Can an Invisible Purchasing Card Reduce Costs for Your AP Department?
Payment automation has long been the goal for accounts payable departments drowning in a sea of paper invoices. While corporate purchasing cards are ideal for managing the majority of a company's small-dollar transactions with multiple vendors, a variation of the p-card, a ghost account, can help when a large number of invoices are coming from a single vendor. Putting all these transactions on a single account with that vendor can significantly streamline your purchasing process.
What is a Ghost Card?
A ghost card, also called a supplier card, is not a card at all. It is actually a high-limit charge account with one vendor or a group of vendors with which an organization conducts a very high number of transactions. Businesses establish ghost accounts with these vendors to reduce the number of invoices coming in from the same or similar suppliers and to consolidate all the charges on a single statement.
Like a standard corporate p-card, a ghost account is maintained by a card provider. However, typically there is no physical card. Instead, the account number is made available to employees authorized to make purchases and, in some cases, one card is produced with several employees having access to the account number. Purchases are limited to vendors with which the account was created.
Ghost accounts have become common in recent years. According to Michael O'Malley, former vice president of marketing for General Electric's corporate payment services program, more than 60 percent of GE's p-card customers also use ghost accounts.
"It really extends the benefits and power of a p-card program to a wider base of your employees without the potential control issue of having a card in everyone's pocket," he says.
Vertical or Horizontal?
Although there are a variety of ways to implement a ghost card program, most companies follow one of two approaches:
Vertical. When an especially large number of an organization’s transactions are with one particular vendor, management may create a ghost account with that vendor to reduce invoices and make the purchasing process more efficient. This direct relationship between customer and supplier is the basis of a vertical approach.
Horizontal. If an organization finds that their AP department is getting bogged down processing one category of expense, such as travel or event planning costs, it may create a ghost account only to be used for related purchases. The account would be limited to vendors matching pre-determined Merchant Code Categories. While similar to a standard p-card, this horizontal approach differs in that there is still no physical card and the account can be accessed by many employees.
According to O'Malley, most ghost card programs tend to follow the vertical approach. For example, Starbucks Coffee Company implemented a vertical ghost account with Staples office supply stores nationwide in May 2006 to purchase materials to build promotional signs. Each of the company's 500+ district managers has access to the account, which can only be used at Staples locations.
Although horizontal accounts are rare, O'Malley says they are gaining in popularity. GE itself uses a horizontal ghost card to pay for costs associated with event planning. Each year the company attends several trade shows and has hundreds of related transactions, such as purchasing food and renting audio-visual equipment. Although each expense is from a different vendor, they are all under the same category and covered by the same ghost account. Individuals are able to make these purchases without the use of a physical card.
Benefits of a Ghost Card
Reducing Costs
Whether you are looking at implementing a vertical or horizontal approach, the goals of a ghost card program are always the same: save time, save money, or both. By consolidating purchases with a ghost account, you can cut costs by reducing lengthy invoice-processing time.
When Starbucks first approached Staples with the idea of allowing district managers to purchase signage materials using p-cards, Staples asked for each of the managers' account numbers, expiration dates and other information. Not comfortable with giving out information for more than 500 accounts, as well as fearing the logistical nightmare of handling each manager's sign purchases in separate accounts, Starbucks suggested the two companies create a single ghost account. Although the program is relatively small considering the amount of business Starbucks does with Staples, it did eliminate some potential processing headaches.
"This is putting maybe $10,000 or $20,000 on the program a month, which would have been a couple hundred invoices coming into our AP shop," says Raymond Williams, program manager for Starbucks.
Improved Reconciliation
In addition to reducing the number of invoices coming in, implementing a ghost account can make reconciling purchases made with those vendors much easier, as long as controls are maintained. With most ghost accounts, the burden of verifying whether an employee is authorized to use the account typically falls on the vendor. Before establishing the account, it is a good idea to determine how much information your vendor will record and pass along to your card provider.
The best way to ensure accurate reconciliation is to link each transaction to a purchase order. If the PO number is reported to your vendor, who in turn reports it to the card provider, it will appear on your monthly account statement, greatly simplifying reconciliation. The PO number is all you need to access all relevant transaction information.
ResMed, a medical equipment manufacturer in California, has a ghost account with its airfare provider and ties nearly every purchase to a PO number. ResMed AP supervisor Jerry Tyler says matching transactions with POs eliminates much of the reconciliation work, although there are still occasional problems.
"There have been a few periods where something has been paid, there was a PO, but we can't identify who the actual approver was initially," he says. "Maybe because a vendor dropped the ball or didn't take that person's name down." To avoid similar problems, make sure your vendors understand the importance of recording transaction information.
GE offers a service to its card customers called vPayment, which automates the reconciliation process by matching each order to a PO. The service creates a series of ghost accounts for your business that have no funds in them. Once a PO is generated, the exact dollar amount is added to one of the accounts and the remittance information is sent to the vendor. After the account is debited, the vendor cannot access the account again. Since the transaction is linked to a purchase order, all reconciliation data is already available.
