A few weeks ago, we looked at the advantages and disadvantages of traditional bank supply chain finance (SCF) programs. As the second part of our four blog series, this time around, we will focus on purchasing cards (P-cards) as a accounts payable program. Like the bank program evaluation, we will look at P-cards across five factors:
- Access for suppliers
- Funding stability
- Cost of capital
- Supplier Support
A P-card is a type of commercial card that allows organizations to take advantage of the existing credit card infrastructure to make electronic payments for a variety of business expenses, including supply chain supplier payments. In the simplest terms, a P-card is a charge card, similar to a consumer credit card.
Access for Suppliers
The use of a P-card for accounts payable has access issues for many suppliers; that is, it’s not a viable option for many for the simple fact they don’t accept credit cards. There are several reasons for this:
- The supplier doesn’t have the capability. If a small company does manual (paper) billing, they may not have a technical mechanism to take cards (even something as simple as Quickbooks). This is an issue for many small businesses that make up the bulk of a buyer’s supply chain.
- The supplier doesn’t want to bear the cost. For a vendor, the average costs for credit card processing ranges from 1.5 to 2.9 percent for swiped cards, and 3.5 percent for keyed-in transactions.
A quick search finds the following cost for the four major card providers:
- American Express – 1.58 – 3.30 percent
- Discover – 1.53 – 2.53 percent
- Mastercard – 1.29 – 2.64 percent
- Visa – 1.29 – 2.54 percent
If a buyer has $1,000,000 in annual spend with a supplier, that can equal up to $33,000 in fees annually.
Since P-cards are credit cards, the buyer’s ability to use them is subject to credit limits implemented by the card issuer. Depending on the size of the buyer, this can be inadequate to cover large purchases and if the buyer goes over their limit, it can put a squeeze on funding availability to continue making purchases to suppliers (and other operating expenses). This can significantly limit the scope of how the card can be used across the entire supply chain. With limited capital available with the credit card, buyers are not able to support long tail suppliers with an early-payment program. Usually, accounts payable departments can only use the pCard with a small handful of suppliers.
Cost of Capital
The cost of capital is a mixed bag for P-cards. On one hand, card programs offer rebates for use. P-card rebates, like the cash-back deals consumers get from their personal credit cards, can secure buyers between 1-3 percent in savings. But the amount of savings varies depending on four main factors: the volume and amount of the purchases and the number of P-cards issued.
On the other hand, the pCard has to be paid in full each month. That presents a limited working capital lift, as the entire balance has to be paid every 30 days. Depending on the time between statement and due date, it could be significantly less than 30 days. When buyers are looking to standardize terms, this can present a situation where true spend (when the bills are actually paid) is unpredictable and payments are made before the norms of many industries, effectively preventing buyers from holding on to cash longer.
While P-cards have some online reporting capabilities, they still only offer limited visibility into spending. Unlike credit cards, which typically show transactions on the company online dashboard as they’re being made, P-card transactions don’t appear until several days after they’ve happened. While this process may seem faster than the PO process, it’s lagging compared to other options.
And because there’s a lag in between when a charge is made and when it appears on a statement, there’s the potential for misuse. Out-of-policy spending may not be discovered until it’s too late to reverse the damage.
Furthermore, P-card reconciliation incurs high admin costs. Most P-card systems don’t categorize spend or integrate with an accounting system.
Finally, purchasing cards offer an incomplete picture of spend data. Most P-cards don’t have reporting capabilities that show budget holders how much cardholders spent versus how much they had budgeted for, obscuring meaningful spend analysis.
P-cards offer little-to-no support for suppliers that may run into issues with transactions. Card companies offer no onboarding or assistance to companies that may have never taken cards. This can be a deterrent to acceptance of cards, especially for smaller companies with smaller accounts receivable departments. Coupled with the fees mentioned above, moving to a strictly-card payment scheme can damage relationships between buyers and suppliers.
When looking at working capital options, supply chain finance and dynamic discounting programs present a much better option to P-cards. With better technology, support, reconciliation, and ease of use, they better serve the needs of buyers and suppliers. More importantly, they can serve the needs of the entire supply chain, not just select suppliers.
P-cards have their place in the financial operations of large companies. They can be perfect for some operating and employee-related expenses, like software subscriptions, telecommunications services, utilities, and travel. However, the limits of credit cards cause more problems than they solve. In addition to the things listed above, P-cards can increase the risk of fraud from employee misuse and can be doggedly inefficient. Additionally, employees using the cards have to be trained on specifics: what purchases are allowed and not allowed, how to reconcile the transactions, and other nuances of the program. Again, this is a time and resources drain.
In examining the entire landscape of working capital and early-payment solutions, there are better options to support your supply chain and suppliers in a more secure, efficient way.