Purchase Cards (aka PCards as they are commonly known) have been around for a long time. They are particularly common in the UK and US, with some limited but growing use in other geographies. Often introduced originally as an alternative to petty cash, Purchase Cards have come a long way and are worthy of consideration as a key part of your Source to Pay strategy.
Types of Card
Walk-in Plastic is the traditional form of PCard and the form most people associate with the term “PCard”. Its primary use is for mobile employees, e.g., engineers to purchase items they need to complete jobs, although it can be used in other scenarios and is typically allocated to an individual or a department. Restrictions can be placed on the card to only purchase certain categories of goods or be used with specific suppliers.
Virtual Cards (aka VCards) are single-use cards that are linked to a specific transaction. The Buyer requests a Virtual Card, either directly on a website or an App, or indirectly by contacting someone in the organisation authorised to issue Virtual Cards and passes the card details onto the supplier to pay for the good or service and are typically used for tail spend – low value, low volume transactions including single-purchases, where the primary benefit is avoiding the need to onboard the supplier or process them as a One-Time-Vendor.
Embedded Cards (aka Lodge Cards) are lodged directly with the supplier who uses the Card to process payment for any goods or services purchased by an employee. Embedded Cards are commonly used in conjunction with catalogues for mid-range spend – low value, moderate to high volume, where the primary benefit is avoiding the need to process an invoice.
Payment by Card is an increasingly popular working capital mechanism to allow organisations to use a simple credit facility to pay typically high value invoices using the Card over BACS, e.g., to secure extended payment terms.
Benefits of Purchase Cards
Purchase Cards provide a number of benefits, some which are common to all Card types and some which vary depending on the type of Card in question.
Benefits that are common to all Card types are:
- Rebates from the Card Provider
- Suppliers receive instant payment while you benefit from (potentially) extended payment terms at no cost
- Because suppliers are paid immediately, they will never put you on stop! This can be especially useful in times of economic stress
- Buyers can purchase things they need, potentially urgently even if the supplier is not registered with your organisation
Benefits that are specific to types of Card are:
- Virtual Cards avoid the need to onboard tail suppliers and eliminate One-Time-Vendor processes, both of which can be time consuming admin processes
- Embedded Cards negate the need for receiving and processing an invoice, which can significantly reduce the invoice volumes processed by your AP team
- Payment by Card allows you to access extended payment terms on specific invoices
Which Suppliers accept Purchase Cards?
Many suppliers accept Purchase Cards and most Card Providers will compare your supplier list with their records to see which suppliers transact with other customers in this way. This provides a list of “Matched” and “Unmatched” suppliers, which when compared with your spend data (invoice volumes, transaction values and overall spend) will enable you to segment your supply base and identify the right Purchase Card to use with which suppliers.
It is worth pointing out that just because a Supplier isn’t recorded as Matched doesn’t mean that they won’t be prepared to take payment via a Purchase Card, at least Walk-In Plastic and Virtual Cards, which are more or less identical to a Consumer Credit Card. It could just mean that the Provider hasn’t registered any transactions with their Cards for that supplier. Many Providers offer an Acquisition Service where they will run an Outreach programme on your behalf targeted at the suppliers you have identified and offer them support in accepting Card payments if they lack that ability already.
What about Purchase Orders?
Good question! In principle, Payment Cards can be used with both PO (“PO”) and Non-PO (“NPO”) purchases, however there are some considerations and different Card types are more suited to one or the other scenarios.
Walk-In Plastic and Virtual Cards are commonly used with NPO purchases. The main reason for this is that the main efficiency benefit of these Card types is avoiding the need to onboard tail suppliers or process One-Time Vendors, therefore it is counter-intuitive to raise a PO with a Supplier that is not registered as such with your organisation. That being said, there are potential uses, particularly for Virtual Cards with established suppliers, and so there is no reason why they cannot be used in conjunction with a PO.
The main consideration when using a Card without a PO is dealing with the situation where the ordered goods are not received. In a PO based three-way match process, the lack of a Goods Receipt will prevent the supplier being paid and while this is often due to poor Receipting discipline, it is a safeguard to ensure you do not pay for Goods not received. With a Purchase Card, issues of non-receipt of Goods (including partial receipt or quality issues) is handled via a Dispute process, where a Dispute is raised with the Card Provider who will investigate the claim and if they find in your favour, issue a rebate for the value of the transaction.
Embedded Cards are most commonly used with PO purchases, and ideally associated with a catalogue, which means your existing approvals and receipting policy can remain intact. In some cases, it is mandatory to issue a PO, for example if the item being purchased is a stock item, in which case the Goods Receipt is used to replenish stock levels.
The main consideration when using a PO in conjunction with a Payment Card of any type is the lack of an Invoice. An invoice received against a PO acts to ‘consume’ that PO and close it off. Without an invoice to match to the PO you are left with open POs that need to be closed off manually, which is an administrative burden we would much rather avoid.
Some integrated P2P platforms, such as SAP Ariba, have in-built capability to avoid this situation by indicating in the system which vendors are to be paid by Card, thereby removing the invoice from the equation. If you are processing your invoices in ERP or in a standalone Accounts Payable system then you will need to resolve this anomaly, e.g., by synthesizing an invoice from the Card transaction file you receive from the Provider. You will also need to make sure that you don’t inadvertently pay suppliers twice, as it is not unknown for a supplier who has been paid via a Purchase Card to submit an invoice as a record of the transaction.
The final consideration when looking at Purchase Cards is the financial reconciliation process.
Since your Card Provider is now paying Suppliers on your behalf, they will issue a statement at an agreed frequency, typically monthly, either in an industry standard format (of which there are several forms) or as a CSV file. The file will list all the transactions processed (i.e., payments that they have made on your behalf) in that period, along with the Merchant (Supplier) details, which you can use to process the transactions in your ERP.
One very important consideration at this point is the level of transaction detail in the statement, which will vary by Merchant (Supplier);
- Level 1 is the least detailed and gives only a transaction value with no VAT details. This means that you cannot claim back VAT without further evidence
- Level 2 provides VAT information at the overall transaction (header) level, which means you are able to reclaim VAT on these transactions, however you are unable to allocate costs within your ERP at a granular (line item) level
- Level 3 provides full line item information including VAT at line level, which means you are both able to reclaim VAT and allocate costs within your ERP at line level.
Depending on the volumes of transactions you plan to process via Purchase Cards, you should ensure you have sufficient horsepower in your Accounting team(s) to process Card transactions, and explore opportunities to automate the process wherever possible. It is advisable to plan to capture as much accounting information as you can at the point of purchase, e.g., by requiring the Buyer to specify an Accounting Object (e.g., GL, Cost Centre, Work Order etc.) as the alternative is your Accountants having to expend effort contacting the Buyers to ascertain the correct information. Most Card Providers allow you to configure the Card Request process to capture additional information for this purpose.
Purchase Cards are often perceived as promoting rogue spend and lacking the necessary controls to ensure adherence to Procurement Policy, but that is not really true; at least, not any more. The use of Purchase Cards does benefit from additional monitoring (and, if necessary policing) of their use, but the efficiency and financial benefits can be substantial, particularly when the potential for rebates is factored in. Purchase Cards can be a powerful tool in your Buying Channels strategy and so they deserve a fresh look to see how they could benefit your organisation.