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November 08, 2012Michigan Community College Business Officers Association Presented by:Turning A/P From a Cost to a Profit Center

1AgendaPayment Industry TrendsCard Program FundamentalsPrimary Value PropositionPayment Optimization StrategiesIndustry Best Practice HighlightsPNC Card Services OverviewQuestions

22Payment Industry Trends34Payment Industry TrendsMigration From Checks to Electronic Payments

*PayStream Advisors: Value of Purchasing Cards 20124Payment Industry Trends North American Purchasing Card Spending ($B)

PROJECTED*2012 RPMG Purchasing Card Survey56On average, 52% of transactions under $2,500 were paid with a purchasing card

On average, 31% of transactions between $2,500 and $10,000 were paid with a purchasing card

Average organizational purchasing card spend is expected to increase over the 2011 base year by 8% in 2012, by 26% by 2014 and by 48% by 2016

The most common use of purchasing cards is for office supplies, MRO, computer hardware and software and peripherals

Electronic Accounts Payable (EAP) spend grew by 67% in the two year period from 2009-2011 increasing use of cards as an alternate means of supplier payment!Payment Industry Trends Purchasing Behavior and Performance (2012 RPMG)6Key Talking Points:Best to consider as two separate programs traditional P-Card and AP. Traditional P-Cards are distributed to users to capture low dollar, non-strategic spend. Users typically reconcile and get approval after the purchase and reconciled transactions are uploaded to the GL for accounting purposes.

The AP program program is focused on moving check based spend to card by integrating into the AP module. Companies continue to use their same front end processes to issue POs, get approval and receive invoices for matching. Once the purchase is approved for payment, it is loaded into the AP module for actual payment.

The reason for pursuing an AP program is that most of an organizations spend (as much as 80%) continues to go through Accounts Payable for payments. By adding a card payment, you can increase your volume significantly.

Card Program Fundamentals7Employee Purchasing cardsCard Building BlocksFor smaller dollar decentralized purchasingReduces time for receipt and payment of goodsA lot of value for both buyer and vendorsEmployee Travel cardsFor travel & entertainment expenses Preferred method of payment for these vendorsImproves financial controls (SOX compliance) Ghosted Purchasing cardsFor preferred (contract) vendor orderingFacilitates online ordering and paymentA lot of value for both buyer and vendors Electronic AP cards Payments requiring backend approvalEnables card settlement on POsAutomated solution for both push & pull approachesOrganizations capturing the greatest percentages of transactions and spend have multiple card programs Single Use Card AccountsFor one time payment vendorsXML capabilities through Web ServicesImproves payment cycle timeCard Program FundamentalsDeployment Across the Procure to Pay CycleDistributed CardsNon-Distributed Cards8Card Program FundamentalsDeployment Across the Procure to Pay Cycle9Distributed CardsGhost CardsElectronic AP CardsAccount IssuancePhysical cards held by employees16 digit account # housed by vendor16 digit account #Spending LimitMonthly discretionary maximumMonthly discretionary maximum

$0 incremented by approved amounts onlyOther ControlsMCC, transaction size, frequencyMCC, transaction size, frequency

MCC, transaction size, frequency

Card PresentmentPoint of PurchaseCharged upon Fulfillment/Service DeliveryUpon receipt, approval and payment decisioning push and pull optionsTransactions ServedNon P.O. indirect spend, travel & entertainmentSelected centralized vendor relationships air travel, overnight courier, supplies, tempsStrategic spend requiring continued procurement, receiving and approval processesAccountingMixture of default mapping, cardholder reconciliation and exportCentralized reconciliation assisted with cost center or department ID passed with transaction recordExisting approval and accrual process unchanged payable relieved when approved and file sent to PNCCard Program FundamentalsRisk Mitigation/Compliance ConsiderationsTraditional Point of Sale ControlsMerchant category controls (MCC)Per transaction spend limitsDaily, monthly, & annual spend limitsVelocity limits

Management Visibility into SpendReal time visibility into recent authorizationsNext day visibility into processed transactions Reporting of potential exception activities

Fraud MonitoringPNC provides proactive fraud monitoring 24x7 through the analysis of suspect spending patternsUtilizing an intelligent neural network that risk-rates the probability of fraudulent transactions based on a cards past spending history and PNC determined fraud criteria queues

Liability Waiver CoverageProvides insurance coverage addressing cardholder misuse up to $100,000Covers posted transactions surrounding notification of terminationCovers 75 prior to, and 15 days from, notification of termination

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1011Assists clients with the conversion of their accounts payable payments from check to electronic card paymentsPayor-initiated solution which allows clients to produce a card run from their Accounts Payable System with subsequent settlement execution through the card payment network Systemic funding of vendor for approved paymentsCombined with delivery of electronic remittance informationVariety of Supplier settlement solutionsOpportunity to penetrate more strategic spend

Card Program FundamentalsElectronic AP Card Solutions - Overview11Key Talking Points:Best to consider as two separate programs traditional P-Card and AP. Traditional P-Cards are distributed to users to capture low dollar, non-strategic spend. Users typically reconcile and get approval after the purchase and reconciled transactions are uploaded to the GL for accounting purposes.

