acceptance and understanding, new complementary solutions have emerged. These new solutions build on the functionality of purchasing cards, but add additional controls or data elements. New solutions include single-use accounts and straightthrough processing, both found in U.S. Bank Access Online Payment Plus. 2.1 The Forces Driving Change One outcome of the recession has been a greater focus on cash management. As liquidity and cash position became of paramount importance in light of tighter credit lines, accounts payable gained greater strategic focus from management, and this in turn opened the door to innovative new approaches for use of electronic payments. Newer technologies such as Electronic Invoice Presentment and Payment (EIPP), cardless solutions including single-use accounts and other accounts payable payment solutions are seen as the key drivers of commercial card growth in the years to come, as they gain broader acceptance. As Figure 2.1.1, taken from a recent National Association Figure Results of Spring 2010 National Association of Purchasing Card Professionals Poll on Automated Payables. Source: NAPCP.org 3

5 Single-use accounts were developed to add yet another layer of security to commercial card payments. As their name suggests, these accounts provide an account number that is good only for a single transaction. Payment Plus offers a fully automated solution for use of single-use accounts whereby program managers control where, when, and for what dollar amount the accounts can be used. Many organizations are finding that singleuse accounts are a useful tool for payments where additional control is required. Straight-through processing can best be described as direct deposit of payments into supplier merchant bank accounts. Buyers initiate the payments that run on purchasing cºcard networks and ultimately result in suppliers receiving payments without having to process payments through point-of-sale devices. In fact, account numbers are not exchanged. This streamlined process allows both buyers and suppliers to reap benefits including increased automation from initiation through reconciliation, decreased operating costs and improved cash flow predictability. The latest RPMG study shows that these solutions are moving quickly from cutting edge to mainstream, as 43% of organizations interviewed indicated that the use of epayables will account N for future growth (Figure 2.2.1). 2.3 Representative Case Studies New electronic payment solutions are delivering on the promises of cost savings, convenience and control. The case studies below offer five examples of how U.S. Bank customers are driving bottom-line cost savings using new technologies as well as traditional purchasing cards. Copyright 2010, R. Palmer & M Gupta Figure Reasons for Past and Future Increases in Purchasing Card Spend. Source: 2010 Purchasing Card Benchmark Survey Results, RPMG Research Corporation Case Study: eprocurement In 2008, we highlighted an eprocurement case study involving a large regional health care provider. In 2008 this provider was just beginning to phase-in the increased usage of cardless cards with limited suppliers, and was concerned about the loss of data from their eprocurement processes. In the two years since the last study, the organization significantly increased usage of Payment Plus and has seen many positive results in processing costs and speed of payment. The seamless integration to existing eprocurement processes allowed the organization to exponentially increase spend month-over-month. The average transaction size rose to over $6,000, a figure much higher than the industry average, and a strong indication of the support for cardless solutions as settlement vehicles.

