The Commercial Card Game:Why You and Your Suppliers Should say, “Deal Me In”

Trish HerskovitzTrish Herskovitz

Senior Vice PresidentSenior Vice President

Treasury ManagementTreasury Management

Texas Sales ManagerTexas Sales Manager

TEXPO 2011

Gary McGinnityGary McGinnity

Assistant TreasurerAssistant Treasurer

Union Drilling Inc.Union Drilling Inc.

Kristy FurlowKristy Furlow

Senior Vice PresidentSenior Vice President

Regional Sales Manager – Texas and Regional Sales Manager – Texas and

LouisianaLouisiana

AgendaAgenda

• Commercial Card Trends

• Commercial Card Transaction Basics

• Card Transaction Benefits – Buyers

• Card Transaction Benefits – Suppliers

• The Union Drilling Card Experience

• Q & A

Trends –Trends – Declining B2B Check Declining B2B Check VolumesVolumes

The typical organization today makes only 57% of its B2B payments by paper check, down from 74% in 2007 and 81% in 2004.

Source: 2010 Association for Financial Professionals (AFP) Electronic Payment Survey.

Trends – Electronic Payments on Trends – Electronic Payments on the Risethe Rise The percentage of noncash payments that were electronic (vs. checks)

rose from 68% in 2006 to 78% in 2009. Electronic payments include ACH, credit card, debit card and prepaid card.

Source: 2010 Federal Reserve Payments Study

Trends – Steadily Rising Card SpendingTrends – Steadily Rising Card Spending

Purchasing Card Spending in North America (in $ billions)

In the past decade, purchasing card spending has quadrupled from about $40 billion annually to more than $160 billion a year.

Source: Purchasing Card Benchmark Survey Results 2010, RPMG Research Corporation

Merchant

CardIssuer

Acquirer

Processor

AssociationsVISA/MC

Cardholder

1

2 7 8

14

13

115 4 3 6 9 12

PLAYERS:

Merchant

Card Holder

Merchant Acquirer=Merchant Bank

Association = VISA or MC

Processor

Card Issuer

10

15

Basics – Commercial Card Transaction Basics – Commercial Card Transaction Flow Flow

Basics – Understanding InterchangeBasics – Understanding Interchange

• Interchange is a transfer fee between issuers and acquirers used to maximize the growth of the payment network for the benefit of all participants.

• The current Interchange Reimbursement Fee (IRF) rate structure includes rates that vary by card product, processing technology and merchant category in order to reflect the economics and operational characteristics of a transaction.

Buyer Benefits | Buyer Benefits | Process Efficiency/Cost SavingsProcess Efficiency/Cost Savings

The average administrative cost (including sourcing, purchasing and payment activities) of a traditional purchase order based process was reported to be $93, compared to around $22 for a purchasing card transaction (a per-transaction savings of about $71).

Source: 2010 Purchasing Card Benchmark Survey, RPMG Research Corporation.

Purchase Order Purchasing

Card

Buyer Benefits | Rebates/RewardsBuyer Benefits | Rebates/Rewards

• Rewards: Air fare, hotel stays, gift cards

• Rebates: Based on level of spend

• Variables in rebate calculations– Issuing bank– Card brand– Merchant– Level of detail the vendor

sends with the transaction (i.e., Level 3)

– Size of transaction

Buyer Benefits | Float GainsBuyer Benefits | Float Gains

• Commercial card cycle standard is 30 calendar days with a 25 calendar-day grace period before payment is due.

• Card payments provide an additional 25-55 calendar days of payment float.

• Due to extended payment float, balances remain in your account longer in order to offset service fees, pay down debt or earn interest.

