Transaction services 2015: SMEs apply for credit cards

Kimberley Long
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Commercial cards are moving beyond mere expenses to become another source of funding in the supply chain, especially for the middle market.

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Banks are searching for alternative funding solutions for their clients in a market where restricted liquidity demands better use of available resources. And as corporates push for better working-capital management and internal efficiencies, being more inventive with products they are already familiar with is a smart solution. 

Commercial credit cards have now moved to the fore to fill that mandate. Cards are hardly a recent development in corporate banking, but they have matured beyond being used just to pay for corporate travel and entertainment expenses. Cards are increasingly being used as part of supply-chain financing and even as part of the cash-management process.

The immediate advantage in their use comes from the additional time available to settle the final payment. Maria Parpou, director of product, Barclaycard GCP, says: "There is an inherent benefit to businesses from using cards though the extended payment terms that they offer." 

By using a credit card, a corporate can pay its supplier within a couple of days of making a purchase, yet still have some time before they have to reconcile with the bank, giving them greater liquidity in the intervening period. 

Mel Gargagliano, head of commercial cards for GTS EMEA, Bank of America Merrill Lynch, says: "Suppliers can receive commercial card payments within two or three days, so they receive their money quickly. The buyer then could have up to 55 days to pay the bank, depending on where it falls in the payment cycle." 

Deutsche Bank’s commercial credit card services are provided by American Express. When a payment is made by a corporate customer, American Express does not require the transaction to be settled for up to 58 days. Björn Hoffmeyer, country manager for Germany and Austria at American Express, says this ensures that the buyer gets paid promptly, while improving the client’s liquidity as they receive 58 days of interest-free credit. 

This shift towards credit cards is creating new streams of liquidity for smaller businesses as it cuts the cost of processing payments. "They [SMEs] can pay suppliers to terms and achieve working capital benefits, or potentially pay earlier than terms, still gain a cash flow benefit but look to negotiate better commercial rates from the supplier as they will benefit from earlier payments," Parpou says. 

Cards can also create strategic advantage, which translates into cost savings. Depending on the volume of transactions, these can quickly add up. Steven Robson, head of wholesale cards at Citi, explains: "The change in how transactions are made can reduce costs. Changing payment processes to credit cards allowed a corporate to reduce the cost of each transaction from £58 to £8. The movement of other payment flows to cards can also create a new revenue stream based on the rebate on the card spend." 

Corporates willing to receive payments through cards are seeing that it is a guaranteed payment from their buyer that comes within a set timeframe. Because of the certainty it provides, they are often willing to offer discounts. 

Bjoern hoffmeyer 160x186

By improving visibility of outgoings, businesses can gain a better overview of all expenditure, as well as a greater understanding of potential cash pressures

Björn Hoffmeyer,
American Express

Many corporates still operate with spreadsheets and cheques. They will, therefore, need to make considerable cultural changes – not to mention investments – to adapt to rapidly changing technology and move towards an e-payment system. 

In the meantime, credit cards are emerging as a bridge between old paper and new electronic payments – and beyond. Diane Reyes, global head of payments and cash management at HSBC, says: "Cards are increasingly being considered as part of a broader cash management strategy. Cards can adapt to the e-commerce and mobile payments options more easily than paper. They can be utilised as a virtual payment solution, but its functionality is reassuring in its familiarity."

Cards have the advantage of being a known quantity by corporate treasurers. Mostly, they do not require expensive or complex new technology before adoption. The user does not have to be given training on how to make a payment. Reyes adds: "It’s easy to understand how to use cards and the benefits are clear. We are seeing interest in HSBC’s card offering really ramping up."

Commercial credit card usage has been gaining traction in the US, where many mid-market corporates are still transitioning away from using cheques. European institutions appear to be slower to migrate away from cheques, but are adapting as the advantages become clear. 

In particular, virtual cards are emerging to cover a gap in e-payments. Operating digitally, they have time and efficiency advantages, but, like cheques, they have clear payment and security parameters. Virtual cards are given an individual number to make a one-off transaction; limits are set on the time frame in which the cards can be used; the amount to be transferred is pre-set; and the payee institution is also predetermined. All of this prevents the card from being used for any other purpose.