Revenue from commercial cards has been growing at a steady pace in the past decade, spurred by an increasingly global economy. Sara Perria investigates how banks in the US have coped with the financial crisis, turning it into an opportunity to strengthen their commercial cards business
Commercial cards are gaining momentum, with the financial crisis working as an incentive more than an obstacle, as companies need to cut costs and monitor employees’ expenses closely.
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Technological improvements are allowing for increased control over the expenses approval process, with the possibility of tailoring the programme to the employee, its role and the type of expenses authorised.
A stricter monitoring of how employees spend their money is already a good incentive. On top of this, banks say, they can offer cost savings through the reduction of costly paper checks and opportunities to negotiate discounts with select suppliers. Many commercial card programmes also allow companies to earn an annual rebate based on their total card spend.
The US and Europe are experiencing a significant growth and US banks have been quick in grabbing the opportunity.
Commercial cards include various types of products, from small business credit and debit cards, to prepaid commercial cards, or corporate cards.
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By GlobalDataJP Morgan Chase, the largest US bank by assets, is the first issuer of Visa and MasterCard commercial and purchasing cards by volume, according to a 2012 Nilson Report. If we focus solely on the US, it also leads the small businesses credit card and the prepaid commercial cards ranking.
Runner-up Bank of America (BofA), the second largest US bank by assets, experienced a significant 16% credit card volume increase. This can be read as the positive result of its decision to integrate the commercial cards business with its Global Transaction Services (GTS) group, which is part of Global Banking and Markets.
BofA decision to link closely the commercial card business with GTS aims to target clients that may be interested in a broader range of services and need not only commercial card expertise, but also advice on how a ( card programme can operate in tandem with the broad range of working capital solutions.
"The commercial card team develops strategies and solutions that are closely aligned to the treasury goals of our clients, integrating ePayments solutions to help unlock working capital while increasing efficiency, visibility and control," Kevin Phalen, head of Bank of America Merrill Lynch’s card and comprehensive payables team said.
Limiting the commercial cards’ snapshot to corporate cards in the US, Citigroup is by far the biggest issuer, with a purchase volume of $11.5bn, followed by BMO Harris and BofA with $6.7bn and $6bn respectively. JPMorgan, according to the Nilson report, is fifth, with $5.5bn.
Moving to Europe, figures by consultancy firm Value Partners show a steady compounded annual growth in the commercial cards business, with a 9% increase from 2005 to 2012.
"These are a type of payment products with growing penetration despite the state of the economy as their business case is funded of cost reduction and increased control on spending for corporates said Francesco Burelli, partner at consultancy Value Partners. "It is a win-win type of product that benefits the corporate customer and the provider alike," he added.
What is driving growth
Banks are well aware of the fact that commercial cards are becoming a growing source of revenue.
BofA is investing heavily – in terms of technology and staff – and has reported a 20% growth in revenue from commercial cards over the last five years.
The bank says that, as treasury and accounts payables professionals are becoming extremely savvy, a card becomes more widely recognised as a key solution in a client’s payments transformation efforts.
"More and more companies realise the value in adopting electronic solutions due to the cost savings, improved and streamlined processes and enhanced visibility and controls. That recognition is driving the usage of commercial card solutions across the globe," Phalen explains.
The financial crisis has also played a role in underpinning commercial and specifically corporate cards usage, due to greater need to control expenses.
At the same time, JP Morgan head of international commercial cards Catherine Moore, explains, business travel is picking up following the economic slowdown, making it all the more important to deliver the right product and customer experience.
"We have been working closely with companies to assist them with enhancing their travel spend analysis and programme implementation to meet their commercial card needs," Moore says.
"However, just because people are travelling more does not mean that they are travelling in the same way as pre-crisis levels: employees are travelling less in business class service for short-haul flight and are often avoiding hotel stays by flying early morning and coming home in the evening whenever possible," she stresses.
Yalamanchili Europe president Chris Ellis stresses how technology improvements and new platforms have opened new possibilities in managing corporate cards. For this reason, these are becoming more and more appealing to companies that want to keep a closer and attentive eye on what is spent and where.
"We focus on prepaid cards and we offer platforms that haven’t got the burden of the old legacy system," Ellis says.
