Payments’ new land of opportunity

Eduardo Vergara explains how the flexibility, security and advanced control of Single-Use Accounts and Purchasing Cards is garnering widespread appeal in commerce and banking.

Until recently, the prime focus for Treasury had typically been targeted at two ends of the payment spectrum. Plastic has traditionally been used for Travel & Entertainment (T&E) and a number of low-dollar expenses, while Automated Clearing House (ACH) has been reserved for the high-ticket, direct suppliers. Check processing, renowned for its high cost and no revenue benefit, was utilized to fill in the remaining gaps.

Now, however, companies see a new land of opportunity: the fertile 'middle ground' of payment, which encompasses a wide field of transactions that have, until this point, been handled by paper. By targeting this broad landscape, companies gain on every front; they leverage working capital, increase float and raise their revenue from rebates. And by adopting automated channels, they slash indirect processing costs, a one-time investment that produces perpetual results. Companies now are following two key strategies towards capturing this profitable middle ground:

• Implementing Single-Use Accounts to hold on to cash longer, pay suppliers sooner, increase rebates and reduce Accounts Payable (AP) manpower costs
• Extending Purchasing Card to cover new spend categories to drive compliance, greater rebates and deeper integration with e-procurement systems

What's been missing?

Single-Use Accounts

Clearly, the will to transform is stronger than ever, but companies may have felt uncertain about launching new solutions and waiting for products and technology to catch up to the marketplace need.  Automation, after all, has been the X factor in AP transformation - and for good reason.

Companies have embraced automated payment through the use of ACH and wire transfers, and procure-to-pay represents the future. The efficiencies are tremendous. Yet these channels do little to help companies leverage their working capital, and unlike card programs, they produce no rebate revenue.

On the other end of the automation continuum, checks are notorious for being the most costly and inefficient way to pay. The average cost to process a check is $89, according to RPMG Research Corporation. Fraud is an issue with the paper process, which also offers no rebates and does not leverage float. Reducing the volume of checks has been a long battle for AP professionals, but they have been hampered by the lack of advanced payment alternatives.

Purchasing Card usage has emerged as the best tool for indirect spend, yet companies have been conservative in deploying the cards, and suppliers have needed time to recognize the benefits that they gain from card acceptance.

Now, companies are spotting new opportunities through a portfolio of sophisticated products and technology tools. Payment can, in fact, be highly customized, as well as automated, with finely calibrated controls at each step of the transaction. Faced with this landscape, companies realize that they can take a broader view in managing payment to command a larger percentage of their transactions. The will is there and now there's a way - through adopting Single-Use Accounts and expanding Purchasing Card penetration.

Single-Use Accounts gains traction

Single-Use Accounts has become a simple, effective alternative to check payment for medium-sized transactions. Although it has the flexibility of a commercial card, Single-Use Accounts is an electronic AP tool with special security, antifraud and reconciliation features. It operates with the ease of a ghost (virtual) account, which is an account number assigned to a specific vendor for high-volume purchases with larger spending limits. However, Single-Use Accounts has the advantage of being transaction-specific, and, therefore, can deliver strict controls at the point of purchase and automatic reconciliation on the back end.

Single-Use Accounts, in fact, performs like a check but works like a card. Each transaction is given a unique 16-digit account number, which is assigned to a specific invoice and vendor. This account number is active for only a defined time frame and is electronically matched to pre-purchase information. The number can be used at any point in the purchasing process: at time of order, invoice or receipt of goods. Merchants work through the Visa or MasterCard network to accept and settle the Single-Use Accounts transactions. Consequently, instead of having a general ghost account number for all of a corporate customer's charges, the supplier receives an account number for each single payment with purchasing parameters embedded in the system.

Single-Use Accounts allows companies to lock down purchasing controls as they see fit. They can establish unique spending restrictions, including limits on transaction amounts, dates and merchants, thereby reducing or entirely eliminating fraud and misuse. On the back end, automatic electronic remittance allows suppliers to get paid faster and companies hold on to cash longer, gaining greater power over their cash flow. VISA OR 

Who benefits?

