purchasing procedures, CompUSA now sustains $3.5 million of monthly charges on its cards, which are issued by GE Capital. The company has

twice increased its transaction limit for buyers of ad space and other regular purchases in the year the p-card program has been operating. The

limit has doubled to $3,000 from an initial $1,500.

By using the card to pay for its newspaper ads, CompUSA has cut its

advertising costs by as much as 1%, reflecting, in part, rebates that GE Capital gives the retail chain for using the card. The "merchant discount"

fee that newspapers pay GE Capital for processing the card transactions funds the rebates.

CompUSA is not alone in giving a new boost to p-cards. After launching its

first p-card program last August, Marriott International is already charging $3.5 million a month on 1,200 Visa cards issued by Paymentech (now part

of J.P. Morgan Chase Bank). The Bethesda, Md.-based hotel chain expects to triple its card charges by next year, says Michael Cullen, vice

president for business integration.

Nextel Communications has been receiving hefty rebates by charging

millions of dollars of Federal Communications Commission license fees through its p-card, says Joel Stafford, director of accounts payable at the

Reston, Va., company.

As a purchaser itself, the government is realizing big p-card savings. The

Department of Defense last year charged a whopping $5.5 billion through p-cards, up 20% from 1999, says Bruce Sullivan, director of the DoD's

joint card management office.

Trouble in Paradise

Indeed, after years in which corporations and government purchasing

agents sputtered along with pilot p-card programs, data indicate that the cards have become an ever more significant feature of the purchasing and

settlement landscape.

Corporations doubled their card spending in the 1999-2000 period, while

government buyers increased their card purchases by 278%, according to

"The 2000 Purchasing Card Benchmark Survey." The study, conducted by

Richard Palmer of Eastern Illinois University and two academic colleagues, further forecasts that corporate card spending will double in 2001 and 2002

from $40 billion to $80 billion. (For details, see www.napcp.org/palmersurvey.)

Other signs of brisk growth in the use of corporate cards abound. P-card

administrators organized their own trade association, the National Association of Purchasing Card Professionals, last year. Visa and

MasterCard, the two associations that dominate the p-card world, say they are taking steps to overcome the major obstacles to card use–resistance

to paying the discount fees on the part of merchants and unhappiness with the lack of transaction settlement data needed to close their books on the

part of corporate card users.

Despite the good news for traditional card associations, there are signs of

turmoil in the status quo. Purchasing cards are outmoded in an e-commerce world that depends on the cooperation of suppliers as well as purchasers,

some bankers and consultants say.

"P-cards are great for one-off purchases," observes Walt Hazelton, senior

consultant with Gunn Partners in Boston. But e-procurement systems are built to channel high volumes of transactions to a few preferred suppliers.

Such concentrated spending makes it less expensive for suppliers to send an electronic summary billing each cycle instead of using the p-card, he

says. The process still is automatic, and it allows suppliers to avoid the discount fees charged on p-car transactions, which are often 2% of the

purchase price or higher, says Hazelton.

Baloney, counters Marlene Lieberman, a marketer of p-cards at J.P.

Morgan Chase. "All those predictions that e-procurement systems would bring the death knell for p-cards haven't panned out," she says.

"E-commerce ventures need a way to include online settlement if they expect to gain traction, and p-card is the preferred solution."

But Prof. Palmer agrees with Hazelton. P-cards are temporarily getting a

boost from e-procurement activity because the cards are widely accepted and easy to implement, he says. But users of e-commerce systems are

clamoring for alternatives that marry the front-end convenience of cards with the robust transaction data captured by e-commerce engines.

Established trading partners also want electronic settlement engines that respect the timing and credit relationships they have worked out, instead of

the rigid payment schedules imposed by the p-card model.

Furthermore, what critics call the soak-the-seller model of p-cards may not

hold up as e-commerce matures. "P-cards presume that buyers dominate the process, which is not always true in the B2B e-commerce world,"

Palmer notes.

Disintermediating the Associations

Some banks already are taking steps to bypass the card associations.

U.S. Bank, the largest issuer of purchasing cards by dollar volume, plans to

introduce a settlement engine for online trading in the fourth quarter or early in 2002 that will process any of a variety of payment

mechanisms–including p-cards, electronic data interchange (EDI), Automated Clearing House (ACH), checks and, even, barter. "We will

execute whatever payment [trading partners] have chosen and provide full reconciliation," says Regan M. Hutton, senior vice president for sales at

U.S. Bank, which is based in Minneapolis. "It will be a closed-loop solution, so all the detail will be captured and available."

