Will U.S. Bancorp Retain Its Purchasing Card Rank?
Levinsohn, Alan, ABA Banking Journal
Loss of an exclusive government contract may bring short-term pain, but the bank has an otherwise enviable position smack in the middle of increased card usage by corporations and government agencies
Under the hood of U.S. Bancorp hums a formidable bank card franchise.
This $74 billion banking corporation headquartered in Minneapolis is the largest issuer of purchasing cards, the biggest provider of Visa travel and entertainment cards, and a hefty issuer of Visa credit cards.
To these product lines it adds an owned-and-operated merchant processing unit, plus nearly 5,000 automated teller machines. The result is an $800 million-a-year payment systems business, currently yielding a 22.5% net margin and a 2.4% return on assets.
Millions of digital payments flow daily through its electronic networking technologies on behalf of corporations, retailers, and government agencies. In fact, much of U.S. Bancorp's purchasing card business has come from federal agencies, where it had a monopoly. But this year, Washington introduced something new: competition, and the bank saw its share reduced to 24% of a bigger pie.
Despite this setback, the bank is positioned enviably--and at a particularly auspicious time. Use of cards by employees of companies and government agencies to buy supplies and pay expenses is growing fast.
Their allure to the organizational buyer is chiefly the efficient electronic remittance and expense record that cards provide. Virtually paperless, cards eliminate purchase orders, invoices, payment vouchers, and checks. A purchasing card system also has the potential to connect with other electronic treasury, accounting, and purchasing systems. Naturally, banks want to be part of this and purchasing cards are a way in.
Allure of purchasing cards
To end users, a purchasing card works like a credit card, but without the revolving credit (beyond a one-month "float"). A company or government agency gives an employee a purchasing card to pay for travel expenses or purchase supplies and other low-ticket items. Most of these card charges are under $2,500.
The card issuer authorizes each transaction at point of purchase. That is when the card-using organization's limits are enforced for characteristics such as price, type of item purchased, and, often, which "authorized" supplier is used.
Purchase card pricing follows credit card practice except that because purchasing cards are nonrevolving, issuers make money from annual cardholder fees and from interchange fees. On the merchant side, the merchant's bank--often in combination with a technology company like First Data Corp, Total Processing Systems, or U.S. Bancorp's own merchant processing unit--earns revenue from the merchant discount.
Over time, credit card transaction fees have shrunk as competition has increased and technology and volume have driven unit costs down. When the first credit card, Diners Club, was introduced in 1949, transaction costs were between 5% to 10% of the purchase price. Restaurateurs paid it all, and waited a month to receive payment.
A raw deal? Perhaps. But once restaurateurs discovered that Diners Club was more than a customer service, that it could be a powerful marketing mechanism, they caught on.
Purchasing cards reach maturity
American Express, a legendary marketer, for years rode this concept, and still does on its charge cards-positioning itself as a service-oriented company for upscale, status-conscious, card holders. The company has traditionally charged merchants twice as much in transaction fees as Visa or Mastercard.
In corporate purchasing and travel cards, American Express has long led-- in fact created--this market. Because of its merchant relationships, American Express had a socalled "closed-loop" of information--a closed warehouse of data between sellers and buyers. With that information, American Express was in a position to help its corporate or government card holders make volume deals with special, "authorized" suppliers, thus giving American Express an edge. …