o matter how you cut 'em, purchase cards are coming up aces. In fiscal 1999, Uncle Sam saved an estimated $1.1 billion on 21 million purchase card transactions. In the same year, rebates based on sales volume and fast payment netted the government more than $55 million. Four new players entered the purchase card game in November 1998. Citibank, Bank of America, Bank One and Mellon Bank joined U.S. Bank, which had held the sole purchase card contract until 1998.
Adding players caused no interruption in the exponential growth of card use. In 1989, just 10,000 federal employees and military service members held government VISA cards. Now, more than 500,000 civilians and service members hold cards. The number of card transactions grew from just more than 2,000 in 1989 to nearly 21 million today, while the value of those transactions vaulted from $460,000 to more than $10 billion.
The General Services Administration's Federal Supply Service, which negotiated the new card contracts, estimates that agencies save more than $50 per transaction in administrative costs each time someone uses a purchase card instead of a paper purchase order. Some agencies forbid employees to use anything but purchase cards for purchases of $2,500 or less. The Defense Department, government's biggest card user, requires a written determination from a senior executive or flag officer for any noncard purchase at or below $2,500-government's "micropurchase threshold."
To further encourage card use, DoD directed that cards be used to pay for training requests up to $25,000 and for all medical services and nonappropriated fund payments up to $2,500. During 1999, Defense bought more than 91 percent of its micropurchases and 56 percent of its training using the card. In addition, contracting officers can use purchase cards to make payments above $2,500 on existing contracts, including the federal supply schedules.
DoD pulled in more than $20 million in rebates in 1999 from its two card companies-Citibank for the Navy and Marine Corps and U.S. Bank for the Army, Air Force and other Defense agencies. The department's purchase card program management office estimates that as more card payments are made faster, the rebate total could double. One key to faster payments has been getting supervisors to more quickly reconcile their cardholders' transaction logs with the banks' bills each month.
Until recently, "billing officials weren't doing timely reviews," says Dennis Hudner, deputy program manager of the DoD card program office. "Bills would then lapse, but the interest was paid out of a central account, so the people who were offending weren't feeling the pain." Now billing officials must certify that each card statement is "legal, proper and correct," says Hudner. "If there is an erroneous payment, they can be held personally liable, so they're doing a more diligent job."
Nevertheless, in February 1999, DoD was late in paying more than $10 million worth of bills. As a result, the department put in place a policy to suspend any card with a bill 60 days or more in arrears and to suspend all the cards at any organization where an account is 180 days overdue. By the end of 1999, the Army and Air Force had reduced delinquencies by 78 percent and 62 percent respectively over 1998. The Navy continues to have problems, but has at least cleared up all its outstanding balances under the card contract that ended in November 1998.
Another key to speeding up card payments is allowing Web access to card accounts. Both U.S. Bank and Citibank offer such access, allowing establishment of new accounts and review and certification of cardholder statements online. DoD is testing online certification and will roll it out departmentwide later this year, Hudner says. Once such a system is in place, billing officials will be able to view all cardholder statements online, certify them and trigger the sending of obligations and invoices to the department's accounting and payment systems. "Using this tool and electronically passing information should cut payment [times] and increase rebates," Hudner says.
Know When to Fold 'Em
Other agencies also are increasing their reliance on charge cards. The Interior Department is so taken with the cards that it has folded its travel, fleet and purchase cards into one, an integrated MasterCard with Bank of America that is carried by 55,000 of the department's 66,000 employees-23,000 of them with purchase authority. The integrated card replaces three cards Interior employees used to carry: American Express for travel, U.S. Bank VISA for purchases and Wright Express for vehicle fleet expenses. "We decided to give all our business to one vendor because the previous contracts all had different nuances and payment procedures and we were not getting the greatest benefit from our spending power," says Debra Sonderman, director of acquisition and property management at Interior.
