Now, banks and procurement executives are singing a new tune that reflects not only recognition that companies can still gain efficiencies by using cards selectively, but also promotes a new treasury philosophy and the dominant trend in treasury technology–payments can be made in many forms but the key to productivity is an integrated, holistic payments strategy that handles the variations on a single platform. This next generation of payments automation will have "a single user interface on the front end, but four pipes on the back end" that will deliver payments by card, check, ACH or wire, predicts Greg Hammermaster, senior vice president for commercial card services at SunTrust Bank in Atlanta. "The choice of pipe will be driven by corporate policy and implemented by system programming."

With this approach, treasury staffs can now turn to their banking partners to ask for a custom-fit for a payable rather than worrying about getting sold a vehicle that may not be the most efficient. "Clients send us one file and we help them determine the payment mix to get the best return on investment," reports Peggy Yankovich, a senior vice president at Bank of America.

So what does all this mean for p-cards? Probably that almost all companies eventually will use them to some degree, given that they will be an easy "pipe" option on these payment platforms. And the more p-cards move from being a substitute for petty cash to being a strategic procurement tool, the more deeply involved treasury becomes, notes Frank Dombroski, vice president for commercial card solutions at JPMorgan Chase. "Our vision is to tie all the payment types into one holistic solution set," he explains. "As the holistic approach evolves, card payments become more of a cash management solution, and treasury becomes more influential than ever in central procurement strategy."

The new approach is exactly the shot in the arm that p-cards needed. After years of pushing cards and rebates, providers could see the marketing strategy was running out of steam for a variety of reasons–primarily because major suppliers who held the key to automating large transactions just weren't willing to bite. Sure, dollars being charged to p-cards were growing, but basically in step with overall corporate spending. "They are stuck below 5% of overall spend and below the $5,000 transaction level," notes Drew Hofler, senior manager of financial solutions for $350 million Ariba Inc., a leading supplier of e-procurement systems with headquarters in Sunnyvale, Calif.

The reason is simple economics, argues Hofler: While buyers greatly simplified the settlement process for themselves and earned substantial rebates to boot, sellers are charged the "usurious" effective rate of at least 24% APR, when the effect of the discount is properly calculated. That won't fly with most of the large-ticket purchase-order suppliers that banks and purchasers covet. "Banks are pushing p-cards hard for A/P settlement, but the cost to core suppliers is often ridiculous," he observes.
"That's why we're seeing a big move to buyer-funded discount management," he notes. If the buyer is getting a 50 to 80 basis point rebate for card purchases and could get a price discount worth 120 to 150 basis points by paying the seller early with its own funds, a growing number of sophisticated purchasers are doing just that. Since accepting the card means the seller is paying the banks 200 to 250 basis points, eliminating the middleman is a win-win situation for buyer and seller, he explains.

Cutting-edge purchasing operations have a card program, but supplement it with buyer-funded discount management and then add third-party financing as a third option, since they usually limit internal funds available for supplier financing. "It takes a three-legged stool," Hofler insists.
P-cards are also used to tout the process savings from relaxed controls, but then some suppliers began to look for cracks. That's what happened at the Terminix subsidiary of ServiceMaster Corp. in Downers Grove, Ill. With a traditional card program, ServiceMaster charges $145 million to 2,600 cards annually in its seven business units. But the contractors who were paid by card to do repair work for Terminix would sometimes keep the card number on file and simply charge a new job to that number the next time Terminex hired them instead of sending a new invoice. "It was creating a control and internal audit issue we had to resolve," says Mike Gaffey, director of card services.

Gaffey's banker JPMorgan solved the dilemma with a new tool, ExacTrac, which issues single-transaction card authorizations only after invoices have been approved. It's a clear win for Terminix and the bank, but it's not a huge win because the local repair firms are small fry with the size of transactions that p-cards have traditionally feasted on. But that's not a breakthrough into large transactions, and most corporate procurement operations are not willing to settle these until invoices have been received, matched and approved for payment. "You talk to one company and they tell you how well payment after invoice approval is working," reports Richard Palmer, Lumpkin Professor of Business at Eastern Illinois University and p-card's leading academic researcher. "You talk to another and they're striking out. It seems to depend a lot on the supplier. When you're buying products that carry fixed costs, it doesn't work well; suppliers either don't want to accept the card or try to raise prices. When you're buying services that don't carry fixed costs, it seems to work better," he explains.

That's disappointing news for card-issuing banks. To capture larger transactions and appeal to control-minded procurement in the Sarbanes-Oxley era, banks reinvented "cards" about two years ago as cardless devices that can be linked, one on one, with individual transactions. For example, when ABC Corp. gets an invoice from XYZ Corp. for $257,834, ABC can perform two- or three-way matching, route the invoice to everyone who should see and approve it and then e-mail XYZ a card number that is good only for $257,834 and only for 30 days. Transactions settle through card networks and are eligible for rebates. XYZ pays the discount. "With delayed settlement, the incentive for suppliers to accept card payment pretty much disappears," observes Carol Barkley, senior vice president for marketing in U.S. Bank's corporate payment systems. "We encourage clients to look for win-win solutions that reward suppliers too. Sometimes that means trading rebates for something of greater value within the supply chain."

Banks that once won business by offering attractive rebates are now talking a different strategy for driving p-cards. "We're educating the market to focus on broad value instead of raw rebate dollars. It's an uphill effort, but we're getting there. Treasurers and procurement executives are seeing the wisdom of giving up some rebate margin to grow card-based spending and expand into new categories," notes JPMorgan's Dombroski. "Rebates will matter less in the world we are moving toward."

Now that MasterCard is a public corporation and Visa soon will be, there may be fresh approaches to pricing. And some banks have started a conversation about reducing the so-called discount rate that funds the givebacks as well as bank costs and profits. "We're talking with Visa and MasterCard," Dombroski reports, "about modifying the interchange structure, especially for large-ticket transactions. We think they are listening."

One View of Growth

The five-year growth trend in p-card use is certainly positive. According to a 2007 survey commissioned by American Express Co. and taken by Accenture, the growth of indirect spending done with p-cards has increased dramatically, surging to 28% in 2007 from just 6% in 2003. That's the dollars. The number of transactions rose to 57% from 16% over that same time period.

The online survey of about 30 self-selecting companies also indicated that compliance with contracts and purchasing policy was greater when p-cards were used (86% compliance) than when they were not used (81% compliance). The survey did not attempt to measure growth of transactions where p-cards were used in combination with purchase orders, matching and approval prior to payment. It did find that 92% of the p-cards issued were individual cards, 4% were group or department cards and another 4% were supplier cards.