The Innovative World of B2B Payments

  Commercial card issuers and processors are offering new products and services, many Web-based, to exploit transaction data that can be gathered with cards. But are they enough to capture more payment share?
  It's enough to make a credit card executive cry. There were 9.1 billion business-to-business payments worth $31.3 trillion in 2001 and about 90% of the transactions were done by check and cash, according to Celent Communications. That's trillion with a 'T' and billion with a 'B'.
  The silver lining to those numbers is that the opportunity for plastic is there. And the card business is building the infrastructure to make important inroads into the market.
  Cards come with that low-tech but still useful magnetic stripe that stores and generates all kinds of information about the transaction. That has more purchasing managers shifting to cards because transaction data can be automatically gathered and manipulated, thus reducing labor-intensive paper handling.
  Celent estimates that purchasing card, or P-card, sales could reach $190 billion by 2006, up from $104 billion this year for a compound annual growth rate of more than 22%.
  Because of their growth potential, including their ability to capture ever-larger transactions through new venues such as the Web, P-cards are the current hot item in the world of commercial cards. The sector also includes travel-and-entertainment, fleet and business cards, the latter aimed at small businesses. T&E card growth rates have suffered in the past few years because of the downturn in travel caused by the weak economy and Sept. 11.
  A survey this year of 579 companies using P-cards found that monthly transactions per-card rose from 3.75 to 5.21 from 2001 to 2003. During that time, the employees issued P-cards rose from 6.2% of all employees to 11%.
  The "2003 Purchasing Card Benchmark Survey" from RPMG Research Corp. found company spending on the cards nearly tripled in that two-year span. On average, the companies spent $1.6 million per month through their P-card programs in 2003, up 153% from $633,000 in 2001.
  With that kind of growth, some in the card industry are expanding their business-to-business development and marketing efforts. MasterCard International has been especially aggressive in rolling out new commercial card products and services for businesses.
  "Cards can reduce paper invoices, cut the use of checks, and capture data," says Steve Abrams, MasterCard's senior vice president, corporate payment solutions.
  This April, MasterCard launched its e-P3 corporate purchasing card that takes advantage of MasterCard's powerful data-gathering and routing capabilities. In a major one-two punch, the Purchase, N.Y.-based association aligned with top processor First Data Corp. to offer e-P3 through its newly created affiliate, Velosant.
  If e-P3 succeeds, it could reflect the changes in the purchasing card market. P-cards began as a tool for small purchases to cut the use of cash and checks. MasterCard is betting that e-P3 will make P-cards one part of a single data-gathering and data-mining system that automates corporate purchasing, accounting and payments.
  American Express Co. also has stepped up the data-manipulation capabilities that it offers to clients with its Work channel for commercial card customers.
  Visa USA, meanwhile, has chosen to stand behind its member banks as they market their own commercial card systems to business customers. Visa already has a prominent spot in the market as U.S. Bank, the U.S. Bancorp subsidiary, carries the Visa brand and led the bank commercial card market in 2002 with $15.2 billion in charge volume, according to Thomson Media's 2004 Card Industry Directory.
  More Demands
  MasterCard, Visa and AmEx compete fiercely in the P-card arena. By charge volume, Visa held a 40% market share, MasterCard, 32%, and AmEx, 28%, in 2001, according to Celent.
  Corporations are demanding a wealth of information from each transaction that they can then store and manipulate. This storehouse of data, called Level III, includes the date, supplier, amount, sales tax, order number, employee name, sample number, item product code, description, unit of measure and price.
  That puts cards at the core of the new purchasing models. The Level III information can be moved quickly to an online data repository, manipulated to track spending and disseminate invoices, and used by staff for reconciliation of expenses. Beyond those nuts-and-bolts, companies can mine the data for all manner of information that can lead to cost savings, discounts from suppliers and fraud reduction.
  Not too shabby for a piece of plastic. But even though card executives have talked about Level III data for years, only 35% of P-card transactions carry all that information, according to Celent.
  But that's just the point, argue proponents like MasterCard. These new offerings will help P-cards replicate all the data found in traditional paper invoices and help companies do more thorough jobs in tracking and manipulating purchase information.
