1. Introduction
Organisations view purchasing cards as the payment vehicle of choice for low value transactions.
Over the past two years purchasing card spending has grown strongly and the US Government in particular derived significant benefits by mandating the use of purchasing cards.
The General Services Administration Program for US Government Departments is the largest in the world (over $15 billion per annum) and provides important pointers to help companies use their cards more effectively. This purchasing card program saved the US Government over $1 billion in it’s last fiscal year.
Going forward, purchasing card spending is expected to double over the next two years, which would equate to a market size of approximately $80billion by the year 2002.
The most frequently cited factors driving spending to the purchasing card are the speed and convenience for the end user, reductions in the cost and time associated with purchasing related activities, and the ease of use to acquire goods over the Internet.
According to a purchasing card benchmark survey conducted earlier this year by a team of academic researchers, the average saving per purchase transaction with the use of a purchasing card is noted to be $68.
This saving can be even greater if Purchasing Card Transaction data is effectively integrated with business accounting and financial systems. This paper highlights the experience of BoE Bank and focuses on the importance of data management to the success of purchasing cards.
2. What is the Purchasing Card?
The purchasing card was developed to streamline the traditional purchase order and payment process and cut the cost and time of acquiring routine goods and services. These purchases are typically described as MRO, (maintenance, repairs and operational expenses) and include:
• Office supplies, e.g. furniture, computer equipment, fax and photocopying supplies
• Stationery
• Services, e.g. Couriers, Storage, Printing, Security, Hygiene and Cleaning
• Catering and canteen.
Purchasing Cards can also be used for business travel and accommodation expenses, if a business requires consolidated expense management and data.
The area where Purchasing Cards are likely to deliver most benefit is when they are effectively integrated with B2B e-commerce systems.
The underlying infrastructure of a global payment association like MasterCard ensures that the Purchasing Card operates according to standards and well established regulations govern the acceptance and processing of Purchasing Cards all around the world.
3. Key Features
3.1. Spending controls include:
• Limits per card and transaction (value and volume)
• Restricted use for selected supplier categories and even specific suppliers.
• Zero “floor limit”, therefore every purchase transaction must be authorised before the purchase can be processed.
These controls are flexible and can be applied as strictly or loosely as the buyer requires.
3.2. Purchase details with financial transactions.
The card system allows for line item detail such as product description, quantities, price, tax amount and shipping charges to be linked to the financial transaction. This information is normally only available once the buyer receives the invoice. With the Purchasing Card, all purchase details can be linked to the financial transaction and viewed on a daily basis.
3.3. The Bank makes electronic payment directly to the supplier within a 2 to 3 days of the shipment, compared to 45 or more days with debtor’s accounts.
4. How is the card used?
Buyers are assigned a limit and spending profile
Orders are placed in the usual way
The purchase is charged to the card
Purchase details are submitted by the supplier to the bank with the financial transaction
The bank pays the supplier within 2 to 3 days
The cardholder receives a monthly statement and pays the bank
Electronic reports are available for reconciliation
While the process is simple, successful implementation is dependent on the extent of procurement and payment re-engineering. Existing purchasing and payment processes for MRO goods and services are often inefficient and costly so the Purchasing Card presents an opportunity to streamline procedures and add convenience, without losing control.
As the supplier can now provide purchase details with the card transaction, the card effectively eliminates the need for invoices. The added benefit is that these purchase details (line-item-detail) allow buyers to directly integrate purchase transaction information into their business systems.
5. BENEFITS FOR BUYERS What the Government needs to do
5.1 Reduce cost of purchasing and payment by up to 60%.
This is made possible by:
• Cutting out unnecessary administration and reducing accounts payable to one monthly statement and one payment.
• Replacing manual processes with electronic ordering, payment, reconciliation and cost allocation – e.g. receiving statements and reports by e-mail and online enables instant information sharing and processing.