Buyer Benefits | Overall Cost Buyer Benefits | Overall Cost SavingsSavings

Total Dollar Amount of Monthly Check Disbursements $1,000,000.00 Total Number of Monthly Checks Written 250Percentage of Total Disbursement Dollars moving to Commercial Card 25.00%Percentage of Total Number of Check Transactions converting to Comm'l Card 25.00%

Average Savings of Commercial Card Transaction*

$31.00 Rebate/Reward 0.50%Average Days of Payment Float Extension Due to Commercial Card 40Interest Expense Savings/Interest or Credit Earned 4.50%

Total Estimated Monthly Commercial Card Spending

$250,000.00 Total Estimated Monthly Number of Commercial Card Transactions 62.5

Annual Float Benefit

$11,095.89

Annual Transactional Savings

$23,250.00

Annual Rebate/Rewards Benefit

$15,000.00

Total Annualized Benefit of using a Commercial Card

$49,345.89

Sample Commercial Card Benefits Calculation

*National Association of Purchasing Card Professionals and Palmer & Gupta P-Card Benchmark Survey Report estimate the Purchase Order process to cost anywhere between $50 - $250. The Commercial Card transaction process is estimated to cost $19 per charge.

Buyer Benefits| Fraud Risk Buyer Benefits| Fraud Risk MitigationMitigation

• Nine out of ten organizations (90%) that experienced attempted or actual payments fraud in 2009 were victims of check fraud.

• 88% reported that they believed “increased use of electronic payments for B2B transactions” was an important strategy for mitigating potential payment fraud risks.

Source: 2010 Payments Fraud and Control Survey, Association for

Financial Professionals (AFP).

Buyer Benefits | Fraud Risk Buyer Benefits | Fraud Risk MitigationMitigation• Issuing bank or the

merchant typically bears card fraud related loss

• Payment disputes – Time to review transactions prior to money leaving your account

• Card insurance coverage – employee loss provisions

Buyer Benefits | General Ledger Buyer Benefits | General Ledger IntegrationIntegration• Accounts Payable needs to enter general ledger codes

for all purchases into accounting system.

• Online general ledger integration tools provide that capability for card transactions

• Expense reporting capabilities for cardholders – available through some G/L integration tools

Buyer Benefits | Single-Use CardsBuyer Benefits | Single-Use Cards

• aka “ghost” cards

• Card number assigned for purposes of a single transaction only

• Number can only be used for a transaction of a particular dollar amount to a particular vendor

• Allows for secondary approval, which adds a control in the purchasing process

Supplier Benefits | Attract/Retain More Supplier Benefits | Attract/Retain More BusinessBusiness

• Card acceptance can be a central component in a preferred vendor relationship.

• Similar to how today it is impacting retail businesses such as fast-food restaurants, card acceptance can drive new sales for wholesale businesses.

• Nearly half of respondents (49%) in a national survey* said that over the past five years their suppliers that accept purchasing cards have increased share of business with their organization to a greater extent than suppliers that do not accept cards.

2010 Purchasing Card Benchmark Survey, RPMG Research Corporation

*.

Supplier Benefits | Get Paid FasterSupplier Benefits | Get Paid Faster

• Total float on check payment – typically 5 to 7 days

• Total float on a card transaction – typically 36 to 72 hours

Supplier Benefits | Get Paid Faster Supplier Benefits | Get Paid Faster

• Negotiated terms can also speed payments

• Best strategy for buyers to persuade suppliers to accept card transactions: Offer to shorten payment terms.

• Improved cash flow (e.g., net 15 terms instead of net 30) and strengthened customer relationship can help offset fees related to card acceptance (i.e., interchange).

Supplier Benefits | Supplier Benefits | Ease Collections ManagementEase Collections Management

• Take late payments over the phone

• Take payment by phone and enable further shipments; reduce “credit holds”

Supplier Benefits | Supplier Benefits | Improve Payment Processing Improve Payment Processing EfficiencyEfficiency• Today’s tools allow

suppliers to accept card payments online in an automated fashion.

• Click a button and money is in your account.

Supplier Benefits | Single-Use CardsSupplier Benefits | Single-Use Cards

• Ghost cards reduce Payment Card Industry Data Security Standard (PCI DSS) exposure.

• PCI DSS was established in 2004 by five major credit card companies to protect against card-data breaches.

• If a single-use card number is stolen, it can’t be used for any transaction beyond the single transaction for which it was established (i.e., to a particular vendor for a particular amount).

