Employees of Chevron Corp. are using MasterCards issued by First Chicago Corp. to buy everything from hammers and nails to office equipment.
By switching to plastic earlier this year for its small purchases, San Francisco-based Chevron expects to streamline its buying procedures.
Procurement for a large corporation like Chevron is an inefficient process involving purchase orders, mail processing, invoicing, matching invoices to receipts - in all, at least nine steps that aren't required with a card-based system.
"This program, over the course of time,will get a significant volume of low-value invoices out of our system and into the electronic environment of MasterCard and First Chicago," said Norm Osborn, a team leader at Chevron.
Huge Potential Market
The Chevron procurement program is one of the biggest of its kind, as the bank card industry moves to exploit a new market estimated to represent $400 billion a year in potential transaction volume.
For First Chicago, the program represents not only a new growth area for credit card transactions, but an opportunity to build its big cash management business.
"The key here is that we have strengths as a cash management bank and we have strengths as a card issuer," said Donald P. Kilpatrick, vice president of the First Card division. "We [in the card unit] bring the economies of scale."
Among Cash-Management Elite
The bank is among the top five in cash management, according to industry surveys. "We're trying to position [the procurement card] as part of our continuum of corporate payment services," said Cynthia Phillips Meyer, the vice president in the cash management division who is responsible for procurement cards. "Plastic is just another payment mechanism for our customers."
When the program is complete, Chevron will have handed out 2,500 to 3,000 cards to employees. By one estimate, the employees will charge up to $22.5 million a year, assuming $7,500 in spending per card.
Interchange Fees
Although the terms are confidential, officials say the bank collects interchange fees - which generally range from 1% to 2% on sales - from merchants' banks, as well as modest transaction fees and service fees from Chevron.
Officials wouldn't say how much Chevron is saving. But Mr. Kilpatrick said another client claims to have reduced the cost of each transaction to $30, from $55, as a result of switching to a procurement card.
Turning Point
Chevron started looking for a new way to handle small purchases because it had determined that 70% of transactions accounted for only 7% of the money being spent.
"A lot of invoices represented very few dollars," Mr. Osborn said. "This is what turned our heads to say, we can't process every transaction the same."
The card, he said, will allow Chevron's employees "to concentrate on a smaller number of transactions" of $2,500 and up.
Mr. Osborn said the big oil company solicited proposals from American Express Co. and several banks.
First Chicago won, he said, because of the electronic reporting capabilities and the relatively wide acceptance of MasterCard by Chevron's merchants.
"Another reason is that we thought First Chicago had a strategic interest in developing this procurement card program," Mr. Osborn said. "We thought as a major corporation they would work with us in partnership. As it was being developed, we wanted to help provide a good deal of the direction." Hand in Software Development
First Chicago was among the banks that helped fund the development of procurement card software three years ago by Procard Inc. of Denver in a program with MasterCard International. The software, now used in nearly 80 procurement card programs including First Chicago's, transforms data gathered at the point of sale into detailed reports to the procurement manager.
It also enables the manager to impose controls on the use of the cards. The manager can set individual spending limits, as well as control what each employee is authorized to buy.
First Chicago's investment in developing the software was in the $100,000 range - far less than what it would have cost the bank to develop the same software itself, Mr. Kilpatrick said.
Procard estimates the number of transactions using its system will approach 70,000 in the fourth quarter, up from fewer than 10,000 in the first quarter.
Experts say one reason procurement cards are beginning to proliferate is a herd mentality within industry groups.
Executives talk among themselves. Chevron, in particular, has made a special effort to publicize its procurement program within the oil industry.
What's more, one program tends to lead to another within the same industry group, because the same vendors serve an entire industry.
Mr. Osborn said that when Chevron asked vendors if they accepted MasterCard, about 40% said yes. But another 40% said they would accept MasterCard if Chevron switched to the procurement card.
Oil Companies on Board
As a result of all this, about a third of First Chicago's procurement clients are oil companies
The bank is rolling out programs for Exxon, Shell, and Amoco and is in discussions with Texaco and Mobil, said Stnaley W. Anderson, president of Procard.
It has also targeted governments as a potential market for the programs, winning a contract to provide procurement services to various state colleges and other agencies in Texas that is expected to lead to additional college business.
Ms. Meyer said that the procurement card is helping the bank to add to its client list, and that the cards are getting easier to sell. Often as not, it's the customer who brings it up."
