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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.
By improving visibility of outgoings, businesses can gain a better overview of all expenditure, as well as a greater understanding of potential cash pressures
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.
Reyes says: “The company can limit the specific usage of the card. Spending taking place in unauthorised locations will be rejected at the terminal.”
Virtual cards also give very detailed information. As well as the basic details of the card used and the customer details, each item is individually listed with its quantity and unit cost, which enables granular analysis of spending and gives the treasurer greater insight into the company’s purchasing.
Parpou says: “Consider the process steps leading up to and post payment in both the corporate’s account payable and the supplier’s accounts receivable teams. Take, for example, the bank statements that have to be reconciled with payments made and payments received.”
The detail also improves time efficiency as it makes the payments and invoices more readily identifiable.
Parpou says: “Using (say) a virtual card-based payment solution means that there would be one virtual card for each payment instruction or invoice. This makes reconciliation a simple 1:1 matching, and this is done by the issuing system automatically, hence improving data quality and reducing process time.”
Deeper data analysis
A further benefit beyond reduced costs to the treasurer comes from the ability to look into types of data that cannot be gathered in cash or cheque payments.
The data obtained from cards can help to highlight any issues in the chain that could be made more efficient. Hoffmeyer at American Express says: “As well as giving insights to help long-term forecasting, the data from these expense-management systems can be invaluable for managing cash-flow issues in the short term by flagging any areas where costs are too high or inconsistent.”
This data can provide in-depth analysis on where spending is being made away from favourable suppliers, or identify trends in developing spending patterns through shifts in the business operations and expansion into new regions.
Gargagliano says: “There are working-capital benefits through the levels of control and the visibility of data.” Through working in this way the buyer’s procurement team may be able to negotiate favourable terms with its most-used suppliers, enabling further cost savings.
The data obtained from card use can also help solve the problem of how to assess transaction and counterparty risk for an SME’s treasury team, since card providers will have already carried out some detailed scrutiny of existing and future customers before extending credit.
Parpou explains: “There is no need for master data cleansing. In signing up to accept card payments suppliers are checked and registered by the acquirer and corporates are similarly vetted by the card issuer, and so payments are transacted using this data rather than corporate held accounts payable master vendor records.
“Of course good records are important but gathering, checking and maintaining detailed records across the whole supply chain, including the long tail, is not core to business and can be rendered unnecessary [this way].”
Through assessing trends in spending, the treasurer can identify points where higher volumes of payments are being made, and help the team to plan their cash management strategies to deal with these spikes in use.
Hoffmeyer at Amex says: “By improving visibility of outgoings, businesses can gain a better overview of all expenditure, as well as a greater understanding of potential cash pressures in the future. Expense-management tools ensure that businesses can track trends, such as potential over-expenditure or excessive ordering.
“Having accurate information management systems and forecasting in place ultimately leads to tighter financial control, resulting, hopefully, in more opportunities for investment and growth.”
Despite the cost savings and data-analysis benefits, banks are finding that they still need to explain to corporate treasurers at companies of all sizes how commercial cards could be a favourable alternative to paying in cash. But when a company does understand the advantages, it is often keen to adopt the payment method.
“There is growing mid-market interest,” Gargagliano says. “Some corporates are learning of the benefits and want to adopt a commercial cards programme. Others need some education around how it can be advantageous to them.”
The experience across corporates varies; some may have a number of suppliers in the chain that are already willing to take payments by cards, while others may be thinking of on-boarding at a later date. There are also corporates that are resistant to change.
There is growing mid-market interest. Some corporates are learning of the benefits and want to adopt a commercial cards programme. Others need some education around how it can be advantageous to them
Mel Gargagliano, BAML
Changing the culture of making payments within a company can be a slow process, as treasury staff need to be educated about the advantages. Some of the team may be reluctant to give up a portion of their responsibilities.
Citi’s Robson says: “On the B2B side, card transactions can help to deliver process efficiency and real cost savings. But gaining the maximum benefit does mean some internal re-engineering, and then there can be some departmental reluctance as a result.”
Such change requires the approval across a number of functions within a company. In addition to treasury, procurement, accounts payable and IT will have to be involved with various elements of the process, which can slow adoption.
The decision to bring in cards will be assessed between the bank and the company to decide if it is the correct approach for their operations. Banks can work closely with the client to ascertain if the shift will work with their supply chain through looking into their existing supplier base and identifying which of these firms are already accepting cards for payments. Should there be enough in the network to make it beneficial, a move to cards will likely be proposed.
Irfan Butt, head of trade product and structuring for GTS EMEA at BAML, says: “We analyse the supplier spend data and propose an appropriate solution. The treasurer would know what they want to do but may be unsure of whether their suppliers will join the supply-chain finance programme. In truth, depending on the supplier’s profile, they could even prefer to receive a payment by card.”
Corporates looking to step up to the international stage may find that a universally accepted payment option removes some of their concerns about transacting with new foreign counterparts. Cards can be used internationally, making payments across the supply chain. While they might not be accepted by corporates in every market, they can make completing payments with overseas corporates easy and mitigate some of the risk.
Middle market companies are the ones who stand to benefit the most from switching to cards. Many are becoming savvier about how to manage their efficiencies with a small treasury team. Reyes says: “Smaller companies, which can be leaner, can really benefit from the additional working capital that can be accessed through using cards.”
Like consumer credit cards, commercial card products come with benefits. Corporates can receive rebates on the cards and can also offset business costs. Depending on the provider, these can range from discounted membership to breakdown services and cashback on fuel purchases to rebates on spending. While they are nice to have, these are advantages that stretch deeper into the business. The combination of working capital benefits to middle market goes far beyond the advertised advantages of preferential hotel rates or car hire.
[SMEs] can pay suppliers to terms and achieve working capital benefits, still gain a cash flow benefit but look to negotiate better commercial rates from the supplier as they will benefit from earlier payments
Maria Parpou, Barclaycard
Barclaycard’s Parpou points to another benefit as being the process of transfer of title of goods. In traditional ordering and payments, the ownership of the goods passes to the buyer when the goods are paid for. However, as this could be up to 120 days later, the goods may have already changed hands again or been consumed in production process.
Parpou explains: “Think of bricks that move from the manufacturer to a builder’s merchant, to a builder to a home owner for their extension. If the builder’s merchant defaults on their payment, the brick is now part of a house but whose brick is it? With a card-based payment that risk is with the manufacturer’s card issuer and title passes at a much earlier point.”
Cards also help companies that may have struggled to get formal financing from their bank because of a poor credit history. The payment terms of the cards will vary depending on the credit worthiness of the company, but can still act as loans or provide a solution for companies that do not otherwise have access to supplier finance.
Parpou adds that card payments can smooth the invoicing process to the point that it can remove the need for the invoice completely: “Cash flow can be improved by deferring payment to suppliers while settling with the card company on extended terms. This provides prompt payment, to terms or better, to the supplier and releases aged debt and decreases their risk. It also helps the customers’ working capital and potentially reduces unit costs through them being ‘competitive payers’.”