6 This organization has recently gone a step further and added straight-through processing to their electronic payment solutions. This option has allowed the organization to further streamline payments not only for themselves but for key suppliers as well. Suppliers have especially been receptive to improved cash flow and lowered carrying costs. For the program sponsors, the Payment Plus story has been one of increased cost savings, reduced risk, improvements in cash management, and broader revenue sharing opportunities. This case study shows how the effectiveness of straight-through processing will continue to drive adoption of electronic payments. As the program manager for this program put it: It s so easy. And (it is) great security for us to not have the account number and know the funds have already been deposited. Going forward, MasterCard Advisors believes that both buyers and sellers will come to see the benefits of straight-through processing as an end-to-end solution for payments automation in still greater numbers Case Study: Cardless Solutions and Traditional Purchasing Card Programs In the past, many organizations started with corporate card programs to manage travel and entertainment expenses, then moved on to purchasing card programs. Today many organizations are starting with cardless payment programs and then expanding usage into traditional plastic purchasing cards. Cardless solutions are proving to be a particularly great fit for organizations that are risk-averse when it comes to decentralized procurement. Some of these organizations have avoided card programs altogether, for fear of fraud or out of control spending. However in 2010, the increased controls available with cardless solutions allowed these organizations to see card payment in a new light. As a result, many are now enjoying more control than ever before and reaping the benefits of enhanced cash flow management. One such organization, a regional media and communications provider, began their foray into cards by launching Payment Plus because it allowed electronic settlement while maintaining existing invoice and payment controls. The successful launch led to tremendous increases in program usage year-over-year, turning a small pilot into a multi-million dollar program, with an average transaction of nearly $2,000. Now convinced of the cost savings, convenience and controls that cards deliver, the organization has expanded its program into other spend categories, and is using both purchasing cards and ghost accounts (accounts where no actual plastic card is issued) in addition to Payment Plus. Similarly, a private university started with Payment Plus, and then launched a traditional purchasing card program. By targeting larger vendors being paid with checks, the university has been able to significantly reduce operational costs with Payment Plus. Success in this endeavor has meant average transaction sizes of over $20,000 and cost savings associated with every check payment. Following the success of this program, the university added a traditional purchasing card program for low dollar purchases. With cards in their wallets, employees are now able to purchase items they need in an efficient and timely manner, while the university maintains strong oversight, and control with these expenses through merchant category code (MCC) blocking. MCC blocking prevents certain purchases from being made altogether and the university is able to monitor all card expenditures through reporting, increasing overall visibility. 5

7 2.3.3 Case Study: Automation = Success Across Organizations Cardless accounts and electronic invoice presentment and payment (EIPP) solutions are two quick ways to reduce costs and improve payment automation. By reducing payment processing costs, one K-12 school district was able to redirect the savings toward the purchase of items needed for students and schools. Because U.S. Bank EIPP can fully automate invoice processing, audits and payment, personnel were able to focus on more strategic activities. They now need only monitor a minimal number of exceptions, freeing up thousands of hours of personnel time to focus on tasks that can add value and drive cash back into the system. With U.S. Bank EIPP, the district has been able to reduce days-payable outstanding to improve the capture of speed-of-payment discounts while also improving overall cash flow. With the automated audits and full integration with their Skyward system, the district now also enjoys increased visibility over the entire process a crucial element in meeting the demands of public oversight. For a large healthcare management organization, launching Payment Plus meant they were able to grow their program from under one million dollars in annual spend to over 75 million. This enormous growth in spend and cost savings was brought about by the additional security and controls of cardless payments. Payments that had always been settled with checks were the primary focus and the organization strongly supported the migration by making Payment Plus the default payment method within their Enterprise Resource Planning (ERP) platform. This ensured that payments were consistently being settled electronically without slippage and that the organization was able to fully optimize the benefits of cardless payments. These immediate benefits, particularly revenue sharing and reduced check payments, have meant strong ongoing internal support for program expansion. All levels of the organization strongly believe that core costs can be removed as payments are converted to Payment Plus. Furthermore, the organization s auditors are pleased with the overall increased control, and the treasury group likes the improved cash management that cycle-based payments offer Case Study: Traditional Purchasing Card Programs Still Yielding Significant Benefits In focusing on the numerous benefits of emerging technologies like cardless solutions, there is a risk of forgetting the benefits of a traditional purchasing card program. For the major state university considered in this last case study however, no reminders are necessary. In this case, the university has grown its program by over 10 percent every year since its inception. The university works to ensure that as much of its spend as possible is diverted away from costlier traditional processes such as checks and onto cards. This impressive growth rate is the result of a focus on ensuring that cards are in the hands of the right people. The university is always looking to find new ways to deploy cards to capture appropriate spend. Ghost accounts are used with some suppliers, and these accounts are integrated with the university s SciQuest platform, reducing processing costs even further. Recently the state government became part of the university s contract for cards. Having recognized the success of the university s program, they have sought to replicate it across many state agencies. In explaining their rationale for this decision, 6

