A means of providing corporate customers with a streamlined and cost effective way of paying for expenses and settling business to business transactions, the use of commercial cards continues to grow globally. In this Business Briefing we look at the types of cards available to corporates today, as well as the importance of global card programmes to the treasury function. We also examine how the regulatory environment is shaping card usage.
The market today
As companies are becoming more global, and treasury functions are moving towards a centralised model, commercial cards have become an increasingly important tool for efficient cash management.
Commercial cards allow companies to move away from legacy, paper-based accounts payable (AP) processes, to realise the benefits of automating AP and to meet increasingly tough performance goals.
The shift towards electronic AP, as evidenced by the graph below, has been heavily influenced by the difficult economic environment, with corporates focusing on greater cost cutting, improved working capital management, and increased control and visibility.
Chart 1: Percentage shift to commercial payment cards from cheques and other payment methods
Source: Visa 2009 Cash Management Survey
Card programmes that leverage state-of-theart technology can help corporates to achieve significant, and indeed, almost immediate results in these key areas of focus.
Overview of card types
There are three main types of commercial card available today:
Corporate cards
Best known as travel and entertainment (T&E) cards, corporate cards are by no means a new offering; however, the technology behind them has improved significantly in recent years. “T&E is one of the most controllable corporate expenses, which can represent 1.5-3% of a company’s total revenue,” says Cate Luzio, Head of EMEA & Canada Commercial Card, J.P. Morgan. As such, companies are looking to reduce expenses, optimise their working capital and gain full visibility over expenditure via card programmes. By establishing a global card programme, company T&E expense data can be consolidated, currencies can also be consolidated, and revenue can be generated through cash rebates. T&E cards eliminate the need for advance cash flow and provide an easy to use, widely accepted payment method. Certain cards also carry executive privileges such as VIP travel services and insurance.
Purchasing cards
Corporate purchasing cards, or P-cards, have long been used for low-value purchases. Increasingly, P-cards are being recognised not just for their ease of use, but also for their ability to bring visibility and transparency to the low-value purchase-to-pay cycle. Detailed purchase information such as description of the product, quantity and price is now standard. This information can be used to see exactly what is spent and where improvements can be made. P-cards are more evolved in the UK, US, Canada and Australia today but the market continues to evolve globally and corporates demands for global P-cards are growing. Cards for single-use or limited use accounts (also known as virtual card accounts), already heavily used in the US, are also proving increasingly popular in Europe as a means of improving control and security around corporate spend.
Prepaid cards
A simple, pre-funded electronic disbursement solution, these cards can be issued by a company to its employees. Cardholders can use the card to purchase goods and services, make purchases online, pay bills or get instant access to their funds 24 hours a day. Prepaid corporate cash cards can provide many benefits including the elimination of costly cheque and cash issuance – cheques can be lost, stolen, delayed in the mail or reissued and it is a safer alternative to cash. These cards can also increase control and visibility of spend by providing a full audit trail, can give the cardholder immediate access to funds and can be used as an alternative T&E card, for infrequent travellers for example. While popular in the US, Europe is lagging in development here and prepaid cards remain more of a consumer product rather than a commercial product for the time being.
The need for a global card programme
Globalisation has driven multinational companies to centralise back office functions in order to realise visibility benefits, together with economies of scale and efficiencies in cash management. In order to achieve this vision of a unified global company, access to data is king. As such, companies have been investing in enterprise-wide finance systems, and are constantly seeking consistency in their global interfaces. A properly managed global card programme can deliver numerous benefits, including:
Improved reporting and data delivery.
Not only does richer data assist in identifying misuse of cards earlier, thereby enhancing control, access to consolidated spend data can help to drive strategic sourcing. Reporting can also be improved if the detailed data is then integrated into the general ledger.
Economies of scale.
By leveraging global rather than regional spend, companies can improve their purchasing power and negotiate better rates with vendors.
Reduced costs.
