Purchase Cards have been used by government agencies and corporations to streamline their buying processes for 20 years now. The last ten years has seen tremendous growth beyond the initial “early-adopter” and “getting it figured out” phases, and has grown into an established and growing market segment for enterprise payments. In fact, survey data reports that the annual U.S. Purchase Card spending grew from $80 billion to $110 billion between 2003 and 2005.
However, in order for purchase cards to be used by business and government buyers, they must be accepted and processed by merchants.
This article answers some basic questions regarding the use and characteristics of Purchase Cards to help merchants better understand the market context.
Understanding Purchasing Cards and Their Use: What is a Purchase Card?
On the surface, a Purchase Card may look like your average business or consumer credit card, but a closer examination reveals that Purchase Cards possess more features, capabilities and controls. A typical Purchase Card can be setup to control:
- Number of monthly transactions
- Number of daily transactions
- Total monthly spend
- Daily spend
- Amount per transaction
- Where the card may be used based on merchant MCC code (MCC restriction)
These extra control features help buying organizations manage their purchasing policies and processes.
One of the most differentiating characteristics of Purchase Cards is that their transactions can be processed with the same level of information normally found on an itemized invoice. This is called “Level-3” line item detail transaction data. Level-3 information contains information about the items purchased such as Item Part Number, Description, Quantity, Unit of Measure, Price and more. Level-3 data must come from the merchant and be submitted with the card transaction.
The following chart compares the levels of some of the information that is delivered with Level-1, Level-2 and Level-3 transactions:
Merchants are being asked to supply Level-3 transactions and need help selecting payment solutions capable of meeting their needs.
Why are Purchase Cards Used?
Purchase Cards are used by buying organizations to streamline their purchasing and payment processes. Cards may be used a variety of ways, but for routine purchases they are issued to authorized cardholders so they can place orders and make payments directly and efficiently on behalf of the buying organization.
In other cases, Purchase Cards are used to make large purchases and payments and are used with Purchase Order and e-procurement systems. As the value of the transactions increase, so does the need to have accurate and detailed information about the purchase or payment.
Because of the increasing transaction value and need for financial accountability, Purchase Card use is often accompanied by the need for the merchant to provide Level-3 line-item detail, which defines exactly what is being purchased, with the payment transaction.
The Level-3 payment detail is delivered electronically to the buying organization’s Purchase Card reporting system where it can be reviewed on a daily basis and automatically entered into their accounting and finance systems.
Purchase Card transactions have tiered interchange rates and are priced differently compared to standard consumer or business card transactions. MasterCardTM and VisaTM have created special interchange rates to encourage supplier participation and support of Purchase Card programs by reducing the supplier’s transaction costs if Level-3 line item detail information is transmitted with the financial settlement.
The key to obtaining the best rates for these transactions is to include line-item detail, also known as “Level-3.” Payment processors can bring substantial value to the merchant by helping them qualify for the lower-cost Level-3 rates. This is even more important if the transaction sizes are large.
Who is Using Purchase Cards and How Much?
Purchase Card use is widespread, even if it is not highly visible. Most midsize and larger corporations have Purchase Card programs in place. Federal, state and local government agencies have multi-year contracts with their purchase card-issuing banks. Universities and utility groups have systems deployed. Purchase Card systems are offered by many commercial banks and other financial institutions.
As noted, the annual U.S. Purchase Card spending grew from $80 billion to $110 billion between 2003 and 2005 – of greater importance is that recent studies suggest that this volume could increase eightfold if all transactions below $2500 were paid with Purchase Cards.
Federal procurement guidelines already mandate Purchase Card use for all spending under the $2500 level. Since 1998 (when a new 10-year contract was issued), the program has increased more than 100% in dollars expended and 60% in transactions. In fiscal year 2005, 301,216 Federal Purchase Card cardholders spent $17.4 Billion dollars via about 26 million transactions for goods and services. See www.gsa-smartpay.com for more information.
Why Merchants Care About Purchase Cards
As more businesses and government users migrate to using purchase cards, merchants who accept purchase cards also benefit. Merchant benefits include:
Faster payment cycle – receive payment in two-to-three days, as opposed to the 30-, 60-, or 90-day wait commonplace with many corporate purchases and traditional payments.
Lower interchange rates. Interchange qualification savings of 30 Basis Points or more are possible for providing Level-3. Greater savings are also possible depending on transaction size.
Level-3 data can help a merchant with transaction documentation or responding to chargeback requests (all the transaction detail is in one place).
Preferred status with their customers. Some buying organizations have mandated use of Level-3 with some or all of their transactions.
Finding Balance for the Merchant
Merchants want to obtain these benefits, but they are also have issues that they need to balance. These include:
- They need their solutions to be within their capability to use and to support reduced total cost.
- They would like to lower credit card transaction processing costs. Again the best way to do this is by ensuring proper interchange qualification.
- Ease of use and deployment. The system should be intuitive and capable of supporting their business processes – as an example, a merchant might need to process transactions manually by a field sales office, electronically from an e-commerce website, and from a back- office accounting system.
- Their system should afford the ability to integrate data back into their internal systems or offer management reports and inquiry capability to manage business volumes.
- Migration path for future development
Understanding your Merchant Business: A Solutions-oriented Approach
Merchant processing requirements and solution selection may be influenced by their…
- Business size: Is the merchant’s organization large, small, or midsize?
- Typical customers (doing business with the merchant): Are they consumers / corporations / government (Federal, state, local). Are the customers repeat or random?
- Type of sales: What is being sold – goods, services or both?
- Sales channels: How are the sales made – MO/TO / Website / E- commerce / Card present?
- Timing of sale: Are sales made with real-time or non-real-time requirements?
- Monthly dollar and transaction volumes: How many transactions will be made across the sales channels – 1 or 100,000?
- Number of locations: Single or multiple?
Transaction/business processes: Is a stand alone solution appropriate or one that can integrate into the merchant’s ordering or finance system needed?
IT infrastructure/systems in use: What systems does the merchant currently have and are they planning for change in the near future? What application software is used – SAP / Oracle / Quickbooks / etc.
Communication options: What communications does the merchant have – Dial, Frame Relay or broadband Internet options?
Security requirements: What information security capacities does the merchant have and are they aware of the Payment Card Industry data security (PCI) requirements? What type of system would be best to reduce their exposure?
Select the Right Payment Service to Process Purchase Cards
Accepting purchasing cards allows merchants to stay competitive and become a strategic supplier to corporate or government purchasing card users. These customers often require enhanced purchasing information beyond the standard financial information provided by most other card processing solutions.
by Aaron Bills