5.2 Improve control and accountability:
• All purchases are authorised electronically
• With flexible transaction spending limits as well as supplier restrictions, cards can be
• configured to match the needs and usage profile of each employee and help reinforce purchasing best practices.
• By not issuing the card plastic the risk of card misuse is far lower (only an account number and related detail is needed for most B2B purchases)
• Management reports are provided to reconcile transactions, raise queries and resolve discrepancies
5.3 Gain up-to-date purchase data and tax information daily:
• For expense reconciliation, cost accounting and to integrate with general ledger and accounts payable systems.
5.4 Improve productivity as a result of:
• A shorter ‘cycle’ from the purchase to payment and more efficient use of resources
• Consolidated statements, a single monthly payment and easy refund (credit) procedures which streamline financial administration and accounts payable.
5.5 Strengthen relationships with suppliers
• The prompt, electronic payment guarantee by the bank, is an incentive for quick and accurate delivery.
• Both purchases and returns are easily processed and audited using the card data. therefore queries or disputes can be efficiently handled with the bank’s assistance.
6. Benefits for Suppliers
6.1 Cash flow improves:
• This is because the bank guarantees payment to the supplier within 2-3 days of the transaction, compared with an average payment period of 45 days or longer and the payment happens electronically.
• Better cash flow and lower financing costs is of major benefit to small businesses that are often dangerously exposed to cash flow fluctuations and slow payment.
6.2 Much lower administration costs:
• As the bank guarantees payment in full to the supplier, the cost and effort of collecting on accounts receivable and outstanding debt is virtually eliminated.
6.3 Enhanced customer relationships:
• Processing purchase orders quickly and efficiently on the card
• Eliminates disputes, as each transaction will be authorised electronically before fulfilling the order.
• Providing purchase details (line-item-detail) with the financial transaction, which improves customers’ payment and reconciliation processes.
• Opening up the business to any customer who chooses to pay by card and to do business electronically.
6.4 Create new business opportunities
Using software provided by the bank or certified vendors, suppliers are able to accept Purchasing Cards as well as other credit and charge cards that are already widely in use.
In return for these benefits, the supplier pays the bank a commission, which is a percentage of the transaction value. A simple financial model can quickly demonstrate the cost and benefit of converting debtors (accounts receivables) into Purchasing Card clients.
7.What about E-Commerce and E-Procurement?
The purchasing card is the ideal electronic payment method for online business purchases.
No purchase is truly an online transaction unless payment takes place online as well.
Using the Purchasing Card to pay for e-commerce purchases is probably the most effective way to start doing business electronically. It doesn’t require a big investment, or the use of complicated procedures.
B2B e-commerce and specifically e-Procurement is an extension of existing business processes using the Internet as a channel. E-Procurement allows for efficient interfaces between trading partners and more effective use of data, it is incomplete without integrated payment processes. By using the Purchasing Card and online payment software, traditional business purchases can be made just as easily online.
Regardless of how a purchase is made – on the internet, by phone, fax, e-mail or in person, the Purchasing Card will consolidate all purchasing activity across multiple channels.
After all the publicity about B2B e-commerce and. e-marketplaces. we suggest it’s time to get “back to basics” and implement best business practices.
The use of a purchasing card can play a major role in this by improving efficiencies, controls and management, streamlining processes and improving the ‘bottom-line’.
8. Integrating the Purchasing Card
The key to success is integration of data and processes, between the supplier, the Bank and the buyer.
To integrate a purchasing card into existing business processes, end-to-end data management is required, from requisition/order/purchase to payment and reconciliation.
The purchasing card can be used in the real world (physical in-store), for remote purchases (e-mail/catalogue/telephone orders), and the virtual world (Internet). To integrate the card effectively, systems are required for each scenario.
Our goal at BoE Bank is to offer complete and seamless integration from the supplier’s back-end system to the final reconciliation by the buyer and success depends on two key issues:
a. The payment solution must be generic and open-ended. It would be simply too expensive to develop customised interfaces for specific systems used by suppliers and buyers.
b. We cannot do this on our own and must necessarily form partnerships with ERP and e-procurement vendors, and integration specialists.