  Another driver of commercial card use is the federal government's SmartPay card program begun five years ago. In fiscal 2002, SmartPay generated nearly $21 billion in transaction volume, and the P-card program alone had nearly 400,000 cardholders (box, page 39). Because of its sheer size, the government program could bring more companies on board the card train.
  AmEx Dominance
  American Express helped to create travel-and-entertainment cards and it still dominates that market. American Express claims its corporate cards do six times the annual charge volume of its nearest competitor.
  Most commercial card transactions fit the 80/20 rule, says AmEx's Mac Schuessler, vice president and general manager, corporate purchasing solutions. "They account for 20% of the dollars spent, but 80% of the transactions," says Schuessler.
  The average per-transaction cost with traditional, manual handling of checks and invoices is $91, according to RPMG. That drops to about $22 with a P-card.
  And using a card cuts the time that staff waits for an item. Using the purchase-order-and-check method, it took 11.2 days from start to item delivery. It took only 2.9 days when a P-card was used, according to RPMG.
  For issuers, the shift to replace corporate paper-based systems with plastic is similar to the move on the consumer side to debit cards from checks. In both cases, banks see lower processing costs while generating interchange revenue.
  "We like the (corporate card) business because it's a volume gain," says Rich Meliska, vice president at J.P. Morgan Chase & Co. "It doesn't cost a lot more to process 1 million (card transactions) than 100,000. It costs us more to process more checks."
  That interest from its members has kept MasterCard on its toes.
  The $31 trillion figure is what experts estimate the B2B market may be worth, but MasterCard's Abrams recognizes much of that may never be done with cards. Payments through the automated clearing house accounted for about one-third of the $31 trillion and cards less than 1%, Celent says.
  But Abrams contends that card volume could grow to 20% to 30% of the market value. "Business card is increasing though (volume is) still small," he says. "It's been growing greater than the consumer side since 1994."
  Evolving
  Cards are evolving to fit corporate needs just as accounting and human-resources departments evolved during the 1990s. Changes occurred as Ariba Inc. developed electronic procurement software to automate those departments. Soon, software developers like Oracle Corp., PeopleSoft Inc. and Germany's SAP AG were creating the next wave, with a primary focus on using the Web.
  In 2000, MasterCard offered Smart Data Online (SDOL), a Web-based reporting system that it designed and developed. SDOL supports all of MasterCard's fleet, T&E and P-cards.
  "We capture transactions daily and the information goes to our global data repository" in suburban St. Louis, says Abrams. "The purchasing manager can see and download (the data) in 24 to 48 hours after (the) transaction." And the information is available in 12 languages and virtually every currency.
  This fall, MasterCard will roll out SD Express, SDOL's next-generation system designed for firms with revenues under $10 million.
  Data mining is top of mind when designing these systems, says Abrams. Consumer card issuers are already very sophisticated users of cardholder information, now it's time for the commercial card side to catch up, he says.
  MasterCard's e-P3 system is electronically linked with purchase orders, invoices, receipts and other paperwork. The data from an e-P3 transaction reside at MasterCard's St. Louis facility.
  Both buyers (purchasing card holders) and card-accepting suppliers must be enrolled in e-P3 to take advantage of all its capabilities. Suppliers pay the interchange, which averages about 1.8% of the transaction price, according to MasterCard.
  In a typical e-P3 transaction, the payer's Enterprise Resource Planning (ERP) system transmits a purchase order electronically to an enrolled biller. The biller completes a Web form that electronically invoices the payer.
  Once the invoice is approved, it is paid with a MasterCard purchasing card or via MasterCard's Remote Payment and Presentment Service, an ACH-style system. The purchaser's system is also automatically updated with Level III data on the transaction.
  Linking the buyer and the seller through the MasterCard network bypasses the point-of-sale terminal used in a typical store purchase. Many terminals aren't capable of gathering and transmitting the Level III data, according to MasterCard.
  The card industry's commercial card push focuses primarily at replacing checks, much like its efforts in the consumer market. But other payment systems are in the B2B market. ACH transfers accounted for 13.2% of B2B transactions in 2001, Celent says.
  If e-P3 doesn't work out, MasterCard has a slew of other commercial card products. In the last 14 months, it has introduced payroll, incentive, flexible benefit, project, meeting, relocation, travel per-diem and supply-chain incentive cards.
