For an organization looking to provide its commercial customers with a payments vehicle, an open loop payment program is typically the default solution. However, there are five types of program requirements that may lead a program sponsor to a closed-loop alternative.
2. A Little About Multi Service A closed-loop billing and payment service provider for more than 30 years, we’ve processed transactions for program sponsors such as:
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6. Shared Benefits For Program Sponsor: Network control Functional customization Customer captivity Fee management For Accountholder: Minimal fraud, waste, misuse Rewards Open Closed
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12. Customer Captivity 71% of fleets in the trucking industry say that they are more likely to buy from vendors that have implemented a closed-loop program. A dedicated line of credit means that a competitors’ sales do not have an effect on the customers’ purchase opportunity with the program sponsor. Streamline billing and payments for customers while maintaining internal operations.
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14. Fee Management 71% of merchants cite “Fees too high” as a reason to resist or not accept cards 1 . First Annapolis and NAPCP. End-user Survey on Supplier Acceptance. Report of Survey Results. Nov / Dec 2009.
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Notas do Editor
Copyright CPI 2010
Some quick housekeeping. For the purpose of this presentation, I will use the following terms to refer to the following definitions. While general purpose cards may allow accountholders to restrict usage to merchants with MCCs, these cards are still, inherently, open loop.
The commercial card market was really launched into the mainstream through the U.S. government adoption of P-Cards beginning in 1986. The commercial world followed with large corporations to SME’s issuing employees P-Cards for business expenses. To throw a few numbers at you in regard to the sheer size of this market: The GSA Smartpay program booked $30.2 billion in FY 2010 and earned $325.9 million in refunds For a program sponsor looking to provide its commercial customers with a payments vehicle, an open-loop payment program may seem like a natural solution. However, we have to consider the ability for a co-branded or private label open-loop card program to compete with the advantages their customers already achieve through a corporately-issued purchasing card. If the commercial customers within the program sponsors’ portfolio are already utilizing a general purpose p-card, we need to reconsider the sales proposition. What added value does another account offer to my commercial customers? What are the advantages and disadvantages to the program sponsor?
In fact, closed loop shares a good number of benefits with open loop. [Shift to Venn diagram, showing closed-loop and shared-benefits].[S h ift to Ve n n d i a gr a m , s h owi n g c l o s e d - l o o p a n d shar e d - b e ne f i ts ] . So, when does closed-loop become a viable / valuable solution? Well, we’ve worked with consultants, program sponsors and other business partners in this sector for more than 30 years, and inevitably, when a program sponsor decides to move into closed-loop, there are one of five factors involved. [Enter closed-loop points one at a time} We’re going to spend some time reviewing each of these.
“If we offer a cobranded Visa, MasterCard or whatever, we have to compete with the credit card the customer currently has in his pocket. Because it offers air miles, rebates or some other incentive, it is tough (and expensive) to knock that card out. But if we make an offer tied to our Closed Loop account, I don't have to compete against their strength.”
Perhaps the program sponsor desires to implement a commercial card program for both its U.S. and Canadian customers, but its preferred banking partner and open loop card issuer is not capable of servicing both sides of the border. Just because an open loop commercial card program isn’t feasible does not mean a commercial card program is unjustified. Because closed loop card programs are not subject to the same bankcard regulations as their open loop relatives, issues like geography become substantially less challenging. Utilization of Merchant Category Codes (MCCs) allows P-card issuers to limit the type of vendors with which a cardholder can conduct business. Likewise, agencies have created “closed-loop merchant networks,” which include vendors that have been selectively identified to accept the card or account. MCC blocking allows cardholders with a broad set of purchasing needs (i.e. from toothbrushes to televisions and utility purchases) to maintain access to a diversified vendor network, while the agency safeguards against purchases that clearly do not fall under the individual’s domain (i.e. jewelry, fuel, motor vehicles). On the other end of the spectrum, an employee with a specific procurement function (i.e. aviation fuel or aftermarket vehicle parts and service repairs) does not require access to a majority of merchants on a broad P-card network, yet the nature of this employee’s purchases would require a large credit limit on the account. In such a situation, a closed-loop network of aviation fuel vendors or aftermarket parts and service dealers is created and a card that is exclusively accepted at this network of vendors is issued.