Security
A common concern among businesses implementing a purchasing card program is security. Managers want to know that the people using the accounts are authorized to do so and that their purchases are legitimate. Since ghost cards can only be used at a limited number of vendors and since no physical card is in an employee's hand, ghost cards are less open to fraud and misuse than standard p-cards. However, it is still important to have a system of controls in place to prevent and detect fraudulent transactions.
An effective way to prevent reckless spending is to put a spend limit on the account. You can limit how much money can be charged on the account, how much money each employee is able to charge or how often the account can be accessed. At ResMed, management implemented a graduated spend limit, with an employee's position determining how much he or she can charge on the account.
Companies with very few purchases on their ghost accounts may opt out of spend limits, but may flag purchases that appear to be excessive. While Starbucks does not have a spend limit on its ghost account with Staples, Williams says orders that are well above the average are flagged by their AP system.
"The average orders are usually in the $100 to $200 range," he says. "So, if an order comes in that surpasses our threshold, the group that manages these types of goods will reach out to the partner and try to figure out what's going on."
Another way to prevent fraud and misuse of a ghost card is to restrict purchases to a business' MCC. This applies more to companies using a horizontal approach than vertical, since vertical accounts are intrinsically linked to a specific vendor. For companies with horizontal accounts like GE, which uses its ghost account to pay hundreds of vendors for event planning expenses, limiting the type of business where a purchase can be made is essential to prevent misuse.
When developing controls for your ghost card account, work with your card issuer to find out what services they offer since different card issuers provide different levels of account monitoring. Also, work with your vendors when setting up the account to create rules for verifying buyers' authenticity. Most vendors are willing to work with you since ghost cards benefit them as well by reducing the number of accounts they must keep track of, simplifying their back-office processes.
Potential Problems
Despite the benefits of a ghost account, there are several areas of concern that can hamper development of a business' program:
Difficult Startup
Once a company identifies a high-volume vendor with which it would like to open a ghost account, getting the logistics in order can be a daunting task. Making sure your company, your vendor and your card supplier all have the same information requires a lot of communication. When Starbucks opened its account with Staples, management had to make sure Staples could report all the buyer information in the proper field and that Starbucks' card provider could send back the information in a way that could be entered easily into the general ledger. Don't be surprised if your vendor and card provider's IT departments have several meetings before your ghost account gets off the ground.
Failed Controls
Even under strict reporting controls, some unaccounted-for payments are going to slip through the cracks. For example, Tyler says about once every quarter a ghost account statement arrives at ResMed with charges that AP cannot account for. While he says the problem is usually caused by the purchaser failing to notify his department about the transaction, sometimes vendors do not enter the employee's identification into their system when they fill the order. Either way, unidentified payments are a sign that businesses should reexamine their controls or discuss the problem with their vendors.
Lack of Results
Some companies report that after beginning a ghost card program they fail to see any significant cost savings. This could be the result of opening the account with a vendor without a high-enough volume, or of a change in your company's spending habits. If your company is not satisfied with your ghost account, O'Malley recommends discussing the problem with your card issuer. Card providers will work with their clients to perform a spend analysis and determine where a ghost card would provide the most cost savings.
O'Malley says businesses should not abandon their ghost cards if the savings are not immediate. "It's often just a matter of getting everyone on the phone and hashing out solutions. Your issuer can do things for you like analyzing your AP file and looking for the best opportunity."
Setting Up Your Program
Establishing a ghost card account is not a one-size-fits-all task. However, there are a few basic steps managers should take to make sure they are getting the most out of their potential programs:
- Make sure the vendors that you want to open an account with have the technical ability to do so. This is not a major issue since businesses that accept traditional corporate cards tend to also accept ghost cards.
- Work with your bank to determine if a ghost account is right for you. You may find that you could achieve greater savings by getting a general-use p-card instead of a limited ghost card.
- Establish account parameters with your bank. Here is where you link your account to a particular MCC or series of merchant codes and set spend limits, employee restrictions and rules about how often the account can be used, called account velocity.
- Discuss how vendors will handle buyer verification and data reporting. Ensuring your vendor understands the importance of recording each purchaser's identification number when authorizing orders can keep account reconciliation each month simple.
- Consider linking orders to a purchase order. Having the same number on a PO and an account statement virtually automates reconciliation.
- Conduct regular spend analysis to determine if your ghost account is saving as much time and money as you wanted. If not, work with your card issuer to see what could be done differently.
- Re-evaluate your controls to make sure you are reducing the risk of fraud and misuse.
If your AP department is bogged down with invoices from a single vendor or from buying similar items from several vendors, then a ghost account could be an excellent way to streamline your processes. However, implementing a ghost card is not a guaranteed way to cut costs. In order to get the best out of your ghost account, you should maintain open communication with your vendors and your card supplier since they also stand to benefit from a successful program. Also, talk to other organizations that have ghost card programs to find out what works for them and what pitfalls they have encountered. If managed carefully, one or more ghost accounts can greatly reduce the invoice traffic in your AP department.
