By Joanne Robinson, Commercial Payments International

NOTE: The following article is the second of a two-part series analyzing the state of the commercial card market today. Read the first part of the series by visiting www.tsys.com.

Across all products and geographies, there are some concrete trends emerging that indicate where the future of commercial cards lies.

Segmentation of commercial card products is becoming increasingly important and industry experts believe this is needed to drive growth. Not all products fit the needs of all organizations, and unique products are being developed for organizations segmented by size, industry and other factors. Because the card is usually one piece of the banking relationship with these companies, it is even more critical to find a solution to fulfill these needs.

To deliver multinational solutions issuers must provide seamless, uniform services that are flexible enough to handle the unique needs of multiple markets and cultures. Multinational customers require a single global data feed, minimum insurance standards, card member liability solutions, and global relationship management platforms. Financial institutions have traditionally struggled to meet these needs and some cannot easily interoperate with disparate partner systems.

The U.N. estimates there are more than 60,000 multinational corporations in business today. Global commercial spending grew to an estimated $77.3 trillion in 2007, an increase of 12.2 percent from 2006, according to Visa's CCE index. Parslow notes that these businesses are increasingly looking to cut costs and better manage expenses by applying new technologies to the payments function, which is still largely reliant on costly and inefficient paper-based processes.

"Visa's Multinational Program offers international businesses comprehensive support, information and services that complement and enhance their global card programs," said Darren Parslow, head of Global Commercial Products for Visa, Inc. "The program helps enable businesses to better manage purchasing, travel, and entertainment costs — but also gives purchasing and travel managers critical expense controls, global data consolidation services, and reporting systems all facilitated through their Visa financial institution, with service and customer support at both the global and local levels. As a result, employees can conduct business anywhere in the world, and expenses can be managed with more control and efficiency."

Thinking outside the card will also define the future as other types of electronic payments will likely be offered by the networks. According to Steve Abrams, MasterCard Worldwide's group executive for Global Commercial Products, the U.S. commercial card market will see "the next wave with more non-card than card for certain applications." He explains this is due to the need for increased control and transparency for larger transactions, many of which companies do not like to place on cards. Issuers will need to look at all forms of electronic payments that companies will want to use and expand offerings beyond cards to remain competitive, especially in the more developed markets. Parslow agrees and adds that "Visa will be looking at other electronic payments forms and the ability to add value to this space through information exchange, letters of credit, contract compliance and visibility."

Overview by Product

Product development in the commercial cards area has followed a very interesting path, usually taking an existing consumer card product and adapting it for use by companies and government agencies. Almost all markets introduced the traditional corporate card first then added other products such as fleet, debit, prepaid and others depending on market needs. This section will take a quick look at the types of products and some of the more popular applications.

Corporate Cards
Traditional corporate travel and expense (T&E) cards are the most mature product in the portfolio and present in more markets than any other type. They generally operate as a charge card with payment in full at the end of the period. In some markets, a line of credit is attached to a corporate card, but this is not the norm. In most markets, corporate cards are used for travel and entertainment expenditures, though some are used for purchasing supplies and other business related items. Improved data availability continues to increase the value of these cards to companies, especially those that integrate them with other systems.

Loyalty programs are attached to corporate cards in some markets, but there is hot debate about the logic of encouraging employees to spend more on a cost control tool.

Purchasing Cards
Purchasing, or P-cards are valuable tools in the procure-to-pay process for many companies in several markets. These cards are mostly used for recurring expenditures with a set of preferred vendors. A physical card may or may not be attached to the account, and recent developments of one-time use numbers for P-cards have expanded their potential use. Government agencies often very successfully use P-cards in many markets. One of the main challenges facing P-cards is the resistance of suppliers to accept the card for payment, as they do not wish to pay the merchant service fee and believe that traditional methods of payment cost them less. This is especially true for larger purchases which have kept P-cards as a purchase vehicle mainly used for small purchases. P-cards have tremendous potential all over the world and new risk management tools that can be used with them, if properly applied, make them almost abuse proof.

According to Abrams, there is opportunity for P-card expansion across the globe but tremendous changes will be critical to realize this potential. Abrams sees the need for "end-to-end automation with payment gateways" and says that is actually already happening with files being sent to suppliers. Increased control and transparency are definite benefits of these products, according to Abrams, and specifically through tools such as MasterCard InControl.

"More mandates are being seen for control and visibility, especially in the UK and North America and a bit in Australia," reports Parslow, noting that these mandates are key drivers of growth for P-cards. But he acknowledges that "B2B acceptance is a challenge and there needs to be a clear value proposition around the card" and sees the P-card "becoming an instrument for buyer supplier transactions."

Prepaid Cards
Prepaid cards were initially introduced as gift cards for consumers, and then the network-branded open loop cards followed. While they are still mostly a consumer proposition, commercial applications are the fastest growth area in prepaid cards and the potential is almost limitless.

