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This article appears in the November 2009 issue of Cards&Payments.
The recession has taken a bite out of consumer and business card spending, but not all card issuers are singing the blues. Several major commercial card issuers say their purchasing and travel-and-entertainment card activity is on the rise, as corporations seek savings from shifting business-to-business spending from paper checks to plastic.
Even in these tough economic times, more and more corporations are switching routine payments from invoices and checks to purchasing cards, industry analysts say. And though paper-based purchases still dwarf electronic payments, the recession may be helping to speed the migration of routine payments from checks to cards, experts say.
Commercial cards, including purchasing cards and corporate T&E cards, have emerged during the economic downturn as strategic tools to analyze spending and to find areas of inefficiency and waste, says Mike Heindl, a partner with U.S.-based Diamond Management & Technology Consultants' financial services practice. "The economic downturn "has put a lot of corporate spending under the microscope, and purchasing commercial cards offer a lot of tools to see exactly how funds are spent."
Shifting spending from more-costly manual and paper-based processes to purchasing or T&E cards also helps corporations cut costs from $6 to $20 per transaction, Heindl says. A typical U.S. company made 74% of its B2B payments by check in 2007, down from 81% in 2004, according to the Association for Financial Professionals, which conducted its last survey in September 2007.
For certain banks, such commercial card growth is one of the few bright spots in a year when overall card spending is down and losses are rising. MasterCard Worldwide reported a decline in overall credit and charge card volume of 15% through the first two quarters of this year compared with the same period in 2008. Visa Inc., whose operational results lag by a quarter, said its credit card sales volume fell 9.7% through the first three months of this year. But several large banks say their commercial card business is rising.
"We are experiencing strong purchasing card growth this year, contrary to economic trends," says Gregory Kerwick, managing director of commercial card solutions for JPMorgan Chase & Co.'s J.P. Morgan Treasury Services. While he acknowledges that T&E spending is down this year, Kerwick says J.P. Morgan has "offset some of those declines" by adding new clients and by finding "new pockets of spending" within corporations.
J.P. Morgan, which last year won a bid to provide purchasing and T&E cards to more than 30 federal agencies, is winning significant new T&E business this year in the private sector in the U.S. and Europe. In July, Northrop Grumman Corp. selected J.P. Morgan to issue its T&E commercial credit card, making the Los Angeles-based security and defense contractor the issuer's largest private-sector T&E card customer in total cardholders and spending volume. J. P. Morgan issues both Visa and MasterCard commercial cards.
Citigroup Inc. has also notched several commercial card-program wins recently. In June, Citi announced it won a three-year contract to issue purchasing cards for the Hong Kong government's 3,000 employees. Within the past year, Citi says it has extended its global commercial card-processing platform to new markets, including Hungary, Romania, Czech Republic, Slovakia, Poland, India, Taiwan, Thailand,
Philippines and Indonesia.
Enhancements to existing commercial card technology is helping to drive new business, Paul Simpson, Citi global head of treasury and trade solutions, tells Cards&Payments. Citi in August introduced a new generation of single-use, or "virtual," accounts available in 48 countries, enabling corporations to improve corporate control over commercial card transactions. Although single-use commercial card accounts are not new, Simpson says Citi's new Virtual Card Accounts offering, which harnesses MasterCard's inControl technology, is the payments industry's first such multicurrency offerings.
"Enabling our customers to use inControl across our global commercial cards platform is a particular advantage for multinational companies looking to simplify their policies and more precisely dictate how and where cards will be used, right down to the specific store or vendor," Simpson says. If present trends continue, "within two to three years" virtual cards could represent some 30% of Citi's total commercial card business, he adds.
While analysts say American Express Co. remains the payment industry's dominant T&E card provider, Visa Inc. and MasterCard are steadily improving their offerings as competition intensifies.
Visa in September unveiled its IntelliLink Spend Management tool enabling commercial card issuers to track and report spending data on commercial cards in multiple currencies and languages. United Kingdom-based Spendvision Holdings Ltd. developed the tool in partnership with Visa; issuers may customize it to their needs.
MasterCard in August said it formed a series of partnerships, including with the Bank of Montreal, to deliver more-detailed travel data to corporate clients. The initiative could open the T&E market to banks previously too small to compete, says Steve Abrams, MasterCard global product group executive for commercial products.
Suppliers tend not to resist when payers switch from checks to payment cards, says Joanne Robinson, president of the U.S.-based research firm Commercial Cards International. "Suppliers might not like interchange fees, but they love guaranteed payment and quick turnaround on payments, especially in an uncertain economy," she says.
Although purchasing cards have been gaining ground steadily over the past few years, momentum has picked up recently as more government agencies have adopted them, Robinson says. "For some reason, when governments decide to use purchasing cards, corporations tend to follow," she says.
