Automating Middle Market Vendor Payments with Commercial Cards

vendor-payments-7-5-17.pngWhy are so many businesses still using checks for vendor payments, after all these years? Advances in payment technology has created better ways to pay and be paid and there are now opportunities for banks to offer something different. BC Krishna, the president and CEO of MineralTree, and Justin King, senior director of partnerships at Visa, sit down to discuss this issue in the following Q&A.

Q: Why are middle market businesses continuing to use checks for vendor payments?
JK: First, there is a perception among middle-market companies that checks are convenient, quick and secure. However, sending and receiving checks creates significant waste in the form of higher processing costs (for both suppliers and buyers) and lost cash flow (for suppliers). Furthermore, recent research from the Association of American Certified Fraud Examiners (ACFE) shows that a majority of business-to-business payment fraud is check-based. Second, middle-market companies sometimes do not have access to the bank and technology platforms that are helping drive payment optimization among large companies over the recent years. These feature-rich tools can help optimize payments holistically by enabling payment to the right supplier, with the right payment method, at the right time.

BC: On the surface, checks are easy. There’s no supplier enrollment. There are no questions such as: Are you a card-accepting merchant? Do you accept my card? Sending remittance detail, which is critical for any invoice payment, is trivial. The detail is on every check stub, and getting setup to send checks is simple. There’s no need to be underwritten for cards or ACH. There are no limits on how many checks I can send out. However, checks are slow and paper-based so they require more manual work to create and send. There is also no guarantee as to when the payment will arrive at the vendor’s location that could put you at risk for late-payment penalties.

Q: Are commercial cards in broad use for making vendor payments, as opposed to just travel and entertainment?
JK: Commercial cards for vendor payments, or virtual commercial cards, are being leveraged broadly for a variety of use cases among large market companies in the U.S. and Canada. They are also a growing payment product outside North America and emerging as a key payment method for small to medium sized businesses in the U.S.

BC: Our experience is that commercial cards are still an emerging payment vehicle, especially for middle market companies. The market is gaining more awareness of the benefits, principally to buyers, of card-based payments, but it is still early days. The market opportunity is gigantic.

Q: What is keeping commercial cards from being THE payment method of choice for vendor payments?
JK: Research shows that there are three primary perceptions that can be barriers to the adoption of virtual commercial cards. Those are unknown value to the organization, anticipated supplier resistance and lack of technical resources to perform a system integration with a payables platform. We know from experience that these barriers can be overcome with the right platforms, the right processes and the right client education.

BC: I completely agree with Justin. Cost—to the supplier—is a factor too. Vendor payments are usually higher value than travel and entertainment expenses. Middle market vendor payments can average $2,500 per item, and there may be some resistance to adopting electronic payments if there is concern about the security of these transactions, for example. The good news is that there are payables platforms that help protect organizations against fraud and provide access to one-time use cards as a payment method.

Q: What is the relationship between MineralTree and Visa about?
JK: MineralTree and Visa have a strategic alliance, under which MineralTree has integrated with Visa’s accounts payable automation capabilities. These capabilities enable MineralTree, together with participating Visa financial institutions in the U.S., to provide the bank’s corporate clients with a full suite of Visa virtual commercial card creation, controls management and processing.

BC: We want to make it easy to enable a Visa financial institution to drive commercial card adoption. And that means eliminating the hurdles of integration and supplier enrollment. It also delivers a packaged solution that addresses the accounts payable vendor management pain that middle market clients experience.

Q: Can smaller issuers benefit from a commercial card program?
JK: Not all issuers have commercial cards, but most financial institutions that have a significant customer base of middle market and large market organizations often offer a commercial card program to clients. These programs drive an opportunity to diversify revenue streams, create greater customer stickiness, and deploy a product capability highly desired among commercial customers. Issuers of all sizes can benefit from having a commercial card program.

Real Time Payments and the Untapped Opportunity of Corporate Credit Cards

credit-cards-11-7-16.pngCorporate credit cards are already a great source of revenue for banks. And there’s a lot of room for growth, both in terms of interchange revenue and value that banks can provide to their business customers. If banks look at how their customers currently use corporate credit cards, they’ll find an untapped opportunity to expand their usage.

Using corporate credit cards for accounts payable (AP) has obvious benefits: Businesses can time their payments to vendors more precisely, take advantage of the working capital extension available through their credit line, and benefit from rewards and cash back programs. In addition, compared to checks—the most common way in which businesses make AP payments—credit cards have very low occurrences of fraud.

The use of corporate credit cards in AP should be an integral part of a business’s cash management strategy, but it is not. MineralTree recently conducted a survey to assess the current state of corporate credit card use in the accounts payable function and uncover reasons why more AP spend is not being moved to corporate cards. You can read the full survey report here.

Key Survey Findings
Over a two-week period in late summer 2016, almost 200 finance and AP professionals completed an online survey exploring the state of credit cards in their business. Some of the most significant findings of the report include:

  • More than one-third of respondents are not using corporate cards for vendor payments.
  • The reasons businesses give for not moving more AP spend to commercial credit cards is varied and plagued with misconceptions.
  • Impacting the bottom line is the number one benefit cited by respondents for moving more spend onto commercial credit cards.

The Shift in Accounts Payable
To truly understand the state of credit card use in AP, respondents were asked which types of payments were made on their corporate credit cards: travel and expense payments, vendor payments (AP), or both. Only 50 percent of respondents use cards for both. More than one-third of respondents only use their cards for travel and expenses.

The chart below shows the number of vendor payments made by businesses who exclusively use their card for travel and expenses. About 80 percent of respondents make 50 or more vendor payments every month. Businesses who make more than 50 payments per month can strongly benefit from AP and payment automation and the ability to easily pay their vendors with credit cards.

For those businesses already using cards, adding AP spend onto cards is relatively simple. Finance policies are in place and department heads know the process for submitting and recording expenses.

These businesses can easily expand their policy to include vendor payments and improve their AP process at the same time. Ultimately, this will increase the “card-able spend” and the finance team will add additional value to the business by bringing in significant rebates. At a modest 1 percent cash back, companies earn $10,000 for every $1 million in card spend. Banks should recognize this as a significant opportunity and start marketing cards for AP purposes. Offering complete, packaged cash management solutions that solve problems as business clients see them will encourage them to move AP spend onto cards. The banks who do this early will find an untapped opportunity for new revenue through merchant fees and use of the card’s credit line.