The amount of manual labour surrounding paper invoices for example is reduced by a card programme, as statements are received electronically. This presents opportunities for automated reconciliation, reducing administration costs and freeing up staff for more value-added tasks. The company’s global funding costs should also reduce with a tailored card programme as fraud risk is reduced, and spending limits can be more easily managed.
But, is consistency in card programmes across jurisdictions a possibility?
Industry challenges
According to Luzio, one of the major challenges in offering a global card programme is the impact of regulation on the way that issuers conduct business across markets.
In Europe, the Single Euro Payments Area (SEPA) and the EU Payment Services Directive (PSD) have introduced some hurdles for issuers, with much discussion around multi-lateral interchange fees (MIF) for intra-regional transactions. The MIF is a percentage fee which is paid per card transaction by the acquiring bank to the issuing bank. While these discussions have so far revolved around consumer transactions, commercial cards are likely to be affected in the medium-term.
The swathe of new regulation across Europe has also meant that card transactions in the region are now far more controlled than in other global markets, even more mature markets such as the US. According to Luzio, since the changes in regulation, clients with European card programmes and issuers alike have had to revisit paperwork surrounding card programmes to ensure compliance, which has introduced some hurdles to standardising the compliance requirements for global schemes. However, while SEPA and the PSD have presented challenges, as a result of these initiatives, the European arena has put in place a number of mechanisms around control, data privacy and protection, and fraud prevention. “Anything that helps towards protecting the client can only be a positive move,” says Luzio.
Another key challenge with multi-jurisdictional programmes is the pace of expansion, which is often rapid. Therefore, it is frequently difficult for key vendors and/or outsource partners to expand at the same rate as their customers and the card issuers themselves. This means that the acceptance rate for some cards may be lower in certain jurisdictions.
Interview
Commercial Cards
Cate Luzio
Head of EMEA/Canada Commercial Card & Global Alliance Banking
Why should commercial cards be a concern for treasury, not just the procurement function?
Over the past 24 months, treasurers have been working even harder at finding effective ways to maximise their working capital, and also to reduce their expenses. Given that T&E can represent up to 3% of a company’s revenue, the numbers here are significant.
As such, treasurers are looking at best practices around expenditure, how to optimise their cash flows, and how to remove the need to pre-fund expenses with cash allowances or cash flows. Managing this properly frees up cash that can be redeployed, providing additional liquidity for the corporate, enabling reinvestment of funds, to earn additional interest for example.
There’s also a revenue sharing angle here, because of the rebate opportunity. Traditionally in the US, rewards have been a big incentive for companies, especially in the middle market segment, but today, when there is a cash rebate on offer, the treasurer and the procurement manager have the opportunity to bring funds back to the company’s bottom line.
Global multinationals and large corporates tend to be more interested in a financial incentive rather than rewards. The broader card programmes can be, both in terms of geography and company scope, the increased rebate a company can earn.
Finally, treasurers and CFOs are now looking at the end-to-end value chain and commercial cards are a part of achieving a full end-to-end solution.
What are the major challenges in implementing a global card programme, from a client’s point of view?
Looking at the clients that we have helped with implementing a card programme to date, a successful programme really comes down to corporate policy and mandate. In many firms, in particular SMEs, employees still use personal cards for their expenses. Overcoming this legacy behaviour can certainly be a challenge, so the message really has to be ‘top down’; the treasurer, the procurement manager and the travel manager need to enforce use of the commercial cards, whilst explaining the reasons why.
With a global implementation, there are of course challenges across the different countries involved, such as securing buy-in, coping with varying local legislation, managing contracts and also harmonising the speed and ease of implementation. As such, it is very important that from an implementation perspective to have a global implementation manager.
This allows for end-to-end support for the process of implementation globally, so that there is a single point of contact for the client. Once the programme has been implemented, the provider’s consultative support should be ongoing, with the programme being reviewed as it matures. After the programme has reached a level of self-sufficiency, a global relationship manager should take on the role of global client liaison.
Which card innovations are clients most interested in today?
