Commercial card strategies
have helped corporates weather the global recession, but the
potential for growth is still enormous. Particularly in Latin
America, where are number of US banks are looking to launch new
programmes. Robin Arnfield reports.
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Despite the 2009
financial crisis, the US commercial card market has continued to
grow. Purchasing managers see commercial cards as a way of
controlling spending. But Latin America is still nascent, but
commercial cards issuers expect big growth in the region.
“The financial crisis benefited US
procurement cards (P-cards) because, when an economic slowdown
occurs, purchasing managers need to find better ways to control
spending,” says Aite Group senior analyst Nancy Atkinson.
“Because they provide so much data
on individual transactions, P-cards can be controlled so they’re
only used for certain types of purchases.”
Data from the Association of
Financial Professionals reveals that, while cheque usage by big US
corporations is falling, P-cards are used for only 4% of US
corporations’ payments to major suppliers. Nevertheless, First
Annapolis Consulting’s Frank Martien and Dan O’Neill remain
optimistic.
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By GlobalData“Factors such as the increasing
adoption of electronic invoices and integration of P-cards with
accounts payable [A/P] systems have led to an accelerated decline
in cheque usage over the past three years,” say Martien and O’Neill
in First Annapolis’ December 2010 report.
“Many observers wonder whether
automated clearing house (ACH) payments, wire transfers, or cards
will capture a disproportionate portion of the growth opportunity
in electronic payments in the wake of the cheque’s ultimate
demise.
“Within the US market, P-cards’
ability to capture data and to offer centralised payment controls,
along with their online reporting and reconciliation tools,
arguably position P-cards for significant capture of this
growth.”
Volumes
In 2006, the US
commercial card market grew 19% year-on-year in volume terms,
according to Aaron McPherson, practice director for financial
services at IDC Financial Insights.
“It also rose by 19% in 2007,
slowing to 11% in 2008 and 9% in 2009, but recovering to 12% in
2010,” McPherson says. “I think the US market will rise by 13-16%
in the next few years. P-cards solve many problems for corporations
by integrating electronically with their financial supply chain
systems and by providing credit lines.”
According to McPherson, Visa is
taking more volume than American Express in the US, due to Visa’s
larger acceptance network and to the number of banks pushing Visa
commercial cards.
“Amex must address a perception
problem, in that firms wrongly see it as solely providing travel
and entertainment [T&E] cards, when it also offers P-cards,”
McPherson says. “In 2010, Visa’s US commercial credit cards saw
1.7bn transactions, worth $268bn.”
“MasterCard commercial credit cards
saw one billion transactions, worth $164bn, and Amex commercial
cards 1.25bn, worth $211bn.
“Visa US commercial debit card
transactions totalled 280m transactions in 2010, twice as much as
MasterCard commercial debit volume.” (All these figures include US
government cards.)
Rebates
McPherson says a
significant proportion of P-card transactions are for low-cost
e-commerce purchases, which were previously made from business
supply catalogues.
“For example, going to the
Staples.com site to buy printer cartridges,” he says.
The economics of the P-card
industry, where issuers provide rebates – cashback – to their
biggest clients based on purchasing volume, act as a barrier to
P-cards being used for large-value transactions. The rebates are
derived from the merchant service fee – typically 2% – that
suppliers pay for accepting card payments.
Terry Wellesley, BMO Bank of
Montreal’s executive managing director, corporate payment sales,
North America, says the rebates banks have to pay their top-tier
clients hurt their P-card margins.
“Paying rebates is not such an
issue in the middle-market due to lower volumes,” Wellesley says.
“In e-commerce, which is an area offering great opportunities for
P-cards, issuers can also get better margins.”
The challenge for P-card issuers is
to persuade their clients’ suppliers to accept P-cards for
higher-value items, says Aite Group’s Atkinson.
“Despite the card associations’
‘honour all cards’ rules, suppliers often don’t accept P-cards due
to their high merchant fees, despite taking other types of cards,”
she says.
“Banks rarely enforce this breach
of the ‘honour all cards’ rules. They know which merchants reject
P-cards as they check their clients’ supplier lists against the
list of Visa- and MasterCard-approved merchants. P-card payments
could grow exponentially if the card industry adjusted its policies
on P-card merchant fees.”
Virtual cards
Most US P-card
issuers now offer virtual cards, which can only be used
electronically.
“Some of these virtual cards may
only be valid for one transaction, to prevent fraud,” Atkinson
says.
JP Morgan offers virtual accounts
enabling clients to generate one-time-only card numbers to pay for
larger, single purchases. The accounts are integrated with the
electronic invoicing and procurement systems the bank offers
corporate clients.
Bank of America Merrill Lynch
(BofA) has offered the ePayables virtual card account product for
five years. ePayables is used, not by individual purchasers, but by
the A/P department to pay invoices.
