The Commercial Card Game:
Why You and Your Suppliers Should say, “Deal Me In”
Gary McGinnity
Trish Herskovitz
Assistant Treasurer
Senior Vice President
Union Drilling Inc.
Treasury Management
Texas Sales Manager
Kristy Furlow
Senior Vice President
Regional Sales Manager – Texas and
Louisiana
TEXPO 2011
Agenda
• Commercial Card Trends
• Commercial Card Transaction Basics
• Card Transaction Benefits – Buyers
• Card Transaction Benefits – Suppliers
• The Union Drilling Card Experience
• Q&A
Trends – Declining B2B Check Volumes
The typical organization today makes only 57% of its B2B payments by
paper check, down from 74% in 2007 and 81% in 2004.
Source: 2010 Association for Financial Professionals (AFP) Electronic
Payment Survey.
Trends – Electronic Payments on the Rise
The percentage of noncash payments that were electronic (vs.
checks) rose from 68% in 2006 to 78% in 2009. Electronic
payments include ACH, credit card, debit card and prepaid card.
Source: 2010 Federal Reserve Payments Study
Trends – Steadily Rising Card Spending
Purchasing Card Spending in North America (in $ billions)
In the past decade, purchasing card spending has quadrupled from about $40
billion annually to more than $160 billion a year.
Source: Purchasing Card Benchmark Survey Results 2010, RPMG Research Corporation
Basics – Commercial Card Transaction Flow
Associations
VISA/MC
11
10
3 6
5 4
9
12
Processor
Card
Issuer
2
7
13
Acquirer
8
PLAYERS:
14
Merchant
Merchant
Card Holder
Merchant Acquirer=Merchant Bank
Association = VISA or MC
15
1
Processor
Card Issuer
Cardholder
Basics – Understanding Interchange
•
Interchange is a transfer fee between issuers and acquirers used
to maximize the growth of the payment network for the benefit of
all participants.
•
The current Interchange Reimbursement Fee (IRF) rate structure
includes rates that vary by card product, processing technology
and merchant category in order to reflect the economics and
operational characteristics of a transaction.
Buyer Benefits |
Process Efficiency/Cost Savings
Purchase
Order
Purchasing
Card
The average administrative cost
(including sourcing, purchasing and
payment activities) of a traditional
purchase order based process was
reported to be $93, compared to
around $22 for a purchasing card
transaction (a per-transaction
savings of about $71).
Source: 2010 Purchasing Card Benchmark Survey, RPMG Research Corporation.
Buyer Benefits | Rebates/Rewards
•
Rewards: Air fare, hotel stays,
gift cards
•
Rebates: Based on level of
spend
•
Variables in rebate
calculations
–
–
–
–
Issuing bank
Card brand
Merchant
Level of detail the vendor sends
with the transaction
(i.e., Level 3)
– Size of transaction
Buyer Benefits | Float Gains
•
Commercial card cycle standard is 30 calendar days with a 25
calendar-day grace period before payment is due.
•
Card payments provide an additional 25-55 calendar days of
payment float.
•
Due to extended payment float, balances remain in your account
longer in order to offset service fees, pay down debt or earn interest.
Buyer Benefits | Overall Cost Savings
Sample Commercial Card Benefits Calculation
Total Dollar Amount of Monthly Check Disbursements
Total Number of Monthly Checks Written
Percentage of Total Disbursement Dollars moving to Commercial Card
Percentage of Total Number of Check Transactions converting to Comm'l Card
Average Savings of Commercial Card Transaction*
Rebate/Reward
Average Days of Payment Float Extension Due to Commercial Card
Interest Expense Savings/Interest or Credit Earned
Total Estimated Monthly Commercial Card Spending
Total Estimated Monthly Number of Commercial Card Transactions
$1,000,000.00
250
25.00%
25.00%
$31.00
0.50%
40
4.50%
$250,000.00
62.5
Annual Float Benefit
Annual Transactional Savings
$11,095.89
$23,250.00
Annual Rebate/Rewards Benefit
$15,000.00
Total Annualized Benefit of using a Commercial Card
$49,345.89
*National Association of Purchasing Card Professionals and Palmer & Gupta P-Card Benchmark Survey Report estimate
the Purchase Order process to cost anywhere between $50 - $250. The Commercial Card transaction process is
estimated to cost $19 per charge.
Buyer Benefits| Fraud Risk Mitigation
•
Nine out of ten organizations (90%) that experienced attempted or
actual payments fraud in 2009 were victims of check fraud.
•
88% reported that they believed “increased use of electronic
payments for B2B transactions” was an important strategy for
mitigating potential payment fraud risks.
Source: 2010 Payments Fraud and Control Survey, Association for
Financial Professionals (AFP).
Buyer Benefits | Fraud Risk Mitigation
•
Issuing bank or the merchant
typically bears card fraud
related loss
•
Payment disputes – Time to
review transactions prior to
money leaving your account
•
Card insurance coverage –
employee loss provisions
Buyer Benefits | General Ledger Integration
•
Accounts Payable needs to enter general ledger codes for all
purchases into accounting system.
•
Online general ledger integration tools provide that capability for
card transactions
•
Expense reporting capabilities for cardholders – available through
some G/L integration tools
Buyer Benefits | Single-Use Cards
•
aka “ghost” cards
•
Card number assigned for
purposes of a single transaction
only
•
Number can only be used for a
transaction of a particular dollar
amount to a particular vendor
•
Allows for secondary approval,
which adds a control in the
purchasing process
Supplier Benefits | Attract/Retain More Business
• Card acceptance can be a central component in a preferred vendor
relationship.
