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The Truth about Purchasing Cards: The Good,
the Bad and the Ugly

Purchasing cards (p-cards) are a tool commonly used in business for purchasing low cost, one off or high volume items. Many organizations have utilized and continue to utilize p-cards as a means to quickly buy things they need without having to go through the hassle of the traditional PO process (i.e. requisitions, invoice approval, approve, and finally payment processing). This allows for greater flexibility and ease of use for employees in charge of completing these tasks.

A PayStream Advisors report1 agrees that p-cards are a necessity with the accounts payable process and states that spend on p-cards is experiencing a 16 percent growth in annual spend over the next two years. The report also states that on the buyer side, the benefits of p-cards have long been recognized by many companies and can be summarized into three main categories:

Lowering Processing Costs

P-cards transactions often result in lower processing costs compared to the traditional purchasing process – given that organizations are cutting out a number of steps from the process, including the generation of requisitions, purchase orders, invoices, receipts and the approval of all these documents.

A benchmarking report from J.P.Morgan2 states that “the average cost per transaction with a traditional purchase order process is $92.49, while the commensurate cost with a purchasing card is $21.91. This equates to 76% in savings related to requisitions, sourcing, approvals, purchase orders, invoices and checks.”

p card graphsSource: Purchasing Card Benchmark Report: Key Program Statistics and Best Practices, J.P.Morgan, 2013

Transactional Control

P-cards provide a number of tools for managers that help them gain greater control of spend within their company. A few examples include spend visibility, consolidation purchases for volume or negotiated price discounts, and help with reducing maverick spend. Most p-card providers offer analytic tools that give the company visibility into purchasing habits to help them spot trends, identify possible savings, and better forecast for improved liquidity.

 Attractive Rebates

Rebates offered by issuing banks have become a significant attraction for the use of p-cards. Given the competitive nature of the market place, large volume programs can earn significant rebates. With the right card program, organizations can save money on overhead, obtain lower prices for goods and services purchased and get cash back from the card issuer.

In view of the various potential benefits, p-cards can be a great tool to have in the payables arsenal. But that does not mean that they can be used for every purchase that a company makes.

Purchasing cards can be extremely useful when it comes to low dollar purchases where suppliers are not averse to giving up a small percentage of the transaction amount in order to receive payment almost immediately. But because p-cards force suppliers to pay an interchange fee on every single transaction, they are typically not accepted for large purchases where suppliers are reluctant to give up 2-3% of the purchase price (the average merchant interchange fee charged by issuing banks) for getting paid early. And this reluctance only tends to increase as the value of the purchase increases.

This is one of the primary reasons the average transaction value on p-cards has been low2; the J.P.Morgan report shows that the average spend per transaction is $278 for large markets and $308 for middle markets. To put this into perspective, let’s look at an example: a 2% interchange fee on a $250 is $5, which a supplier may not mind giving up. On the other hand, a 2% fee on a $10,000 purchase is higher at $200, which a supplier is likely more reluctant to pay.

While we are on this topic, let’s talk about a specific type of p-cards that are generating a lot of buzz – push p-cards or buyer initiated payments. These cards give a buyer the ability to pay a supplier using a credit card after the invoice approval process. While the concept of receiving rebates and maintaining control over the transaction through an invoice approval process may sound very attractive, there are often a number of limitations to this idea.

One of the reasons suppliers generally even accept a card payment is because there is no invoice, no approval lag and they receive payment immediately. If buyers start paying them using cards at the end of the invoice approval process (which could be 25-30 days after the purchase), there is very little incentive, or perhaps no incentive at all, for suppliers to accept the card payment. Large buyers may be able to force some of their smaller suppliers to accept p-cards in this scenario, but it will only mean that the costs will likely be passed back to the buyers in other forms. So, even though rebates sound like a great revenue stream, they may be coming at the expense of higher cost of goods and adverse supplier relations.

Given some of the concerns around p-cards and push p-cards on the supplier side, dynamic discounting is emerging as an attractive alternative to p-cards because it puts the control back in the hands of the supplier in determining whether or not to give up a discount in exchange for early payment. Stay tuned for more on dynamic discounting in our forthcoming posts on this blog.




1 The Value of Purchasing Cards: Utilizing P-Cards as a Strategic Form of Payment, PayStream Advisors, Inc., 2012

2 Purchasing Card Benchmark Report: Key Program Statistics and Best Practices, J.P.Morgan, 2013


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