Are interchange economics the largest barrier to commercial card usage?

The benefits of commercial card payments seem clear enough. Buyers can streamline their Procure to Pay process, drive working capital benefits and access rich transactional data. Suppliers can improve their Days Sales Outstanding (DSO) and enhance customer relationships. Banks can grow transaction revenues while keeping their corporate clients happy.

Yet, despite a compelling case for growth, commercial cards have signally failed to take off in B2B payments. Just 2% of all global business spend is currently captured on card*.

We believe things are about to change. Next generation virtual payments platforms will transform commercial payments by tackling many of today’s major challenges head on. In this first of a series of three blogs, we look at how these virtual platforms will empower banks to control transaction pricing, giving them the kind of  flexibility needed to make card payments work more cost-effectively for all participants in the transaction.

Costly and inflexible

So why is controlling transaction pricing so vital to unlocking the potential in business spend not made through commercial cards?

It’s simple. The big problem with commercial card transaction pricing today is that they depend on interchange based economics. With current interchange rates for commercial cards (more than 1.5% in Europe and higher in other regions) suppliers are facing prohibitive and inflexible costs of more than 2%. Those costly interchange rates also put a block on buyers’ ambitions for wider card use as costs become passed onto them.

Efforts to address this problem haven’t really worked. For example, Large Ticket Interchange programmes offer lower costs to merchants for higher value transactions, but require extra invoice level data from suppliers.

Rebate sharing is another idea. Some providers offer solutions that can pay some of the rebate the buyer earns from their card issuer back to the merchant to reduce the cost of acceptance. When it comes down to it, though, this is just the buyer paying a portion of a fee the merchant has already paid.

Meet the needs of the business

What is really needed is a flexible approach to pricing that takes account of transaction value, business conditions, and relationships. To accrue the cost benefits of card payments, banks must be able to offer greater control on transaction pricing outside the restrictions of interchange rates, and set their own flexible cost strategies to meet the needs of their business and their partners.

Benefits of a second generation virtual payments platform:

• It is designed to enable  your corporate clients  to go off card rails when paying suppliers. A single platform decouples payment initiation from payment execution, enabling a buyer to execute the payment via the most appropriate channel, and enables banks to define new commercial models that suit the underlying payment dynamics.
• Once paymenta are routed outside card rails, interchange no longer applies. This means that differential transaction pricing can be introduced. This could be pricing in the form of a fixed cost to the supplier, or a lower percentage fee, or it could be that some or all of the cost is paid by the buyer.

The ability to control transaction pricing can play a major role in unlocking card payments benefits for all parties involved.

Suppliers will be able to dramatically ‘right-size’ transaction fees to their business and payment needs , and reduce costs. They will be able to break through the de facto ceiling on transaction value imposed by today’s interchange costs. Banks  will in turn be able to offer buyers the chance to address a far wider range of payments and drive greater transactional revenues for their commercial cards business and push virtual payments into new spend segments