This means that they can be more agile: "We come from a different world: we don’t expect clients to tell the bank what they need every time, because we set them up on a platform that can be managed autonomously by the company itself. We are able to support far more flexible products on a prepaid platform," Ellis adds.
For example, a company can access to its account and set the specific scope of its corporate cards. It can choose to allow an employee to spend up to $1,000 and another one up to $500. It can also choose where that money can be spent, at what time, or whether the card can also be used to withdraw money from ATMs.
Many banks consider prepaid corporate cards not profitable enough, but Yalamanchili says this is not the case and stresses that interchange fees are not higher, while providing a very effective means of checking expenses.
JP Morgan claims it has processed nearly half a trillion dollars worth of prepaid payments and helped more than 1,500 clients implement and manage successful prepaid payment programmes to become the largest prepaid card issuer in the United States.
"Prepaid commercial cards are growing, but not at the expense of credit commercial cards," Moore says.
"Prepaid cards allow quick and secure disbursement of payments to individuals .They are rapidly becoming the disbursement vehicle of choice for corporations looking to maximise payment efficiency, minimise the cost and inconvenience of paper checks and deliver an easy-to-use pay alternative to payees," she says.
Competition
The market is growing fast and offers major opportunities, but competition is high.
BofA explains that to gain its share of the market it has made a "significant investment in expanding its global footprint".
According to Phalen, BofA cards are accepted at nearly 36 million merchant locations worldwide and servicing is available in local time zones in more than 16 languages. The commercial card programme supports over 30 currencies and it is run from a single point of contact and a single card management platform to manage worldwide spend.
The strategy of the second US largest bank by assets focuses on an "holistic view of the client’s total needs, creating solutions that successfully address key challenges while helping achieve greater operating leverage within the treasury area," Phalen stresses.
"What sets the firm apart in servicing is its fully integrated approach, with clear channels of communication across all levels and all locations. We also believe that the best client experience will occur when we can control each part of the process. And owning the end-to-end solution is key to that, he adds.
The head of cards also highlights how the bank has been investing continuously in the platform and how, over the last few years, the Commercial Card business has received a sizable percentage of the investment dollars allocated to GTS .
JP Morgan, instead, says it has offered commercial card solutions for more than 25 years and currently serves more than six thousand public and private sector clients and more than six million cardholders.
A good point of observation to see how the market is evolving, with mobile services on the rise: "We are seeing changes in how employees book, conduct and report their travel, so providers need to adapt to meet their needs. As one would expect, mobile services for travel and banking are impacting on how clients interact with their employees on the road. More tools that can be available in a handheld space are essential and going forward."
Challenges and strategies
As the commercial business becomes more and more sophisticated, new challenges crop up. Travel managers and procurement professionals, for example, have worked diligently to drive savings by consolidating suppliers within categories and using data to not only ensure compliance to those deals, but also to negotiate even further savings with chosen travel providers.
Moore explains: "In the ‘airline’ category, we see firms that have done a good job getting their base fares to record low levels, but the overall fares are still relatively high."
Last March, the first US bank by assets developed a strategic partnership with AirPlus International that offers business travel programmes a new approach for corporate cards and central bill accounts that will help customers adapt to these industry changes over time.
"Together, we are offering a global T&E solution that delivers three unique benefits to business travellers and travel managers: one, value through worldwide customer service with local expertise; two, leading payment products in local markets around the world; and three, consolidated corporate travel and entertainment spend data, utilising data directly from the airlines, Global Distribution Systems and travel agencies," Moore says.
Importantly, these solutions allow programme administrators and travel managers to view a complete picture of all travel costs, improving transparency, increasing compliance and enhancing cash management and cost savings.
BofA stresses instead how commercial card programmes are becoming more virtual, more mobile and more global. Organizations are searching for new ways to streamline and access their payments information, while achieving cost savings and efficiencies.
In Phalen’s words: "There is considerable value to be gained in terms of managing costs, automating processes, enforcing controls and enhancing data reporting. Perhaps most importantly of all from a treasurer’s perspective, the resilience of the supply chain is increased by delivering substantial working capital benefits to both the company and its suppliers."
The list of challenges is then clear and revolves around transforming paper payments to electronic solutions; understanding regulatory changes and risk control; navigating regional nuances to grow their business across borders; and increasing supplier acceptance of card.
