Cheque-free technology
Slick and streamlined

Card-based transactions are starting to revolutionise procurement and the management of corporate supply chains, explains John Salter.

The 2018 target date for ending central cheque clearing in the UK may seem like a distant watershed. What’s fascinating, though, is the torrent of technological advances that are already transforming both the character and the efficiency, in particular, of cheque-free banking transactions with corporate customers.

In this era of the Y-generation, you might imagine that all the most meaningful change is about the speed and fluidity of electronic personal account management. Not so. What we’re seeing now is how card-based transactions are also starting to revolutionise the management of corporate supply chains.

Procurement is at the heart of this. Corporate treasurers, pressed by today’s risk-management environment, are now working much more closely with their cost-conscious procurement colleagues to protect their supply chains. And this, in turn, is fuelling a measurable upsurge in executive interest in procurement cards. The promise of the P-card isn’t hard to explain. The conventional supply chain process is typically long, tedious and often manual: from purchase orders, through invoicing to cheque payment, with all the accompanying confirmations, the process generates paper, time and cost.

P-card technology streamlines this clunky process: the purchasing company issues its supplier with what amounts to a charge card and the conditional authority to debit that card with the cost of the supply as it’s delivered.

There’s no question that the use of the P-card is growing as corporate users and their banks gain knowledge – and confidence – about the considerable supply chain benefits. And, like all process innovations, let’s be frank, it’s been an educational challenge.

Launched first in the United States by leading card issuers like Visa and MasterCard, it’s fair to say that the market for corporate P-cards was initially restrained in three rather predictable ways:

Acceptance:

There was an initial reluctance simply to trust “that piece of plastic”. In the early days, that was an almost cultural caution which, if you think about it, can’t have been much different from the suspicions about trusting “that piece of paper” which must have characterised the introduction of the cheque itself.

But today, of course, for the plastic card – just as it was for the cheque – familiarity and convenience have become the macro-drivers of change. People are now quite simply comfortable with cards. We’re in a market that’s being revolutionised by the “Facebook generation” who scarcely view cheques as a credible instrument and who are demanding more efficient, contactless, mobile, instant-access solutions. Cheques are the dinosaurs on their block. Now, for corporates too, cards have evolved as the successor species.

Security:

There were early and understandable concerns about whether P-cards offered sufficient security and control features to manage what would often be quite significant spends in a way guaranteed to prevent fraudulent transactions. It’s an instinctive hesitation – the company issuing its P-card to a supplier worries that it is also surrendering some important element of financial control.

And, precisely because of these concerns, the truth is that, in the last 5-6 years, there have been huge advances in the security features wrapped around all banks’ transactions with their corporate customers, including their P-card facilities.

As a bank, we sit down with our corporate customer and decide what business an individual supplier is automatically sanctioned to transact on that card – spend limits, values and types of permitted purchases, and so on. And then, typically on a monthly basis, the P-card will be cleared to zero. It’s taken time to produce that degree of mutual comfort.

Information:

One of the immense operational benefits for the company issuing the P-card, of course, is the big door it opens to automating and streamlining the management of its supply chain. But the vital corollary of that is the quality of management information that’s being automated.

And here, too, we’ve seen big technological strides in the last few years. This now ensures that the P-card is configured with all the management information needed by the issuing company to close out each supplier transaction electronically, download it straight into its banking system and complete fast, reliable and automatic back-end reconciliations.

Scale that up to cover the tens of thousands of companies supplying a typical corporate, and the efficiencies inherent in this route round our paper-laden methods of supply chain management are pretty obvious.

And the advantages don’t stop there. Companies and their banks are now realising, for example, how the creation of this virtual supply chain settlement function can also enhance activities like trade finance. Once it’s electronic, the system replaces the heavy paper flows (that trade tends to be rather famous for!), making it easier for corporates and their suppliers to use the information on the P-card to access the working capital facilities they need from their banks.

As a matter of fact, the potential benefits drive deeper still: one exciting aspect of the P-card technology is its capacity to expand the area of mutual advantage enjoyed by streamlining the supply chains for “vertical communities” of competing companies.

Most banks currently separate their roles as cardissuers and card-acquirers. A few, like Lloyds, integrate their issuing and acquiring capabilities, which makes it easier to create these procurement “verticals” among corporate customers in the same line of business. Building and construction companies, to use just one example, are all calling on the services of a quite limited population of concrete suppliers and concrete carriers. Their buyers all talk to the same concrete suppliers and all settle separately with each other using different and sometimes quite clumsy paper-based processes.

The opportunity here – and in other sectors – is to close the loop and create a “vertical” mini-community of businesses, all getting the benefit of the same information about concrete availability in the same way, at the same time, accelerating the process and taking out the procurement inefficiencies.

This is an approach Wells Fargo Bank adopted 3-4 years ago in the United States and they’ve had tremendous success working with these corporate “verticals”. At Lloyds, we’ve studied that US model closely and have been attracted by the similarity of their market profile and their approach.

What particularly attracts us is its potential to reinforce our Trusted Adviser approach. You’ll rarely get one company talking to a competitor about working with a third rival to achieve a more efficient way of buying and selling. But the P-card is a mechanism that enables the bank to help companies do just that.

This is what banks are supposed to do, we believe – to help create these “virtuous circles” by introducing clients that have mutual interests and getting them to work together to produce a unique solution.

JOHN SALTER is Head of Payments Trade and Card at Lloyds Corporate Markets.

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