Automated Payment Solutions Virtual Card Settlement VS Checks

1. Automated Payment SolutionsVirtual Card SettlementVS Checks Presented by: John Widdifield, Executive Director, Automated Payment Solutions JPMorgan Chase Global Commercial Card – Government, Not-for-Profit, Higher Ed, and Healthcare October 3, 2013

2. Agenda • Current Payment Landscape • Market share by Pay Type and Trend • What is a Commercial Card • Types of Commercial Card Programs • Card Based Options for Settling AP Invoices • AP Cards / Supplier Cards • E-payments / Single Use Accounts • Commercial Card Benefits VS checks • To your organization • Vendor Benefits • Sample Business Case for Virtual Card Settlement • Q&A MasterCard® smartdata.gen2TM is a registered trademark of MasterCard Worldwide and the smartdata tool is a MasterCard Worldwide Incorporated solution

3. Current Payment Landscape

4. Landscape of Vendor Payments Checks remain the principal form of payment. Small and medium-size transactions dominate payment activity. Transactions by Payment Type • 76% of CFOs cite “lower invoice processing costs” as top AP goal • However, paper checks: • Can cost $0.75 to $8 per transaction • Offer little float, minimal controls, no visibility • Make fraud and misuse harder to detect • Do not earn rebates Checks 64% 76% 29% Card 13% 6% ACH 4% 6% Wire 3% Transactions Below $2,500 Transactions Between $2,500 - $10,000 Source: Aberdeen Group, September 2009, Visa Middle Market Study 2007, RPMG 2007

5. Factors Driving Electronic Payment Processes Given the tangible benefits electronic payments deliver over paper-based checks, it is not surprising that adoption of electronic payments has significantly increased over the past five years, while manual payments have declined. • Benefits • Cost reduction • Decreased paper consumption • Compression of procure-to-pay cycle • Ability to capture rebates and early payment discounts • Improved visibility • Reduction in fraud Source: Federal Reserve and NACHA research

6. Commercial Cards Defined What is a Commercial Card?

7. What is a “Commercial” Card Commercial Cards are credit cards with special controls and value-added functionality • Different from a small business or private label card • Spend and merchant controls • Credit based upon organization, not principal officer or cardholder • Statement balance due in-full • Sophisticated analytical tools available • Terminology • Purchasing card (P-Card) • Corporate card (T&E) • OneCard (combination of the two) Two lines of embossing

8. Types of Commercial Cards • Purchasing Cards • Cards used at the point of sale for small dollar purchases • Issued to individuals that need to make ad hoc purchases • Centrally billed and centrally paid with Corporate Liability • Travel Cards (Corporate Card) • Cards issued to individuals used primarily for travel expenses • Could be individually billed or centrally billed • Individually billed programs are Joint & Several Liability • Accounts Payable Cards • Cards used as a payment mechanism to pay invoices per the regular procurement process • Usually virtual or “ghost” cards tied to AP or a supplier • E-payments/Single Use Account “Virtual Cards” • Fully automated and secure virtual card alternative to checks Used in place of invoice Typically used after invoice approval Alternative to checks

9. Virtual Card Based Options for Settling AP InvoicesAP Card / Supplier Cards ande-payments / Single Use Accounts

10. 1. AP Card or Supplier Card • Card(Ghost) accounts are issued to the Accounts Payable Department or Supplier and are used to pay invoices in lieu of issuing checks • Purchasing and approval processes remains intact • Vendor is flagged in AP data base as a card paying vendor • A/P Department already has processes in place to capture • Account allocation • Capital equipment accounting • Benefits of an AP/Supplier Card • Reduce the number of checks issued • Retain vendor history • Increase DPO and decrease Vendor DSO • The financial incentive can turn Accounts Payable into a profit center

11. A/P Card process works with all systems Your Organization 1. The process for matching, entering and approving invoices in your company’s AP system remains intact – nothing changes Notify your supplier of approved payment(Liability to bank rather than “cash”) 2. Vendors are flagged as pay-type “card” in AP system. Your Supplier 6. Transaction data extracted from online system for account reconciliation and bank is paid (liability to bank is cleared to “cash”) 4.Supplier processes transaction on POS device and is paid within 48 hours 5. Vendor transaction is posted and becomes available online

12. e-Payments/Single Use Accounts

13. e-Payments/Single Use: Automating Vendor Payments An electronic payment solution that offers the security of ACH with the float and rebate earning potential of commercial card Invoices • Virtual payment account number – no physical plastic is issued • Reduces the opportunity of vendor and employee errors or misuse • Auto reconciliation of vendor transactions • Similar to checks: • A unique 16-digit virtual account number for each payment • Accounts are active for a defined time period (e.g., 30 days) • Account credit limit equals the exact payment amount – to the penny

14. e-Payments offer check like controls with security of ACH Delivered to a Specific Vendor Defined Time Period Credit Limit is set to the specific payment amount Unique Account Number Remittance Data accompanies each Payment Invoice #001… Invoice #002… Invoice #003…

