Wendy Atkins looks at how credit cards can help both governments and corporations to save money and time, while keeping tabs on overall spending in a transparent, auditable way.

How much does it cost a local authority to change a light bulb? It might be a variation on an old joke, but when UK national newspapers highlighted the case of the £50 light bulb, it was no laughing matter for taxpayers in the north-eastern English city involved.

This is an extreme case, where a purchase that should be less than 50p ended up costing more than £50, but the message seems clear: too much bureaucracy and too many people are often involved in making government – and even corporate – purchases, resulting in lengthy and costly procurement processes.

The major credit card companies are targeting the bureaucracy associated with government and corporate purchases with an interesting mixture of products directed at specific market sectors. To a large extent, the cards speak for themselves: Visa Government Procurement, Visa Purchasing, MasterCard Corporate Purchasing Card, MasterCard Purchasing Card and American Express Corporate Purchasing Card, to mention just a few.

The markets such cards target provide major growth opportunities, especially important in the countries where profitability in the consumer credit card market is slowing down.

Perks of plastic

What is in it for the customer? Whether the client is a corporate or government user, the card provides numerous benefits in terms of cost savings as well as improved business processes. As David Harrison, head of government and procurement services, Visa Europe, comments: “From the cost perspective, reduced process costs are a given, considering how much time can be saved by employees using the card. The UK’s national audit office figures have revealed that public authorities could make an average saving of between £25 and £75 per transaction by using procurement card methods.” The figures are similar in the US, where procurement cards are saving organisations an average of $54 per order.

Audit trail

However, cost is only part of the story. Visa International estimates that 23 million pieces of paper were saved in 2004 by using procurement cards, based on an average of 10 pieces of A4 paper per transaction. Furthermore, procurement card schemes enable organisations to provide an audit trail as well as improve control, accountability, simplicity and transparency of purchases. White collar fraud reduction is also a desirable offshoot, as cards provide management with information on who is making payments to whom, when and for how much.

“From some governments’ perspective, transparency is more of an issue as there are often problems in tracking payments, especially in developing countries,” says Aliza Knox, senior vice-president, commercial solutions, at Visa International. “For example, Nigeria is very keen to deploy procurement cards to address this problem. Meanwhile, tax collection in South Korea has increased by $17bn as the government and taxpayers could see legitimate transactions taking place with cards that had previously been unreported.”

In May 2005, executives attending MasterCard International’s public sector forum in Washington DC reported that card-based payments are now indispensable to the way public sector entities throughout the world acquire goods and services.

“While public sector payment needs and requirements may differ from country to country, the fundamentals – such as transparency, control, auditability and good stewardship of funds – are the same everywhere,” says Eva Robinson, vice-president, global public sector business development, MasterCard International.

The results of an informal qualitative survey of the event’s delegates revealed that payment cards deliver greater insight into an organisation’s spending habits, giving them the “feeling of control”. Eight out of 10 respondents strongly agreed or agreed that such spending control would be enhanced through additional use of business intelligence tools.

And nearly all respondents said they believe cards streamline payment processes, thereby improving productivity and efficiency. Four out of 10 identified “payments streamlining” as their most important business consideration when implementing a card programme, while one-third cited “greater payment policy compliance” as most important.

The situation today

The US began using procurement cards in the late 1980s and is seen as today’s market leader. “Although there is good market penetration here, KPMG has identified that the market will double in the next five years, so there’s still untapped potential,” says Mr Harrison. In Europe, the UK is ahead of the pack because it started using procurement cards in 1997. However, other European countries are close behind, as many others also began procurement card rollouts in the late 1990s.

Earlier this year, OGCbuying.solutions (the trading arm of HM Treasury) revealed a £1bn cumulative spend on its Government Procurement Card (GPC Visa) by more than 62,000 users in more than 420 public sector organisations since the launch of the programme in 1998. More than 50% of this spending has taken place since February 2003. Visa claims the total spend represents a £186m saving for taxpayers (based on the UK National Audit Office figure of £28 per transaction).

Other countries of interest include Thailand, Australia, Singapore, Brazil and Hong Kong. “The Thai government is using cards for travel and expense management and successful implementation of this programme creates opportunities to expand additional card-based payment projects in the Thai government,” says Ms Knox.

Market potential

In January 2005, Visa International unveiled its commercial consumption expenditure (CCE) index – a standardised metric designed to track business and government spending globally. Using CCE, Visa International estimates that total business and government spending in 2004 amounted to $54,800bn, compared to $41,500bn five years ago (a 32% increase). For 2005, global CCE is predicted to be $58,500bn, a 6.7% increase over 2004.

However, as Ms Knox points out, “Visa, MasterCard and Amex cards represent just $600bn of this spending today, so there’s huge market potential.”

Today, government procurement makes up a significant percentage of the procurement card market, particularly in Europe. However, this seems to be a market where governments lead and business will soon follow.

The opportunity to penetrate new markets with a product that works well for both bank and client seems the perfect recipe. Simplicity and cost savings could be a powerful combination for organisations seeking the economies and transparency demanded by their stakeholders.

PLEASE ENTER YOUR DETAILS TO WATCH THIS VIDEO

All fields are mandatory

The Banker is a service from the Financial Times. The Financial Times Ltd takes your privacy seriously.

Choose how you want us to contact you.

Invites and Offers from The Banker

Receive exclusive personalised event invitations, carefully curated offers and promotions from The Banker



For more information about how we use your data, please refer to our privacy and cookie policies.

Terms and conditions

Join our community

The Banker on Twitter