Payment Card Programs Support Transparent Fiscal Management

Payment Card Programs Support Transparent Fiscal Management

By Eva M. Robinson

For state and local public-sector organizations across the country, the scenario is all too familiar. While the revenue outlook is positive, as reported by the National Governors Association and the National Association of State Budget Officers' December 2005 "Fiscal Survey of the States," the long-term fiscal challenges remain. Agencies are facing increasing pressure and scrutiny from elected officials, taxpayers, and the media, all of whom demand greater accountability regarding how and where public funds are spent.

While government budget allocations and approvals vary by jurisdiction, public-sector entities everywhere can make the most of their precious resources--and greatly increase accountability and transparency--simply by implementing the right payment card solution. Though payments often are an overlooked aspect of government operations, the fact is that the right payment solution can deliver tangible savings. Innovative payment tools allow state and local government agencies, including school districts and public hospitals, to manage the complete spectrum of their order and payment processes more efficiently than ever before. Whether the need is for maintenance, repairs, and operational requirements, fuel for government-owned vehicles, or funding expenses related to official travel, the right payment solution can lower administrative costs, increase productivity, strengthen financial controls, and enhance constituent service.

Several studies, including a 2003 benchmark study by professors Richard J. Palmer of Eastern Illinois University and Mahendra Gupta of Washington University in St. Louis, found that organizations using purchasing cards save $69 per transaction, compared with old paper-based processes that rely on purchase orders, invoices, check payments, and the associated administrative and reconciliation functions. Purchasing cards enabled organizations to reduce and redeploy headcount to higher value-added activities and, on average, cut procurement cycle times by 74 percent, the number of petty cash accounts by 57 percent, and the number of suppliers in an organization's database by 42 percent, the study reported.

In addition to cost and productivity savings, the right payment solution can aid in regulatory compliance issues such as procuring from small and minority-owned businesses, as well as tax reporting. Today, advanced MIS reporting tools tied to payment solutions enable government agencies and other public-sector entities to stratify merchants based on their socioeconomic status. This makes it easier to ensure that public funds are being spent according to established guidelines with the right types of merchants. These reporting tools also can identify purchases that may be subject to additional IRS reporting.

Delivering Savings at the Local Level

At the local level, purchasing cards are generating valuable cost savings and efficiencies across the country. For example, the Chicago Public Schools system deployed a new MasterCard purchasing card program in August 2005. Cards are used for purchases ranging from textbooks to computers to janitorial supplies. The program, established through issuer Harris Bank, a unit of BMO Financial Group, provides Chicago Public Schools with a volume incentive on the total amount spent on all purchases and delivers purchasing details electronically.

Spending on the cards increased from about $230,000 in the first month to between $6 and $7 million in December 2005, and is expected to reach nearly $60 million in the first year, according to Heather Obora, chief purchasing officer for Chicago Public Schools.

Obora estimates that once the program is deployed across the entire school system early this year, with 1,500 purchasing cards distributed and all systems fully automated, the total savings to Chicago Public Schools in the first year will be $1.8 million (including productivity efficiencies, potential purchase volume incentives, and lower transaction fees). "Our goal for the program is to have it cover operational expenses and maybe even have it pay for some after-school programs for the students," says Obora.

Working in partnership with Harris Bank, Chicago Public Schools is putting in place a fully automated electronic system that matches invoices with corresponding purchase orders and payments. When purchases are consummated, all transaction details are captured at the point of sale and sent back to the school district electronically for automatic reconciliation.

"The response from the school district's vendors has been amazing," says Obora. "Vendors like it because they get paid much faster, usually within 48 hours instead of between 45 and 60 days, the way it used to be. It's much less labor intensive and there's not as much paper to push for them or us. We're saving on check-writing fees and the cost of all the manual data entry we used to do." Obora estimates that on the accounts payable side alone, the organization will save $150,000 in 2006, which equates to three full-time equivalent (FTE) employees.

Business Intelligence

Beyond cost savings and productivity improvements, new business intelligence tools also enable state and local public-sector entities to track card usage online and gain valuable insight into where every dollar is spent, on what, and by whom. This allows agencies to account for governmental spending, consolidate purchases, and gain leverage for negotiating volume-pricing discounts.

Rather than simply establishing rules about payment card usage, program administrators are now able to enforce those rules to ensure that cards are used only at approved types of suppliers and do not exceed per-transaction spending limits. With online tracking of card usage, program administrators also can detect and respond to irregular activity in a timely fashion instead of months later when paper reconciliations and audits are performed.

Getting Started

The first step in establishing a payment card program is to make the decision to break away from the constraints of time- and labor-intensive, paper-based processes. Given the widespread adoption of payment solutions by government agencies, much primary and secondary research is readily available to help gain endorsement from internal stakeholders.

The next step is to identify the right partners: a card-issuing bank and payment card brand that are able to assist with tailoring a program specific to an agency's needs. For most public-sector entities this is often accomplished through the request for information (RFI) or request for proposals (RFP) process. It is important to make the RFIs and/or RFPs as detailed as possible regarding an organization's specific purchasing and payment needs and goals to identify the right partners.

"It requires a certain amount of process re-engineering and can get complicated if an organization doesn't have adequate support from its payment solution vendor," says Peter Zeigler, Director and North American Portfolio Manager of the BMOePurchasing Solutions Division at Harris Bank. "My advice to public-sector organizations is to look for a vendor who can work with them on a consultative basis."

Average implementation time is between eight and sixteen weeks, according to Zeigler. Given the tremendous cost savings, productivity improvements, and tighter controls that purchasing card programs provide, increasing numbers of publicsector entities are making or contemplating making the transition from paper-based to paperless purchasing. According to Zeigler, Harris Bank receives one or two RFPs every week from various public-sector entities seeking to deploy a purchasing card program.

Payment solutions offer a powerful, highly effective tool to facilitate more open, transparent, and cost-effective administration of public
finances. With public-sector entities dedicated to fiscal responsibility, payments remain an obvious but often overlooked administrative operation. However, increasing numbers of public-sector organizations around the world at every level of government are seeing firsthand that payment solutions clearly are an efficient way to procure and pay for essential goods and services while maximizing the value of every budget dollar.

Editor's Note: Eva M. Robinson is Vice President, Public Sector Payment Solutions, MasterCard International. With over 20 years of service with the United States federal government, Robinson has extensive public-sector experience, including assignments in military logistics, accounting and finance, and procurement.
A former member of the U.S. Navy's Professional Acquisition Community, she was responsible for developing procurement policy that determined how Navy and Marine Corps buyers purchased goods and services under $100,000 and served as the Navy's representative to the DOD Acquisition Regulatory (DAR) Council (Simplified Acquisition Policy committee). Robinson implemented the U.S. Navy/Marine Corps Purchase Card program.