Card Issuers Finding it Tough To Crack B2B Payments

  While consumers are accustomed to paying for goods with a swipe or touch of a card, most businesses still complete transactions by exchanging mounds of paper invoices. This, say some card industry players, represents one of the few big opportunities remaining for issuers to significantly build their portfolios.
  Indeed, the major card associations and some of their member issuers have been working hard trying to convince businesses to convert to plastic. But the fact that companies still conduct most of the transactions using paper suggests the business-to-business market has been, and may continue to be, a tough one for issuers to crack.
  "When you think about it, it's not so surprising," says C. Scott Strumello, an analyst with Westbury, N.Y.-based Auriemma Consulting Group. Many suppliers, especially small ones, might only have a couple of business clients asking them to accept payment cards. "It's tough to justify the cost of setting up a merchant account," Strumello adds.
  Indeed, 52% of small businesses say they would make payments with a card if their suppliers accepted electronic payments, according to the March 2006 Visa Small Business Cash Management Survey. Indeed, many find it especially difficult to use payment cards for core business services, Strumello notes.
  "It's one thing for a company to go to Staples and buy office supplies, and it's another to pay your accountant that way," Strumello says.
  Core business services, such as accounting and legal fees, comprised 54% of business spending in 2005, more than any other category, according to the Visa Commercial Consumption Expenditure Index.
  According to the Visa small-business survey, only 10% of respondents reported using a credit card for even some core business services. As such, the use of checks still prevails, as 94% of respondents reported using checks for core business services and 83% reported using them to cover maintenance and operating costs, the second-largest spending category.
  Visa says small-business spending grew 5.4% in 2005, to $4.7 trillion, but only about 2% of those transactions involved the use of payment cards.
  Retailers who deal with thousands of customers need to streamline payments by using cards. But a corporate buyer might make only four to 12 purchases per year from a wholesaler, says Brian O'Keeffe, an analyst with the Waltham, Mass.-based Mercator Advisory Group. "They're just used to sending a paper check," he says.
  That is unfortunate, experts say. "The card systems are a very cost-efficient way to do a lot of transactions," says Alex W. "Pete" Hart, a consultant and former president and CEO of MasterCard International. Payment cards can remove the clutter of paper checks and invoices, and the attendant administrative costs, he adds.
  Card companies and their member banks have begun a push to turn the situation around, utilizing not just cards but e-payment initiatives as well.
  Visa has released the results of a variety of studies to help member issuers show companies how they can move away from paper payments. Kenneth Thomas, Visa director of corporate relations, concedes that, so far, these "best practices" studies have had a "card-centric approach," which works best for companies looking to streamline smaller payments.
  In the next few months, however, Visa plans to release what Thomas calls a payment-integration study, which will show how to utilize the information that goes along with an electronic payment. "It's not to the point where we can say we have the best practices," says Thomas. "But we will have recommended practices."
  Last June, MasterCard International launched a major advertising push for its corporate cards in such magazines as BusinessWeek and The Economist. Products highlighted included MasterCard Smart Data Online, a Web-based reporting tool that tracks company spending, and MasterCard's Corporate Card, frequently used for travel expenses.
  "I see a tremendous positive trend in the use of all of these tools," says Steve Abrams, MasterCard senior vice president for corporate payment solutions. Use of MasterCard consumer cards is growing 8% to 12% per year, he adds, but use of commercial cards is growing about 30% annually.
  Corporate cards already dominate certain sectors of business spending. Travel-and-entertainment expenses long have been paid with plastic, for example. But the card associations' data show these charges are relatively small.
  "Procurement is where the opportunity is," Thomas says. The buying of raw materials, goods and services, and purchases for other needs comprise over 80% of business spending. Payment cards, however, might not be an ideal solution. These transactions, especially large ones, can have thousands of details, Thomas adds, with many different types of materials or services at different prices.
  Large buyers typically need an electronic payments program that can compare contractual agreements with what the supplier plans to send, and can flag any problem before payment is made. MasterCard says it has such a program, called MasterCard e-P3. The program embeds a buyer's purchasing card into an electronic payments program and sends remittance data back to the supplier, Abrams says.
  Cost an Issue
  Experts still consider interchange rates a major obstacle to expanding the use of payment cards to B2B purposes. Most suppliers do not want to pay up to 3% of the sale price in card fees, says Mercator's O'Keeffe, especially for big-ticket items.