In 2009, $6.1bn in payments was
processed using ePayables.
“ePayables has had faster growth
than commercial cards that have been around for 10 years,” Jennifer
Petty, a BofA card product executive, says. “This is because the
growth of ePayables is driven by transaction size. P-cards are used
for transactions worth $300 typically, and ePayables is used for up
to $5,000.”
Latin America
“Commercial cards are still new in
Latin America,” says Atkinson. “There will be initial traction in
Latin American T&E cards, and later we’ll see growth in
P-cards, mainly for lower-value transactions.”
“The Latin American commercial card
market is an emerging but still nascent market,” Paul Horn,
Citigroup’s global product manager for commercial cards, says.
“There are niche pockets of
commercial card spending in countries such as Brazil and Mexico
that are important opportunities.”
BofA has identified Latin America
as an area for expansion.
“BofA is currently developing its
Latin American commercial cards operation,” Petty says. “During
2011, we will be launching in key markets such as Brazil, Mexico
and Chile.”
“As with many other developing card
markets in the world, the market for commercial cards in Latin
America remains largely untapped,” says Edgar, Dunn & Company
analyst Romina Abal.
“This is especially significant in
the small to mid-size corporations where less than 5% of all
business expenses are on cards. Even though most small business
cash flow requirements are still funded through personal cards,
some banks and card networks/brands are starting to offer products
and services to cover the needs of this niche.
“For example, American Express,
which has traditionally issued commercial cards to large
corporations, has started to offer small business cards in
Brazil.”
EDC anticipates significant growth
in the Latin American commercial card market in the region for the
next five years, especially in Brazil which shows the highest
market potential at around BRL300bn ($179bn).
Amex is seeing growth opportunities
in P-card usage in the Latin American middle market, spokesperson
Molly Faust says.
“We are seeing more and more Latin
American clients using P-cards for items such as telecoms, taxes
and insurance, so they can have better visibility on spending,”
Faust adds.
“While Latin American executives
tend to use their own cards for commercial purchases, Citi is
working with its clients to promote the use of T&E and P-cards
[by employees] throughout the region,” says Agustin Gonzalez,
Citi’s Latin American commercial cards manager.
“The adoption of P-card programmes
gives clients the opportunity for cost-savings, fraud reduction and
tighter internal controls.”
Citi’s commercial cards business
operates in Latin America in two ways.
“We have a local presence in
individual countries, where we have local commercial card clients,”
Gonzalez says. “Also, as a global bank, we have multinational
clients with Latin American subsidiaries, whom we can offer
local-currency Latin American cards.
“In countries where we don’t have a
presence, we offer cross-border cards. It’s common for a client to
ask for commercial cards in multiple Latin American countries.”
Citi expects to double its Latin
American commercial card business in the next few years, Gonzalez
says.
Citi’s Latin American subsidiaries
operate local commercial cards processing platforms. However, Citi
plans to implement its global cards platform across the region,
including core back-end systems, a global reporting database, and
‘front-end’ web tools.
Offering a global platform in Latin
America will benefit Citi’s global clients as they will get a more
consistent reporting and administrative experience across the
region, Gonzalez says.
Corporate prepaid
cards
One growth area in Latin America is
corporate prepaid cards, says Celent senior analyst Zilvinas
Bareisis.
“Prepaid cards will play an
important role in some niches of the corporate card market
including government benefits, meal and gasoline vouchers, payroll
and fleet cards,” Abal says.
“In Latin America, Citi sees big
opportunities to offer corporate and public-sector prepaid cards,
because of the large number of unbanked consumers,” says John
Kohari, head of Citi’s global prepaid card services.
“Corporates can use our cards for
payroll and incentive payments to staff, and for making reward or
rebate payments to customers, while governments can pay benefits
through our cards.”
Citi launched a Latin American
corporate prepaid card platform in 2010, and during 2011, will roll
out corporate prepaid cards in Argentina, Brazil, Colombia, Mexico,
Panama and Peru, Kohari says.
Miami-based NovoPayment has rolled
out corporate prepaid cards for employers to give to staff,
distributors, and agents in Venezuela, Peru, Mexico, and
Colombia.
These cards include prepaid fuel
cards, incentives/rewards cards, and travel expenses cards.
NovoPayment argues that offering corporate prepaid cards eliminates
employers’ administrative costs and also reduces the fraud and
theft risks of using cash and cheques.
“The growth of corporate prepaid
cards in Latin America is promising, given the fact that more and
more companies are responding to the value proposition,” says
NovoPayment CEO Anabel Perez.
“There is no question that, once engaged, they recognise the
savings and improved efficiencies corporate prepaid cards provide.
But it’s disappointing because corporate prepaid could be growing
so much faster except for the fact markets are so underserved.”
