P-cards begin to fulfill promise
World-class buying operations re-engineer the procure-to-pay process to improve efficiency
By Susan Avery -- Purchasing, 4/7/2005 2:00:00 AM
Purchasing cards are starting to reach their full potential. Introduced 20 years ago as a payment tool for low-dollar indirect goods and services—mainly MRO and office supplies—requisitioned by employees, purchasing cards in the hands of program administrators at best-in-class companies now are being used to settle an increasing number of transactions passing through e-procurement and ERP (enterprise resource planning) systems.
As such, the cards are proving to be more powerful than ever. Best-in-class companies have reengineered the procurement-to-payment process, making it more efficient. They've eliminated steps and, in some cases, the need for human intervention. Costs related to the process are down too. In other words, they are finally cutting fewer paper checks. More than satisfied with these results, purchasing card program managers are finding new uses for the cards, pushing the card associations and issuers to extend programs to include high-ticket goods and services and/or users at locations beyond the borders of North America.
Integrating cards
"Without integration into a company's back-end financial systems, purchasing cards are just not successful," says Patricia Loria, vice president of large markets at MasterCard International. "When we first launched the cards in 1993, we saw them as a simple payment vehicle. It wasn't until we started to think of the cards as part of the re-engineering of the procurement-to-payment cycle that there was any real traction."
Cost savings figures quoted by industry associations are often dependent upon integrating the cards into the financial supply chain, says Loria. "Unless your organization is doing that, you're missing a lot of value."
As such, purchasing card program managers tell Loria that they need Level III data, or line-item detail, with their transactions. "This is the kind of information that purchasers are used to receiving from reports generated by corporate or T&E cards. They are looking for this next generation of data to further enable their negotiations with suppliers. As these buying systems that we're linking with become more technically sophisticated, our customers increasingly are looking for us to stay on top of the trends and make sure we're integrating purchasing cards as far forward in the process as we can. They don't want to simply link to the system after the transaction is conducted and hope that the merchant sends information."
To meet these needs, MasterCard has developed a number of products that integrate purchasing cards with e-procurement and back-end financial systems. Chief among them are a global data repository, e-P3 (Electronic Invoice Presentment and Payment) information management system and SmartLink software and SmartData Online.
For the global data repository, MasterCard collects a company's spend data—whether it's being serviced by one bank in the U.S. or multiple banks across the world—and puts it into a common format that can be integrated into back-end financial systems. The card association also supports custom file formats for companies that have built their own platforms; it provides 200 customers with such tools. Developers at MasterCard's technology organization in St. Louis work with banks and customers to build the files.
SmartData Online is an MIS (management information system) that also integrates into ERP systems; MasterCard and its issuing bank have the capability of providing standard or custom data feeds to these systems from SmartData.
e-P3 applications work with such MasterCard partners as Oracle to integrate the card into a company's financial supply chain. As such, the card is integrated into every step of the process, from setting up the invoice, to making a payment. SmartLink is a similar application developed for SAP. And through these products, customers can receive Level III data.
"With Level III data, which includes a customer code, companies can attach an expense to a code in an ERP system and funnel it through the global data repository so it links directly to the cost level that's appropriate by the time it gets to the AP system," says Loria.
And because MasterCard's e-P3 product is linked to the financial transaction through every step of the process, the card actually captures Level III data in a new way. Customers don't have to rely on suppliers sending data with the transaction which is what's been done since the associations and banks first started issuing cards. "We are able to increase the promise of purchasing cards to improve efficiency and reduce costs," says Loria. "It's really the way purchasing cards will be in the future."
Ghost cards
Figures released by the Federal Reserve in December show electronic payment transactions exceeding check payments for the first time. In 2003, e-payment transactions totaled 44.5 billion, compared to 36.7 billion checks. In three years, the volume of electronic payments increased 13.2%.
"There's still a lot of desire to automate the procure-to-pay process," says David Nelson, product manager for e-settlement at GE Corporate Payment Services, a developer of corporate bank cards and e-settlement tools. GE Capital Financial is an issuer of the MasterCard Corporate Purchasing Card.
