Drive along any highway and you are sure to see new town homes and single-family housing developments lining the landscape. In many cases, the homes are virtually identical, distinguished only by an occasional swing set in the backyard or the make of car occupying the driveway. For homebuyers the lack of choice can be a nightmare.

When it comes to distinguishing purchasing card features offered by various issuers, the situation is similar.

"Purchasing cards are not new; you could even call them a mature product," explains Steve Kopp, president and founder of the CFO Advisory Group, which services the needs of organizations looking to make improvements around their card programs. "As hard as it was for card issuers to differentiate that type of commodity product 8 or 10 years ago, it’s incredibly difficult today."

What’s the Difference?

Kopp explains that card issuers have tried to differentiate on price. But the purchasing card market is a low-margin business - for some banks it’s a loss leader - so there’s a limit to how much issuers can afford to differentiate on price. Forays into improved customer service, such as having bank personnel on site at card-user locations to help administer the purchasing card program, were also tried, but soon most issuers began offering the same service benefits.

"The only point of differentiation now that banks and networks can offer their cardholding customers is the ability to expand the purchasing card program beyond what it already is," says Kopp, pointing to three methods of accomplishing this goal. "One area is increasing usage - taking the existing cards held by employees and putting more volume on them. A second area is reach, or getting more cards in circulation. And the third is limiting exclusions, which broadens the use of the card."

However, loosening restrictions and putting more cards on the street might leave user companies feeling a little uncomfortable, especially in light of the growing problem of fraud and abuse the Federal government has experienced with purchasing cards. According to the Associated Press, one of the five banks that provide purchasing cards to Federal employees was forced to write off $58 million in fraudulent or abusive purchases in 2000.

PNC Bank is hoping to tell a different story. Working with Austin, Texas-based automated payment software solution provider Works, Inc., the bank is marketing a purchasing card feature that opens the door for expanded card usage without losing valuable fraud and abuse controls.

"We’re teaming our purchasing card with Works’ payment manager application," explains Jeff Felser, PNC’s vice president and group product manager for card services. "The application is a purchasing workflow engine that has all the typical bells and whistles you’d see with a purchase order system. What we do is tie a P-card to the back end for ease of settlement."

Under PNC’s new feature, called the zero-balance-purchasing card, you can maintain a card that is not assigned a value. You can use that card to make certain large payments for your company, but only after purchase orders have been processed and routed for approval. For example, suppose you need to purchase a new computer, and that computer costs $1,000. You log onto the online payment manager application, enter a purchase order for a new computer, and the system automatically routes it to the appropriate individuals for approval. Once the purchase order is approved, you receive an e-mail informing you that you can now purchase the computer. The appropriate value to make that purchase has been added to your card, and you can only use that card at a computer-related store to make a single purchase. Once the purchase is made and PNC receives confirmation of the transaction, a message is instantly sent back to the payment manager application, which takes the value on your card back down to zero. The card cannot be used again until another purchase order is generated and approved.

"Over the last two-and-a-half years, all the card issuers have basically caught up to each other from a benefits and features standpoint," says Felser. "We’ve also seen that the market is fairly well saturated. What we’re doing is working with our clients to expand card usage, extending it to categories that are not typical P-card purchases."

Felser indicates that among PNC’s clients using this new purchasing card tool, the average purchase is 50 percent greater than for standard purchasing card clients. In addition, the purchases are going considerably beyond the standard $2,500 level. In one case, he says, a single transaction was made for $135,000.

Says Felser, "The new feature is generating a lot of enthusiasm among clients, and it’s helping to overcome traditional objection to card usage, which is loss of control."

Technology Enhances Benefits

Technology is playing an increasingly greater role not only in adding benefits and features to purchasing card programs but also in meeting the demands or card users. Michael O’Malley, marketing manager, Corporate Expense Management Services for GE Capital, notes that customers are demanding more capabilities in terms of interfacing the purchasing card reporting system with their other corporate systems.