15. How Do e-Payments/Single-Use Accounts Work? Automated (check-run) file exchange, notification to the suppliers, and reconciliation 5. Reconciliation, billing and payment Bank 1. Payment file 4. Transaction data YOUR ERP SYSTEM VISA OR MASTERCARD 2. Supplier notification Vendor enrollment done by bank 3. Supplier payment SUPPLIER

16. Commercial Card BenefitsVSChecks

17. 1. Reduction in Paper Check Volume and Processing • Paper check costs: $.75 - $8 / per check • Daily Operating Issues: • Voids • Re-issues • Uncashed • Paper Check Fraud “Every year fewer and fewer of our payments are made via paper check sent via the US mail. Leveraging virtual cards for some vendors allows us to take advantage of the efficiencies of electronic payments, and create an income stream.” County Auditor, May, 2013

18. 2. Increases your DPO while decreasing vendor DSO Example 30 Day Billing Cycle with 14 Day Payment Terms AVERAGE PAYMENT FLOAT = 29DAYS 30-day billing cycle 14-day grace period Day 1 of billing cycle • Billing cycle begins • Pay vendor with purchasing card throughout cycle • Vendor processes payment for settlement Day 30 • Billing cycle closes • Statement is presented • Payment not due for another 14 Days Day 44 • Payment due in full Grace Period (time before payment is due) may be longer or shorter than 14 days Shorter = higher rebate Longer = lower rebate

19. 3. Card payment can alleviate 1099 MISC reporting • IRS regulations effective for the 2011 tax year shifted the burden for 1099 reporting on transactions paid by card to the acquirer • Acquiring entity is now responsible for reporting all card transactions to the IRS • You no longer have to marry card and check transactions to verify payments the $600 reporting threshold • Your company still has to report transactions paid via check, cash, ACH and wire • MasterCard’s whitepaper outlines the legislation

20. 4. Rebate (Sample Rebate Earnings - Directional Only) $15MM x 1.34% = $201,000/year $25MM x 1.47% = $367,500/year Reduced Check Volume Increased Cash on Hand • Notes: • Billing Terms/Frequency of Payment impacts rebate • Large Ticket Interchange (LTI) rebate • Incentive for large suppliers to move to card settlement at a lower rate • Brings in additional spend, but at lower rebate %

21. Value Proposition for Vendors

22. Electronic Card Settlement Yields Multiple Benefits For Vendors • Guaranteed form of payment by the bank for customer approved transactions • Early payment liquidity solution for vendors that require immediate cash on hand • Reduced check processing costs. • Simplified reconciliation with full remittance and payment processing details • Access to payment portal showing historical (24 months) payment and remittance history (e-payments option) • Automate postings/clearing of paid invoices (e-payments option) • Minimal to no-change management (majority of vendors already have a POS terminal) • Large Ticket Rates can lower vendors’ card fees

23. Where do Virtual Cards Fit? (Segmenting your suppliers) There are four main value drivers associated with Virtual Card Payments • Check Processing Benefit – moving spend to e-Payments results in the reduction of checks. Benchmark cost to process a check is between $0.75 to $8 – this cost would be eliminated for those vendors moved to e-Payments • Days Payable Outstanding Extension – e-Payments allows accelerated payments to vendors while extending DPO • 1099 Reporting – 1099 reporting burden removed • Financial Rebate – Receive a rebate on all spend transitioned from checks Rebate earning solutions Check/Wire/ACH • Examples • MRO • Office Equipment • Professional Services Automation benefits Virtual Card Settlement • Examples • Business Retail • Office Supplies • Lodging Commercial Cards

24. A/P Card/e-payments adoption grew 67% from 2009 to 2011 Projected Actual 2012 RPMG Purchasing Card Benchmark Survey

25. AP Cards VS e-Payments: Which is the Best fit For Me? • AP Cards: • Simple to get up and running, no IT work • Less automated process (i.e., buyer notification to vendors of payments) • Generally recommended for programs with projected annual charge volume of < $10 million/year* • E-payments: • More automated and secure solution for both Buyer and Suppliers • Vendor Portal offers significant value to suppliers (remittance interface and data repository) • Requires IT integration work, vendor enrollment process • Generally recommended when annual charge volume > $10 million/year* *How much Spend Can Be Captured: Rough Rule of Thumb: ~10% - 15% of total AP spend can be converted to a virtual card settlement solution e-payment solution generally requires $75 - $100 million+ annual AP spend to achieve $10 million+ in annual card spend

26. A Sample Business Case for e-Payments

27. Sample Business Case for e-Payments

28. 1099 Vendors Construction projects Consulting fees Courier services Drug testing Insurance premiums Internet provider fees Landscaping Licenses Relocation expenses Rental equipment Road maintenance Short-term leasing Temporary services Waste removal Workman’s comp premiums MasterCard/Visa acceptance allows for usage beyond common categories A vendor match will help you discover which of your vendors currently accepts cards

29. Understanding Spend Potential Via a Vendor Match • Quick and cost free service • We’ll help you identify which vendors already accept MasterCard/Visa and what level of data they provide. • Essential to determine program spend potential • Confirm MCCs for easier program set-up Providing annual spend and number of invoices will allow for a thorough analysis

30. Automated Payment SolutionsVirtual Card SettlementVS Checks Thank you!Questions? October 3, 2013