• Similar to how today it is impacting retail businesses such as fast-food
restaurants, card acceptance can drive new sales for wholesale
businesses.
• Nearly half of respondents (49%) in a national survey* said that over the
past five years their suppliers that accept purchasing cards have
increased share of business with their organization to a greater extent
than suppliers that do not accept cards.
2010 Purchasing Card Benchmark Survey, RPMG Research Corporation
*.
Supplier Benefits | Get Paid Faster
• Total float on check payment –
typically 5 to 7 days
• Total float on a card transaction –
typically 36 to 72 hours
Supplier Benefits | Get Paid Faster
• Negotiated terms can also speed payments
• Best strategy for buyers to persuade suppliers to accept card
transactions: Offer to shorten payment terms.
• Improved cash flow (e.g., net 15 terms instead of net 30) and
strengthened customer relationship can help offset fees related to
card acceptance (i.e., interchange).
Supplier Benefits |
Ease Collections Management
• Take late payments over the
phone
• Take payment by phone and
enable further shipments;
reduce “credit holds”
Supplier Benefits |
Improve Payment Processing Efficiency
• Today’s tools allow suppliers to
accept card payments online in
an automated fashion.
• Click a button and money is in
your account.
Supplier Benefits | Single-Use Cards
• Ghost cards reduce Payment Card Industry Data Security Standard
(PCI DSS) exposure.
• PCI DSS was established in 2004 by five major credit card
companies to protect against card-data breaches.
• If a single-use card number is stolen, it can’t be used for any
transaction beyond the single transaction for which it was
established (i.e., to a particular vendor for a particular amount).
Union Drilling – Company Profile
• Fort Worth, TX-based provider of
contract land drilling services and
equipment
• Serves U.S. oil and natural gas
producers, primarily those operating
in the Appalachian Basin (including
Marcellus Shale), Arkoma Basin,
Permian Basin and Fort Worth Basin
• Fleet of 71 drilling rigs
• 1,200+ employees
• 8 divisional locations across the U.S.
• 2005: company doubled in size
through acquisitions, went public
• 2010 revenue: $192.5 million
Union Drilling – T & E Program
• Before 2009, “Corporate Credit Card” for travel & entertainment and
some emergency purchasing
• Card users included:
▪ Rig managers (“tool pushers”) – 24/7 operation
▪ Divisional managers
▪ Corporate executives
▪ Truck drivers
▪ Mechanics
• Rig-to-rig traveling sales environment
Union Drilling – Adding a Purchasing Card
• In 2009, company established
Purchasing Card Program
• Transitioned to a new card
provider
• Converted to a new T&E card
program and added a
Purchasing Card for divisional
purchasing agents
• Began using purchasing card
with key vendors of rig supplies
in each division
Union Drilling – State of the Program
• 300+ T&E cards issued
• 16 Purchasing Cards
• About $500K in monthly spend
• 80/20 spending breakdown
– 80% spend on Purchasing Card
– 20% spend on T&E Card
Union Drilling – Control Benefits
• Purchasing Department introduced a company-wide
Purchasing Card Program
• Eliminated invoicing for small-dollar purchasing for rigs
• All card purchases reviewed/approved by Divisional Managers and
Director of Purchasing
• Greater accountability (i.e., Why buying so many socket sets?) and
eliminated monthly cut-off issues
• More timely and greater visibility into purchases
• $2K single purchase limit
Union Drilling – Other Key Benefits
• Cost Savings – Elimination of
Accounts Payable data entry,
check-related costs, invoices for
$5 purchases
• Rewards - $60,000 a year at
current spend levels
• Improved vendor
relations/customer service –
Immediate payment vs. 45-60 days
• Extended disbursement float
Union Drilling – General Ledger Integration
• ERP conversion (Oracle)
• Conversion to updated commercial card general ledger interface
tool – required new coding system
• Eliminated dual entry and reduced clerical error with automation
of interface
Union Drilling – Special Challenges, Advice
• High employee turnover
– Card issuance fees
– Need for employeedeparture control
procedures – Finance, HR,
IT
• Trust (and verify)
– Employee agreements
• ADVICE: Start slow and
build the program
– Vendor Acceptance - no
issues with MasterCard,
Visa
– Internal Acceptance - no
problem/fewer POs
Card Benefits – A Recap
Buyers
Suppliers
Process efficiency/cost savings
Attract/retain business
Float gains
Get paid faster
Rebates/rewards
Ease collections management
G/L integration
Improve payment processing efficiency
Fraud risk mitigation
Questions
Gary McGinnity
Assistant Treasurer
Union Drilling Inc.
gmcginnity@uniond.com
(817) 546-4305
Trish Herskovitz
Senior Vice President
Treasury Management
Texas Sales Manager
Capital One Bank
trish.herskovitz@capitalonebank.com
Kristy Furlow
Senior Vice President
Regional Sales Manager
Texas and Louisiana
Capital One Merchant Services
kristy.furlow@capitalonebank.com
(225) 242-3947
This presentation is for informational purposes only, does
not constitute the rendering of legal, accounting or other
professional services by Capital One, N. A. or any of its
subsidiaries or affiliates, and is without any warranty
whatsoever.
(214) 855-1633
© 2011 Capital One. Member FDIC. All rights reserved.