For consumers in the United States, paying merchants – whether by swiping or dipping a card, or tapping a mobile or smart device – is easier than ever. Electronic payments are obviously the default option for ecommerce, and debit cards are the most frequently used non-cash payment instrument at the point of sale. But business-to-business, or B2B, payments have not yet caught up.
Business checks might not be handwritten anymore, but they continue to use up reams of paper, even as the rest of the business world transitions to digital tools. In fact, most businesses still use checks. A 2016 survey by the Association for Financial Professionals (AFP) found that the average U.S. business pays about 51% of its bills by check. This reflects a 4% decrease year over year since 2004, when AFP began reporting on this metric. This varies by company size; middle-market corporations pay about 67.3% (two thirds) of their expenses with checks, while larger corporations make about 49% of their transactions by check. Additionally, while the percent of payments paid via check is declining, the overall volume of business checks is still increasing. Businesses in the United States wrote 4.1 billion checks in 2015, up nearly 20% from 3.5 billion checks in 2012, according to data from the Federal Reserve. Paying by check is still firmly entrenched in U.S. business practice.
And yet, there is an ever-increasing array of options for businesses that want to make payments electronically, including purchasing cards, which can be a great option for businesses. Purchasing cards are a type of corporate charge card used for buying supplies, materials and day to day non-Travel & Entertainment expenses. This article will focus specifically on how purchasing cards can be used by Accounts Payable departments (for a closer look at payments on the Accounts Receivable side, see Seizing the B2B Opportunity in the September/October 2017 issue of Transaction Trends). A charge card is like a credit card, with two key differences: 1) a charge card can be pre-funded or the balance on a charge card must be paid off in full by the payment due date or term (usually one month for consumer charge cards), while a credit card has a revolving balance; 2) charge cards for consumers typically do not have a pre-set spending limit – instead, the spending limit varies from month to month; and businesses can typically set their own spending limit. In fact, businesses can impose many types of spending controls on purchasing cards, from limits on monthly spending and number of transactions to restrictions on merchant category codes.
For instance, a clothing design firm could designate one card for its fabric supplier and set an upper limit on how much can be spent at that supplier each month. The firm could then designate a different card for catering that could be used with multiple different caterers but restrict the merchant category code to help ensure that the card is used appropriately. Finally, the firm could restrict access to the fabric supplier purchasing card to employees in the design department, and restrict access to the catering purchasing card to employees in the events or operations department.
Purchasing cards can vastly reduce accounting costs. The cost of paying by check is more than just the price of the check itself. There is also the shipping cost and the time it takes employees of the business to write, mail, collect, and reconcile the check. All of this can add up to as much as $20 per check. Cutting a check is a slow and cumbersome process that requires a lot of human oversight and intervention. If a check gets lost, stolen or returned, the total costs can be up to 10 times the original costs. A purchasing card transaction is instant, whereas a check takes at anywhere from 6 to 9 days to clear. Purchasing cards often come with real-time transaction monitoring and analytics, offering businesses the opportunity to automate administrative processes and free up staff time for more high-level work. Additionally, the increased level and detail of purchasing card transaction data allows for finer control and oversight of AP processes, which can reduce costs associated with fraud. Finally, purchasing cards afford businesses greater flexibility with their working capital. Wire payment transactions are also instant, but the money is withdrawn instantly as well. With a purchasing card, payment is not due until the statement closing date. This makes it easier for a business to plan out its cash disbursements and ensure adequately. Conversely, a check payment posts immediately; if the business is paying its creditors (payables) faster than its debtors are paying it (receivables), then the business goes without cash for longer. ACH payments take 1-2 days to clear, but businesses that pay with ACH are dependent on external ACH timetables. Purchasing cards strike an ideal balance between flexibility and control that is well suited to most standard business vendor payments.
Merchant acquirers often create additional incentives for Accounts Payable departments to adopt purchasing cards. Consider a business, Logistic Solutions, whose top payables are vendor A, supplier B, and vendor C. If all three vendors/suppliers accept purchasing cards, then the business can proceed as usual. But if, say, A and C do not accept purchasing cards, then the Logistic Solutions’ acquirer can try to sign them up as new clients, and give Logistic Solutions a share of the interchange. This way, the Logistic Solutions AP department has two fewer checks to cut each month and it gets a bonus for bringing the acquirer new clients. Purchasing cards also often generate a rebate, which is the equivalent of getting cash back on a consumer credit card transaction.
Given the benefits of purchasing cards, particularly for relatively low-value transactions that do not involve complicated terms or carry high risk, why have businesses been reluctant to embrace them? In some cases, businesses are not willing to create separate processes to handle simple, low-value transactions versus mission-critical, high-value expenses that have specific terms or require more complex controls than purchasing cards can provide. In such cases, it can help to demonstrate that check costs, which tend to be flat (that is, independent of the overall transaction value), can add up quickly over many small transactions. According to data from the Federal Reserve Payments Study cited above, the average business check was worth $207 in 2015, up 5% from $197 per average check in 2012. Bill.com estimates that the average business check costs about $10 to cut – about 5% of the average check value. Multiplied across the 4.1 billion checks written by businesses in 2015, this amounts to $41 billion in check processing costs. Not all of these checks can be converted to purchasing card transactions, of course. But for many businesses, at least some of their check payments would be easier, cheaper, and more secure if they were purchasing card payments instead.
Another reason, one commonly found in very small businesses, is that the proprietors prefer to use personal credit cards for the business’s expenses. Personal credit cards tend to offer better rewards than business cards, and the interest rates and other associated fees tend to be more predictable. However, allowing employee access to a personal credit card introduces significant complications and risks for the cardholder. As noted throughout this article, purchasing cards can be much more easily distributed, and finance departments can set controls on their usage by individual employees. Additionally, purchasing cards tend to have higher spending limits and better reporting than personal credit cards, because they are designed to be used for business expenses.
As with any new process or technology, businesses can be averse to change. Financial departments are especially sensitive to risk. It is critical that acquirers highlight the security benefits that purchasing cards can bring in addition to the other benefits discussed here. Ultimately, different businesses will have different concerns and priorities, and so acquirers seeking to make a strong case for adopting purchasing cards will need to thoroughly understand the circumstances facing their merchant customers.
By Scott Goldthwaite, Vice Chair of the ETA Technology Committee