Union Drilling – Company ProfileUnion Drilling – Company Profile

• Fort Worth, TX-based provider of contract land drilling services and equipment

• Serves U.S. oil and natural gas producers, primarily those operating in the Appalachian Basin (including Marcellus Shale), Arkoma Basin, Permian Basin and Fort Worth Basin

• Fleet of 71 drilling rigs

• 1,200+ employees

• 8 divisional locations across the U.S.

• 2005: company doubled in size through acquisitions, went public

• 2010 revenue: $192.5 million

Union Drilling – T & E ProgramUnion Drilling – T & E Program

• Before 2009, “Corporate Credit Card” for travel & entertainment and some emergency purchasing

• Card users included: ▪ Rig managers (“tool pushers”) – 24/7 operation ▪ Divisional managers ▪ Corporate executives ▪ Truck drivers ▪ Mechanics

• Rig-to-rig traveling sales environment

Union Drilling – Adding a Union Drilling – Adding a Purchasing CardPurchasing Card

• In 2009, company established Purchasing Card Program

• Transitioned to a new card provider

• Converted to a new T&E card program and added a Purchasing Card for divisional purchasing agents

• Began using purchasing card with key vendors of rig supplies in each division

Union Drilling – State of the Union Drilling – State of the ProgramProgram

• 300+ T&E cards issued

• 16 Purchasing Cards

• About $500K in monthly spend

• 80/20 spending breakdown

– 80% spend on Purchasing Card

– 20% spend on T&E Card

Union Drilling – Control BenefitsUnion Drilling – Control Benefits

• Purchasing Department introduced a company-wide Purchasing Card Program

• Eliminated invoicing for small-dollar purchasing for rigs

• All card purchases reviewed/approved by Divisional Managers and Director of Purchasing

• Greater accountability (i.e., Why buying so many socket sets?) and eliminated monthly cut-off issues

• More timely and greater visibility into purchases

• $2K single purchase limit

Union Drilling – Other Key BenefitsUnion Drilling – Other Key Benefits

• Cost Savings – Elimination of Accounts Payable data entry, check-related costs, invoices for $5 purchases

• Rewards - $60,000 a year at current spend levels

• Improved vendor relations/customer service – Immediate payment vs. 45-60 days

• Extended disbursement float

Union Drilling – General Ledger Union Drilling – General Ledger IntegrationIntegration• ERP conversion (Oracle)

• Conversion to updated commercial card general ledger interface tool – required new coding system

• Eliminated dual entry and reduced clerical error with automation of interface

Union Drilling – Special Challenges, Union Drilling – Special Challenges, AdviceAdvice

• High employee turnover

– Card issuance fees

– Need for employee-departure control procedures – Finance, HR, IT

• Trust (and verify)

– Employee agreements

• ADVICE: Start slow and build the program

– Vendor Acceptance - no issues with MasterCard, Visa

– Internal Acceptance - no problem/fewer POs

Card Benefits – A RecapCard Benefits – A Recap

Buyers Suppliers

Process efficiency/cost savings Attract/retain business

Float gains Get paid faster

Rebates/rewards Ease collections management

G/L integration Improve payment processing efficiency

Fraud risk mitigation

QuestionsQuestions

Gary McGinnityAssistant TreasurerUnion Drilling Inc.gmcginnity@uniond.com

(817) 546-4305

Trish HerskovitzSenior Vice PresidentTreasury Management

Texas Sales ManagerCapital One Banktrish.herskovitz@capitalonebank.com

(214) 855-1633

Kristy Furlow

Senior Vice PresidentRegional Sales Manager

Texas and LouisianaCapital One Merchant Serviceskristy.furlow@capitalonebank.com

(225) 242-3947

This presentation is for informational purposes only, does not constitute the rendering of legal,

accounting or other professional services by Capital One, N. A. or any of its subsidiaries or affiliates, and

is without any warranty whatsoever.

© 2011 Capital One. Member FDIC. All rights reserved.