The AP program program is focused on moving check based spend to card by integrating into the AP module. Companies continue to use their same front end processes to issue POs, get approval and receive invoices for matching. Once the purchase is approved for payment, it is loaded into the AP module for actual payment.

The reason for pursuing an AP program is that most of an organizations spend (as much as 80%) continues to go through Accounts Payable for payments. By adding a card payment, you can increase your volume significantly.

ActivePay for Accounts PayableCard-based Payment MechanismReceivingInvoiceVoucherPaymentDecisionPush SettlementFunds directed to suppliers established merchant service accountElectronic remittance advice directed to supplierSupplier funded in 24 - 48 hoursSourcingPull Dedicated SettlementApproved funds added to dedicated supplier card accountElectronic remittance advice directed to supplierSupplier processes along with other card transactionsSupplier funded in 24 48 hoursCompany manages approved payments which remain outstandingAP Card BenefitsRetention of current sourcing, approval, and payment decisioningSignificant increase of card penetration into overall spendresulting interchange revenue sharing potentialNatural extension in payment termsElimination of check-based execution costs: postage, banking fees, etc.Current Process Remains the SamePull - Single Use SettlementApproved funds added to single use card accountE-mail directed to supplierSupplier will obtain single use card account number, expiration date, CVVSupplier funded in 24-48 hoursCompany manages approved payments which remain outstanding12ActivePay

13Current sourcing, approval and AP processing activities are unaffectedAccounts are only funded for amounts approved and authorized No card account details are housed within Accounts Payable environment or are transmitted to PNCAutomated transmission of payment authorization file to PNCNo physical card issuancePNC solutions fully PCI-DSS compliant protecting payment detailsFraud monitoring and reportingPNC has experienced $0 fraud across our epayables programs since inception in 2004

Card Program FundamentalsElectronic AP Card Solutions Key Control Considerations13Key Talking Points:Best to consider as two separate programs traditional P-Card and AP. Traditional P-Cards are distributed to users to capture low dollar, non-strategic spend. Users typically reconcile and get approval after the purchase and reconciled transactions are uploaded to the GL for accounting purposes.

The AP program program is focused on moving check based spend to card by integrating into the AP module. Companies continue to use their same front end processes to issue POs, get approval and receive invoices for matching. Once the purchase is approved for payment, it is loaded into the AP module for actual payment.

The reason for pursuing an AP program is that most of an organizations spend (as much as 80%) continues to go through Accounts Payable for payments. By adding a card payment, you can increase your volume significantly.

Value Proposition14Efficiency, Revenue Share, Float, and Other Technology BenefitsConvenience ranks as the number one benefit of p-card programs, followed by the receipt of rebates15

*2012 PayStream AdvisorsValue PropositionBenefits of Card Programs16Integration and confirmation of receiving function prior to payment decisioningForces approval and compliance of company business rules prior to paymentComplete vendor file timeliness and accessibility to this vendor data varies by system (more problematic in older legacy deployments)Complex requisition rules/interface can promote maverick spending with associated exception request for disbursement workflow degrading A/P processing efficienciesExpense and complexity of maintaining vendor file particularly for one-time vendors or other small dollar itemsGenerally characterized by a relative high cost to processEfficiencyTraditional Procure to Pay Model CharacteristicsEfficiencyCharge Coding Card Transactions17

Review, validate and enhance transaction detailsCustom Charge Coding access, transaction splitting, complex tax estimationReceipt integrationReviewed transactions will be automatically available for Approval or Extract

GL Coding and Transaction SplittingEnhanced Data, Level I, II, & IIIApproval Rules and HistoryInterchange Revenue Sharing18Accepting merchants are assessed interchange fees for access to the card processing network (Visa, MC, AMEX, etc.)

