The Bluerock Review

APRIL 2004 A JOURNAL DISCUSSING STRATEGIC ISSUES FACING THE FINANCIAL SERVICES INDUSTRY Richard Powell, former Head of Commercial Cards and Card Acquiring for HSBC in the UK talks to Julian Sawyer about the trends and challenges in the commercial card market.

COMMERCIAL CREDIT CARDS: AN INTERVIEW Julian Sawyer, Bluerock Consulting COULD YOU GIVE AN OVERVIEW OF THE COMMERCIAL CARD MARKET? There are different sectors - small business, middle commercial market and large corporate market, aiming at three distinct segments with different customer requirements. These markets are served by issuers in different ways. The small business market is well served with the core business card product. This segment is essentially offered an easy to use and convenient payment service to separate personal payments from company payments, free up personal lines and potentially reduce bank charges. The customer proposition is clear and easy for branch staff to articulate and sell at local branch level. The large corporate market is offered value added services to essentially streamline their procurement, travel and expenses management and accounting processes, in order to manage costs better overall. This sector is becoming increasingly more competitive as the issuers increase their functionality and services through corporate and purchasing card products. The middle market is more intangible in terms of differing size of organisations, their usage of payment mechanism and their real requirements. This leaves the middle market being perhaps the biggest opportunity or untapped space. WHAT WOULD YOU SAY ARE THE MAIN DIFFERENTIATORS IN THE SERVICES OFFERED TO LARGE CORPORATES - COULD YOU OUTLINE THEM? At the top end of the market the real gain offered to corporates is the understanding of their costs - tools enable you to continually re-assess where your travel and expense (T&E) costs are being spent. By giving a real picture of the types of expenditure and the suppliers used, it enables corporations to identify their real needs and negotiate better deals with suppliers. Over the last few years, both Mastercard and Visa have developed enhanced solutions to assist the gathering of this data. Essentially, this information capture process starts with the employee as cardholder, flows through the Merchant, Acquirer and Scheme to the Issuer and finally on to the Corporate. Data can be posted direct to the General Ledger and analysis tools used by the procurement department to evaluate trends in spending patterns. This integrated flow of data from card holder to corporate General Ledger is the tricky bit and continues to be refined. We are not just talking about integration between a cardholder and the Corporate's General Ledger system, but also considering how to increase the number of Merchants and Acquirers worldwide who are capable of providing the extra value added data required.

SO WHO ARE THE MARKET PLAYERS? Amex has historically dominated the large corporate market - the services offered in this space have traditionally been superior to those offered under the Mastercard and Visa schemes. However recently, major advances by both of these schemes have been providing a new level of competition which has allowed HSBC, RBS, Barclaycard and others to challenge Amex through leveraging their existing corporate relationships. The high street banks have always dominated the small business market through a business card offering. WHAT IS THE MARKET SHARE OF THE MAJOR ISSUERS? Market share is an interesting concept in the corporate space; it is difficult to state how big the actual and potential market is, given the ever increasing opportunities to utilise card payments in new sectors or those previously served by alternative payment types such as cheques and cash. There is a huge potential market not yet tapped, especially if you look at how far personal cards have developed. The growth will be in identifying new areas and ways in which the card can be used, for example, in further replacing the cheque. A window cleaner is likely to welcome an immediate payment mechanism using a remote device that ensures confirmed receipt of funds rather than issue bills and then manage the cheque collection and physical banking process. It is these new business areas that become compelling for growth of the commercial card space. WHAT CHANGES HAVE OCCURRED IN THE LAST 5 YEARS? Three main themes come to mind immediately. Firstly, the development in functionality offering value-add services to corporates. Banks now realise this is not about extending the personal card proposition to companies but more about adding services and functionality to specifically address business needs. Secondly, working with Mastercard and Visa, issuers are back in competition with American Express. Finally, the development of ecommerce and the use (and acceptance) of cards as the mechanism for payment has been a significant change. This move has enabled cards to support e-commerce procurement programmes. We've come through a lot of hype during the dot-com boom but there is evidence this is actually happening now with more and more companies looking at this area. Corporates today are always looking at saving costs and whilst traditionally procurement, travel and expenses have not been of principle focus, this will change. IN THE BLUEROCK REVIEW IN OCT 2003 JAMES CRANFIELD OUTLINED HOW CREDIT CARD ISSUERS IN THE PERSONAL SPACE MAKE MONEY - TYPICALLY 60% OF INCOME IS IN INTEREST PAYMENTS, WHEREAS IN THE CORPORATE SPACE THE COST DYNAMICS ARE DIFFERENT. CAN YOU OUTLINE HOW THEY MAKE THEIR MONEY? There are different business models used here, because of the differing levels and requirements of the various types of business customer. At the small business end, the model can be viewed as similar to the personal issuers with credit options a growing requirement. The value-add for the large corporates is the savings and efficiencies that they can achieve by using the data provided by their issuer. The thinking behind placing a value on this data continues to evolve. You have to remember that this is a relatively new and fast growing area of the marketplace for corporate issuers.