Interior surveyed its cardholders before renegotiating and found they wanted to carry fewer cards. Now those who travel and have purchase authority carry just one card to pay travel costs, buy goods and services, and cover fuel costs, though all three lines are not activated on every card. For fiscal 1999, employees used integrated cards for 990,000 transactions worth $400 million, $312 million of that in the purchase card line.
The new cards solve another multiple card problem that showed up on the cardholder survey. Under the old agreement, "if you had a maintenance guy and he was working on five different projects, he would have to have a purchase card for each project," Sonderman explains. "We couldn't get the accounting correct in the agency's accounting system."
Today, using Bank of America's Web-based desktop management tool, EAGLS, cardholders or their finance offices can reallocate transactions to the appropriate funding sources and categories. "Yesterday, my boss's administrative person was looking at a purchase card invoice and saw a transaction that came in as equipment but it really was for supplies. She reallocated it using EAGLS, and it will show up in the next day's invoice and be reposted," Sonderman says. The ability to reallocate transactions is important because so many Interior offices have very limited funds in various categories and they have to manage them closely, she adds.
Daily invoicing also is helping the department manage better, Sonderman says. For example, under the old contract, the department would prevent people from making purchases using their cards around Sept. 10 each year to prevent any lagging invoices from coming in after Sept. 30 that might cause overspending in an appropriation and trigger the Anti-Deficiency Act. Paying quickly also is winning the agency larger rebates from banks, which issue refunds to agencies based on the volume of their transactions, the speed of their payments and whether they pay electronically. Interior's appropriation allows the agency to pool rebates to support beneficial management initiatives. For fiscal 2000, the department will spend about $4.3 million on initiatives ranging from financial management systems migration and information technology security to environmentally friendly procurement. Interior will use $675,000 in rebates to support and oversee the card program itself.
So far, Interior appears to be the only agency willing to issue integrated cards. Sonderman says other agencies have trouble overcoming the trust issue. "The perception is that if you give people the buying authority, they will do something wrong," she says. The keys to Interior's program are making sure employees understand the rules and doing periodic monitoring. "We have so much information with the integrated card that it is very easy to identify if something is possibly not an appropriate transaction," Sonderman adds. "We decided that we're going to build our program based on the 99 percent of people who do the right thing."
Hudner says DoD takes a similar stance. "This is a risk-managed program, not
a risk-avoidance program. The measures you would have to take to avoid risk would cost more than you save by using cards," he says.
But risks persist. In April, Bureau of Indian Affairs officials acknowledged widespread purchase card abuses had led to firings and discipline of employees. Despite the risks, Interior has eliminated a whole layer of card transaction review. "We had about 20,000 people with [purchase] cards and 12,000 reviewing officials," Sonderman says. "It was embarrassing. Inspector general reports said we didn't have a fraud problem, so we eliminated the approving official role." Instead, the department now relies on reviewing officials who every six months must check and certify the accounts of employees under their purview.
At DoD and many other agencies, cardholders still must keep a separate paper log of their purchases, which they and billing officials use when reconciling card statements each month. Sonderman says Interior no longer requires such logs, though employees may keep them. "They have receipts, they have paper statements, they have electronic statements online through EAGLS. As we move more and more people to using EAGLS, particularly for cost allocation, there is less reason to require folks to have a log." Like all government cardholders, Interior's must keep receipts for three years and make them available for review or audit within 48 hours of a request.
Like Interior's cardholders, those at GSA's Federal Technology Service (FTS) have more reasons to use their cards under the new card contract. FTS cards issued by Citibank and held by all of FTS' 400 employees serve a variety of functions. They are employees' ID cards and are used to gain access to the agency's Willow Wood headquarters building in Fairfax, Va. The cards contain fingerprint information that employees must have to log onto their PCs. They can be used to gain access to certain secure Web sites and to encrypt e-mail. They also carry property pass information for office equipment such as laptop computers. In addition, they serve as travel, purchase and telephone calling cards and provide access to American Airlines e-tickets.