9. Managing data from Supplier to Buyer
By consolidating financial and purchase information, the Purchasing Card allows both suppliers and buyers to provide and manage data in a standard format using commercially available software.
Our locally developed solutions are:
CPS (card payment software) and i-PayOnline to import data from suppliers SmartLink and browser-based electronic statements for buyers.
10. Supplier Card Acceptance Systems
In the B2B market, where telephone, e-mail or taxed orders are likely to be used, merchants are supplied with customised card payment software. This software is a PC based Windows application where payment details with full line-item-detail can be captured and submitted to the Bank. The software can be integrated with suppliers invoicing systems to automate the transfer of data.
i-Pay Online is a web-based card processing system, specifically developed by BoE Bank to support the Purchasing card and is typically integrated with an e-procurement system.
It is a client/server application hosted by the bank, with two key functions:
• real-time authorisation of card payments
• a remote browser-based transaction management system for settlement requests, refunds and capturing of final line-item-detail
• i-PayOnline meets the business need for online card payments in B2B transactions as an affordable, efficient, secure and trusted solution – based on proven standards and protocols.
If purchasing cards are presented for payment of online purchases, invoice detail is captured and submitted to the card-issuing bank.
A unique trace number is generated at the time of authorisation that can be used as a key element in the transaction management interface.
The transaction administration interface allows the supplier to request payment for authorised transactions, edit line-item-detail, do refunds and enquire about the status of transactions.
11. Technical Details:
i-PayOnline is a client/server application with a small plug-in on client side (ASP and COM objects).
Digital certificates are used for authentication of the client application and the suppliers.
Messages are 128 bit encrypted between the client application and the server at the acquiring bank.
i-PayOnline will issue a warning if cards from foreign or unfamiliar banks are used for payment.
12. Providing data to Buyers:
The data sent to cardholders includes a number of account management reports, e.g. Declined and Disputed Transactions, which can be used to verify the control parameters for individual cardholders, and to detect possible abuse of the card.
Cardholder statements are sent in electronic and paper form to individual cardholders and transaction details are summarised by merchant category e.g. stationary and cleaning services. Statement details can be provided on a weekly basis to reduce month-end administration.
Cardholders also have the option to access transaction data sent to the MasterCard reporting system – Smart Data. Reports can be viewed online and downloaded for analysis and cost accounting. In our experience, most corporate clients require the purchase and financial data to be downloaded directly into their ERP or proprietary systems and then use their own reporting tools.
MasterCard SmartLink is a customised solution to integrate the rich data available to card holders into SAP R/3. SmartLink streamlines the expense management process and eliminates unnecessary data capturing. Other features and benefits for SAP users are:
• Invoices from suppliers need not be captured in SAP as the invoice detail is retrieved from the Mastercard Smart Data system and automatically merged into SAP. No “goods received” note is required.
• Cost and account allocation can be automated by means of a buyer’s profile that is set up in Smartlink.
• An invoice is generated within SAP with full details of the supplier and line items, made payable to the bank, but with ‘blocked for payment’ status.
• The cardholder’s statement is sent electronically by the bank. This data is imported into SmartLink and used to match the transactions on the statement with those on the invoices. Once reconciled, invoices will be released automatically for payment to the bank.
13. Conclusion:
The implementation of a Purchasing Card programme, is a low cost way to cut processing costs, simplify procedures and improve controls and management information.
These benefits should be enough of a compelling case to use Purchasing Cards, regardless of whether your business uses advanced ERP and/or e-procurement systems.
University of Cape Town has implemented the totally integrated Mastercard SmartLink into SAP. Linda Harrower, the University Purchase Administrator is delighted with the product. “We are discovering new applications daily, all making procedures and processing so much more hassle free and smoother, and saving vast amounts of time, administration, paperwork and
cost.”