Other card issuers besides J.P. Morgan agree that, while overall T&E card spending is down this year, many corporations are requiring more of their employees to use T&E cards when entertaining clients or traveling to gain greater savings (
Annual purchasing card spending in North America rose 24.5% over a recent two-year period, to $137 billion in 2007 from $110 billion in 2005, according to U.S.-based RPMG Research Corp., which gathered purchasing card data through a survey it conducts every two years. Its most recent survey involved 1,238 purchasing card users through a cross-section of public agencies, universities and private corporations. The total amount of purchasing card spending in North America is growing at about 15% annually and will reach $218 billion by 2012, RPMG estimates.
Cost Savings
Key categories for purchasing card transactions include computers, telecommunications and printing equipment; media and advertising services; and transportation and delivery services, RPMG'S 2007 survey found.
The average cost of each traditional, paper-based transaction in a typical organization is about $90, factoring in the total cost of personnel and hours involved in processing between 10,000 and 25,000 transactions annually, according to RPMG. Replacing a similar volume of paper-based transactions with purchasing cards can cut the average cost to about $20 per transaction, says Richard Palmer, RPMG president. "If you take all the time and people involved in a traditional paper-based transaction, including requisitions, purchase orders, approvals and disbursement, some companies are spending as much as $150 to process each transaction," says Palmer, who has studied purchasing card trends in a series of research reports and surveys since 1998.
Major banks began promoting purchasing cards to their corporate customers in the mid-1990s, but adoption was slow at first, Palmer says. One reason is companies feared losing control over spending on supplies and miscellaneous purchases if they abolished entrenched paper-based processes that seemed more secure. Another barrier was the perception that purchasing cards were prone to fraud and misuse.
In fact, purchasing card fraud is much lower than perceived, says Palmer, who estimates the fraud rate at about $250 per $1 million spent. "The visibility, detail and tracking tools purchasing cards offer make it hard for an employee to hide improper spending," he says, adding that the complex chain of paperwork involved in paper-based transactions can create many more loopholes for fraud.
One of the most-compelling arguments for switching routine payments to purchasing cards is the richer data that accompanies electronic payments. Visa, MasterCard, American Express and Discover Financial Services each have gradually enriched the details available about each transaction, enabling companies to aggregate spending data for analysis more easily.
Better Analysis
"With purchasing cards, corporations can easily analyze spending data from a number of different directions, which is hard to accomplish with separate, disconnected paperwork-based payment processes," Heindl says.
Canada-based Bank of Montreal's BMO Financial Group is experiencing double-digit growth in its MasterCard corporate purchasing card program this year, says Mary DiRenzo, BMO senior manager, market development and strategy. Some 30% of BMO's commercial card business is coming from the U.S., and the majority is in Canada, she says. "More corporate clients are adopting purchasing cards, and the spending on those cards is also rising," DiRenzo says.
Although the trend has been gathering steam for a few years, the economic downturn seems to be fueling greater purchasing card growth this year, DiRenzo says. "We are seeing a distinct desire by corporations to harness purchasing cards across more departments in order to get a better view of their overall spending and find ways to save money," she says.
BMO sends purchasing card consultants to visit its corporate clients, where they analyze spending patterns and recommend areas ripe to move payments to plastic from paper. But one of BMO's biggest drivers of growth is when the consultants help corporations expand their use of existing purchasing card programs, DiRenzo says.
"In many cases, corporations already have a purchasing card program, but only a fraction of people are using them and only on certain types of purchases," she says. "When more departments in an organization begin using purchasing cards, it's easier to see spending patterns across the whole organization and to analyze where there could be cost savings or spending-volume discounts."
Improved Leverage
The first thing corporations tend to see is the opportunity to negotiate better deals with suppliers of frequently purchased items. "When a company starts using purchasing cards more widely across the organization, redundant purchases and missed opportunities are often revealed," DiRenzo says.
Examples include discovering employees making purchases outside the parameters of existing supplier contracts, or incidents in which different individuals are purchasing the same commodity separately when centralizing that function would improve pricing and maximize efficiency.
Some banks use proprietary systems to enhance their purchasing card offerings, and others are getting assistance from third-party software developers.
U.S.-based SunTrust Banks Inc. last year adopted the Spendvision technology, customizing it for its own corporate clients.
SunTrust says the bank is experiencing "strong" growth in its Visa purchasing card program this year, helped by its ability to quickly identify cost-saving opportunities for its clients. "We are working with companies across the nation to help them manage routine payments with purchasing cards and T&E cards, showing them the efficiencies and cost-savings," says Nick Alex, SunTrust senior vice president and director of product management.
Robert Kirby, Spendvision founder and president, says as corporations continue to push for more control over their purchases through cards, demand is rising for customizable tools enabling deeper analysis and spending management. "We predict that over the next five years purchasing cards will become the norm for many corporations' routine payments," he says.
The economic downturn has hurt card issuers' overall profits, but purchasing cards that offer cost savings to recession-battered corporations are proving to be a bright spot. CP