To assist its clients, GE Corporate Payment Services offers an opportunity analysis exercise. It downloads files from the client's AP register and uses its supplier list to determine the companies that accept the MasterCard purchasing card product. Going through the exercise gives clients the metrics they need to drive transaction volume from checks and increase efficiency in the back office. GE then works with clients to develop a communication plan that educates suppliers of the benefits of using the card. One is that suppliers will be paid quicker, within 24 to 48 hours, as opposed to 60 or 90 days.
Nelson points to the procure-to-pay best practice of the use of "ghost cards," which provide companies additional controls over the use of purchasing cards. They are typically designated for use by a single department or with a single supplier, usually have large spending limits and allow purchasing card program managers to track and reconcile activity on the account without putting plastic in the hands of every single buyer in the organization.
GE issues ghost cards to its clients who use its vPayment electronic settlement tool. vPayment consists of back-end processes attached to the purchasing card that use patented technology to extract a unique identifier out of a procurement system without anyone having to enter it.
"Cost per transaction is extremely low with a purchasing card compared to a check," says Nelson. "With vPayment it's even lower because we've eliminated the need for someone to allocate and check the accounting." vPayment can be integrated with a procurement or AP system. Procurement software house Ariba recently announced that it has integrated the vPayment electronic settlement tool as a payment option in its Procurement Solution Supplier Network. And e-procurement solution provider SciQuest made a similar move last spring when it integrated vPayment with its procurement automation solution. vPayment also is available on demand.
"The three most important things about vPayment are control, control, control," says Nelson. "A fourth is data." Control over use of the cards works like this: For each customer using the MasterCard purchasing card with the vPayment settlement tool, GE has created a set of ghost cards and places them in a pool. Each set has a predetermined number of cards. The pool works like a library. When a client makes a payment with the card, a request goes to the vPayment system which pulls a card from the pool (or library). GE establishes a preauthorization for an amount specified by the client. If the supplier attempts to go beyond the spending limit, the card will be declined. The supplier, however, can use the card for spending amounts lower than the preauthorized limit; this can help fulfill orders in partial shipments. Once the preauthorization amount is used up, GE returns the card to the pool.
In the preauthorization process, GE establishes fields that can be assigned up front for particular transactions. Through the process, the data is saved in a file and settlement record that's sent to the client's reporting system. The process requires no human intervention. With purchasing card payment, typically a user has to allocate the transaction to a particular general ledger account. GE customers have used the vPayment tool for more than $1 billion in transactions in 2004. Fifty customers use the tool.
E-procurement systems
At American Express, Michael Fiore, director of global initiatives and alliances, works directly with customers who are using the company's purchasing card product with their e-procurement system. He also works with software companies that are partnering with American Express.
"The technology has come of age," he says. "Since 1999, we've seen growth of 3,600% in this space, and it continues. Clients are putting more of their spend through e-procurement systems and paying with purchasing cards." The 3,600% figure now represents 14% of American Express' global purchasing card volume.
As with MasterCard, Fiore finds that American Express' larger customers are asking for tighter integration between the cards and their e-procurement systems. "They want to automate the entire process, from the time requisitioners place an order until the time they reconcile and settle the transactions." [See accompanying sidebar.]
Much of American Express' growth in purchasing cards is from client use of ghost cards with e-procurement systems. Requisitioners place an order with a supplier with whom their company has a ghost card. The supplier charges the order to the ghost card and then uses American Express' electronic files to integrate with e-procurement systems to close out reconciliation. A ghost card is an account dedicated to a department or company so that the supplier knows that any order that originates with that department or company will be put on the card. It helps clients with reporting; they can pull information from the account to view charges with that particular supplier.
For American Express purchasing card clients that use e-procurement systems from Ariba, the two companies have created Ariba Processing Plus. The product integrates settlement functionality—the supplier doesn't have to go offline to use a point of sale device to process a transaction—into the Ariba network. The supplier uses the same tool to receive the order and to settle the materials he's shipping. This benefits both the buyer and supplier, helping to further streamline the acquisition process.
