Procurement Cards Work as Reengineering Tool

Procurement cards, the newest wave in commercial card marketing, are more than just another implement in the plastic toolbox. They play to the corporate hunger for restructuring and reengineering.

The sellers of procurement cards say they are capable of streamlining the corporate purchasing function - at once decentralizing it and making it more accountable for routine supply expenditures. And the payoff is hundreds of thousands of dollars a year in savings, they say.

Egged on by MasterCard and Visa, banks have only begun to go after the procurement market, but American Express, as in corporate cards generally, has already staked out a strong position.

A study by Ernst & Young found that transactions of less than $1,000 represent 75% of transactions at many companies but less than 18% of dollars spent. American Express has said that Scott Paper Co. was able, by using procurement cards for its smaller purchases, to reduce its purchase- order cost from $152 to about $3.

Procurement cards and the automation that backs them up are supposed to help business units function independently. Ultimately, procurement card systems will be able to offer comparative pricing data, enabling purchasing managers to select the lowest-cost alternatives with the click of a mouse.

The market for procurement cards is growing tremendously - about 100% a year, compared with 20% for traditional business cards, according to First Bank System, the leading commercial card marketer in the banking industry.

The potential is about $300 billion of small-dollar purchases made a year, only about 1.5% of which now goes on cards, said Robert Lavaro, senior vice president of commercial card products at Visa International.

The procurement card business is widely expected to be as large as the personal card business by the year 2000.

"We see the purchasing card arena as our biggest growth area with respect to commercial card products," said Keith Pierce, vice president of Total System Services Inc., Columbus, Ga., the largest procurement card processor.

For issuer banks, the challenge is to make the most of their current positions in the business market. Procurement cards are very much tied in origin and fate to the travel and entertainment cards long issued by Visa, MasterCard, and American Express. The T&E business remains dominated by American Express, which has about a 60% share, compared with about 20% each for Visa and MasterCard, according to Visa data.

"This is a hypercompetitive market," said Mr. Lavaro.

American Express also dominates the small-business payment market, with a 22% market share, compared with about 11% each for Visa and MasterCard. The remaining small-business transactions are done by cash or check.

While banks are trying to leverage their business account relationships, American Express poses a serious threat to the bank procurement card movement because of its strong corporate card penetration, said Mr. Pierce. "They talk about the millions of dollars they have invested and the staff they have hired," the Total System official added.

Introduced in January 1994, the American Express procurement product has signed up more than 75% of the Fortune 500 companies, including Walt Disney World, Northrop Corp., and International Paper, according to John Yates, senior vice president of American Express' corporate purchasing card division.

In addition, it has 14,000 industrial suppliers on its acceptance system and is adding suppliers at the rate of 500 per month with the aid of a 60- person recruiting force.

"We were not quick to market, but once there we entered with a far superior product and network capability," said Mr. Yates.

Satisfied with the size of its client base, American Express is now focused on building its infrastructure. This year, the company announced software packages to enhance procurement card data - and formation of a consulting group to help clients install the card function in their purchasing departments.

This fall, American Express hopes to announce a tracking system that would incorporate an enhanced version of SIC codes to help purchasing managers monitor purchases against budgets for specific products. The system, developed with Dun & Bradstreet, should eventually allow price comparisons among vendors, said Mr. Yates.

But there is one hitch in American Express' plan. The codes must be accepted by MasterCard and Visa as well, since most retail terminals are linked to the bank card networks.

"The question becomes a political one," said Philip Skarston, vice president of marketing at Procard, a Golden, Colo.-based purchasing card software developer. "I'd be really surprised if Visa and MasterCard buy into this.

"A more likely scenario is that they will develop their own standard."

The bank card associations are well aware of American Express' procurement card aspirations and are aggressively marketing their own products.

"It's sort of like the Oklahoma land rush," said Mr. Skarston. "Everyone wants to get in before it begins to look like the T&E card market."

For example, First Bank System of Minneapolis is aggressively marketing its procurement cards, recently inviting more than 400 companies to a seminar on the product. It has stolen companies away from American Express, including Allied Signal and Merck. And the bank is launching procurement card-like offshoots, including a relocation card and a fleet management card.

The relocation card is ideal for companies that move employees around a lot. A fixed amount of cash can be put into an account to pay for moving- related expenses, averting stacks of paperwork.

Likewise, the fleet management card can be used for gas and repairs and offers more precise accounting than current paper-based systems, said Philip Heasley, the vice chairman overseeing First Bank's product group.

Bank card issuers are also competing among themselves and with American Express for consulting business. Because integration of the procurement card requires a complete overhaul of a company's purchasing department, many banks have become de facto management consultants.

"Corporate cards were easy for banks," said Procard's Mr. Skarston. "This is an entirely different prospect."

Bank of America, which launched its MasterCard procurement card in October 1994, strongly emphasizes its consulting abilities. "Other issuers are not focusing on bringing users up to speed once they sign on," said Shelia Santos, vice president of purchasing cards. "We have a faster ramp-up time."

The bank has a 500-person marketing group that includes consultants and "implementation managers." "This was a major commitment for B of A," said Ms. Santos.

Although procurement cards, like corporate cards, have lower chargeoff rates than do consumer cards, they require a lot more investment, as well as care and feeding by the issuing bank.

"There is the realization by banks that they either have to outsource these support services or hire staff," said Mr. Skarston. "My sense is that banks are rethinking how they want to be in this business."

Said Mr. Pierce of Total System Services, American Express "will be successful. But the bank card issuers are holding their own and should continue to compete strongly."

Ellen Leander is a New York-based freelance writer.

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