Raise credit card buying limits, but lower fees

There arguably is no aspect of procurement reform that has positively influenced the everyday life of the average government employee more than the credit card. It has made the difference between getting everyday products and services quickly and conveniently and the old— perhaps almost forgotten— world, where obtaining the simplest item could produce months of frustration. The card also saves the government hundreds of millions of dollars annually in administrative expenses associated with buying inexpensive items.

The wild success of the credit card has prompted suggestions that its use be authorized for purchases above the $2,500-per-transaction limit for non-contracting people, which is common in almost every agency.

Increasing the limit potentially is a great idea for two reasons. First, the speed and administrative cost savings that cardholders realize on inexpensive buys could be applied to more transactions. Second, and in my view at least as important, using credit cards for transactions worth more than $2,500 is possible, given current procurement law, only in the context of placing orders off contract vehicles already negotiated by a contracting shop. Increasingly, these orders are placed using electronic catalogs.

The $2,500 limit corresponds to the "micropurchase" threshold in statute, which waives almost all of the legal requirements surrounding federal procurement. Purchases totaling more than $2,500 are subject to additional competition and

socioeconomic requirements, which means that a federal employee who does not work on federal contracts may use the card only if placing an order off a contract reflecting statutory procurement requirements.

However, that's no cause for complaint; in fact, the opposite is true. For information technology, the contracts that people would use to place orders worth more than $2,500 are blanket purchase agreements or indefinite-delivery, indefinite-quantity contracts that have been negotiated to leverage agency buying power. And they provide quick delivery too. So, in fact, it is a very good idea— as a general matter— to encourage people to buy off these contracts rather than to buy small quantities at higher prices that have not taken advantage of the government's buying power. If the only way you can buy more than $2,500 worth of products using a credit card is to use BPAs and IDIQs, that is a great incentive to use contract vehicles that are advantageous on their own merits.

There is one gigantic fly in this ointment, however: the "merchant fee" that credit card companies charge vendors for using the card. Generally, the fee is about 1.5 percent. For a $2,000 purchase, the fee would total about $30. For a $100,000 purchase, however, the fee is $1,500.

The merchant fee covers three things: the credit card vendor's processing costs for credit card transactions; the credit card vendor's cost of money because a credit card company pays the merchant immediately, while the buyer doesn't have to pay for a month or so; and the credit card vendor's profit. Of these three, the latter two increase with the size of the transaction.

However, the processing cost for a $100,000 transaction is the same as for a $1 transaction. Current merchant fees are based on the size of the typical commercial credit card transaction, which is much less than $100. Keeping the same percentage on government transactions for more than $2,500 is a rip-off.

Why should the government care about merchant fees if the fees are charged to the vendor and not the customer? You don't have to be a Nobel prize-

winning economist to realize that the merchant fee is part of the vendor's cost structure. And in the tight margins that exist, particularly for IT hardware, that 1.5 percent is significant.

I don't know enough about the mechanics of contractual relationships among the government, vendors and credit card vendors to have a suggestion for what the best solution is here. Perhaps it might be possible for government agencies to negotiate with credit card vendors a decrease in merchant fees for purchases worth more than a specific dollar amount.

A provision in the General Services Administration's new master contract with credit card vendors allows federal agencies to negotiate very low merchant fees— as low as $1 per transaction— for an agency's major contractors. So far, only the Department of Veterans Affairs has taken advantage of the provision and only for contractors that do not otherwise accept credit cards. Expanding its use should be considered.

High merchant fees are a lose-lose situation for government and IT vendors. The fees inhibit what is otherwise a great idea. Dave Barram, let's have GSA show some leadership here.

-- Kelman was the administrator of the Office of Federal Procurement Policy from 1993 to 1997. He is now Weatherhead Professor of Public Management at Harvard's Kennedy School of Government.