Many of these customers are starting to look to pay for higher ticket items with the cards. "We are finding and continue to see that the better the integration, the more clients are considering using the cards to pay for "nontraditional" goods and sources," says Fiore. "It differs by client. But as long as the value and the integration is there and tight, it opens the door to nontraditional types of spending. "
Clients also are looking for better integration for purchasing cards into their ERP system, says Fiore. "They don't want to simply input purchasing card data in the systems, they want to use the card as a method of settlement or payment for the goods going through an inventory ERP system. Control is an issue. Typically there's more risk in commodities purchased through an ERP system."
In November, American Express introduced a spend analytics workbench that runs on technology built by Ketera Technologies. The workbench identifies spend data which is put into a tool American Express provides to the client. Working together, the two are able to analyze the data and identify sourcing opportunities. The workbench provides a holistic view of a company's spend; it's not just for spend through e-procurement systems.
"The value of purchasing cards is still very strong," says Fiore. "Even outside the electronic environment the industry will continue to grow. It's a severely untapped area. Growth is being driven by larger companies that invest in these platforms. There are still many companies out there that still use the purchasing card in its basic form."
Best practices
About one year ago, Visa introduced a Commercial Consumption Expenditure (CCE) Index, a tool that uses government spending data to monitor and analyze trends in business-to-business payments. Similar to the Personal Consumer Expenditure Index, Visa uses the tool to help its member banks develop programs for their customers. For 2004, the CCE shows that business-to-business spending was $14.5 trillion. Only about 2% of this figure is settled using electronic payment. As Visa sees it, this shows that a significant opportunity exists for companies to increase efficiency and reduce costs in the procurement to payment process.
Replacing checks with purchasing cards is one way companies can do this. What's more, with a well thought-out purchasing cards program, they can also receive regular reports on employee spending habits, data that helps in future negotiations with key suppliers.
"The potential for growth in purchasing cards is tremendous," says Janet Zablock, vice president of commercial solutions, Visa USA. "Part of it is that companies have invested heavily in implementing ERP or e-procurement solutions and maybe haven't seen the return on that investment they were expecting. They're looking at how to get more value out of their investment and make it even more efficient." From her vantage point, Zablock sees increased demand from Visa's purchasing card customers for integration with ERP systems from such companies as SAP, Oracle and PeopleSoft.
To help purchasing operations become more efficient at procure-to-pay, Visa has developed 60 best practices, or recommendations, on ways companies can improve the process, using its products. It could be by integrating data into an e-procurement system, establishing more stringent policies for commercial card usage or ensuring that all suppliers that can be paid with a purchasing card are paid with the card.
"We try to provide solutions that work the way companies want to pay for goods and services, integrating within the systems they have or are considering implementing," says Zablock. "Our goal is to standardize the data flow, integrating data into the applications while working on front-end options where users select our commercial or purchasing card products as payment tool from their ERP or AP application."
Roughly one million suppliers that accept Visa purchasing cards provide their customers with much coveted Level III data, or line-item detail. That's about 40% of the card association's $124 billion in commercial volume. To increase that figure, Visa has a dedicated team of five individuals that works with suppliers. "We hear from customers that data from these particular purchases is important to them," says Zablock. The association provides clients with AP Analysis that shows how to make the process more efficient. The consulting service takes a holistic view of the process, looking at both the merchant and client sides to ensure a recommended solution works for the client. Visa is working with PeopleSoft, Oracle and SAP on products that enable requisitioners to initiate payment with a purchasing card from their companies' AP system.
Zablock says that as customers become more comfortable with the controls and reporting, they are more likely to start paying for higher tickets items with the cards. "Average transaction size has increased to $350," she says. A new large ticket program has a spending limit of $5,000 per transaction. At the same time, more midsized companies are adopting and embracing cards.
Purchasing squeezes more value from p-cards
08/15/2007P-cards: A big idea for small companies
11/15/2007Purchasing molds more powerful tools
06/02/2004Purchasing drives enhancements
02/05/2003
Now Playing: 
