Issuers are Still Waiting For a Commercial Card Boom

  Purveyors of commercial cards remain frustrated about why so many financial managers at businesses and government agencies still prefer paper payments to electronic ones. After all, electronic payments settle faster, and they enable firms to better track their spending, supporters of card-based payments contend.
  But the vast majority of business transactions, 97 cents per dollar, still are conducted with cash, checks and wire transfers, according to Visa USA. What has card issuers so eager to increase commercial card spending is the sheer magnitude of commercial transactions. Visa estimates U.S. commercial spending in 2006 was $17.4 trillion compared with U.S. consumer spending of $7.2 trillion last year.
  "What amazes me is you still have many companies that see paper as the number-one opportunity to control costs," says Tom Tierney, senior vice president of U.S. commercial card sales at American Express Co.
  At first glance, a raft of recent studies about the payment attitudes and habits of business financial managers seem contradictory. On one hand, they show a level of reluctance to abandon entrenched noncard payment methods. On the other, a growing number of survey respondents recognize inefficiencies in their corporate payment behaviors and express plans to improve payment speed and information gathering with payment cards.
  Those plans represent a huge growth opportunity for issuers that can market the right products and services to distinct types of companies, experts say.
  Finance executives and comptrollers surveyed in December for a report recently issued by AmEx seem to prefer purchase orders and checks to cards for controlling spending and gathering information on spending activity.
  Respondents were asked whether they considered effective each of four methods to pay for business expenses: purchase orders and checks, corporate cards paid directly by the company, corporate card transactions billed to employees then reimbursed by the company, and employee use of personal credit cards for business expenses that are then reimbursed by the company. Respondents could cite more than one method as effective.
  In controlling total spending, purchase orders and checks were considered effective by 89% of respondents, and corporate cards billed directly to companies were considered effective by 40% of respondents. Reimbursement for employee corporate card use was considered effective by 40% of respondents, and reimbursement of employees' personal credit cards was considered effective by 27%.
  As an effective way to gather information on spending activity, 88% cited payments by purchase orders or company checks, while 84% cited corporate cards paid centrally by their companies. Additionally, 67% cited corporate card use in which employees are billed then reimbursed by their companies, and 19% cited employee use of personal credit cards followed by company reimbursement.
  Corporate cards fared better when respondents were asked which payment methods are an effective way for employees to purchase what they need: 85% cited corporate cards paid directly by the company, 74% corporate cards with company reimbursement, 70% purchase orders or company checks, and 68% employees' personal credit cards.
  But other studies suggest that attitudes about the value of commercial cards may be changing.
  Visa International released a report in March that found that 67% of financial executives and treasury managers in the U.S. and Europe plan to increase use of payment cards at their businesses within the next 18 months. Seventy-five percent of respondents said the most-important function of electronic payment methods is the ability to make a company's spending data easier to access.
  On the small-business front, an October report by TowerGroup, a research firm owned by MasterCard Inc., found that only one in three small businesses use commercial credit cards. But TowerGroup sees more small businesses increasing their use of commercial cards and projects that momentum will increase in the next few years.
  TowerGroup says U.S. spending by small-business owners on business cards in 2004 was $109 billion. Spending for small-business expenses on personal credit cards that year was $76 billion. In 2006, small-business spending on personal credit cards had only climbed to $86 billion, while spending on business cards was $168 billion.
  By 2009, TowerGroup projects small-business spending on personal credit cards to increase to $108 billion and spending on business cards to reach $320 billion.
  QUICKER, EASIER
  Quicker, easier access to spending information is the lure issuers and networks hope will draw more business payments from paper to plastic.
  "On a global basis, [financial managers] want to have control over all their employees," says Steve Abrams, MasterCard global commercial product group executive.
  Card networks and issuers also are working to link card transactions more conveniently into the software companies use to order products, manage inventory and balance budgets.
  Electronic invoice presentment and payment systems offered by card networks and third parties for business-to-business payments have been around for about five years. Yet many companies have been reluctant to abandon their familiar paper invoicing and payment systems for electronic methods they may not understand, says Christine Levine, an AmEx spokesperson.
  "They have been looking for not only a big company to offer services, but they want support throughout the process," she says.
  In March, for example, AmEx introduced a new product that it hopes will drive more B2B payments to purchasing cards from paper checks and invoices. AmEx's S2S eInvoice&Pay system allows companies to process all of their invoices and issue payments to suppliers through a single online process that AmEx manages. The system enables payments routed from one company's bank to another through the automated clearinghouse system or on AmEx purchasing cards.
