Powering potential with payments: The commercial card optimization opportunity

Finance departments are under cost containment pressure. Specifically, accounts receivable (AR) teams face a particular – and growing – challenge. We know that consumer payment preferences evolved during COVID-19. But the pandemic also accelerated the shift to digital payments between business-to-business (B2B) and business-to-government (B2G) entities. At the same time, organizations’ payment administrative processes were disrupted, with most staff working remotely. Against this unsettled backdrop, revenue teams had to rise to the challenge of making their payments processes more efficient and flexible to accommodate a wider range of payment methods.

The payments disruption didn’t stop there. Most of the pandemic’s effects might have eased, but payment preferences continue to evolve quickly: commercial credit cards and virtual cards, for instance, are growing in popularity and usage. Meanwhile, the challenging geopolitical landscape and volatile economic conditions are increasing the pressure on accounts receivable (AR) teams. Cost-cutting is a priority.  In our new survey of 300 U.S.-based finance professionals, 73% say that keeping payment acceptance costs low is highly important to them as they try to control their expenses.

Effective and efficient payment acceptance is crucial to business success

AR departments tend to be dismissed as “back office” finance operations. But the professionals we spoke to for our survey, who are all from organizations that accept commercial credit card payments, know that reducing the time and energy spent on payment acceptance could affect the whole business:

• 59% say that improving their commercial card acceptance environments would free up their people for more strategic projects and initiatives.
• 57% say that improving their commercial card acceptance environments would improve staff productivity.

In this report, we find out what problems AR professionals indicate they are having with acceptance and management of their B2B payments. As payment transformation continues and preferences keep changing, we explore how they can stop counting the costs of commercial card acceptance – and capitalize on the opportunity instead.

The pressure pile-on for AR professionals as payments transformation continues

AR teams are under pressure to keep up with shifting market conditions and new ways of working. The mix of payment methods businesses use for their payment transactions is expanding as companies seek greater visibility and security – both of which they can get from commercial credit cards*. Many businesses will also turn to this payment option in the current economic environment if they struggle to access traditional corporate and commercial financing options. Thus, it’s crucial for organizations to accept many types of commercial cards for business payments. But they can bring unpredictable overhead costs* because credit card interchange rates vary by card brand as well as by card type, acceptance method and transaction size – and they can change at any time. Commercial and corporate credit cards tend to carry higher interchange rates.

Beyond commercial cards, payment transformation shows no sign of slowing down. Our survey shows that 30% of the organizations that accept commercial credit card payments now accept virtual cards for their B2B payments, and 55% have seen an increase in payments made with virtual commercial cards in the past three years. Yet more traditional payment types, such as checks and cash, still account for a significant proportion of a businesses’ payments not made on commercial cards – creating a wide range of options.

Despite the wide range of payment methods accepted, 56% of respondents in the survey reported an increase in payments made on commercial credit cards in the past three years. And organizations with annual revenue above $500 million were much more likely to say they saw a ‘significant’ increase in these commercial card payments in the past three years (11% agree) – probably because they’re more likely to be doing business with other large organizations, which are in turn more likely to use commercial cards as a form of payment. Thanks to these increases, commercial card payments now represent a significant proportion of organizations’ receivables, likely displacing the frequency of traditional check and ACH payments.

The data demand

Accepting commercial card payments often results in higher interchange acceptance rates. Mitigating the increased costs often requires investing significant time and energy into including enriched transaction details and the purchase data with each commercial card payment accepted. This is because capturing additional transaction details at the time of payment helps to better authenticate the transaction and provides useful information for the card issuer, which means it carries less risk and, therefore, may qualify the commercial card payment for lower acceptance rates. These available lower interchange rates, established by the card brands Visa and Mastercard, for their branded commercial cards are known as Level 2 and Level 3 processing.

To achieve Level 2 and Level 3 processing and corresponding acceptance rate programs, businesses must accept purchasing cards, corporate cards, business cards or government spending accounts (GSA) issued by Visa or Mastercard. Each level has other requirements, such as:

• Level 1 processing only requires standard transaction details such as payment amount and date of the payment.
• Level 2 processing adds applicable sales tax and a customer identifier to the transaction.
• Level 3 processing requires more than 20 fields of line-item detail required by the involved card brands, must be captured and sent with every commercial card transaction authorization, including: tax ID, shipping ZIP, freight amount, item description, quantity and product code.

Data brings sizable savings

Under the Visa and Mastercard Level 2 and Level 3 acceptance programs, businesses can achieve significant savings by gathering and passing on Level 2 and 3 data with commercial card payment acceptance. Typical card-not-present (CNP) interchange rates from Visa for corporate cards range from 2.7% for Level 1 data, 2.5% for corporate card payments including Level 2 data and 1.9% for corporate card payments including Level 3 data.

Higher-value transactions are known as “Level 3 large tickets” – Mastercard defines these transactions above $10,000 while Visa’s threshold is $7,755.56 and higher. For these large transactions, published commercial card interchange rates* drop to 1.45%. However, our survey shows that some businesses are missing out on these available interchange rates through the commercial card acceptance programs established by Visa and Mastercard: 70% of the professionals in the survey say they transmit Level 2 data to their payment processor, and 58% say they send Level 3 data.

