No matter the size of the enterprise, the accounts payable team tends to be deluged with paper. Mostly in the form of invoices and/or paper checks sent to suppliers. In fact, 70% of all invoices are still paper-based, according to Ardent Partners research, which can cause significant headaches for the accounts payable team from an efficiency and time-management perspective (not to mention the financial impact). Paper invoices take around 12.4 days to process and approve, so extending that across potentially several thousand invoices on a monthly basis doesn’t scale well.
Perhaps the most bothersome part, however, is that a high number of approved invoices in the average enterprise are for one-off purchases that may not happen again for several months, if at all. For that matter, many approved invoices are also for indirect materials such as office supplies, coffee, and other items that aren’t part of a product the enterprise sells. There’s a way to cut down on all this paper: the purchasing card.
How Does a Purchasing Card Work?
In my discussion about commercial cards at the end of October, I touched briefly on an explanation of purchasing cards (“p-cards”) and how they’re used. To recap, p-cards came about in the 1980s as an outgrowth of the success that corporate cards enjoyed helping to manage business travel programs. The cards emanated out of a desire and need to eliminate the “petty cash drawer” that businesses used to keep on hand for the small one-time purchases. Over time, their convenience of use and the dramatic expansion of suppliers who accept cards has driven their growth. Called procurement cards in the UK, p-cards are designed to allow enterprises to leverage the credit card infrastructure in order to cut down on the number of purchase orders generated and invoices processed and paid.
At a very basic level, purchasing cards allow enterprises to use the same credit card processing networks as consumers in order to pay for day-to-day business expenses. A purchasing card is, in this way, the business equivalent of a consumer’s primary credit card. The main difference between a consumer card and a purchasing card is that p-cards don’t carry a balance from month-to-month; the enterprise must pay the card issuer in full each month. P-cards also offer regular rebates on dollars spent, which does happen in the consumer world but not necessarily on the same scale.
Many small and mid-sized businesses, may use p-cards for most or all enterprise spend. Services companies in particular, such as management consultants, may be able to use p-cards almost exclusively.
Where are Purchasing Cards Most Effective?
P-cards have traditionally shown their value when it comes to low-dollar-value, high-volume transactions. If an enterprise wants to purchase coffee for the break room, for example, the office manager may use a purchasing card to pay the bill. This means a purchase order (PO) doesn’t get generated and the accounts payable team doesn’t need to process an invoice in order to pay the coffee vendor. Likewise, the coffee vendor doesn’t have to generate an invoice and wait weeks or, more likely, months to get paid. Multiple transactions like this build up over the course of the billing cycle, and then at the end of the month the AP team pays the entire bill in one lump sum to the card issuer.
The reason p-cards are popular is because of the process savings that accrue to the buyer by avoiding any P2P documentation, as well as the program rebates that are generated. Efficiencies and speed of cash receipt are among the supplier benefits. Suppliers do pay a fee for that convenience in the form of an interchange fee that suppliers must pay to process a card transaction. Expansion of p-cards to larger ticket items and distinct categories has the opportunity to gain more traction as the card companies and issuers get more creative with their offerings.
Who Offers Purchasing Card Solutions?
Purchasing cards are ubiquitous in the commercial payments realm. As a result, many banks and other non-bank financial services firms offer a purchasing card product. Some card issuers refer to their p-card solutions as “commercial cards,” which is technically true but slightly inaccurate. A few of the purchasing cards out on the marketplace are offered by companies such as:
- JP Morgan Chase
- US Bank
- Citibank
- American Express
- Bank of America Merrill Lynch
- Commerce Bank
- Barclays
- Bank of Montreal
- Citizens Bank
- SunTrust Bank
Final Thoughts
Purchasing cards show their strength as part of an integrated payments workflow tied in with other electronic payment methods. When it comes to the high-volume, low-dollar-amount purchases that enterprises make every day, p-cards can simplify the payments workflow and allow for payment consolidation across all the employees making business-necessary purchases. P-cards may not take on all indirect spend across the enterprise, but they can certainly take on a fair percentage. As such, p-cards are definitely worth your time and consideration.
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