PNC, as a Card Issuer receives a portion of the interchange and can share a portion of the interchange they receive

Rebates paid on qualified spend use of tiers to determine appropriate rebate (top tier applied to all spend)

PNC can either rebates or reward models through Visa Extras

Financial proposal impacted by billing cycle length, payment terms, number/size of expected transactions18Payment FloatWorking Capital and Payment Float Impacts Electronic AP Cards 19Payments to vendors can be made on any day throughout the PNC Billing Cycle, we are assuming that on average, you company will pick up 15 days of Payment Float based on the 30 day PNC Billing Cycle. Additional payment float days can be gained based on 7 payment terms.Billing Cycle: Your company is able to choose any date between the 4th and the 25th of the month, or the 27th of the month, for the end of its billing cycle. PNC Banks standard billing cycle period is 30 calendar days. Date6/76/106/136/166/196/226/256/287/17/47/77/107/137/16 7/197/227/257/287/31 8/3 8/6Days0369121518212427303336394245485154 57 60Vendor PurchaseVendor Payment Terms n/30Traditional Check PaymentCheck to VendorTraditional Check-Based SettlementCard-Based SettlementPayment Terms:7 DaysCheck Payment to VendorPNC Billing Cycle Start DatePNC Billing Cycle End DatePayments made to Vendors throughout Billing Cycle22 Day Average Float ExtensionACH to PNC

Other Technology BenefitsIntelliLink Spend ManagementIntellilink offers a suite of tools and services that includes everything from reporting to expense management straight through to data integration.

It is a comprehensive, data-rich solution that gives you unparalleled access to the information you need whenever you need it.

Gain greater visibility into company spend locally and globally.

Manage transactions, services and permissions quickly and easily.

20Set up custom email alerts to signal key events and stay informed, including things like approvals, availability of reports or statements, and specific program thresholds.

Key features are always available with a minimal amount of clicks, and context-sensitive help provides immediate information relevant to whatever feature youre currently using.

Other Technology BenefitsOnline Expense Management and Reporting21Advanced Expense Management Features:

Custom Approval FlowsParallelMCC BasedTransaction $Out of Pocket TransactionsMileageCustom Rate TablesCash Payment ExtractsDelinquency ManagementComplex Tax EstimationComplex Policy IntegrationIf/ThenPolicy RemindersMandatory RulesQuestion BasedViolation MonitoringReceipt ManagementScanningIntelliLink can be accessed via smart phoneCaptured receipts can be uploaded in the following formats (GIF, TIF, JPG, JPEG, PDF, XLS or XLSX file)Streamline Charge Coding with Default MappingOther Technology Benefits Interactive Program Reporting/Business IntelligenceUser Friendly InterfaceWide array of interactive report templatesCustomizable report parameters user defined filters and output formatsMultiple report formats including Excel and PDFOne-click statementsSchedule reports for delivery directly to your homepage On-Demand AccessRole and Hierarchy based accessRobust Reporting enables Strong Program ManagementExpenditure AnalysisKnow what, where, and how your cardholders are spendingCompany AdministrationStay on top of month end reconciliation and approvalsUsage and MonitoringIdentify and correct out-of-compliance spending

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Payment Optimization Strategies23Payment Optimization StrategiesUnderstanding Payment Economics24

*Revenue Share based on rebate of 100 bps. Float based on 3% Cost of Capital.Payment Optimization Strategies Creating an Optimal Payment Mix While it is not feasible to pay all suppliers with card, by deploying a payment protocol model of card first, ACH second, and check last, Companys can migrate toward an optimum payment mix. 25Misc. Expense, Local Procurement and Individual TravelCentralized/Recurring Expenses (Temp Help, Office Suppliers, Courier, Large Ticket Travel)Remaining Direct & Indirect SpendCapital Markets, Fiduciary, Tax, Cap ExSmaller Dollar Recurring & Non-RecurringDistributed P-Card & T&E CardVendor Ghost Card E-Commerce with CardCard Based Settlement, ACH and CheckWire Transfer, ACH and CheckCard Based Settlement, ACH and Check26

Payment Optimization Strategies Creating an Optimal Payment Mix Vendor Identification/Engagement PNC Vendor AnalysisAnalysis of vendor base to determine which vendors are likely to take cardsFocus on suppliers accepting currently card payments

Vendor EngagementCommunication with potential suppliersLength and scope of calling campaignProcedural, scripted discussionDo not negotiate alternate terms

OtherModify future bid language to reserve right to pay via cardOptional merchant service enablement