The major applications for commercial prepaid cards are government benefits disbursement, travel cards, payroll cards, corporate incentives and per diem cards. Governments around the world are implementing prepaid solutions to replace costly, inefficient paper-based programs to distribute benefits like unemployment insurance, disaster relief funds, child support and other funds. Thirty-eight states in the United States distribute funds to their constituents with a Visa prepaid card, saving millions of dollars annually on administrative costs.

According to recent research conducted by Boston Consulting Group for MasterCard Worldwide, the public sector prepaid segment is expected to reach $284 billion globally by 2015, with $162 billion of this in the U.S. On the corporate side, it is estimated at $114 billion by 2015 in the United States alone. Laura Kelly, Senior Vice President, Global Prepaid Solutions, Core Product, MasterCard Worldwide, states that there are many benefits to these cards including "get cash out of the system, displace checks, offer more reporting and transparency and control all expenses on one product." As state governments nationwide face budget deficits, "disbursement of funds with a prepaid payment card can help save governments significantly on costs and realize greater efficiencies," reports Parslow. Prepaid cards also enable businesses to reduce costs traditionally associated with paper-based payroll processes, and avoid check-related fraud losses and theft, while providing recipients with greater convenience and security, he added.

In the current economic climate many small businesses have had their access to credit tightened and are instead shifting to prepaid or debit cards so that they can still get the reporting and data available through a card program. Where programs have been implemented Kelly reports that "employees and consumers both like them and they can be put into the market fast." These programs also are more profitable than the consumer types and present an excellent opportunity for issuers to add to their commercial card product line.

Business Debit Cards
Business debit cards are linked to a deposit account of a company and are used almost exclusively by small companies. This is a category that has been experiencing significant growth in some markets but has not even surfaced in others. To increase penetration in this segment, Bruno Perrault, group head, global small business and mid-sized enterprises, MasterCard Worldwide, believes that "businesses have to be motivated to use the card and introducing discount programs and other incentives will achieve this."

According to Visa's 2008 Small Business Cash Management Survey of 750 small businesses in North America, the use of business debit cards has doubled in the last three years and satisfaction with this form of payment has grown by 41 percent to 64 percent. Forty-three percent of respondents noted that if they could make all of their purchases on a business payment card, they would — up from 38 percent in 2005.

"This growth underscores an interest from small business owners to continue to use ready funds for business expenditures, but to transfer that spending from checks and petty cash to more efficient electronic payments," said Raghav Lal, head of global small business products for Visa Inc.

Both Perrault and Lal encourage issuers to include a debit card with all new small business accounts. Lal also notes that "debit cards need sufficient spending bandwidth such as daily limits that match needs of a business and not those of a consumer household." This is a product that offers significant opportunity and lower risk for issuers around the globe.

Fleet Cards
Fleet cards are issued by oil companies, specialist fleet card issuers and banks. The model varies among markets and there is increased interest in these products as more information becomes available at the gas pump in more markets. Steve Abrams, group executive, global commercial products for MasterCard Worldwide, believes "without a doubt we will see fleet cards expanding with increasing demand in the UK, Europe, Asia and quite possibly China." More companies are using fleet cards not just as a payment mechanism but to track employees, control expenses and drive business to preferred suppliers to obtain discounts.

Reporting Tools
A group of products that is very closely related to commercial cards, and indeed improves their benefits, are the new reporting tools that are being introduced all over the globe. These tools are increasingly sophisticated and easier to use than in the past and offer corporations and governments greater transparency, comprehensive data, streamlined procedures and many other benefits. They can be integrated with current systems, thus streamlining day-to-day processes, resulting in efficiency improvements and provide end-to-end reporting. The comprehensive data received from these tools can be used to negotiate with preferred suppliers as well as to enforce internal compliance and analyze spending.

TSYS, MasterCard and Visa, among others, offer versions of these tools for issuers as well as many other companies that may offer tailored solutions for specific industries or in-house systems. A commercial card program can be maximized by use of these tools.

Looking to the Future

Technology will continue to be a strong driver of growth and market development. Increased availability of data is expected to continue and companies will become more and more sophisticated in their use of this data. This will be aided by new technology applications and increased integration of systems and processes. Other technologies, such as mobile, may be applied in the commercial payments area and non-traditional providers may play a stronger role.

One thing that will not change, however, is the basic benefits that commercial cards provide, which are needed by organizations of all types and sizes — control, efficiency and transparency.

About the Author

Joanne Robinson is the co-founder of Commercial Payments International, a provider of premium information to the commercial payments industry. She has been in the cards and payments area since 1979 when she began her career at Citibank and also worked for MasterCard and Diners Club before starting her own consulting business in 1994. Joanne is a regular speaker and chair at industry conferences around the world, and has been widely published and is frequently quoted in many payments publications.