Everyone likes finding hidden money lying around the house. A $20 bill in last year's coat pocket, a $5 bill in the center console of your car, or even the loose change under your couch cushion is always a nice surprise. And what's the first thing you think of when coming across "found" money like that? If you're anything like me, you think of what you can buy. Because let's be honest, "found" money is "free" money.
Now, what if I told you there is "free" money to be found in your AP department right now? What would you spend it on? Lunch, supplies, or maybe the new Treasury Management System you've been wanting? Whatever you want to do, you can find this spare interCHANGE by looking under the “cushions” of your payment terms.
Interchange is a fee that the vendor's bank pays the issuing bank for the privilege of accepting a credit card transaction. Issuing banks will often share a portion of this fee with the corporate cardholder in the form of a cash rebate (as incentive for using their card program). While rebates are often lower than traditional discounts offered to suppliers, card-based payments can be used to supplement the discounts already in place. Think of it as adding coins to your interCHANGE jar. They add up quicker than you think.
If you’re thinking about adopting a Commercial Card solution into your organization, there are a few points to consider.
First, you’re going to need help deciding which suppliers to approach with a card-based payment option. Commercial Card issuers have proprietary tools that can tell you which suppliers are already accepting card payments from your peers. While it’s true that nobody knows your suppliers like you, working with someone who understands the industry can make your supplier segmentation efforts much easier.
Next, you will need to decide which Commercial Card methods are right for you. Card-based programs for corporate B2B payments go by many different names, and not everyone can agree on their definitions. Terms like Corporate Card, Purchase Card (P-Card), Ghost Card, and Virtual Card (V-Card) are commonly used to generically describe card based B2B payments. The reality is there are some subtle, yet very important, differences between each of these terms that need to be understood if you're thinking about adopting card-based payments in your Accounts Payable department. Let's break down these differences.
- Corporate Card or P-Card are terms most commonly associated with physical plastic in the hands of authorized employees. These cards have a purchase limit that is greater-than or equal-to the expected monthly spend of each cardholder. Purchases on these cards tend to be lower value and most often relate to Travel & Entertainment (T&E) expenses. There is rarely much thought given to a vendor's acceptance since the purchases follow patterns of retail, where card payments are the norm.
- Ghost Cards are similar to P-cards in that they have purchase limits greater-than or equal-to the expected monthly spend of the cardholder. The biggest difference is that there is no physical plastic on which to print the number. The account details are usually held on-file by a single vendor for recurring charges (think subscriptions) or to collect prepayment on orders placed for goods and services (think travel agent, airline, or online wholesaler).
Virtual Card or Single Use Accounts is a form of a Ghost Card that is intended to be used only one time. The purchase limit is set to the exact amount of the payment owed, and there are restrictions that can be placed to limit when the card can be used and how many “swipes” are allowed before the limit is reached. This type of card is ideal for B2B invoice payments. The Virtual Card or Single Use Accounts information is typically delivered to suppliers electronically and can be accompanied by line item remittance details. Some issuers can even integrate Virtual Card payments into your accounting or ERP system.
Online & Telephone Payments. This category doesn’t have a specific industry term, but it’s still important to consider. Some suppliers will only accept card-based payments if you are willing to log into their website or call them on the phone. While this doesn’t sound like a practical solution for many AP departments, there are Commercial Card Issuers that offer this as a service. They have teams of people dedicated to logging in or picking up the phone to pay suppliers with a Ghost or Virtual card on your behalf.
Commercial Card programs are often an underutilized option in most Accounts Payable strategies. Best-in-class Commercial Card strategies will include a combination of all the methods mentioned above.
- Corporate Cards in the hands of employees (along with a comprehensive expense policy) keep the business moving forward by ensuring small ticket items can be purchased without the need for prior approval.
- Ghost cards held on file by strategic suppliers ensure prompt fulfillment of orders, as well as accounting efficiencies by tying a single supplier to a card account.
- Virtual Cards streamline the payment process by replacing some checks with electronic delivery of payment and remittance details.
- The Commercial Card issuer is tasked with going online to pay monthly utility payments using a Ghost Card, adding time savings and additional spend toward rebate calculation.
The reality is that the shared interchange (rebate) is not the only financial benefit of adopting a Commercial Card program. You can also realize cost savings by replacing some of your check payments. You can add efficiencies by automating payments through a Virtual Card program. I would also be remiss if I didn’t mention the inherent terms extension you could find by financing a portion of your payables through a card program. Take a look at your payment strategies and see if it’s time to make an interCHANGE. If so, Nitor can help you determine which Commercial Card program is right for your organization.
Lastly, adding a Commercial Card program to realize all the benefits mentioned above is just one component of a comprehensive Cash Management Strategy. There are other levers that are complimentary to making your strategy complete. That is a whole other blog!"
Join us for our next webinar, "Unlocking "Solar" Value with Cash Management", to learn how Procurement can work with Treasury to build an annuity-based value that recurs and compounds in perpetuity (without massive infrastructure investment).