By closed-loop, he means that the bank has direct access to both buyer and

seller. Visa and Mastercard–but not American Express–have so-called open loop systems in which the buyer and the seller may use different

banks. Because a bank pays itself in a closed-loop system, it is not bound by association interchange rules, even if it uses the card network to clear

and report transactions.

Hutton says that he expects other bank card issuers to join the closed-loop

party in order to facilitate e-trading. "Most of the large players are working

on solutions that will go beyond p-cards for settling e-commerce transactions," he says.

The reasons are obvious. "Banks will wire around the [card] associations

when they can make more money by doing so, and trading partners will wire around banks for the same reason," says David Blanc, vice president

of global supply management and chief procurement officer at Alliente, a Colorado Springs, Colo.-based company that processes purchasing

transactions on an outsourcing basis for Lucent Technologies, Hewlett-Packard and other

manufacturers. "That is happening more and more all the time. A bank can disintermediate MasterCard or Visa."

U.S. Bank already has the online transaction technology in place for wiring

around the card associations. It will anchor its new service with two platforms–C.A.R.E., its Internet reporting and self-service administrative

package, and PowerTrack, an off-card settlement exchange developed for the trucking industry. "It will be an online, real-time settlement system that

will work within electronic marketplaces," Hutton asserts.

The product's success, of course, depends on the bank's ability to convince

vendors and other suppliers to enroll. Hutton believes that will be a cinch since the sell side is begging for ways to avoid the merchant discount fees

of the p-card associations.

Another Idea

Bank of Montreal already offers an electronic settlement engine that can

accept p-cards or alternative-payment methods. Dubbed "Procure2Pay," the program is offered as an application service provider (ASP) that hosts a

database of transaction information. It uses front-end procurement automation technology similar to systems provided by Ariba, Commerce

One and Clarus, and can be integrated with those systems or function as a simple settlement engine.

Procure2Pay is aimed at purchasers, meaning that companies must

convince their key suppliers to sign up. But Ford says suppliers don't need much prodding.

"We can accommodate companies that have existing payment terms and

want to keep it that way," says Randy Ford, director of B2B e-purchasing solutions at Bank of Montreal. "They can settle through our service and still

pay directly in, say, 40 days. When we don't provide credit, we can do the transactions for about 30 basis points instead of 200 or 300."

The card associations are not standing idly by, of course. Several years ago

MasterCard introduced price breaks on the merchant discount rate for sale of big-ticket items, and Visa is planning to do the same. It already gives

discounts to suppliers of the federal government.

Both associations also are discussing ways to liberalize their payment

strictures. For example, they may permit a transaction to be reported through their card system even if a supplier agrees to let the purchaser

stretch out a payment for 30 days as long as the seller agrees to absorb the risk of a default.

However, the associations must move cautiously when it comes to

changing policies that have hooked users of purchasing cards. Card issuers have been rebating the merchant fees they collect to purchasers–and the

banks see this as a major boost to p-card volume.

"Vendors are screaming bloody murder about paying a 2% fee to the

banks, but issuing banks are giving back more than 1% to the buyer in many cases," says Blanc. "The trend has been to use higher and higher

rebate incentives."

Some banks have been so aggressive in promising rebates, he adds, that a

reduction in merchant discounts could cost them money. "They're afraid of going underwater and having the rebates exceed the revenue," Blanc says.

Forget About the Float

Buyers aren't reluctant to crow about their windfalls. "Last year we

received $25 million in rebates," says Sullivan, the Defense Department's p-card maven. "Our goal is to double that as we move more purchasing

on-line and use the p-card for settlement. The move to e-procurement can't happen fast enough to suit me."

The card associations, for their part, tell suppliers that the rebate system

induces purchasers to pay quickly. Since adopting U.S. Bank's C.A.R.E.

and Citibank's CitiDirect, the DoD pays its card issuers within five days

after the end of a billing cycle. When he had to wait for paper reports to

arrive by regular mail, the best Sullivan could hope for was two weeks.

"Normally, we'd pay right on the due date," he says, "but the value of the

rebates is greater than the interest we would earn by holding onto the money longer, so it pays to settle quickly."