Industry Best Practice Highlights27Card Usage Best PracticesMeasured Performance and Improvement Strategy28Best In Class22% of spend captured through card29% of vendors paid via card28% of transactions via cardAverage11% of spend captured through card19% of vendors paid via card14% of transactions via cardLaggards6% of spend captured through card11% of vendors paid via card8% of transactions via cardDesignate dedicated p-card administrator and empower the positionEnergize program with development of new policy and limit channels to by-pass card usageEducate internal stakeholders and suppliers through formal expansion programSeek greater transaction detailInvolve p-card administrators in strategic sourcing initiativesIntegrate p-cards with primary transaction systems value of electronic AP cardsBest in Class reflects top 20% of respondents, Average reflects middle 50% and laggards reflect bottom 30% of respondentsAberdeen P-Card Benchmark ReportCard Usage Best PracticesHigh Performing Program Commonalities29Distribution and AccessDistribute on average twice as many cards than low performance programsAllow departments or business units to decide on how many cards should be distributed Less likely to restrict card use to only supervisors, managers, or purchasing personnelControlHave per transaction limits that are, on average, twice as high than low performance programsCustomize monthly card spend limits depending upon individual spending responsibility or positionHave a wider allowable span of spend for any given category of goods or services SourcingConduct data mining of card transactions to ensure policy complianceRestrict some or all of their card activity to preferred vendors Use card spending data as basis to request higher discounts from vendorsRPMG P-Card Benchmark Survey ReportCard Usage Best PracticesHigh Performing Program Commonalities30OtherHave a higher level of top management support than low performance programsTwice as likely than low performance programs to require purchasing department to refuse to process requisitions that could be bought on card Increase use of ghost or other card accountsAllow automatic debits (charges) to card for recurring paymentsHave an ongoing method of communicating card information to cardholders and managersEvaluate spending patterns of cardholders with high number of disputed transactions and deactivate unused cardsFormally audit and review card spending approvalReduce number of vendors in AP master file because of card useRPMG P-Card Benchmark Survey ReportDefining card spending limits is the number one mechanism companies implement to prevent card misuse31

*2012 PayStream AdvisorsIndustry Best Practice HighlightsControls to Prevent MisuseCompanies are looking to provide more and better internal education to increase p-card usage among employees32

*2012 PayStream AdvisorsIndustry Best Practice HighlightsSteps to Increase use of P-CardsPNC Card ServicesOverview33PNC Card Services Overview34PNC Market Presence

Strategic, growth business7th largest Commercial Card provider3,800 + customer programs - covering procurement, travel and combined card usesContinued investment in operations staffing and capabilities PNC Experience

Pioneer in Commercial Card marketOne of the fastest growing issuers in the country, since inception in 1995Double-digit, YOY growth through distributed card and leading-edge payables solutionsAnnual spend in 2011 over $6.9B

PNCs Integration and Support

Experienced, dedicated team support from implementation through the life of programEvery client relationship is viewed as a partnershipPNC has proven experience in interfacing with all major ERP systems including SAP, Oracle and PeopleSoft

PNCs Multinational Capabilities

Commercial cards available in 34 countriesMultiple currencies supported including CAD, GBP, and Euro Support available in 15 languages Integrated Transaction Management and Reporting

34Chart10.060.260.680.780.210.010.310.590.10.480.510.01

IncreasedSameDecreased% Change By Payment Type

Sheet1IncreasedSameDecreasedCheck6%26%68%ACH78%21%1%Wire31%59%10%Card48%51%1%To resize chart data range, drag lower right corner of range.

Chart111381117284057808998110123137149161176196212229247267290

Increased

Sheet1IncreasedSameDecreased931266894121195359109685119711981799280401572803894985110612371378149916110176111961221213229142471526716290

Chart10.060.10.120.340.370.560.670.72

Column1Benefits of P-Card Programs

Sheet1Column1Ability to negotiate better pricing with vendors6%Reduction in maverick spend10%Improved compliance with contracts/purchasing policies12%Float/ability to increase days payable outstanding (DPO)34%Reduction in procure-to-pay cycle time37%Lower processing cost56%Rebates and incentives from p-card issuers67%Increased convenience for employees72%To resize chart data range, drag lower right corner of range.

Chart1509.040.63ACHACH-0.12Check1.23-0.63WireWire-7

Revenue ShareFloatCostPayment TypeCost/Benefit of PaymentPayment Economics Based on Average $5,000 Transaction

Sheet1Revenue ShareFloatCostCard$50.00$9.04$0.63ACH($0.12)Check$1.23($0.63)Wire($7.00)To resize chart data range, drag lower right corner of range.

Chart100.220.570.620.660.710.810.88

Series 1Controls to Prevent P-Card Misuse

Sheet1Series 1We don't use any controls0%Blocking specific vendors by ising preferred supplier lists (PSL)22%Merchant Category Code (MCC) blocking57%Have a commercial card administrator for training and monitoring usage62%Conduct audits of compliance with card usage policies and procedures66%Cardholder agreements that employee signs71%Require receipts for purchases81%Define card spending limit and/or individual transaction limit88%To resize chart data range, drag lower right corner of range.

Chart10.110.170.190.260.320.380.39

Series 1Steps Taken to Increase Use of P-Cards

Sheet1Series 1Increase in spending limits11%Mandate usage of cards where accepted17%Supplier outreach and education19%Increase the number of employees given a commercial card26%Expand use to more spend categories32%We are not planning to increase usage of cards38%Provide more/better internal education39%To resize chart data range, drag lower right corner of range.