"Customers want their purchasing card systems to talk to their ERP, their HR systems, and their sourcing systems," O’Malley explains. "They want more automated sharing of data. They want middleware between different business systems."

Middleware is the latest buzz word. If you consider that the card issuer is on one end of the equation with the customer on the other, middleware is the software solution that helps customers take transaction information and move it back through their financial systems for posting and reconciliation. In a standard purchasing card scenario, cardholders receive a statement from the bank or card issuer, write their internal account codes next to each of the bank statement transactions, and then send it to accounts payable for data entry into the financial system.

"That’s the most laborious process," explains Jim Carroll, president of Expense Path Software, a provider of software solutions that automate and streamline corporate purchasing, fleet, and travel card programs. "Some banks provide an electronic file that can be mapped into a company’s financial or accounts payable system, but it doesn’t necessarily give the customer validation of the data going in."

Expense Path Software is one of the companies working to define the middleware market. The company’s P-Card Solution helps to automate the entire p-card process. According to Carroll, when cardholders make a purchase, they enter all the critical information - price, tax, accounting code, supplier name and shipping information - into an online order log. The purchase is assigned a tracking number. When the purchasing card statement is electronically downloaded at the end of the month from the card provider, the information previously entered into the order log matches and imports into the statement, which can then be posted to the general ledger.

"Companies need the ability to not only assign a different account number for each line item, but each line item on each order may need to be split out," explains Carroll. "If you buy a box of paper and want five reams to go to project A and five to project B, you put one line item in and indicate the 50 percent breakdown."

GE Capital has also developed a middleware tool, ePcard XML. Currently, most purchasing card transactions require the supplier or merchant to type the customer’s purchase order number into the customer code field at the point of sale. However, many merchants do not have this field enabled, and those that do run the risk of entering the purchase order number inaccurately. ePcard XML automatically extracts the purchase order number from customer’s e-procurement system, appends it to the transaction record, and transmits it to the customer’s accounting system for automated reconciliation.

"What ePcard XML is really doing is taking the human element out of creating the match between the transaction amount and the purchase order number, and allowing companies to map the transaction back to their general ledger without any human intervention," says GE’s O’Malley.

In addition, ePcard XML creates a pre-authorization, putting both dollar and time limits on the specific transaction. When a merchant settles a transaction, the system checks the authorization request against the limits assigned when the purchase order was created. Suppliers attempting to charge more than the purchase order amount are declined authorization at the point of sale, thus reducing potential overcharging, fraud or misuse.

Level III Data

A key issue where purchasing cards are concerned is the reporting of Level III data, in particular, detailed sales tax information. For accounting departments that spend significant amounts of time reconciling invoices with purchase orders and mapping expenses to their general ledgers, Level III data is extremely valuable.

Level I reporting data include transaction date, vendor, total sale and location, but no description of goods or services or reference to taxes paid. Level II includes the Level I data plus actual tax information if entered by the merchant, and the vendor’s reference number. Level III includes the merchant’s tax registration number, actual taxes paid, item description, transaction date, as well as product codes and descriptions, quantities, duty amounts, freight paid, and ship-to-zip codes.

The problem, according to the Gunn Partners study "Capturing Sales Taxes on Purchasing Card Purchases", is that for traditional credit card transactions, the sales tax is not captured by merchants as a part of the sale, so it does not appear separately on the purchaser’s statement. Because purchasing card transactions are passed through the same banking network as credit card purchases, merchants are not required to separately capture the sales tax to complete the transaction.

An April 2002 study by Celent Communications, "Purchasing Cards in the U.S.", indicates that only 4 percent of U.S. merchants are equipped to transmit Level III data and that only 35 percent of all purchasing card transactions carry this detail. According to Expense Path Software’s Carroll, that isn’t too surprising. "It generally takes a pretty robust internal inventory system to provide Level III data," says Carroll. "For small mom and pop suppliers, it’s too costly. For others, it can become a true data entry vehicle. If you’re taking an order over the phone and have to type in all the information, you’re not going to be cranking through too many orders on a given day. That’s not practical."

