Commercial cards are used around the world but what sets some markets apart from others are differing levels of maturity and product sophistication. While the North American commercial cards’ market is the largest and most developed, there are some interesting variations in usage in different regions of the world. In this article we look at some of these differences and consider how the commercial cards’ market is likely to develop.

Types of card available

The term ‘commercial cards’ covers corporate credit cards, purchasing cards, pre.paid cards (including fuel cards/fleet cards) and commercial debit cards. There are literally thousands of variants of commercial card products in existence around the world, with new ones being introduced all the time.

Here is a brief look at the main types of commercial cards and the benefits they offer.

Corporate credit cards

Corporate credit/charge cards are commonplace in the world of business. They were the first commercial card product to be launched and are found in more markets than any other type of card.

Companies need to have a cost-effective means of tracking and controlling the business-related expenses of their employees. By issuing corporate charge cards to employees, in conjunction with a clear expenses policy, the companies which issue them are able to gain a good level of control over travel and entertainment (T&E) expenses. It is then easy to monitor the volume of T&E spend by individuals or departments, to ensure that company money is spent with suitable ‘partners’ and to monitor any abuse of the system.

The advantages for corporate clients are:

• Better ability to manage costs.

• Reduction in processing and administration costs.

• Greater transparency.

• Better data availability.

• Reduced risk of theft or fraud.

Purchasing cards

Purchasing cards (P-cards) have been around since the 1980s and are essentially a type of company charge card – one that is specifically used for the procurement of low value non travel-related goods and services. Typically these include things like equipment, materials and office supplies. They allow purchasing transactions to be done more cost effectively than traditional methods involving cheques and are particularly popular with government organisations. As with corporate credit cards, the principal driver for the entity issuing them to employees is cost savings resulting from the elimination of manual processes.

The US government is a major user of P-cards and in the UK Visa Europe’s Government Procurement Card (GPC Visa) has more than 1,700 programmes. According to Visa’s website GPC Visa “generated annual efficiency savings of £186m across the UK public sector” in 2009.

Prepaid commercial cards

Prepaid cards were originally introduced into the market as gift cards for consumers. These are cards which are pre-loaded with a fixed amount of credit. They can be disposable – ie used until the funds on the card are used up and then thrown away, or re-loadable – ie when the value on the card is running low it can be topped up and used again.

Other types of prepaid cards offered by banks and retailers include:

• Youth cards

  – which allow young people (and their parents) to monitor and control spending.

• Travel cards

  – a safer alternative to carrying cash.

• Gift cards

  – an alternative to cash or vouchers.

• Virtual cards

  – for online purchases or purchases by telephone/mail order.

While the use of these cards is still more prevalent in the consumer sector, their adoption by the commercial sector is expanding rapidly – their potential is enormous, particularly for governments, where they can be used to replace high cost, inefficient paper-based methods to distribute unemployment benefits, child support and disaster relief funds.

In the aftermath of the recent floods which devastated Pakistan the country’s identification agency, Nadra, worked with Visa and a local bank to issue over a million prepaid cards. These government-funded cards were each loaded with PKR 20,000 (about €166) and distributed to citizens of Pakistan whose lives had been severely impacted by the floods. The chairman of Nadra stated that “electronic payments are the future for aid disbursement.”

In the corporate arena, meanwhile, the range of applications includes salary payments for unbanked employees, incentive payments and expenses.

Commercial debit cards

Commercial debit cards (or business debit cards) are similar to personal debit cards, except that they are aimed at business users. They are linked to the deposit account of the business and are particularly popular with small businesses. They offer a convenient way for business users to pay bills, draw cash at ATMs and track business expenditure.

This is a category of commercial card which is growing strongly in some markets but has not taken hold in others. In the US less than 50% of small business current accounts have business debit cards.

What are the disadvantages?

While the growth of commercial card transaction volumes and types of usage in recent years have benefitted banks, corporates and individual users, not all parties involved in commercial card transactions appear to be happy with the arrangements. A common view among merchants is that the cost of accepting commercial card transactions is too high. The interchange on commercial cards is often set at a higher level than for consumer cards, which are already viewed by the merchant community as being too high. There are moves in some markets to pass legislation which would place limits on interchange fees.

Another problem, which particularly affects commercial debit cards, is fraud. Despite stronger security measures being implemented by card issuers, such as Chip and PIN, the problem of card fraud does not seem to be going away.

Global variations in commercial card use

In this section we look at some of the regional differences in commercial card usage:

North America

The North American (US/Canadian) commercial cards market is the most mature. In both countries a wide range of commercial card products is available. The US government and the Canadian government both make extensive use of these products. In the case of the US government, it first started using bank commercial card technology back in the 1980s in order to streamline the way goods and services were purchased and to reduce costs. Prepaid cards and debit cards have been growing at a healthy rate in both markets.

Europe

In Europe the UK commercial cards market is seen as the most developed. It has the second largest government card programme in the world, after the US. There is a wide range of products available, particularly corporate cards, centralised travel cards and fleet cards, and a large number of suppliers. Purchasing cards are growing in popularity. There is also likely to be growth in UK government use of prepaid cards, driven by the requirement to disburse benefits in the most efficient and cost-effective way. This is particularly important in view of the UK government’s need to cut the national deficit by all available means. The use of business debit cards in the UK is still limited and is seen as a growth area.

In continental Europe the picture is somewhat different. About two-thirds of companies in Europe use corporate cards but this only accounts for around 3% of total spend.

Many markets have sophisticated and relatively low cost electronic transfer systems. These are used to facilitate all types of payments and are extensively used by businesses. In Germany, for example, the payments’ market for both commercial and retail payments is highly efficient and automated. Payments using commercial cards have hitherto not played a major role.