8 the state indicated that the purchasing card program had demonstrated stronger oversight, and visibility than any of their other payment tools at their disposal, and that purchasing cards met or exceeded all of the state s rigorous requirements for transparency and control. 3.0 Why Organizations Should Renew Their Focus on Cards If your organization s focus has moved away from purchasing cards over the past few years, now may be the right time to look at cards again. Emerging technologies and best practices for their use are delivering significant savings to firms who have re-examined how they use cards. 3.1 Best-in-Class Firms are Realizing Significantly Greater Benefits from Cards Figure Top Goals for Implementing Purchasing Card Programs. Source: Aberdeen Group Purchasing Card Implementation Report The Aberdeen Purchasing Card Implementation Report, published in late 2008 documented the top goals for implementing purchasing card programs, and what improvements organizations are looking to make through the launch of the program. As Figure shows, processing cost savings remain the top goal when implementing a card program. The Aberdeen report also shows how best-in-class organizations are realizing even greater cost savings and rebates by driving nearly 24% more indirect spend onto cards (see Figure 3.1.2). These organizations succeed in diverting spend onto cards because they are applying best practices to program design. For example, 93% of high performing programs integrate card data into accounts payable systems, versus 71% of low performing programs, and 71% of high performing programs secure VP level or higher senior sponsorship for their program, versus 41% for low performing programs. 7 Figure Planned Versus Actual Indirect Spend On Purchasing Cards. Source: Aberdeen Group Purchasing Card Implementation Report

9 Figure Transaction Processing Costs and Average Cycle Time. Source: PayStream Advisors Purchasing Card Implementation Report Research (see Figure 3.1.3) indicates that despite some recent efficiencies realized in traditional procure-to-pay (P2P) processes (i.e., invoice imaging), cards are still the most efficient method of payment, both from the perspective of cycle time and cost to process. The 2010 RPMG study showed that organizations are still reaping significant gains from using purchasing cards. The average per-transaction cost savings among organizations interviewed was more than $70, up from an average of $67 in the 2008 study. This figure represents a 76% reduction in transaction processing costs by using cards, when compared with traditional purchasing methods. Figure Cost Reduction per Transaction by Purchasing Card Use. Source: 2010 Purchasing Card Benchmark Survey Results, RPMG Research Corporation 8

10 The RPMG study echoes the Aberdeen Group findings when it comes to the cost savings seen by higher performing organizations. According to the 2010 study, Best Practice firms are directing 67% of purchases under $2500 onto cards, while Needs Improvement firms only capture 18%. At an average per-transaction cost savings of more than $70, the cost savings these firms are foregoing are substantial. BP AND NI GROUPS Best Needs Practice Improvement Percent Group Group Difference Company Statistics Number of Employees 4,935 5,226-6% Age of program (years) % Program Performance Measures Number of plastic purchasing cards % Purchasing card-to-employee ratio 19.8% 7.7% 158% Average monthly P-Card spending $2,081,611 $425, % Median monthly P-Card spending $860,276 $139, % Transactions under $2,500 placed on P-Card 67% 18% 269% Transaction between $2,500 and $10,000 47% 5% 865% placed on P-Card Monthly P-Card spending per employee $422 $82 418% Cardholder Activity Measures Monthly transactions per card % Spending per transaction $309 $225 38% Monthly spending per card $2,126 $1, % Active cards in a typical month 84% 79% 6% Figure Best Practices and Needs Improvement Group Statistics. Source: 2010 Purchasing Card Benchmark Survey Results, RPMG Research Corporation 9