So how do companies account for the sales tax on purchases? There are a variety of methods. In some cases, cardholders send the paper receipts from their purchases to their accounts payable department where the appropriate entries must be manually entered. Some card issuers offer their own online account management software that enables cardholders to slice and dice transactions into line-item detail, including sales tax information. Others collaborate with third-party vendors to offer similar services.

For example, Wright Express features e-Ledger, which also allocates purchases directly to the proper general ledger accounts. GE Capital’s ePcard XML, Bank of Montreal’s BMO FlexPort, MasterCard’s Smart Link, and Expense Path Software’s P-Card Solution all perform similar functions. As Walt Hazelton, research director at Hackett Best Practices, a leading benchmarking firm, points out, there are other ways to solve the sales tax issue without having Level III data.

"I think the whole concept of Level III data is vastly oversold," says Hazelton. "More and more companies are starting to use online merchant catalogues. The company sets up an arrangement with a supplier, employees go online and make their purchases, and the supplier provides all the details, independent of the purchasing card process."

Kopp offers an interesting take on the subject. He believes that the more software is used to integrate information throughout an organization, the more it becomes layered overhead on a program without expanding its volume. "At the end of the day, the original intent of a purchasing card program is to lower costs. Building additional software into a program, while it does provide companies with better information, increases the cost of a program."

Future Trends

Scanning the horizon, Carroll believes it won’t be long before companies begin moving more toward a one-card solution versus a purchasing card. Banks like the idea of a one-card solution because it allows them to reduce their overhead by half. In theory, it’s a good idea for corporations as well because it should only require half the administration. In reality, however, there are some key obstacles to overcome.

"T&E (travel and entertainment) has always been a personal liability card," Carroll explains. "The card may have been issued on behalf of the company, but the individual is liable for the charges on the card. On the other hand, the charges placed on a purchasing card are a corporate liability. Combining the two would force the T&E world over to the purchasing card world and obligate companies to all these T&E charges."

Hazelton, however, says there shouldn’t be such concern over the issue of liability. The problem, he says, is that companies don’t understand that there are very few differences between corporate and individual liability.

"In the normal environment," explains Hazelton, "the traveler has to submit a report before he or she is reimbursed and before the balance on the card is paid. The report is the company’s backstop for preventing misuse. The normal process for a purchasing card, however, is that the traveler may submit a monthly statement to his or her manager for approval, but independent of that, the company pays the issuer based on the statements it receives once or twice a month."

The reality, says Hazelton, is that managers rarely scrutinize travel reports anyway. And that while employees might misuse a one-card while traveling, they could be misusing the regular corporate travel card as well. "This is not a fraud issue and it’s not a corporate versus individual liability issue. It’s a matter of control. And in my opinion, there are better controls - if you use them - with a purchasing card than with a typical travel card."

Hazelton says the information that issuers provide on a purchasing card statement is more detailed. Even when only Level I information is provided, merchant name and SIC code are identified. For travel expenses, that means hotels, airlines, car rentals and restaurants are all identified through their SIC code. That allows companies to easily categorize expenses for tax purposes. The only potential drawback, says Camille Mayo, procurement card manager for Warner Bros. Studio, is that businesses are not always accurately classified by SIC code.

"We have individuals who are responsible for feeding our production crews," Mayo explains. "One day that individual went to a local fast-food restaurant, but it turned out that chain is classified as mobile home dealerships. It was totally inaccurate, and doesn’t happen very often, but when it does it can build cardholder frustration."

Despite the occasional flaw in the system, Hazelton emphasizes that concern over purchasing card usage and corporate liability should be minimized. "If somebody leaves the company and keeps using his or her card, that’s fraud and the issuer covers that," he explains. "If somebody steals a card number and uses it, that’s fraud and the issuer covers it. So the process for a purchasing card, whether for travel or other expenses, is that managers should still look at expense reports thoroughly. That’s the best control over whether or not an employee is misusing the card."