Initially, all of GSA tried integrated travel and purchase cards, but most other offices went back to two separate cards after they found purchase and travel transactions were getting mixed up. FTS stuck with the integrated cards and most of the problems have been resolved, says Robert Suda, FTS' chief financial officer. "Purchase and travel are turned on for all 400 of our employees," he says. "We've had 278 people make purchases since we moved into our new building in June." Giving all employees cards has resolved some office bottlenecks, Suda says. "Under the old card, if the person who had the purchase card for the office went on travel, no one could buy anything. Now we all have them and we have more freedom," he says. It's limited freedom, however: Most people can spend just $500 a month.
FTS built an Internet-based system to reallocate transactions among accounts. "You can change the accounting code for different functions-supply, training, etc. You can even identify a transaction by vendor, so it lets us keep better track of spending," Suda says.
Many agencies are trying to drive more purchases and payments onto the cards so they can keep better track of spending and use that information to craft better deals with vendors. Sonderman, for example, plans to use the beefier data generated by EAGLS to leverage Interior's purchasing power. "When we get information on which vendors we're buying from, we'll rack and stack it and see whether we need regional contracts so there is a separate rate for Interior," she says.
Sonderman already has toted up Interior's travel spending at large rental car companies and plans to use it to persuade them to stop charging the department's travelers state taxes. Most states have rules against taxing transactions billed directly to the federal government. Interior centrally bills rental cars, but the car companies often ignore the tax exemption when travelers present their cards. Now Sonderman will write to each company citing Interior's annual spending and asking them to honor the tax exemption.
The next frontier is to expand the use of purchase cards as a means of paying vendors and contractors, Sonderman says. Acquisition law permits contracting officers to use the cards to make payments on existing contracts. Currently, only 60 percent to 65 percent of Interior's vendor payments are made electronically. That's largely because banks charge companies for remittal information on electronic payments-the information matching a payment to an invoice. If Interior uses its cards for such payments, vendors still are paid quickly, generally within two days, and the card companies automatically provide the information they need to reconcile their accounts. Both VISA and MasterCard are offering incentives in the form of lower discount rates-the per-transaction percentage vendors must pay card companies-for high-dollar transactions.
Interior also is one of a group of agencies quietly working to get the micropurchase threshold raised above $2,500. The agencies aren't alone. E-commerce companies invading the federal procurement market are strongly interested in conducting business on the Internet using purchase cards. In their view, the current micropurchase limit dampens agencies' ability to do big-and therefore profitable-business deals online. In part because of this pressure, VISA is testing the waters for a lobbying campaign to raise the threshold.
VISA is moving carefully, however, due to long-standing opposition by small business. "We've heard it's a sensitive issue," says David Minier, VISA's director for government services. Paul Bazylak, the company's vice president for government services, says VISA is holding discussions with agencies, vendors and Congress to determine whether to push ahead. To answer small business concerns, VISA built a tool that banks can offer their agency clients to collect data about which vendors cardholders are using. The Office of Federal Procurement Policy and the Office of Management and Budget said, " 'Help us understand where card business is going so we can substantiate whether there are small business hurdles,' so we are providing data on all sites used," Minier says. He hopes to know by the end of this year if and when the micropurchase threshold might change.
Sonderman would like to see the threshold raised so she could get 90 percent of Interior's transactions onto cards. About 70 percent of the department's transactions are at or below $2,500, but "we would get to 92 percent or 93 percent [if the threshold were] at the $5,000 level," she says. "Getting the additional 20 percent out of purchasing offices and letting the [procurement staff] work where they can add value, analyzing purchasing so we can be more strategic buyers, is where we're trying to push the workforce."
"How our financial dollar is spent is different from the private sector," Sonderman says. "We spend 80 percent of that dollar on transaction processing-getting the information in the system, getting the payment logged and sent, making sure the vendor got it, etc.-and 20 percent is spent on decision support-telling managers, 'You're spending twice as much with United as with Delta, so you could get better pricing.' The private sector spends 20 percent processing transactions and 80 percent on decision support. Our goal is to change our ratio so we can give better information to the people responsible for the mission."