IT SEEMS THE CROSS SELLING ELEMENT HAS BEEN MISSED TIME AND TIME AGAIN? I think you are probably right historically, though this is high on the radar screen to address. Business cards are now offered as part of the standard business account package. Another example, and one of the initiatives HSBC have been working on is their Affinity Programme, where they work with trade associations and professional organisations to offer a suite of products tailored for their particular market. The business card is one of those products, along with perhaps, money transmission, stakeholder pensions and motor finance. This is where monoline card issuers (MBNA, Capital One) would suffer over an organisation focussed on relationship banking like HSBC. The relationships with the bank are critically important to many small and medium sized businesses and allow their payment needs to be addressed overall. WE TALKED ABOUT DIFFERENT PRODUCTS CAN YOU OUTLINE THESE? These differ at the various levels: Business Card - suits small businesses (often used to separate personal from company expenditure) - charge card paid off every month (credit option available through some Issuers) - can help to reduce bank charges - provides cash via ATM and normal card usage at home or abroad - provides a basic level of management information Purchasing Card - traditionally low value business to business transactional card - control is provided by blocking certain merchant codes and inputting individual user limits. Transactional data is then used to enable cost management through negotiating better deals from suppliers - accounting advantages through VAT accreditation which further reduce paper handling costs and allow a streamlined accounting process Corporate Card - focuses on 'travel and expense' claims management - gives control over cost base (linked to a T&E policy) and what people are actually spending the company's money on - promotes understanding of where people are spending the company's money and provides more informed basis for T&E policy setting and supplier negotiation - can provide data feed from the card directly into the General Ledger thus providing accounting efficiencies With all products, a variety of payment and liability options are available in terms of who is ultimately responsible for settlement of the card balance (cardholder or company). SOME ISSUERS OFFER MEMBERSHIP REWARDS OR AIR MILES - DO THESE WORK IN THE CORPORATE MARKET? This is a double edged sword, while it is attractive to some organisations to offer their employees something for 'nothing' - does it always work in favour of the organisation when the individual is just short of earning enough points for a 'free' trip to say Bangkok? This is the conundrum for some organisations. Does it actually incentivise greater spend on corporate T&E? Therefore the market has tended to offer products with and without this option, for the organisation to choose.

Creating new uses through the e-channel - increasing the general acceptance of the card as a payment mechanism will result in a significant increase in volume usage and new users of these products. The Mastercard 'one card' scenario (a combined Corporate and Purchasing Card, whereby the point of sale terminal determines the type of transaction) means that you don't actually need two cards and is an interesting development. There are differing strategies being adopted by Visa and Mastercard and this will be an area to monitor, especially if the Merchant needs to upgrade terminals to cope with complex data delivery requirements. The impact on the Merchant must not be forgotten. Offering global corporations a mechanism to centrally assess how their spend differs across the world - say compare travel expenditure between two country operations. In other words, can a true global proposition be delivered? Growing the middle market. Determining the requirements and putting together a proposition to the market. Will this be the business card moving up the food chain or the corporate card dropping down? DO YOU SEE OTHER ISSUERS JOINING THE MARKET? A number of issuers in the personal space do offer or could offer a business card to the small business market though their systems and processes may not be currently designed to handle the core requirements of many corporate customers. The significant corporate card issuers are based around those banks offering full corporate banking facilities and as such, building broader based relationships. I think there are more opportunities to be gained in the commercial card market, but at the lower end (i.e. small business). WHAT ARE THE IMMEDIATE CHALLENGES FACING THE CORPORATE CARD SPACE? There are a number of significant challenges including:- Leveraging the infrastructure that has been developed over the years - this needs to benefit both existing customers plus bring corporate card services to the wider market (as discussed above). The challenge is whether the Issuers can now leverage what they have got: they need to really work on their proposition to achieve the results. Continuing to work with Merchants, Acquirers and Schemes to improve the ease of collecting the information generated at Point of Sale and thus presented on to the Corporate.

For further information please contact: Julian Sawyer [email protected] Alderman's House Alderman's Walk London EC2M 3XR Phone: 020 7743 6780 Fax: 020 7743 6790