When you make the decision to accept corporate cards, your company does, admittedly, incur transactional fees. However, by streamlining both the payables and receivables process while simultaneously improving controls, management information and payment terms to suppliers, the mutual benefits of card acceptance are great, though they may be unseen at first glance.
Buyers understand the benefits of card acceptance, and progressive, cost-conscious buyers are clamoring for suppliers to accept cards. According to a 2014 study from RPMG Research, by moving payments from check to card, suppliers can see a 77 percent reduction in cost, from $90.20 for a $500 transaction with a purchase order and check to $20.38 with a corporate card. These savings are a result of process reductions and bad debt savings. Not only are there monetary benefits, but cycle time is reduced 70 percent by moving to a corporate card from purchase orders and checks. On average, that equates to eight days saved in cycle time.
The tug of war between buyers and suppliers
There is growing friction in the marketplace as buyers demand increased levels of corporate card acceptance from suppliers, increasingly for higher ticket items. Suppliers have balked at this idea, and supplier acceptance typically follows an inverse pattern relative to ticket sizes, with fewer suppliers allowing card payments for these items. However, the market is pushing more suppliers to consider being open to corporate card acceptance, especially when it comes to larger transactions. A recent study from CFO and MasterCard showed that 71 percent of buyers expect corporate spend to change over the next three years. When asked where accounts payable (AP) functions need the most improvement, 65 percent of buyers surveyed responded that processing costs for payables is the area that is in most need of advancement.
Meanwhile, even though seven out of ten buyers believe that corporate spend will increase, slightly more than half of respondents agreed that cost was the biggest obstacle causing suppliers to not accept corporate cards. While only 15 percent of respondents identified themselves as “uninformed,” that number may be higher on the supplier side than they would care to admit, and potentially even higher than they realize. In fact, the long-term benefits of card acceptance can be as fiscally advantageous for the supplier as they are for the buyer.
Obstacles to card acceptance
Perhaps the biggest underlying challenge for increasing card acceptance is that supplier understanding of the card acceptance value proposition is widely varied. While suppliers are aware that there is a cost to accepting cards, they are far less familiar with the cost savings and potential increased revenue opportunities associated with card acceptance. This cost of card acceptance is a deterrent to suppliers, especially since they’re under the mistaken impression that there are little to no costs associated with accepting check and Automated Clearing House (ACH) payments. Wire payments may also be an attractive option, but each transaction incurs a minimal fee and suppliers are willing to absorb these costs out of convenience. Furthermore, a significant number of legacy accounts receivable (AR) systems are structured around check acceptance. The structural changes within the AR team required to allow the flexibility for card acceptance is a process that some suppliers will resist due to the costs.
Why the benefits outweigh the obstacles
The challenge for suppliers is to look past initial card acceptance costs in order to reap the long-term benefits. If suppliers are considering only these costs, they would be wise to consider other hidden costs of doing business with other forms of payment. For example, suppliers mention bad debt as an issue, but most do not fully understand that the certainty of payment impact of card acceptance will reduce bad debts. According to Thomson Financial Database, bad debt as a percentage of financed receivables can be as high as 2.73 percent of the total market in industries such as food, beverage and tobacco. Between wire, check ACH and card payment methods, card collection also has the lowest transaction cost following fulfillment of goods and services on lower ticket transactions. Check collection costs about $32 for a $500 transaction, whereas card collection is as low as $20.
As already stated, card programs reduce non-payment risk and shorten the payment cycle. If a client is late to pay its invoice or a check bounces, the withheld revenue can have a direct impact on the business, forcing a supplier to put operations on hold. With a card program, the collections process is streamlined and card billing cycles improve working capital, allowing for revenue assurance. Paper invoices simply do not have the capabilities to streamline a payments process.
Traditionally, suppliers offer early-pay discounts to buyers to ensure on-time payments and reduce the days sales outstanding (DSO). In many cases, suppliers that accept card payments can eliminate these early payment discounts as customers are willing to forego this benefit if a card is accepted.
Card programs also facilitate greater payment security than traditional payment methods. As opposed to cash and checks, cards provide protection against fraudulent or accidental purchases, giving suppliers more purchasing control. This also reduces the risk of human error and delay with each transaction by supplementing the payments process with an automated payment system. Suppliers receive their funds from transactions almost immediately, and they can be notified in real time if there is suspicious activity on an account or if a card is declined since transactions are logged right at the point of sale.
The most obvious yet seemingly undervalued source of additional revenue garnered from increased card acceptance comes from the buyers themselves. MasterCard found that nearly half of buyers indicated they would increase purchasing if current non-accepting suppliers accepted card. More than half of buyers – or 57 percent – indicated they would increase order frequency, and more than 80 percent indicated they would be more satisfied with the supplier relationship, if corporate card payment was an option.
Like consumer credit cards, corporate card acceptance is becoming commonplace, and those suppliers that neglect to accept cards will find themselves at a disadvantage. When it comes to choosing a supplier, non-acceptance is increasingly likely to cause buyers to do business where cards are accepted. As recently as 2012, the MasterCard study indicated that more than half of buyers were more likely to select a supplier that accepts card. Suppliers must actively engage with their merchant acquirers to ensure that they have been set up in the most optimal fashion.
Source: BMO Financial Group
Timely, incisive articles delivered directly to your inbox.