  MasterCard's competitors are taking a less marketing-intensive approach.
  AmEx offers clients online procurement systems through interoperability agreements with Ariba, Oracle and SAP. Last year AmEx introduced the Work channel to provide expense-management tools. The Web host for Work is International Business Machines Corp.
  'Data-Gathering Machine'
  AmEx promotes Work as a Web-browser tool that handles expense reporting, purchasing card reconciliation and other management tasks. Relevant data are automatically inserted into online expense reports and purchase-reconciliation forms.
  "We're a data-gathering machine," says AmEx's Schuessler.
  Clients can assign codes to individual card transactions and track each for Level III data, says Schuessler. There is also space to track the ethnicity and gender of suppliers, data that are especially important for companies that do business with state and federal agencies.
  AmEx also offers numerous controls over card use. A company can limit for each cardholder the dollar amount per transaction, spending per month, suppliers that can be patronized and the amount that can be spent at each of them, and impose other controls.
  When employees spend at preferred suppliers, discount programs kick in, says Schuessler. A study from management consultant Accenture found companies saved an average of 11% when buying from preferred suppliers.
  While card programs can speed purchasing by cutting red tape, they often also mean more timely payments, another discount driver. It's common for suppliers to offer a 1% discount when the purchaser pays within 10 days, according to Gartner Research.
  AmEx won't discuss discount-rate specifics though Schuessler insists its fees are close to those charged by MasterCard and Visa acquirers. Like bank card acquirers, AmEx charges suppliers a discount rate and gives them a break on the fee, depending on the amount of information they provide for transactions, says Schuessler.
  Laid-Back Approach
  Visa is taking a laid-back approach compared to MasterCard's gung-ho B2B attitude. Visa doesn't develop its own software and hasn't made a marketing push to assure everyone it's a player in the B2B space.
  San Francisco-based Visa contends that such an expenditure doesn't make sense when many companies already have invested in electronic invoicing systems, either by creating their own software or buying it from their bank, says Dave Costa, vice president, commercial solutions.
  "We offer products through a financial institution. We don't develop EIPP (electronic invoice payment and presentment) software," says Costa. "Our sweet spot is payments."
  For its part, Visa offers Level III information, works with Oracle and PeopleSoft to assure system compatibility and offers best-practices guides for P-cards. Otherwise, Visa believes the commercial card market will grow faster if it sticks to routing and settling payments while banks and software companies develop the best products.
  Minneapolis-based U.S. Bank won't argue with that. "We provide a better system by building it ourselves," says Chad Wilkins, senior vice president of relationship management.
  The associations best contribute by gathering and standardizing data for their members, says Wilkins.
  Visa launched Visa Commerce in 2002 for the electronic processing of transactions of up to $10 million directly between suppliers and buyers. Visa says it has tested the Visa Commerce service with U.S. Bank.
  One quiet but major P-card player is ProCard, Inc., a subsidiary of Total System Services Inc. (TSYS), the leading commercial card processor. ProCard markets its commercial cards and services to banks that stamp their own brand on the plastic. While the general public doesn't know its name, ProCard handled 74 million transactions in 2002 and its commercial cards are used by 20% of the Fortune 500. Clients include Bank One Corp., Bank of America and U.S. Bank.
  Information Access
  Along with providing cards and processing, ProCard offers database management, electronic expense-report automation, electronic bill presentment and payment and Level III data. Though a part of TSYS, ProCard works with all card processors.
  ProCard takes the card transaction data, puts them in a database, and uploads that to the Web site of a bank client, where the bank's corporate clients access the information, says Bruce Baude, president and chief executive of the Golden, Colo.-based firm.
  "We integrate and host the (card) statement-delivery product and the Web-services module from the bank. It looks like one service customized from the bank," says Baude.
  For its EIPP service, ProCard uses electronic reports from both TSYS and First Data to offer clients statements, administrative reports and analysis, says Baude. He says that electronic billing services will become a standard part of commercial card packages offered by outsourcers like ProCard.
  The industry is offering businesses a choice in programs from soup-to-nuts, full service to a nearly bare-bones, do-it-yourself style. This variety should help keep the burgeoning commercial card market growing.