Perhaps the program sponsor desires to implement a commercial card program for both its U.S. and Canadian customers, but its preferred banking partner and open loop card issuer is not capable of servicing both sides of the border. Just because an open loop commercial card program isn’t feasible does not mean a commercial card program is unjustified. Because closed loop card programs are not subject to the same bankcard regulations as their open loop relatives, issues like geography become substantially less challenging. Utilization of Merchant Category Codes (MCCs) allows P-card issuers to limit the type of vendors with which a cardholder can conduct business. Likewise, agencies have created “closed-loop merchant networks,” which include vendors that have been selectively identified to accept the card or account. MCC blocking allows cardholders with a broad set of purchasing needs (i.e. from toothbrushes to televisions and utility purchases) to maintain access to a diversified vendor network, while the agency safeguards against purchases that clearly do not fall under the individual’s domain (i.e. jewelry, fuel, motor vehicles). On the other end of the spectrum, an employee with a specific procurement function (i.e. aviation fuel or aftermarket vehicle parts and service repairs) does not require access to a majority of merchants on a broad P-card network, yet the nature of this employee’s purchases would require a large credit limit on the account. In such a situation, a closed-loop network of aviation fuel vendors or aftermarket parts and service dealers is created and a card that is exclusively accepted at this network of vendors is issued.
Open loop commercial cards rely upon complex infrastructure -- rails, if you will -- that is shared by customers and merchants all around the globe. With any infrastructure of this magnitude, changing the rails is no small order of business. Points one and two, because closed loop programs give the program sponsor control over the merchant network, they can ensure that detailed, Level III transaction data, or even specialized transaction data such as VIN number, tail number, PO number, etc. are captured at every merchant location for every purchase Points two, three and four….help…. Specialized applications like these can require the ability to ‘off road,’ something closed loop payment programs can do without infringing upon a infrastructure the rest of the globe depends upon.
While there is upfront time and cost involved in designing and implementing functional customization that fits business requirements, there can be significant long-term advantages and cost-savings. For example, the utilization of tiered invoice verifications in one government closed loop program identified 54,000 invalid merchant invoices prior merchant payment or customer billing. Purchases initiated with a valid P.O. number helps to mitigate instances of fraud and back-end dispute management costs.
The advertising campaigns for both Visa and MasterCard focus on the fact that you can -- and should -- use your card everywhere. And that would be fine by you, so long as everywhere doesn’t include your top competitor. When loyalty is nice, but captivity is better, closed loop commercial cards provide a solution by not giving your customers the option. This may sound rash. Like a short-sited business ploy, but in fact, in a survey conducted by the Kinetic Group, we found that 71% of end-users say they are more likely to buy from vendors that have implemented a closed-loop program. The reasoning for which, goes back to Functional Customization. If Level III data or specialized data is important to your end-users, then the attraction of functional customization allows a program sponsor to justify customer captivity. Another reason to lean customer captivity comes into play, some program sponsors want to maintain control of their AR role. In order to do this without overburdening the AR function, a company may choose to limit accountholders to a closed-loop network.
When program sponsors have control of or strong relationships with their merchant network, the benefit of Interchange is limited. Therefore, fee sensitivity increases. Because a closed-loop program typically only requires one service provider to act as the issuer and the acquirer, there are fewer “mouths to feed” in the transaction process. The US airline industry will pay well over $2 billion in cc merchant fees this year. And do it again next year and so on…
What do companies that experience extremely high turnover, not-for-profit organizations, and organizations with a need to make repeated, high-value transactions all have in common? Historically, all these commercial customer types have shirked away from the opportunity to put open loop commercial cards into their employees’ hands. If your commercial customers are particularly risk averse, an accountholder’s inability to use a closed loop commercial card anywhere except the program sponsor’s sales locations may serve as a major selling point, where others would consider it a marked disadvantage. One colleague of ours actually commented that “many customers don't want "credit" or "credit cards", but are perfectly willing to establish an account and let us invoice them. We would lose a significant number of customers if we only accepted general purpose credit cards.” In some cases, an accountholder may need to make repeated, high-value transactions with a number of vendors. In such situations, a closed-loop network initiated by the end-user can be very effective and has, in fact, been utilized by the U.S. Government for its marine and aviation fuel purchasing programs. One of these programs was developed with such functional customization that zero instances of fraud have ever occurred in the system.
