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CORPORATE CARDS - Your flexible friend, warts and all

Corporate cards offer centralised billing and less paperwork. But thanks to foreign exchange - and the Inland Revenue - it's not as simple as it seems. Robert Jaques.

22 Oct 1997

By Peter Roythorn

An increasing number of UK companies are trying to cut costs by reviewing the way they use corporate credit or charge cards. Companies such as British Petroleum and NET Europe have found that, by using cards to pay for business travel, it's easier to administer expenses and get expense information.

"The use of corporate cards to pay for travel provides a win, win situation," claims Richard Tyson-Davies, head of public affairs at the Association for Payment and Clearing Services (APACS). "The benefits for an FD are almost self-explanatory: comprehensive report statements come from a single source and so administration costs are reduced. It is possible to maintain tight budgetary control by regulating credit limits on individual cards.

There are real benefits for finance departments."

It is apparent that large companies are increasingly reaping these benefits.

Figures from APACS indicate the use of corporate cards is growing strongly year on year. 1995 to 1996 saw a rise of over 25%, both in the UK and internationally. Tyson-Davies states that about 5% of all UK credit card turnover is placed on corporate cards. However, these cards account for almost 10% of international turnover. They become more significant internationally because companies need to pay not only for the actual travel, but associated expenses such as car hire and hotel bills.

The card market may be broadly segmented into two areas. The traditional distinction between credit and charge cards is not significant in the business market as the vast majority of UK corporate credit cards are paid in full at the end of each period and so effectively are used as charge cards.

John Walsh, senior manager for business and corporate cards at Visa says 95% of its corporate cards are paid off in this way. Major charge card companies including American Express and Diners Club issue corporate cards which are differentiated because they have no spending limit. Such companies are centrally administered at an international level.

The other market players are credit card companies such as Visa and MasterCard, international organisations whose cards are issued locally by national banks. These companies offer cards which are distinguished by the presence of a pre-set credit limit, though they benefit from a higher level of acceptance in international outlets.

NET Europe, an international provider of telecommunications equipment, is typical in its use of both types of cards and has developed a company travel policy based on the use of corporate cards.

Using just one travel agent in each country gives NET Europe improved service and the cost benefits of central booking. Its travelling executives are issued with NatWest Visa cards for expenses while the flights are charged to Diners Club cards, retained in respective national finance departments.

Mark Burrows, NET Europe's European finance director, explains that there are advantages and disadvantages with both types of cards. The Visa card, from the company's main corporate bank, was chosen because of its extremely wide international acceptance. The preset spending spending limit gives the finance department control over expenditure.

The Diners Club card has a lower level of global acceptance, but was chosen because of the company's reporting information service. The card also has no spending limit which is advantageous and can cover the high value of flights being purchased.

The principal business advantage of both the cards is a monthly electronic bill download. "From a company point of view the main benefit of putting travel costs through on the corporate cards is the provision of high-quality information via central billing at the end of every month," Burrows explains.

"We do not have to juggle huge amounts of paper invoices from different sources and feed them in manually. We have a single electronic report which is downloaded and integrated straight into our system."

The next stage in NET Europe's expense processing sees the card report data passed in electronic form to the individual employees who then enter the information behind specific expenses. At the same time cash expenses are added to the same computer file.

There have been a number of important improvements associated with this co-ordinated travel policy. Previously there was no integrated travel expense processing. As some individuals would submit expenses irregularly, the company was not able to effectively monitor its monthly expenditure liability because it did not receive a steady flow of information.

However, Burrows points out that an element of compromise was necessary when selecting the widely accepted Visa card product. "NatWest Visa cannot currently offer cards issued in local currencies and still maintain the integrated European reporting," he says. "This is because the Visa suppliers in each country are effectively independent. For us to get pan-European reporting we have had to standardise on a sterling-based card and suffer the currency exchange costs. This is a risk that we would not naturally choose. But against this we have the benefits of the single integrated report for our whole European organisation."

The benefits of single-source electronic card billing can be increased still further with on-line services which are now available from some card companies. Rather than receiving data once a month, these companies offer real-time expense data via a secure computer link. The availability of such a service is especially valuable for major companies who benefit from the ability to continuously batch and process large amounts of expense data.