All manner of companies can benefit from using Single-Use Accounts. Car dealerships, for example, can use Single-Use Accounts to automatically assign a unique credit card number when a car dealer or repair facility requests approval for repairs covered under their vehicle service agreements. Usage parameters based on the service order are automatically assigned to each credit card number - the name of the payment recipient, the exact dollar amount available and the approved type of repair. Once repairs are completed and the credit card number is used, the claim is automatically paid if the service center's name, dollar amount and repair type match those in the system. If these parameters are not met, the dealership is alerted and the payment is held.

Another example from the healthcare sector: if a distributor of healthcare products and services seeks quick automation of its payments process due to the cost, time and effort required to process its large volume of invoices, it can utilize Single-Use Accounts to meet its objectives. While Single-Use Accounts are being implemented, interim ghost card accounts can be established to capture spend. At the same time, efforts can be made to enroll additional suppliers, leading to a more efficient operating process.

Expansion of Purchasing Cards

As Purchasing Cards have evolved, they have become a standard payment tool for corporations and public sector organizations. Initially, the focus had been to use the Purchasing Card for low-dollar invoices, but its usage has been on the rise. By 2012, Purchasing Card spend in North America is predicted to reach $218 billion (nearly double its $110 billion volume in 2005). Now that companies have seen what the Purchasing Card can deliver, they are ready to extend its reach.

The Purchasing Card has expanded on many fronts as companies have added new categories of spend, enrolled more suppliers, broadened distribution of the card within the organization, raised transaction amounts and taken the first steps toward globalizing the program. For example, having originally designated the

Purchasing Card for MRO areas such as office supplies, electronic equipment and maintenance, companies are now focusing on services, moving expenditures with consulting companies, advertising agencies and temporary labor agencies on to the card.

Globalization represents another new frontier for savings through Purchasing Cards. According to MasterCard, although only 27% of companies have multinational programs, corporations that have reaped the benefits of greater Purchasing Card spend in the United States are expanding usage internationally. As more finance organizations adopt the shared services model, many of the nagging issues around globalization (e.g., multiple currencies, VAT tax reclaim, technology integration and regulation) are being successfully addressed.

Companies that have expanded Purchasing Card usage are seeing an increase in the benefits that have always followed the transition from checks to card, benefits such as improved compliance, rebates, increased flat, early pay discounts, process savings, detailed reporting, payment integrated with e-procurement systems, and support in the effort to reduce the number of suppliers and tighten relationships with a group of preferred vendors.

In effect, the Purchasing Card has proven that it has broad shoulders, and with supplier acceptance growing, it has become a lucrative tool for companies committed to reducing their paper processing.

FAST FACTS:

• Single-Use Account rebates can be significant; consider earning 100 bps on your larger, indirect purchases.
• Participating suppliers can be paid 15 to 20 days earlier through Single-Use

Accounts, improving the company's DPO.

• Unlike ACH, Single-Use Accounts utilizes a standard file format, making it easier to manage supplier changes as needed.
• Single-Use Accounts can be deployed as a batch or real-time solution.

Unshackling the Purchasing Card

Companies that have removed the tight constraints around Purchasing Card usage are seeing positive results. Here are just a few J.P. Morgan clients who have broadened their Purchasing Card programs:

New Spend Categories on the Card

With the wider acceptance of the Purchasing Card, a major media company has expanded its use of the card to capture new categories, including temporary employment services, on-premises security, utilities, employee drug screening and background checks, and E-Z Pass toll payment subscriptions.

Result: The company broadened its data capture and gained new controls.

Targeting Nontraditional Suppliers

A global soft drink distributor engaged J.P. Morgan's Expansion Services consulting team to help identify ways to increase card usage in commodity spend categories that in the past had not been seen as applicable for card transactions. More merchants were enrolled, resulting in $17 million in card volume, and new commodities, such as legal service providers, equipment manufacturers and utilities, were added, generating an additional $45 million in spend on the Purchasing Card program. Within one year, the company's spend volume on the Purchasing Card program grew nearly 26%.

Result: After three years, Purchasing Card volume increased nearly 100%.

Indirect Costs in Focus

A world-famous cosmetics brand grew its Purchasing Card program to $50 million within a year of its launch. In addition to traditional spend categories, the business uses the Purchasing Card to pay for indirect costs such as modeling agencies, in-store security services and retail employee uniforms.

Result: More than 1,500 of the company's top vendors now accept the Purchasing Card as payment.