Improving the purchase card program

One of the most positive changes introduced into the procurement system during the 1990s was the government credit card, called a “purchase card.” In the days before the card, every purchase, even small ones on the order of $25, had to go through an agency’s contracting shop.

This meant users would have to fill out a requisition form explaining what they wanted, send it to the contracting office, wait until it got on top of the pile, perhaps answer questions about the item from a semi-clerical purchasing agent, and wait until the item arrived.

Miscommunications frequently led to the need to return the original product and start the process anew. Users often waited weeks or months to receive even minor items. Seventy percent of all procurement transactions were for less than $2,500.  Using the full procurement procedures for small purchases consumed as much as 40 percent of procurement staff time. The purchase card dramatically sped up delivery of simple commercial items to frontline civil servants while saving the government very significant administrative expenses. (The administrative cost of buying these small items was often greater than the cost of the items themselves.)
 
However, this very positive change came with one big downside: Many offices have been using the card to buy things at local retail stores. This is quick, but it condemns the U.S. government – the largest purchaser in the world – to paying the same retail prices available to any individual consumer coming in off the street! 
 
GSA, which manages the program, is now taking an excellent initiative based on the philosophy “if you can’t beat them, join them.”  Given that government customers are likely to continue using local stores, GSA has begun to move aggressively to provide purchase card users automatic discounted prices when using retail outlets that already have prenegotiated contracts or GSA schedules, whether or not the buyer even knows such contracts or discounts exist. So, for example, under the set of 16 blanket purchase agreements GSA has recently negotiated for office supplies, a government credit card holder will automatically get the discounted negotiated price on any item on the blanket purchase agreement at the retail outlets of any of the contract holders.

GSA has also negotiated with Home Depot and Lowe’s to give customers using the card GSA schedule prices (which are negotiated as discounts from retail) when they purchase in those stores. This program is being expanded to retail chains specializing in photographic and audio-visual equipment and supplies, which are often used by government customers purchasing such items.
 
Purchase cards, of course, may be used to pay for orders using prenegotiated contracts, or to pay for transactions using reverse auctions, up to $150,000. (The card can be used as a procurement device, without a pre-existing competitive arrangement, only up to $3,000.) This is another way to get good prices with the card. Here, the problem has been the merchant fee (so-called interchange) that the credit card companies charge vendors who accept the card.

The interchange has been a fixed percentage of the transaction amount, meaning that the merchant fee for a $100,000 transaction has been several thousand dollars, even though the cost to the credit card company of processing such a transaction is hardly more than for a purchase of $100. Some of this sum must get factored into higher prices vendors need to charge the government.  I am guessing that $100,000 individual transactions using a credit card are so rare in the private sector that this issue has never attracted attention. As GSA continues to work to improve the card program, this seems like an area that should get their attention.

(Full disclosure: I am on the board of advisers of Fedbid, whose sellers often get paid using the credit card and are therefore hurt by these high merchant fees.)