This is the case with IBM. After negotiations and a competitive tendering process, the company selected the Diners Club card for its 12,000 UK employees who need to pay for international travel. John Howard, procurement manager at IBM UK, explains the perks of the on-line service: "It means we can go into our PCs and get up-to-the-minute expense data. It's much better than the previous situation where we had lots of different card companies and we were never able to get a consolidated report."

However, these electronic forms do not offer a universally applicable solution. Such a service is available to British Petroleum in the UK, but it has not yet been adopted due to tax processing issues. Michael Hill, global business centre controller, recognises that, for certain companies with the right spending profiles cost benefits could be realised in terms of reduction of clerical effort. However, for BP, current electronic reports from the card companies do not provide enough information to satisfy the Inland Revenue, he says.

"It's a great idea and I'm sure it will happen," Hill says. "But before we could adopt such a system there will need to be refinements. Currently there are serious practical difficulties associated with processing tax on the expenditure. In the UK we are tightly constrained by the demands of the Inland Revenue. The IR does not want to know what the money was spent on, but rather the purpose of the expenditure. There is no way for the card company to know why a particular purchase was made and so they are not able to supply the necessary tax information."

This policy is under constant review, together with BP's overall card strategy. Hill tells FDs seeking the best card deal for their companies: "We do not have a global corporate card deal. At the moment in the UK we use an American Express business charge card, but this is just a reflection of the best deal available in the marketplace at the present time. There are plenty of companies out there competing for business and it is in our interest to operate a continuous process of competitive tendering."

Smart cards, the next generation

Continuing advances in technology are being exploited to produce the next generation of corporate plastic. These smart cards are equipped with microprocessors and are more secure, as the microchip is very difficult to forge. The degree of technological investment and expertise needed to reproduce such sophisticated devices will provide a valuable deterrent against fraud.

The microchips are able to store more information than is currently possible on existing magnetic stripes. For example, flight booking information may be stored in this way so the business traveller will be able to swipe the smart card through a reader at the airport and be issued with a boarding pass. Eventually this technology could make international air travel as easy as commuting.

Simon Chick, marketing manager for company Barclaycard, explains: "The primary area where smart cards will add value for business will be for customers with a well-defined travel policy. The smart card will allow you to programme in the individual travel profile of the company, giving the FD greatly increased control. It will be possible, for example, to define what classes of flight or hotel are available to employees." The next step will be to introduce computerised biometric recognition onto the products. This will make it possible to identify the card bearer by analysing a thumb or finger print. However, issues of robustness and security have yet to be overcome. Current biometric techniques do not offer a sufficiently high level of security to make the technology commercially viable.

"Customer acceptance is also important in this respect," says Chick.

"It is necessary to go through a definite culture change before people will be happy to use a thumbprint for identification instead of a signature.

It's something which will take time for the market to accept and so is still quite a long way off."

Loyalty plans

The fierce competition among companies issuing corporate cards has led to the introduction of a number of incentive plans such as Air Miles to promote brand loyalty.

Des Shaw, director of sales at Diners Club, says that incentive plans are beneficial to both the individual and the company: "Our electronic reporting service is absolutely no use unless the company can get its employees to use the corporate cards. If individuals can get Air Miles on their personal cards, but not the corporate cards, there will be a strong temptation to use their own plastic.

"We would say that the provision of a reward programme is necessary to encourage the use of a corporate card so that the integrity of central reporting data is maintained. If you want the big benefits then you have to use the system." However, Corporate Barclaycard has adopted a different strategy and does not offer any form of loyalty programme on its corporate cards. Barclaycard's marketing manager Simon Chick believes that business customers would rather have services which add real business value. He stresses the importance of services such as the company's centrally negotiated travel booking service. This offers Corporate Barclaycard customers the opportunity to combine their buying power and so receive substantial discounts on business travel.

There are additional reasons why loyalty plans are inappropriate for corporate cards, according to Chick. "Other charge cards offer loyalty cards, but they charge for the service," he explains. "We offer a business service and keep the cost of the service to a minimum. Our customers point out that business cards use business money. There is concern that if employees are enticed to spend more on corporate cards, they will make unnecessary purchases and so increase costs."

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