Purchase card fees pinch vendor profits

The government purchase card, which has become big business over the past

several years, is proving to be too much of a good thing for some computer

companies.

The purchase card, which works much like a personal credit card, has

made it possible for individual agency employees to buy hardware, software

and other products without going through a lengthy requisition process.

The impact has been dramatic, particularly with the advent of online

shopping through the General Services Administration schedule as well as

a plethora of commercial vendors. Federal agencies expect to save about

$54 in administrative costs on every transaction. This already has translated

into millions of dollars in savings.

But as with a credit card, convenience comes with a cost, and the vendors,

who pay those costs, say they are too high.

Credit card service fees, piled on top of industrial fees charged by

GSA or other agencies, are reducing or in some cases eliminating vendor

profits, companies say. Many vendors negotiated government discounts prior

to the widespread use of credit cards and this did not figure in the additional

fees.

"It means that on some product purchases there is no longer a profit,"

said Joel Lipkin, senior vice president of sales and customer support for

GTSI. "In the long term, [the fees] will hurt the end user because [vendors]

have to calculate in credit card fees when determining government discounts."

Under the program, each agency negotiated a payment refund based on

how quickly each was willing to pay its bill. The credit card companies,

meanwhile, pay GSA an industrial fee for every transaction.

But the program also calls for vendors to pay up to 5 percent of the

total purchase price to credit card companies for processing fees. This

additional charge covers the non-payment or fraud risks inherent in electronic

sales.

While such a fee is the norm in the credit card industry, vendors say

it does not make sense in the federal market.

"The government credit cards are highly controlled and there are no

issues of nonpayment or fraud," Lipkin said. "The fees need to be lowered.

We can work on remarkably low profits, but not on no profit."

Jeffrey Koses, deputy director of the Services Acquisition Center at

GSA, agrees that federal credit card fraud is almost nonexistent and pointed

out that the high processing fees were negotiated by the vendors and credit

card companies, not GSA. Vendors negotiate their own contracts with banks

to process credit card transactions.

"We have asked the banks under contract to offer a good merchant rate,"

he said. "[Vendors] have the option of using the companies listed on the

schedule or going somewhere else. If they are unhappy with the fees, they

should shop around for a better rate."

Vendors ought to do a second take if they are paying a 5 percent fee,

said Mark Amtower, founding partner of Amtower & Co., a direct market

specialist and manager of several federal credit card databases.

"Those

that are paying such a high rate are not doing enough credit card business

or shopping around for a better rate," Amtower said. "Five percent is an

exorbitant rate. If they shop around they could get it down to 2 percent."

The processing fees, which help offset the cost to credit card companies

for agency refunds and GSA fees, were never intended for large purchases,

said Chip Mather, senior vice president of Acquisition Solutions Inc., a

federal procurement consulting company. "The fees were intended for people

like you and me spending $50 on dinner," he said. "They were for 500 $50

purchases, not 10 $50,000 purchases."

The situation is made even worse by the other fees vendors already pay.

All vendors pay GSA a 1 percent fee each quarter for sales off the GSA schedule.

And some agencies, such as the Air Force, attach their own 1.75 percent

industrial fee to purchases made off GSA schedule-based blanket purchase

agreements. A vendor could end up paying out more than 7 percent in fees

on a purchase price that is already discounted for government agencies.

Vendors are becoming more concerned because the purchase card is an

increasing part of their business. The number of federal card holders has

increased from 10,489 in 1989 to 510,000 in 1999. More than $10.2 billion

in credit card transactions were reported last year, and GSA, which runs

the card program, expects a 20 percent increase in 2000.

The program definitely has its benefits, observers said. With the increase

in sales comes easier accountability of funds, faster invoice reconciliation

and paper elimination for agencies. The use of credit cards has also allowed

vendors to receive payments in less than 48 hours and has accelerated invoice

processing.

"Credit cards have streamlined the process remarkably," Mather said.

"We are able to get our money up front and don't have to wait 60, 90, 120

days for a check to clear and enter our bank account."

GSA created the existing purchase card program in February 1998, selecting

U.S. Bank, Citibank, Bank of America, Mellon Bank and BankOne to provide

credit cards to federal agencies.

Despite the apparent lack of a need for government purchase fees, a

reduction is not expected in the near future. Only increased competition

and pressure from vendors and agencies will bring down credit card costs,

industry experts explained.

"The fees are high, but there is a cost for cash flow," Mather said.

"I would pay higher fees in exchange for being paid faster. But one day

someone is going to have to say the fees must come down if companies want

to do business with the federal government."