11 Figure Transaction Processing Costs and Organizations Reporting 100% Visibility Into All Payment Activities. Source: Aberdeen Study Purchasing Card Manifesto 3.2 Integrating Purchasing Cards with Accounts Payable can Yield Still Greater Benefits The Aberdeen Study Purchasing Card Manifesto showed how organizations are gaining even greater benefits from cards by integrating them with automated accounts payable solutions. For such organizations, costs to process payments are reduced by 35%. These organizations are also more likely to report that they have visibility into all payment activities (Figure 3.2.1). At present, the adoption of electronic accounts payable (EAP) appears to be a primary focus for larger organizations more so than smaller organizations. The RPMG study found that organizations that adoption was more likely within firms averaging at least 9,000 employees; however, MasterCard Advisors believes that as with other leading practices, successful adoption by larger firms will swiftly lead to adoption by small and mid-sized companies. STATISTICS OF ORGANIZATIONS USING/NOT USING EAP ACCOUNTS Program with EAP Program without EAP Percent of respondent organizations 16.1% 83.9% Average number of employees 9,088 6,868 Plastic card-to-employee ratio 7.8% 10.3% Percent of all respondent spending 26.1% 73.9% Percent of all respondent transaction 20.9% 79.1% Figure Statistics of Organizations Using/Not Using EAP Accounts. Source: 2010 Purchasing Card Benchmark Survey Results, RPMG Research Corporation 10

12 Integration of EAP, including cardless solutions may be driven by a desire to restrict decentralization of payment decisioning. The 2010 RPMG study indicates that organizations integrating purchasing cards have a smaller ratio of cards to employees than those who do not. Further evidence of this is seen in actual spending on plastic cards, where nearly 20% of organizations interviewed indicated a moderate or modest reduction in plastic card spending followed the integration of purchasing cards with EAP payments (see Figure 3.2.3). CHARACTERISTICS OF EAP PROGRAMS 2009 Impact of EAP Spending on Plastic P-Card Spending Significant reduction 3% Moderate reduction 6% Modest reduction 13% Little or no impact 76% No impact (organization does not use plastic purchasing cards) 3% Organizations with EAP Types of Goods/Services Purchased with EAP Different from plastic P-Card 55% Same as plastic P-Card 45% Among Organizations that Use EAP Accounts to Buy Goods and Services that are Different from Plastic Card Purchases. Purchases that differ are: For purchases of goods of higher dollar values 55% For purchases from vendors with whom the organization conducts a high number of transactions 56% For goods and services which are not allowed to be paid by plastic P-Cards 30% For transactions requiring additional approvals/controls prior to payment 45% Other 13% Figure Characteristics of EAP Programs. Source: 2010 Purchasing Card Benchmark Survey Results, RPMG Research Corporation 11

13 3.3 Purchasing Cards are one of the Safest Ways to Make Purchases In an environment full of concern around fraud, cards have been found to be a safer way to buy when compared to cash and checks. The results of the 2009 AFP Payments Fraud and Control Survey shows that a majority of the organizations surveyed experienced attempted or actual payment fraud in These results underscore the importance of fraud control measures to mitigate risk and reduce exposure to losses from emerging assaults to payments. Figure Prevalence of Attempted Fraud in Source: The 2009 AFP Payments Fraud And Control Survey, The Association of Financial Professionals Checks continue to be the preferred target for criminals committing payment fraud. Nine out of 10 organizations (91 percent) that experienced attempted or actual payment fraud in 2008 were victims of check fraud. The RPMG study reinforces the perception that card-using organizations believe that cards offer the promise of greater control and transparency. Nearly half of organizations surveyed (49%) plan to improve control and compliance using purchasing card data, and nearly as many organizations (43%) also plan to leverage card data to enhance leverage with vendors. Figure Primary Purchasing Card Goals: Source: 2010 Purchasing Card Benchmark Survey Results, RPMG Research Corporation 12

14 4.0 Conclusion In 2008, MasterCard Advisors observed that the conversion to electronic payments continued unabated. Electronic payments had fulfilled their promise of cost savings and process efficiencies, and emerging solutionsssuch as cardless payments were expected to ensure these trends continued. aa While the financial crisis of the late 00 s appears to have slowed the expansion of electronic payments in the short term, all indications are that electronic payments will return to previous patterns of double digit growth. 13