The use of prepaid cards is growing in Europe. The governments of countries such as Italy and Romania are looking to use them for benefits disbursements. MasterCard research suggests that the value of the European ‘open loop’ prepaid card market will see an average annual increase of 26% between now and 2017. The same research also expects the rollout of prepaid cards by corporates to grow rapidly. Perhaps surprisingly the replacement of lunch vouchers with prepaid cards is expected to be a big factor in this growth.

Open loop/closed loop?

Open loop cards are cards that are branded by MasterCard, Visa or another network. They can be used anywhere that accepts the network brand. In contrast, closed loop cards are specific to a certain retailer or group of retailers.

Asia-Pacific

The Asia-Pacific region is very large and the development of the commercial cards sector differs widely from market to market. Australia, New Zealand, Hong Kong and Singapore have well-developed markets. The Australian government, for example, has an extensive card programme. Hong Kong and Singapore host the regional headquarters of many multinationals, which often have traditional corporate card programmes in place. Penetration is lower for other products.

An increasing level of activity in the commercial cards market is being seen right across the region but particularly in Japan, Taiwan, Malaysia and India. In South Korea business debit cards are growing in popularity. China and India are of course the two big markets in the region. Both present significant opportunities for growth but each has particular challenges which will need to be overcome:

• India has huge numbers of small and medium-sized businesses which deal largely in cash. A large percentage of its population is also unbanked. Issuers in India, mainly commercial banks, have been looking at overcoming the infrastructural issues and finding new ways to serve business enterprises. Purchasing cards are seeing growth, as are prepaid cards, which are increasingly popular in the form of payroll cards and travel cards.

• Like India, China remains a cash society. Most commercial payments are completed through interbank transfers but this still leaves a sizeable volume of payments for services such as travel which are paid for in cash. Foreign companies with a presence in China are driving the demand for a switch to commercial cards to make commercial payments. Given the vast size of the China market, growth is expected to be significant.

In both India and China, which have enormous government sectors, enabling government-to-business spend to be undertaken more efficiently is going to be a major area of focus for years to come.

Latin America

Brazil and Mexico are the two largest and most developed markets in Latin America, but in outright terms card usage remains low in comparison with more developed markets. Increasing volumes of electronic payments are, however, being seen in the region as business users move away from cash – Visa Inc. reported 15.6% growth in commercial cards payments volume in the Latin America/Caribbean region in 2009. Regional volumes are being boosted by greater use of commercial credit cards and prepaid commercial cards by both SMEs and the public sector. Merchant acceptance is also playing a role in this growth. In Brazil merchant acceptance grew at a very healthy 18.6% in 2009.

Other markets in the region are still at the nascent stage of development but countries such as Argentina and Chile have well-developed consumer cards markets which will pave the way for future growth in commercial cards.

Middle East and Africa

The Middle East is seen as an area with considerable potential for growth in the commercial cards business, particularly in Saudi Arabia and the UAE. Large numbers of foreign multinationals are present in these countries and there is a willingness among businesses in the region to embrace more efficient ways of handling commercial transactions.

In Africa, the principal market for commercial cards is South Africa, the continent’s most developed economy. Traditional corporate cards are the main product, but there is an expectation that the South African commercial cards market will grow.

Commercial cards – the future

According to Marcie Verdin, Group Head and SVP Global Commercial Products at MasterCard Worldwide, “Increasing numbers of companies around the world are beginning to see the benefits of shifting from paper-based to electronic payments so we expect growth to remain strong. Packaged Facts (a well-known US publisher of market studies on consumer products) estimates the commercial payments segment will grow 10.8% over the next five years. There are various levels of market maturity around the world and the opportunities will vary depending on the country.

“In terms of product development, historically mature regions, including the US, Canada and the UK have driven most of the innovations, with emerging markets later adopting some of the solutions. What we are seeing now is that financial institutions in emerging markets are seeking tailored solutions that address local nuances rather than simply adapt existing offerings from others countries.”

Beyond plastic

Morten Kolind, Vice President of Swedbank Card Services commented that “In general the usage of international payments cards is increasing. This goes for both debit cards and credit cards, and for both personal and corporate customers. The development is to some extent technology-driven and the implementation of EMV-chip and PIN makes transactions more secure and thus more attractive to customers, merchants, issuers and acquirers. New features such as contactless cards and other contactless payment devices, rather than traditional plastic cards, will drive the usage of cards, including corporate cards, even further.”

Marcie Verdin broadly agrees: “There are emerging technologies that will change the way we look at commercial cards. For example, we think of a card as a piece of plastic, sitting in a wallet. However, a majority of commercial card transactions for large enterprises actually happen in a “plastic-free” environment. So, while plastic cards may go the way of the eight-track or cassette player, the future likely belongs to the virtual account, offering increased flexibility plus the benefits of a payment card.

“The value of the account number, the network of buyers and suppliers, and the information exchanged among all of the players in the ecosystem is unparalleled. The industry will continue to find new ways to harness this value and create compelling solutions to drive more spend on cards. By turning paper transactions into electronic ones companies can get better information and greater efficiency and transparency.”

Green reporting

There is common agreement that businesses will be focussing more closely in the future on carbon emissions from business travel and improving their sustainability. Card issuers are looking at how they can help their business clients in this area. American Express Commercial Cards, for example, have recently launched the Carbon Savings Account Manager (Carbon SAM), in Europe. This is an innovative service to help companies measure, track and reduce their business travel emissions at the touch of a button.