  ACH and wire transfers long have been used by companies for large, international payments for recurring orders such as those between factories and suppliers. But card payments more likely are used for smaller purchases, such as personal computers and office supplies, that may occur by phone, over the Internet or at the point of sale, Levine says.
  Employees and managers often are reluctant to change payment and invoicing processes they have used for decades. So AmEx offers not just initial technical service to help companies connect existing automated ordering software to S2S, but it also provides customer-service support to troubleshoot after S2S is put in use, Levine says.
  Visa and MasterCard similarly plan to continue to beef up the functionalities of their payment cards and the invoicing and expense-management systems linked to their payment networks.
  B2B 'NIRVANA'
  Darren Parslow, Visa senior vice president of commercial solutions, says the prospect of driving more B2B payments is "Nirvana" for Visa's bank partners and for Visa's competitors given the number and size of transactions to be converted to card payments.
  But even change that eventually could increase convenience and efficiency is not always easy. "Where you have the biggest challenge is in complex payments on the large-business side, where you have existing processes in place between different departments in a company," Parslow says. "The more processes you have to change, the harder it is to change them."
  On the small-business side, Parslow says, the hurdle to overcome is simply to help decision-makers better understand the benefits of card payments.
  Easy is as important as sophisticated, particularly for small-business owners who may be intimidated by new technology. In those cases, observers say, issuers should stress the simplicity and convenience of commercial card payments and related data management programs.
  Issuers, for example, should show small-business owners how they can block inappropriate spending and keep better track of transactions for internal analysis and tax reporting, says Brian Riley, TowerGroup senior analyst of bank cards. "Tell them they can put in exceptions for expensive dinner receipts where the city is not New York, Los Angeles or Chicago," he says. "And they don't have to use 56 Franciscan monks to figure out expenses at the end of the year."
  'TIME IS MONEY'
  And repeat the old "time-is-money" mantra. A 2005 purchasing card benchmark study by Mahendra Gupta of Washington University and Richard Palmer of Eastern Illinois University found that the average administrative cost to businesses and organizations of paying for goods and services using traditional purchase orders and processes was around $89. The average cost of paying for the same goods and services with purchasing cards was around $22, a savings of $67 per transaction.
  "Sixty-three percent of respondents said if the [purchasing] card went away, they would have to hire more accounts-payable personnel," Palmer says.
  Industry experts say payment cards also help businesses analyze costs of vendor supplies and services. And that helps them negotiate better deals with vendors and to require or motivate employees to use certain vendors but not others: Hilton instead of Sheraton, or Staples instead of Office Max, for example, they say.
  SPEEDIER PROCESS
  Electronic ordering, payment and reconciliation systems can speed up transactions and deliveries compared with paper invoices and checks or money orders sent through the mail. The systems also can help companies ensure volume-based discounts and rewards do not fall through the cracks when they are linked to issuing banks' expense-management products, says Frank Dombroski, vice president of commercial card solutions at JPMorgan Chase & Co.
  Chase's Discount Manager program, for example, keeps track of when orders are placed and when they arrive. Purchasers can use the system to set up agreements with suppliers to give smaller or larger discounts on orders based on how quickly they arrive, Dombroski adds.
  Issuers should remember to communicate even the most obvious benefits of commercial cards to potential and existing customers and to keep in mind that the needs of even small-business owners are different from those of consumers, Riley says.
  For example, one way issuers can differ their commercial credit cards from consumer cards is in the timing of billing cycles. The timing should vary by industry and the intended uses of cards. Riley says.
  A 30-day billing cycle may be fine for a travel-and-entertainment card. But an industrial manufacturer likely would appreciate a 90-day billing cycle that takes into account the longer stretch between buying supplies and delivering goods to customers. And a new medical practice by a recent medical-school graduate presents different payment needs and risks from a restaurant or liquor store, Riley says.
  Issuers should balance their risk with the chance to provide the breathing room businesses need with appropriate credit limits and the right amount of time between card spending and billing due dates, Riley says. "You want to keep the billing cycle tight so the money doesn't get diverted elsewhere, and you want to get paid," Riley says.
  Chase long has balanced the risks of both individual corporate and small-business customers and of investing in the right mix of new and old products to serve their preferred payment methods. Like many issuers, Chase manages a variety of business-payment tools, from paper checks to payment cards, and plans to ramp down old payment offerings as new ones take over.
  Commercial card networks and issuers say it is worth their efforts to keep marketing what they consider the superiority of cards over paper for a greater portion of business payments. And they say it is worth their efforts to build better card functionality and related data-management tools to be prepared for expected commercial card growth.
  As Dombroski says, "If we don't do it, somebody else will."
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