Purchasing Card Strategies in the Payables Process
October 28, 2011 – by Greg Hammermaster
As an accounts payable professional, you have undoubtedly noticed the rising use of purchasing cards, or p-cards, in the month-end check run (payables process). Many AP departments are replacing checks, and sometimes Automated Clearing House payments, with p-cards to pay suppliers. While some suppliers push back, given the costs of accepting credit cards, others prefer the next-day funds, reduced overhead of underwriting and collections, the value of electronic payment reconciliation, and, most importantly, the easy-to-use alternative for customers.
Over the last five years, there has been a technology-driven evolution in the use of p-cards in the payables process. The “ghost account,’ or a p-card account number with no corresponding plastic card, is the foundation of this process. Since p-cards were first introduced in 1987, buyers have provided their strategic suppliers with ghost account numbers to stick in their drawers, thumbtack on cork boards, or affix to a PC monitor on a sticky note.
When the buyer was ready to pay the supplier, a phone call to the supplier was made. The supplier keyed the account number, expiration date, and dollar amount into their credit card terminal, and would then manually close out the receivable in their accounting system, while the buyer would manually close out the payable in their accounting system. It was all quite simple.
However, as this process caught on, suppliers became bogged down with the volume of this exception process, and buyers became wary of passing out live credit cards to their supplier community. To remedy these concerns, three automated strategies have evolved to put more visibility and controls around this process.
Automated Strategies Add Visibility and Controls
1. Single Use Account
Using this method:
- the buyer initiates the process by exporting the payables file to its p-card provider;
- the payment processor communicates a ghost account number, expiration date, dollar amount, and invoice numbers to be paid;
- the supplier retrieves the sensitive data (usually via email);
- the supplier processes the ghost account number using a credit card terminal; and
- the ghost account number is then terminated, thus the name, “single use account.’
The value with this process is the supplier is no longer storing a live ghost account number, and each payment is equivalent to an account number, assisting in reconciliation. The challenges with this process are the supplier setup and training, support of an ongoing exception handling process, and the fact that the supplier can take less (but never more) than the total credit limit on the ghost account (which is the total of the combined invoices), creating even more exception handling.
2. Dynamic Credit Line Controls
This process starts out the same way with the buyer initiating a payables file to the p-card provider, and then:
- the payment processor re-sets the credit limit from $0.00 to the exact dollar amount of the invoices to be paid;
- the supplier, who stores its customer’s ghost account number, receives a communication that payment is now ready;
- the supplier processes the account number in the customer profile; and
- after the authorization, the ghost account’s credit limit is re-set back to $0.00 until the next time.
The value of this process is two-fold: 1) negligible supplier setup and training, and 2) limited risk exposure (over a live ghost account), given the credit line is only open fora short period.
The challenges include:
- support of an ongoing exception handling process;
- the p-card industry burden on the supplier storing the customer’s full credit card number; and
- like single use accounts, the supplier’s ability to take less than the total of the invoices, which creates even more exception handling.
3. Push-Pay Process
The most recent advancement in using p-cards in the payables process is push-pay, which more closely resembles the ACH process. Push-pay has just two steps: 1) The buyer exports a payables file to its p-card provider, and 2) the payment processor directly settles the funds to the supplier’s merchant bank account.
Unlike single use accounts and dynamic credit line controls, push-pay does not burden the supplier with setup, training, or ongoing support requirements. Push-pay is also p-card industry friendly, because the supplier never sees or manages the account number, and the opportunity for the supplier to take less than the full amount is eliminated. The only real challenge is suppliers that prefer to manually process payments.
Evaluating P-Card Choices
Inserting p-cards into the payables process is a lot like today’s polarized political environment. There are adamant supporters and adamant detractors, with little middle ground.
The p-card supporters—usually on the buy side—point to eliminating the cost of checks, process automation, and the increased controls and visibility inherent with “electronifying’ the transaction. Some are even bold enough to admit their addiction to the financial rebates provided by their p-card issuer.
The p-card detractors—usually on the supply side—are fixated on one thing: the cost of accepting credit cards or p-cards. And, what supports their argument is that the financial rebates offered by the p-card issuer to the buyers are fully funded out of the fees the suppliers pay to accept p-cards. But, is that really a bad thing?
It is common for a supplier to offer a 2% discount if paid in full within 10 days. The cost of accepting a p-card is 2.5%-3%, and settlement is the following day. Not bad, but the supplier has to be savvy enough to demand payment with a p-card within 10 days of invoice.
Better yet, payment networks, such as Visa and MasterCard, will bring the supplier’s costs down by almost 50% if the transaction size is considered large (roughly $4,000). However, the real, often overlooked value provided by the credit card networks is the combination of their operating regulations and network.
Whether you are a cardholder or a merchant, credit card networks’ operating regulations provide the framework to transact with confidence, globally. The same breadth of confidence or capability is not there with any other payment network.
In addition, the accessibility of electronic credit card data powers many business systems, such as automated expense reporting, e-procurement, and e-payables solutions that would lack audit and regulatory safeguards without integrated credit card data.
Commerce is better off with strong credit card networks, but it is up to you to understand the framework and benefit from the opportunities provided.