Top segments for level 3 savings

1. Government services
2. Industrial supply
3. Business services
4. Utilities
5. Healthcare/medical services
6. Construction, lumber, and building materials
7. Durable goods/commercial equipment
8. Electrical, HVAC, plumbing, life safety
9. Non-durable goods
10. Insurance

Many businesses aren’t transmitting Level 2 and 3 data

While Level 3 processing creates the greatest cost savings for commercial card payments, many organizations are put off by the detail required to qualify transactions for it: 25 established data fields must be correctly completed and arranged in the correct order for every commercial card transaction. Plus, authorization and settlement must be completed within 24 hours to avoid costly transaction downgrades.

When we asked finance executives from the organizations that send Level 3 data about the time their team spends assembling and entering that data, only 15% described it as insignificant, while 9% described it as very significant. Non-C-suite finance executives are much more likely to describe the time spent as significant or very significant (45% of respondents). This suggests that the staff who deal with day-to-day receivable processes are more aware of the true time commitment needed for collecting and transmitting Level 3 data with their commercial card payment activity.

Businesses are counting the costs of card acceptance

AR teams have had to react to the new demands on their time and higher costs associated with commercial card acceptance. But our research shows that many are unhappy with the results. Just 7% of finance executives are highly satisfied with their strategies to mitigate commercial card acceptance costs, and 41% are unsatisfied. Among C-suite executives, 13% say they aren’t at all satisfied, and 40% say they are somewhat unsatisfied with their cost strategies – showing that the effectiveness of strategies in this area is causing concern at the very top of organizations.

What is stopping them from being satisfied with their strategies? Our research shows that interchange rates and fees are the most challenging issues of accepting B2B commercial card payments, followed by the overhead to manage, collect and transmit the additional commercial card transaction data. Commercial card interchange rates and fees are an even greater issue for organizations with annual revenue of more than $500 million: 73% of executives from these larger organizations say they are challenging.  When asked to rank the actions most important in managing the costs and overhead expenses associated with accepting commercial card payments, finance executives were most likely to say that their top priority is reducing interchange rates and fees.

Collecting and transmitting data is draining productivity

The economic benefits of qualifying commercial card payments for Level 2 and Level 3 interchange rates are clear, but the time spent entering and completing the necessary transaction data is a cost of its own. Alternatively, AR teams could instead spend this time on analytical work or initiatives supporting business growth. For instance, 57% of finance executives say improving their commercial card acceptance environment would increase staff productivity. And lost time is not these executives’ only concern; when asked what challenges they currently face in transforming their B2B payments approach, their top response was a lack of organizational skills.

Can employees keep up with the constant changes in and rules applicable to B2B payment types? And can the organization keep its training programs up to date? A lack of knowledge and familiarity with the card brands’ Level 2 and Level 3 programs can be costly. If any Level 2 or 3 data is entered incorrectly, eligible transactions will not qualify for the lower interchange rates available – resulting in higher acceptance costs. Even worse, mistakes may often go unnoticed for months, resulting in the loss of significant potential savings.

The next two biggest challenges cited by these executives in transforming their B2B payments approach are a lack of the latest technology and a struggle to demonstrate sufficient return on investment. Skills are a concern across larger and smaller revenue organizations, but technology is a much greater concern for smaller organizations. This suggests that they’re struggling to keep up as commercial payments evolve. Revealingly, just 1% of finance executives say they face no challenges in the B2B payments space.

A better approach is good for morale

Taking laborious data management collection and entry away from finance teams won’t just increase productivity – it may also significantly improve their working experience. More than half (54%) of finance executives say improving their approach to commercial card acceptance would improve staff morale. Non-C-suite executives are significantly more likely to agree with this: 58% agree, compared with 41% of C-suite executives. Again, this shows that the people who deal with the necessary commercial card transaction data daily are more aware of its impact.

A fresh approach: commercial card optimization steps in

The challenges surrounding B2B payments are complex and substantial. Commercial credit card acceptance rates and fees are a top concern for organizations, and the time and energy staff spend gathering and entering transaction data are a significant drain on resources. But there’s a better path for organizations that want to reduce the costs, overhead expenses and errors of ‘do-it-yourself’ efforts to meet the Level 2 and 3 interchange programs established by Visa and Mastercard. Working with an acquiring partner to manage the various elements of the commercial card acceptance workload can help businesses qualify for eligible commercial card payments for significantly lower interchange costs and free up talent for more strategic and rewarding work.

A well-managed commercial card optimization program can help eliminate time-consuming processes and overhead expenses of specialized gateways, third-party middleware, or extra software and equipment to gather and transmit Level 2 and Level 3 transaction data. It also helps organizations stay on top of changes in card brand rules and interchange rates in the commercial card environment. The pressure on AR teams has been building, and finance leaders should prioritize easing it. In return, they will acquire better business metrics ranging from productivity and cost savings to employee morale. The time to take advantage of the commercial card optimization opportunity is now.

About the research

The data in this report comes from a survey of financial professionals commissioned by U.S. Bank and conducted by FT Longitude, a Financial Times company, in October 2023. 300 U.S.-based financial leaders responded across a variety of industries. All work for organizations that accept commercial credit card payments for B2B or B2G payments. 40% of the companies had annual revenues between $50 million and $499.99 million, and 60% had more than $500 million in annual revenues.