Moves by China to open up to foreign credit card companies earlier this month signals a massive shift in the way the country’s businesses transact with the rest of the world. The card market is already a massive one, at US$8.4 trillion, and is set to become the world’s largest by 2020.
The fact that Chinese businesses will be able to use and accept Visa and Mastercard payments directly for the first time is significant news for Australian businesses importing and exporting with China.
It is a good opportunity for business owners to consider the role that credit cards play in supply chain finance and management, including the challenges and opportunities that this form of finance presents. Many businesses underestimate the share of spend that is ‘cardable’, and assume suppliers won’t accept card payments for large purchases.
Usually, substantial fees are applied to international credit card transactions. These include costly foreign currency conversion fees, which can be more than three per cent, coupled with an unfriendly exchange rate and sometimes the supplier’s merchant fee, which is surcharged back as much as six per cent or more of the total cost..
Foreign policy also inhibits businesses from using their credit cards to pay suppliers. For example, many Australian businesses buying goods from China run into difficulties with foreign currency laws, which make it near impossible for Chinese exporters to be a credit card merchant.
These restrictions prevent businesses in Australia and China from accessing the full array of funds at their disposal, forcing them to seek additional secured funds, expensive unsecured options, or adjust their own cash cycles, effectively slowing down the cashflow of the business’s supply chain.
Most businesses around the world will have a credit card at their disposal, and in many cases multiple cards with additional limits. Often these cards are used solely for travel and entertainment expenses. In reality however, credit cards can be used to fund much larger supply chain expenses, which is a useful way to use interest free periods to negotiate earlier settlements and accrue reward points faster.
Deloitte’s B2B Payments Report found credit card business payments reduce the cost of doing business by speeding up the procurement process, requiring less effort for processing and chasing payment and improving customer relationships and reconciliation.
Businesses today are seeking faster and more secure payments. The challenge is that a lot of payment infrastructure used by businesses in different countries is based on older legacy systems which are not as efficient. Often the supplier and buyer still need to communicate and process documents in separate stages manually outside of the system. This can cause a lag in productivity and pose a security risk because documents and information are not necessarily stored securely. Now, digital platforms which allow buyers and sellers to communicate and manage the entire process and store everything safely in the cloud are being used to support credit card, debit card and other payment methods.
Using a credit (or debit) card for business to business procurement is a useful way to avoid the international transaction fees often associated with traditional credit cards and get access to real-time foreign exchange rates, an interest free period of 55 days and reward terms.
This new approach to cards in China opens up many doors for global businesses transacting with Chinese suppliers using their card facilities. While there are perceived risks and challenges to do with using cards, it is great to see more card options opening up for Chinese businesses, which will ultimately improve the way Australian businesses trade with our neighbour.