  Thomas points to Visa Commerce, a noncard-based electronic payments program that can handle transactions totaling up to $10 million, as an alternative, since it allows the seller to avoid interchange. Instead, member banks that support Visa Commerce set the transaction fee.
  "It's definitely less expensive than an interchange model," says Thomas, although the fees can vary based on the size of a transaction and many other factors. "Visa doesn't get in the middle of this." Like other Visa payments, the funds are moved through VisaNet.
  Visa began developing Visa Commerce in 2002. Currently, several member banks are piloting the system, including Citibank with its client, the U.S. Department of Veterans Affairs. The agency, Thomas says, uses the system to purchase pharmaceuticals.
  Although it can handle large transactions, Visa Commerce is not very complex, and users can access it online, Thomas says. He adds that Visa Commerce works best with buyers and sellers who have dealt with one another in the past.
  "When you use a Visa card, you can engage the bank to settle a dispute like late delivery," he says. Visa Commerce does not support this feature. "It doesn't mean it can't be used with a new supplier, but companies need to decide if dispute resolution is important to them," Thomas says.
  U.S. Bank, a subsidiary of U.S. Bancorp, has taken on Visa Commerce for some pilots, but bank officials prefer to talk about PowerTrack, the bank's own payment service. Like Visa Commerce, PowerTrack is useful for large procurement needs, bank officials say. The bank charges a fixed amount per transaction that, although it varies widely among the institution's clients, is "significantly less" than normal interchange rates, says Carol Barkley, a U.S. Bank senior vice president. PowerTrack often flows B2B payments through the automated clearinghouse system, she adds.
  Paper Cutter
  The bank started developing the service in 1997 to handle freight payments for the U.S. Department of Defense. They were already supplying the department with purchasing cards. But freight operation involved so many suppliers, products and prices, officials needed automated financial controls that purchasing cards did not provide, says Rob Abele, U.S. Bank executive vice president.
  At the time, hundreds of clerks had to wade through thousands of bills to track payments, he adds. Now, the Defense Department does almost all of its $2 billion in annual freight payments through the bank's PowerTrack system.
  "The beauty of Power-Track is it will automatically approve a transaction, and no one at the [Defense Department] has to even look at it," Abele says. It could have a built-in parameter, for example, that allows payment for any bill within $10 of a contract price, "but if it's off by $100 or $200, they'll know to have a contract officer look at it."
  Abele says the bank has about 50 to 60 commercial customers, including Sunoco Inc. and Andersen Windows Inc.
  Self-Help
  Automating payments for the federal government has been a key strategy, Abele adds. "It's an 800-pound gorilla, and it can help you get scale and credibility," he says.
  Some companies are coming up with their own solutions as they move away from paper payments. Mendota Heights, Minn.-based Patterson Dental Supply Inc. has been using payment cards, including a U.S. Bank Visa card, for several years, mostly for the purchases made by their field representatives. "Instead of filling out expense reports for miscellaneous items, it all gets mapped into our system electronically," says Troy Peterson, the company's assistant controller.
  The total funds involved are very small, Peterson adds. "Most of our dollars go out the door buying inventory," Peterson says. But if the company started buying its inventory using a credit card, its vendors would have to pay that extra interchange fee, "and they will pass that on to us," he says. Patterson Dental supplies merchandise ranging from toothbrushes to false teeth to more than 100,000 dental professionals throughout the country.
  Patterson Dental processes about 20,000 paper invoices per month. However, within the past two months, the company launched with one or two vendors an internal program that accommodates ACH payments that debit the company's account, Peterson says.
  "In my opinion, most companies would like to pay for things electronically as long as they don't have to pay interchange rates," Peterson adds.
  Experts say using the ACH system is not for everyone. "It's just pushing dollars from one point to another," says Abele. Large and complex purchases still need to be accompanied by data, he says.
  And payment cards may help meet that need. "Clearly, there are a ton of [B2B payments] that can be won over to payment cards," says Mercator's O'Keeffe. "But like most things, it won't happen as quickly as most of the proponents say it will."
  Both the makeup and culture of companies will have to change, O'Keeffe says. "All kinds of accounts-payable people will need to be laid off; it's not going to be a very quick and bloodless victory."
  While there may be a way to convert more B2B payments to plastic, it may not make business sense.
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