SmartPay Program Gears up For Another 10-Year Run

  For the past 10 years, the General Services Administration's SmartPay program has represented the world's largest contract for purchasing, fleet, travel and combination cards. The program in 2006 generated more than $26 billion in sales and racked up more than 98 million in interchange-generating transactions.
  The next generation of the 10-year program, called SmartPay2, is just beginning. Four banks-Citigroup Inc., GE Capital Financial, JPMorgan Chase & Co. and U.S. Bancorp-won the opportunity in July to bid on more than 350 agency contracts. SmartPay2 officially begins in November 2008, but the agencies are gearing up now to develop task orders, or requests for proposal, which will give the banks the chance to tout their wares to meet those requirements.
  "We believe the SmartPay2 contract is the most comprehensive contract on the planet," says David J. Shea, director of the office of charge card management with the administration's federal acquisition service.
  Industry insiders say SmartPay's first round over the past decade revolutionized how corporate purchasing cards are offered and managed. The administration's new contract asks for even more innovations, such as providing stored-value and even contactless cards.
  "The government has been the industry leader in commercial cards," says Doug Ichiuji, U.S. Bank senior vice president. "They are the best-practice example because they have the largest program in the world and because of the complex systems they've required us to build."
  Now the four banks have to put their pitches together for each of the agencies, which range from huge contracts to very small ones that might require only a few cards. The larger programs clearly are the most profitable, says Nancy Atkinson, senior analyst with Boston-based Aite Group.
  "With the points of competition between the four banks, it becomes more of an art than a science," she says. "They're facing trying to build services that will be common enough to reach a broad base of the agencies but must meet certain needs of key agencies to win a significant volume of the business."
  The banks and analysts say a few agencies are expected to begin issuing task orders to the four banks as early as next month. Under the SmartPay2 contract, issuers will return some of their interchange revenue from card transactions to the agencies in the form of rebates, the amount of which could be a potential competitive factor in the bidding. In 2006, agencies had received $156 million in SmartPay rebates.
  "We're basically giving banks a hunting license to pursue business with individual agencies," says Shea. "You'll see the banks essentially bid on the refunds/rebates that they are willing to pay to pursue that business. The banks look at the potential transaction-volume revenue and see what they can provide based on that activity."
  Indeed, with new agency contracts up for grabs and new deals offered for existing business, the SmartPay2 banks will have stiff competition for the government business and face a long road ahead to fulfill those contracts.
  All new programs must be in place by November 2008.
  "We are moving rather aggressively to get agencies ready for the transition with 'boot-camp' training classes, by helping them develop communication plans to cardholders and management, and helping them with technology and security considerations," Shea says.
  The SmartPay2 contract seeks to provide federal agencies with commercial cards for use by government employees to pay for goods and services, travel and transportation, or a combination of all three. An agency, for example, could use a travel or fleet card to get staff members or government vehicles to the location of a natural disaster. Or a government office could use a SmartPay purchasing card to buy paper clips or other supplies.
  To support these activities, SmartPay and SmartPay 2 asked bidders to supply program-management tools to track spending and card usage. Specifically for SmartPay2, the government is asking for "strategic sourcing," which allows the agencies to leverage supplier relationships to get the best deals on goods and services across the agency, instead of having separate deals in different places within an organization.
  While the government does not pay the banks fees for contract services, banks that provide such programs can rack up millions of transactions for which they earn precious interchange fees from merchants.
  But even with rebates, banks stand to gain substantial footing with the government business. Indeed, issuers that have the wherewithal to make the investment stand to gain huge dividends from winning large portions of the contracts, such as those for the Department of Defense or the Department of Justice.
  TWO DROP OUT
  Though the government awarded five banks contracts for the original SmartPay program, two dropped out of the SmartPay2 bidding: Bank of America Corp. and Mellon Financial Corp., now Bank of New York Mellon. Some industry analysts suspect those institutions determined the cost of participating was greater than the potential for profits.
  BofA has stated that "the economics of the contract [were] not viable" for the company. Mellon Bank did not respond to a request for comment.
  The participating banks say providing services for SmartPay2 contracts is no small task. "There is a tremendous investment to be made on behalf of any issuer that wants to be in this space, and they have to think long and hard about that commitment," says Stephen Kouns, Chase vice president of federal card solutions.
  The departures of BofA and Mellon open up new opportunities for the four awarded banks to win agency contracts. The General Services Administration's Shea says some big contracts are up for grabs, including the Department of Defense's travel card and cards for the Department of Agriculture, both of which BofA previously serviced. Shea did not disclose the number of cards for each agency.
  While in the original SmartPay program the best deals offered were based primarily on interchange rebates offered to agencies, observers say other factors also are taken into account under SmartPay2. Customer service and the ability to support new technologies, such as contactless, are expected to be major considerations for the new contracts, they say.
  "The agencies are smarter this time," says U.S. Bank's Ichiuji. "They are looking for the best value, such as technology and customer service, not just high rebates. There's only enough money banks can share with the agencies."
  Chase's Kouns agrees that pricing will be competitive and that the difference between contracts likely will be specialized services.
  Those services likely will include providing equal access to technology for employees who are hearing- or sight-impaired, as well as contactless cards, which the GSA says were included because they are becoming more prevalent in the payments market. On the top of the list, participants say, is the strategic sourcing capabilities and more transaction control to manage card usage.
  All the banks offer tracking and management tools from both Visa USA and MasterCard Worldwide.
  Visa's Web-based IntelliLink product is designed to help agencies find cost savings and detect card misuse by tracking and analyzing transaction data and building usage rules to protect against misuse, says Mike Smith, Visa vice president of commercial sales.
  MasterCard's Enhanced Merchant Reporting product reports how and where purchasing cards are being used and produces summary and spending-information reports. MasterCard also offers its Expert Monitoring System, which supports strategic sourcing, mines card data for better program management, and helps prevent and identify card misuse.
  The banks also will offer their own specialized services.
  U.S. Bank, for example, has a product called AccessOnline, which it developed for the first SmartPay and will advance into the new SmartPay2 contract. The product allows an agency manager to go online and see where cards are being used. It also gives the manager the option to place restrictions on specific cards by category, such as how the cardholder can spend, says Ichiuji.
  The Department of Defense also uses a U.S. Bank tool called PowerTrack, which is a Web-based invoicing and payment system.
  Chase offers ExacTrac, a settlement system that allows agencies to do electronic invoicing and payments.
  GE Capital and Citibank did not comment for this article.
  Over the next few months, the four banks will tout their wares in hopes of securing contracts that could be worth billions. How much of that revenue they are willing to share and the extent they are able to offer specialized services could make or break their deals.
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