From large multinationals down to the smallest vendor, the city of Pasadena, Calif., deals with a variety of suppliers. At any given time, the city may have 3,000 or so vendors on its books that are currently or recently active. In addition, new suppliers — both regular and "one-off" — are being added to the vendor list almost daily.

The growth and turnover of vendors made check payments a relatively expensive and inefficient means for the city to settle suppliers' invoices. Pasadena's commitment to green standards has also contributed to its preference for electronic payment methods. The city began using the Bank of America Merrill Lynch Purchasing Card in 1997 and by 2000 had also added ghost cards to its electronic payment portfolio. In October 2006, the city went live with Bank of America Merrill Lynch's ePayables solution, which has seen significant adoption by the city's regular vendors. The benefits of robust security features and efficiency prompted Pasadena to explore options also to convert its one-off or infrequently paid vendors to electronic payments.

One possible solution that was considered internally was a "super card," with a number that would not be specific to any one vendor. However, there were security concerns about giving out a single card number and the large dollar value that would need to be available. The development of the Card Shuffler feature on Bank of America Merrill Lynch's Works platform provided the solution to this conundrum. The city implemented the Card Shuffler in 2008 — the first public entity to do so.

From checks to ghost cards

The city's use of corporate purchasing cards has steadily eroded the use of check payments. Of the $129 million spent on goods and services in the last financial year, purchasing cards accounted for approximately $12 million. As part of this amount, several of the largest contract vendors were successfully moved from check payments to ghost cards, which have proven particularly useful for major purchases relating to the city's utilities businesses (including power and water).

Ghost cards have been an effective solution when dealing with well-established suppliers, allowing efficient electronic reconciliation between card transactions and vendor invoices. The declining balance functionality tracks spending on a card in relation to the allocated budget/permitted spend and alerts the user/department if the funds are close to being exhausted.

The next phase in the city's electronic payables drive was to adopt the ePayables card payment solution that enables clients to convert accounts payable check payments to electronic card payments with no change to their existing AP processes. Integrated directly into the city's PeopleSoft ERP system, ePayables enabled Pasadena to send a file directly to Bank of America Merrill Lynch, thereby facilitating a more seamless process. The electronic card payment concept is well suited to vendors that are paid on a regular basis: for example, the contractor that handles the writing of parking tickets.

While ePayables enables vendors to receive their payments faster, the city has made it even more attractive to suppliers by offering net zero terms, rather than the net 30-day basis used for check payments.

Key stakeholder buy-in drives the success. The finance department ensures that invoices are sent to the originating department for approval and follow-up if they are not authorized and returned in a timely manner. Invoices are paid as soon as they are approved, thereby helping the city deliver on the commitment of net zero terms and providing a win/win scenario for the city and its suppliers.

Adoption of electronic card payments by the city's regular suppliers has been encouraging. Most vendors accustomed to dealing with public entities have come to assume that the typical net 30-day settlement terms for check payments usually morphs into net 45 days, accounting for postal deliveries, clearing periods and other delays. As a result, electronic payment is a welcome change for vendors that receive their payments within one to two days of processing the transaction.

Many companies think that vendors are reluctant to accept a card due to associated merchant fees. In reality, vendors' accounting and treasury personnel are keenly aware of the cash flow and working capital benefits of card payments and are happy to accept cards to enjoy the many benefits of expedited receipts. From their perspective, the charges involved are no more (and often less) than the early settlement discount they would otherwise have to offer in order to be paid on a net zero basis. Also, tracking and flagging queries/disputes are far easier to accomplish when operating on a net zero as opposed to a net 30-day basis.

Urgent and one-off purchases

While electronic payment and corporate purchasing cards had proven their worth with regular and larger suppliers, an ongoing problem has been purchases from infrequently used or one-off vendors, particularly those where there was also an element of urgency relating to the purchase.

The two major issues were security and speed. In the case of speed, a vendor with whom the city had never dealt before might be reluctant to extend credit terms on the spur of the moment. If the transaction was urgent and substantial, such as a large one-off heavily discounted purchasing opportunity, or a major emergency breakdown, then this caused major upheaval. Making urgent check issuance was disruptive, and checks had obvious security implications. The Card Shuffler functionality was suited to this sort of situation. Initially the city started with a set of 150 card numbers that were randomly used as required and preloaded with approved funds for a specific payment only. Therefore, there was not a credit issue.

In administrative terms, the Card Shuffler functionality can also save time. The effort involved in setting up a vendor for a one-off card payment is significantly less onerous than it would be to pay the vendor by check. While an extremely urgent check payment could potentially be processed in perhaps four or five hours (at considerable administrative expense), a vendor can be set up and paid via the Card Shuffler feature in as little as 15 minutes.

Vendors like the near instantaneous nature of the payment. From their perspective, the administrative workload is no greater than accepting a card payment from an individual retail customer. A further benefit has been that the Card Shuffler experience puts vendors in a more favorable mindset regarding electronic payments in general. As a result, those with the potential to become regular suppliers to the city are more inclined to participate in the electronc payment program for future transactions, thus creating efficiencies on both sides.

City employees were similarly positive in their response to the Card Shuffler feature. For them, the simplicity and reliability of the process were especially attractive. Training requirements were also minimal; having obtained authorization for the transaction (ideally via the ERP system), the workload simply consists of issuing a card number over the phone. The functionality also helped to improve vendor relations; in many cases, city personnel might be making a personal commitment regarding punctual payment as part of the transaction. It also allows them to take advantage of one-off special end-of-line purchase opportunities, such as for spare parts and machinery used by the city's utility businesses.

Card Shuffler also proved painless for the city's finance department. The associated technology workload was minimal, as the product slotted in easily on top of the existing ePayables infrastructure. This was reflected in the timeline; the Card Shuffler took less than three weeks to implement, including testing.

The initial adoption rate demonstrates the program's acceptance by city personnel and vendors. The original projections were that shuffler transactions would account for perhaps $50,000 of spending per month to start with, rising gradually thereafter. However, shuffler transactions in the first month topped $300,000 and are currently running at $240,000 per month.

The numbers clearly reflect the response from vendors and city personnel to the progressive adoption of electronic payment methods. In 2005, immediately prior to the implementation of electronic payment, purchasing cards were already accounting for nearly 10 percent of total annual payments. The addition of ePayables and the Card Shuffler has more than doubled that percentage, with total electronic payments currently running at approximately $27 million per annum.

Working capital benefits

The electronic payables program has had an appreciable and beneficial effect on the city's working capital position. This is particularly apparent in the case of the Card Shuffler, where instead of having to make urgent check payments throughout the month, all purchasing activity is rolled into a single monthly payment to the bank. This improves the working capital position by extending days payable outstanding (DPO), but also improves predictability, which may improve cash forecasting. More efficient liquidity management enables funds to be left on deposit until month end when just the appropriate single amount is transferred across to the operating account to pay the bank.

Looking ahead, the success of Pasadena's electronic payables program has been a strong incentive to continue to bear down on check payments. One possibility is to extend the current standard terms for check payments beyond 30 days to encourage vendors to accept electronic payment, while another is that new city tenders and RFPs will by default only offer electronic payments; checks will not be an option.

Looking to further drive down costs and improve processing efficiency, Pasadena is implementing Bank of America Merrill Lynch's Comprehensive Payables solution, which will allow it to move even more payments to electronic by combining multiple payment options for their vendors. This turnkey solution will allow the city to send a single file to the bank to process card payments, leverage a proven network of over 85,000 suppliers for ACH payments and include wire payments.

About the author

Larry Hammond is purchasing administrator for Pasadena, Calif.