Aside from the international currency cards, single-use accounts (SUA) are becoming increasingly popular. An SUA is an application which generates single-use numbers (virtual account numbers) with enhanced controls for transactions when the cardholder is not present. Controls can be set for key factors such as the size of the transaction, merchant name and category, currency, location and even date and time. The main benefits of SUAs for clients include increased control, reduced fraud exposure, the ability to capture enhanced data and a paperless solution.
As the P-Card market is not terribly mature on a global level, clients are also interested in combining T&E and purchasing cards into a single multi-card solution. This solution helps to provide standardisation on a global level. Development of third-party or scheme data matching solutions can also help to reduce reliance on the card network and supplier capabilities to pass traditional P-Card data.
Using one platform for both T&E and P-Cards, firms can leverage a card solution that is consistent across borders for consolidation, rebate and leverage opportunities.
Internal challenges
Perhaps the biggest challenge for many companies is their ability to mandate participation in a T&E card programme across their business groups and geographies. For a variety of organisational and structural reasons, most companies currently have difficulty mandating firm-wide participation; as a result, adoption tends to be by business unit. In turn, this means that standardisation can be difficult to achieve on a global or even regional level.
“A thorough, detailed and carefully planned approach of selecting your provider is essential to maximise the chances of adoption across the company,” says Luzio. In order to minimise complexities, most multinational firms find that identifying one partner to manage the company’s card programme can deliver consistency and simplicity over the long-term. Companies should also look to a provider who can deliver what they require from a holistic treasury and finance point of view. But how can global cards be supported in local markets?
Industry solutions
Outside of self-issuance in local currency in every market and country, a popular cross-border card solution is the international currency card. Most frequently US dollar or euro-denominated, these cards recognise that clients do not always require local currency in the jurisdiction they are operating in. The main criterion is having a card that is accepted locally, and international currency cards are widely accepted throughout the Middle East and in Latin America for example, as well as countries such as Russia. As Luzio points out, “These cards are also useful in a country where the client may not feel comfortable working with a local issuer, perhaps because of political or economic instability in the region or they may prefer a consolidated global banking relationship, working with a single issuer. The client still needs a functioning card, access to data and reporting and the international currency card can fulfil that role.”
Conversely, some companies are seeking local currency cards to complete a global card programme. Swiss franc-denominated cards are becoming increasingly sought after as companies relocate their corporate or regional headquarters to Switzerland, for example. Global issuers therefore need to step outside of their comfort zones and address the needs of their clients. “It’s one thing to be global,” says Luzio, “but the key is to think and act local.”
Looking to the future
“The trend towards globalisation is widely expected to continue as a result of the focus on the reduction of back-office and operational costs,” says Luzio. In turn, this is expected to drive greater demand for consistent global procurement tools, including card programmes. Additional factors driving the popularity of card programmes going includes the proliferation of internet enabled devices (smartphones, PDAs etc), which will allow access to transaction data on the move and help companies to cater for a globally mobile cardholder population. Regulation, such as SEPA and the PSD, which is likely to offer enhanced security for the end-user, together with the expansion of chip and pin schemes globally, is also expected to drive corporate demand for card programmes going forward.
A successful card programme requires collaboration, not only within the company, but externally, with trading partners and banking partners. So, choosing the right global card provider is therefore a key task for corporates. To ensure the provider can meet global needs now and in the future, look for a provider who invests consistently in up-to-date products, leveraging the latest technology, who has a pipeline of proven products and can provide superior web-based management tools. Lastly, look for a provider who offers global support and coverage in all key economies.
J.P. Morgan
J.P. Morgan has a unique status in treasury and cash management. We are a full service provider offering traditional transactional capabilities, liquidity and investment management, and global trade services across the entire financial and physical supply chain.
We understand you select a banking partner based on a variety of individual requirements. Our continuing investment in quality treasury and supply chain solutions demonstrates our determination to help you succeed. Operating within a diverse financial environment requires practical answers on a global scale, but delivered with local expertise.
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