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The Nature of Purchase Cards — Part 1

Published: Jan 29, 2014  |  Author: 3DSI staff  |  Categories: Payment Processing

The Nature of Purchase Cards – Part 1In A Thumbnail History of the Credit Card Industry, we considered a brief history of charge cards and credit cards and the utility that they offered to the marketplace. Then, in Adventures in Interchange (Part 1), we took a deeper dive into the interchange structure and the roles that issuers, acquirers and the brands themselves have in that payment system. A theme of this blog post was the tug-of-war between issuers and acquirers to control interchange to their specific financial advantage. Now, we’ll look at an arena where this push and pull manifests in a most interesting manner: purchase cards, specifically in Accounts Payable.

A short history: Back in the late '80s and early '90s the American Express, MasterCard and Visa brands were exploring a condition that was obvious to them. Their cards were now deployed in a significant way into the payment fabric of the U.S., Europe and most of the rest of the world. But these payments were almost exclusively between an individual consumer and a network of sellers of goods or services who already accepted a card for payment. This network of acceptors was a significant part of the value that the brands had built over the years. Now that cards in general had become an accepted, familiar, and efficient tool for individual consumers, the brands looked for other worlds to conquer. In addition to addressing some growth opportunities in certain consumer sectors like supermarkets, parking, fast food, etc., they also turned their attention to the billions of dollars that were being exchanged between commercial business partners who, in that era, usually paid by paper check.

With AMEX in the lead and MasterCard and Visa in close pursuit, the brands crafted a value proposition to replace checks and ACH for B2B transactions that provided administrative, control and reporting tools as offset to the additional notional expense that a card transaction added to a “trade.” As the interchange model required, this expense was assigned to the seller to absorb. The short version of the story is that sellers were less than thrilled to have an additional expense impacting what they already perceived to be thin profit margins. So…restrained mainly by the reluctance of the seller-side, the P-card concept was slow to take off in the U.S. Public sector entities including the federal government were early to see some advantages to making their purchases with cards and had some success mandating that they be used for certain categories of purchases. Since businesses serving the public sector, by definition, rely heavily on government sales, adoption there was faster than in the private sector.

How P-cards were used in the early days

In the federal government arena, P-cards are popular for payments below $25,000, as they also offer some ability to control, review and in some cases, approve payments in advance. After a few scandals hit the press involving misuse of the public’s resources, the control element available with P-cards got traction and mitigated purchasing misbehavior to some extent. But it still remained convenient and efficient to be able to make payments in the field for things like travel, fleet expenses and general purchases made in the pursuit of the job. Next on the horizon was penetrating supply chain relationships and being used to pay formal invoices that are exchanged between trading partners. This was a little complicated in that the legacy payment processes like checks, ACH and wires were often integrated in to accounting and other information processing systems at both buyers and sellers.

An enterprising idea

As the banks were scratching their heads and trying to figure out how to convert enterprise check payments to cards, one creative bank came up with a crazy idea. They told a prospective buyer/cardholder organization that they would share a portion of their interchange revenue with them if they signed up for a P-card program. While kind of like the old joke about tying a pork chop around your neck to get the dog to play with you, these “rebates” were successful in making the buyers invested in successfully replacing checks with cards. MasterCard and Visa had finally found a lever to incent buyers to play. The vendors customers, the buyers, now preferred, and in some cases, required payment to be made using their card. Today, these rebates are referred to as “revenue share” and are a conventional offering to larger buying organizations as incentive to adopt a bank’s card for payment rather than a competitor bank’s. The issuer banks began competing amongst themselves for customers by offering the largest rebates. With predictable results, the commoditization of P-cards was in full swing.

To counter this commoditization, banks began looking for differentiating elements. Accounts payable technologies, buyer-initiated-payments, integration into popular ERP products, tokenization of card information and prepaid cards have definitely elevated the conversation while providing issuers the opportunity to separate themselves from the pack. It must be working because after a slow start, P-card has consistently experienced the highest growth rate of the B2B card products.

In the next and final part of this series, we’ll discuss the vendor response to P-card innovation and their reluctant acceptance.

3DSI staff

Our staff writers work with 3Delta Systems’ and industry experts to bring you news, trends and insight on payment processing, secure data transfer, and credit card safety for card-not-present and swipe transactions. 3DSI products offer card storage, tokenization and data security for B2B, e-commerce and many other types of merchants, and often save them money with Level-3 processing.