Benefits and Drawbacks of Payment Cards

Payment cards are the fastest growing sector of the payment systems market.  The coverage of the payment card schemes continues to grow - MasterCard and Visa now have over 25 million merchants around the world accepting their cards.

So what is a Payment Card? A Payment Card (P-card) is basically a sophisticated credit card developed to help cut the processing cost of low value, high volume purchases. They provide a simple, cost-effective purchasing, approval and payment process, supported by informative management reporting systems.

Benefits

• P-cards can eliminate several steps in the purchase-to-order process providing a prompt payment method. Thus controlling disbursements and maximising working capital.
• They reduce the need for time spent on requisitions, purchase orders and invoice approval
• They can be set up with restricted usage for example by type of goods (e.g. office stationery, travel expenses) or even by specific supplier.  This allows prudent budgetary control and ensures compliance with preferred suppliers.
• They can provide detailed management reporting by line item - e.g. item product code, item description, quantity and cost can all be included.
• They can be used to pay temporary contractors and the typical maximum spend per transaction on these cards is approximately €2,500 although many payments are much lower.
• They are always settled centrally, whether by a division or by the company, and always have corporate liability. They are never paid against an individual's bank account.
• Additionally within Europe, some suppliers are able to provide clients with full, itemised detail, which will appear on their VAT reports (known as level three data). Where level three data is available, VAT reports serve as evidence to support VAT reclaim activities. This eliminates the purchase order paper trail, which can save costs of anywhere from €60 to €100 per transaction. The cost when using a p-card with level three VAT data is approximately €5.

Card providers and what you need to look out for

P-card/business charge cards are offered by most business banks and companies such as Barclaycard, American Express and Diners Club. It's worth examining the different deals available, considering a number of key points:

• Is there an annual fee? If so, how much is it, and do you have to pay it for each cardholder?
• Can you give individual cards to chosen employees?
• What are the minimum and maximum spending limits?
• What are the penalties for late payment of your bill?
• Are there any added perks or benefits - perhaps Air Miles or hotel discounts - that would be useful to your business?

Drawbacks

However the surging demand for payment cards is not without its problems as they have become a target for many different types of fraud. The Nilson Report newsletter, which publishes news and research on consumer payment systems, estimates that in 2006 the global fraud on all types of payment cards was US$4.8bn up nearly 13% on 2005.

Typical methods of payment card fraud include:

• Purchasing cards allow the same person to order, pay for and receive goods or services, providing an opportunity to bypass standard purchase-to-payment cycles controls

• Multiple payments to the same vendor

• Circumvention of internal controls by splitting purchases or shard cards to bypass purchase limited

• Unauthorised person uses the card or cardholder data.

Within a purchasing card programme, stringent controls must be in place to ensure charges are reasonable, properly recorded and made by a valid cardholder.  To mitigate business risk, management requires well-formulated strategies and systems to ensure that comprehensive controls exist and are effective and that in the event of control breaches, appropriate action is taken in a timely manner.

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