While card associations have been slow to change their policies, they can

be quick to shake hands with a partner who can supplement their services.

MasterCard, for example, is teaming up with TradeCard, a new venture

that uses credit insurance to assure suppliers that they will be paid on international e-commerce transactions. And some 20 ventures designed to

promote e-settlement tools to complement–or displace–p-cards are now underway.

"The concepts are excellent," says Chase's Lieberman, "but the [ventures]

have underestimated the difficulty of getting merchants to accept yet another settlement process when it's far from clear which ones will last

and which ones won't."

Melding E-Commerce and P-Cards

With each passing month, companies and card-issuing banks find new ways

to adapt technology to create efficient purchasing and settlement solutions.

Nextel Communications hopes to integrate its J.P. Morgan Chase-issued

purchasing card into its new Ariba e-procurement system. The Reston, Va., telecom company has set up "ghost" cards–which track purchases

by merchant rather than by buyer–with four suppliers, and expects to charge $1 million per month among the four by year-end.

To enhance settlement, Nextel feeds charges from the suppliers that are

listed on its transaction report from J.P. Morgan Chase into Ariba's reconciliation module. More than 90% match and reconcile automatically,

thanks to the merchant capture of Ariba purchase order numbers, says Joel Stafford, director of accounts payable at Nextel. Charges made outside

Ariba follow a different mapping route that brings them into the accounts

payable system.

Individual cardholders at Nextel are given a default accounting code that is

right 95% of the time. If the code is wrong, they can correct it with PaymentNet, a J.P. Morgan online reporting service that Stafford describes

as "awesome." Program administrators can use the service to add accounts, change limits, do overrides, issue new cards or deactivate cards

and run a wide range of reports, Stafford says.

Taking P-Cards Global

While purchasing cards continue to flourish in North America, they have

yet to gain acceptance in other parts of the world. Dow Chemical hopes to change that. "Our next big step is to go international," says Ron Edmonds, director of global procurement service centers at the Midland, Mich.,

chemical giant. "We're a global company and need a global system."

Dow signed up last year for Bank of America's proprietary EAGLS online

reporting and administration system. "The bank promised that EAGLS would support a global operation, and now we have to make that work,"

Edmonds says.

It could be rough going, even if EAGLS lives up to expectations. "Global

applications are running into problems," says Cindy Smith, senior vice president for client relations and program consulting at J.P. Morgan Chase

Commercial Payment Solutions in Salt Lake City. Among the issues she cites: low merchant acceptance, less detailed reporting by overseas

merchants than in the U.S. and problems with preventing cards from being used at certain pre-screened merchants.

Officials at BofA did not return calls for comment. Dow Chemical, which

has used the bank's Visa purchasing card for six years, says it encountered "the usual glitches" when adopting EAGLS, but is beginning to realize some

benefits. "You can get to it from anywhere in the world," Edmonds says.

"Much of the data are prepopulated from the cardholder's number and the merchant's number. In the past, we have over-reported, but EAGLS forces

us to report only the minimum data needed."

Edmonds is also a fan of a proactive messaging feature in EAGLS that lets

him chase down company cardholders who fail to report their transactions. Dow formerly required six to eight full-time people for the task. Their

positions now have been eliminated. "We send [cardholders] messages and shut off their card if they don't respond," says Edmonds. "It's also easier to

retrieve data and do random audits."

One experiment that Dow found to be "a miserable failure" was a passive

approval approach, according to Edmonds. It permits purchases to go through without supervisory approval. Though many consultants

recommend it as a "best practice," Dow disliked its loss of control.

Edmonds is still eager to try other administrative enhancements, such as

being able to change approval limits online. He's hoping to get that in the next EAGLS upgrade. "The loop is closing, but it's not quite closed yet," he

observes. –R.G.

Hold the Doughnuts

When people talk about the future for integrating p-cards with the Internet,

they usually envision advances such as self-service program administration and cardholder access to real-time transaction data. However, GE Card

Services has found another application: Training p-card administrators by Web conferences.

The Salt Lake City-based company conducts two-hour remote sessions

during which trainees sit at terminals in their own offices, linked by telephone to card trainers. The trainers control what the students see on

their screens. "The only thing we can't provide is the doughnuts,", says Kathy Souba, business education manager at GE Card Services.

GE charges $200-240 per person per session. The preferred method of

payment? P-card, of course.