Paying without check or charge

Since 1997, when Pasadena, Calif., began using purchasing cards, the city has preferred to make electronic payments to vendors. Of the $129 million the city spent on goods and services in the last financial year, $27 million were electronic payments. Most recently, the city has replaced urgent checks with an electronic payment for one-time vendors reluctant to accept credit cards. The service has eliminated significant administrative costs from issuing urgent checks.

Pasadena’s electronic payments program includes several options designed to balance security and expediency. In 2000, the city began using ghost cards (credit card numbers without actual cards) to electronically pay for major purchases from well-established suppliers. In October 2006, the city started using ePayables, a service from its bank, Charlotte, N.C.-based Bank of America Merrill Lynch, which converts the city’s accounts payable (AP) check payments to electronic payments with no change to its AP processes. The concept has worked well with vendors who are paid regularly.

While corporate purchasing cards and ePayables have worked well with regular and larger suppliers, the city has had an ongoing problem using electronic payments for purchases from infrequently used or one-off vendors — particularly when the purchase had to be made quickly. A vendor with whom the city had never dealt before might be reluctant to extend credit terms on the spur of the moment. If the transaction was urgent and substantial, such as a large, heavily discounted purchase, issuing checks was very disruptive.

In early 2008, using the bank’s Card Shuffler service, the city began receiving one-time-use card numbers from the bank (not actual cards), and preloading them with the required funds. Once a transaction is approved, the city issues the vendor the card number over the phone.

Setting up a vendor for a one-time card payment is significantly faster than paying the vendor by check — the difference between five hours and 15 minutes in some cases. When the program began, Pasadena officials estimated that those types of transactions would account for $50,000 of monthly spending. However, the first month’s transactions topped $300,000 and currently are running $240,000 monthly.

The new system has helped the city’s working capital position, as well. Instead of making urgent check payments throughout the month, all purchasing activity is rolled into a single monthly payment to the bank. That allows for more efficient liquidity management, as funds can be left on deposit until a single amount is transferred to pay the bank.

Larry Hammond is Pasadena’s purchasing administrator.

Project: Electronic payments
Jurisdiction: Pasadena, Calif.
Department: Finance
Vendor: Charlotte, N.C.-based Bank of America Merrill Lynch
Date began: March 2008