15 Appendix A: Recent Studies that Informed this White Paper The following documents were published between 2008 and 2010, and provide insight into the B2B payment trends noted in this study. Document Date Key Takeaways ABERDEEN GROUP: October 2008 Organizations integrating purchasing cards with accounts payable payments THE PCARD MANIFESTO are experiencing materially lower payment costs as well as ancillary benefits including spend visibility and improved speed of payment. ABERDEEN GROUP: PURCHASING November 2008 Companies using best practices when deploying their purchasing card CARD IMPLEMENTATION REPORT programs realize significantly greater cost savings, often more than double those seen in companies without. ABERDEEN GROUP: THE December 2009 The economic crisis has underlined the importance of effective cash 3-PART BALANCING ACT management. Organizations with high performing cash management functions OF CASH MANAGEMENT use commercial cards significantly more often than their lagging peers. ABERDEEN GROUP: THE STATE February 2010 Business travel has gone from being an unavoidable cost to something meriting OF TRAVEL AND ENTERTAINMENT a strategic mindset. Leading companies that take this point of view are seeing EXPENSE MANAGEMENT significantly greater cost savings than lagging performers. ABERDEEN GROUP: ANALYST INSIGHT: July 2010 Organizations can increase efficiency and reduce costs through EVOLVING DYNAMICS OF CORPORATE electronic payments. BANKING RELATIONSHIPS: ENHANCED PAYMENTS FOR IMPROVED CASH FLOW THE ASSOCIATION OF FINANCIAL March 2009 The economic crisis increased the risk of B2B payments fraud. Commercial PROFESSIONALS: PAYMENTS FRAUD AND cards payments exhibited significantly less fraud or fraud attempts than that CONTROL SURVEY seen with checks or Automated Clearing House (ACH) payments. NATIONAL ASSOCIATION OF PURCHASING Spring 2010 Poll results reflecting of the usage of automated accounts payable CARD PROFESSIONALS: POLL ON solutions among member and subscriber respondents. AUTOMATED PAYABLES PAYSTREAM ADVISORS: EINVOICING Q Improvements in technology and adoption are facilitating faster and more ADOPTION BENCHMARKING REPORT cost-effective commercial payments. Purchasing cards are an example of this, and have tremendous potential to grow. ABERDEEN GROUP: GLOBAL PAYMENTS: May 2010 Leading companies are using electronic payments and process automation MAXIMIZING CASH FLOW WITH ELECTRONIC to drive success. PAYMENTS AND PROCESS AUTOMATION PAYSTREAM ADVISORS: ELECTRONIC Q An overview of the state of adoption and adoption drivers for all B2B PAYMENTS: STREAMLINE P2P, REDUCE payments products. COSTS, A BUYER S GUIDE TO ELECTRONIC PAYMENT SOLUTIONS PAYSTREAM ADVISORS: ELECTRONIC Q A survey of adoption rates of electronic payments products and the factors PAYMENTS AND P-CARD SURVEY driving adoption. RPMG RESEARCH CORPORATION 2010 July 2010 A survey of public and private sector commercial card using entities, PURCHASING CARD BENCHMARK benchmarking key program parameters. SURVEY RESULTS TOWER: ARE B2B PAYMENT PORTALS February 2010 Discussion of the evolution of B2B payment portals, their current state, and ABOUT TO TAKE OFF? the potential end game for the market. 14

16 Contact U.S. Bank for more information From purchasing cards to access tools to complete epayables systems, U.S. Bank offers organizations the solutions they need to cut costs and operate more efficiently. For more information, please contact us at or visit usbpayment.com usbank.com 2010 U.S. Bancorp. All rights reserved. U.S. Bank is registered to U.S. Bank National Association ND. All other trademarks are the property of their respective owners. CPS 3588 (11/10) 5262 (10/10)