December 2007 - The world's largest charge card program already handles more than $26 billion in annual volume, including $7 billion from 157,000 daily travel transactions. But the impressive part still is to come should 350 U.S. federal government agencies successfully transition to the General Services Administration's second-generation SmartPay program covering Visa and/or MasterCard travel, fleet and purchasing cards.
GSA has made a good start on a tremendous task. Following a "rigorous" request for proposals process, in June it awarded master contracts to four banks--three months ahead of schedule.
Set to run for 10 years from November 2008, "SmartPay 2" is tailored to meet the unique needs of the U.S. government while relying on familiar procurement processes, principles and payment card program components. SmartPay 2 will encompass a bevy of new products and services, enhanced security and data reporting, strategic sourcing support and an attractive rebate for its customers: the individual federal agencies, organizations and Native American tribal governments. It will replace the initial GSA SmartPay program in what would be the biggest charge card transition ever.
"Use of charge cards in government was nothing more than a curiosity a decade ago," according to GSA's September 2006 letter to SmartPay 2 bidders. The scope of the current program, GSA said, is "indicative of how these cards have become essential support tools for government agencies/organizations in supporting mission delivery ... Card-based procurement has played a key role in transforming government procurement."
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Organization:
U.S. General Services Administration |
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Volume:
$26.5 billion in total volume, covering purchasing, fleet and travel volume, funneled through the GSA SmartPay charge card program during fiscal year 2006, including $7 billion in total travel; 98 million transactions in FY06 (Oct. 1-Sept. 30) on 3 million government-issued cards across 350 federal agencies, including 2 million travel cards handling 157,000 daily transactions |
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Challenge:
To improve federal agency card programs by implementing SmartPay 2 before the November 2008 deadline |
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Approach:
Rigorous examination of the first SmartPay program contracts ahead of a comprehensive request for proposals; leverage new purchasing trends and commercial infrastructure |
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Solution:
Four master contracts awarded to bidder banks, enabling agencies to begin individual selection and implementation processes |
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SmartPay first launched in 1998 through contracts with Bank of America, Citibank, JPMorgan Chase, Mellon Bank and U.S. Bank. GSA reported the strongest growth in the early years "as convenience and savings from program use over traditional procurement methods drove increased acceptance throughout the federal government." The number of cardholders, however, has trended downward as agencies deactivated unused cards and sought to minimize risk exposure. Over time, GSA also has reported a declining delinquency rate (the percentage of total purchases that are greater than 61 days past the billing cycle date). It cited individual agency efforts to emphasize training, implement "strong program controls" and coordinate with bank card providers to specifically reduce the travel card's delinquency rate to be "comparable to the corporate delinquency rates of 2 percent to 3 percent." GSA previously described the delinquency rate as "the most serious problem with the travel card program."
SmartPay 2 will be the product of extensive analysis of the original contracts, intense market research and a thorough review of the needs of government agency users. It will leverage "the best commercial practices to the maximum extent practicable," GSA said.
"We in the federal government have largely co-opted a commercial process," said David Shea, director of the Office of Charge Card Management for GSA's Federal Acquisition Service, speaking in September during a Society of Government Travel Professionals conference.
In more fully describing the program to
Procurement.travel, Shea said SmartPay 2 would overcome card issuance problems, bank electronic access system deficiencies, financial interface challenges and other hurdles.
Program Requirements
As with any government program, security and fraud prevention are key to
SmartPay 2. Vendors are required to meet the Federal Information Security Management Act and
Payment Card Industry Data Security Standard, offer around-the-clock transaction authorization support, mask personally identifiable data and house all data at U.S. facilities. This is particularly important for the travel card component.
"We know where everyone is going, but what if that information gets out? What if purchasing information got out?" Shea asked. "We are a nation at war. We want better oversight and want to maintain taxpayer faith." The security specifications for the program, Shea said, total 11 pages.
Vendors also were required to provide options for centrally billed accounts (generally used for such specific purposes as group travel), prepaid cards, stored-value cards (perhaps suitable for temporary workers, for example), "contactless cards," foreign-currency cards and an integrated card option combining travel, fleet and/or purchasing.
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"To view these cards as simple 'payment tools' is to miss much of the value proposition they offer to the government and the value offerors need to bring to the competition."
— GSA letter to banks bidding on the SmartPay 2 Program
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Currently, only the Department of the Interior runs an integrated card program. Shea cited transaction identification challenges and fleet managers' preference to subcontract their programs to specialist data handlers. "It remains to be seen," he said, whether such issues would be resolved in SmartPay 2, leading more agencies to select an integrated card strategy.
Bidder banks were asked to make provisions for collecting level 1, 2 and 3 transaction data "to support the government's strategic sourcing initiatives, risk mitigation measures, management reports and other program reporting objectives."
Through SmartPay 2, merchants can earn incentives for supplying level 3 data. Those incentives would come in the form of improved interchange rates set by the card associations.
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2000 |
12.3% |
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2001 |
5.56% |
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2002 |
5.53% |
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2003 |
4.39% |
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2004 |
3.84% |
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2005 |
2.83% |
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2006 |
2.59% |
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2007 |
2.55% |
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Source: U.S. General Services Administration
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Bidders also must be able to provide GSA's designated data warehousing service provider "with the support required during the design, construction, testing and implementation of the data warehousing services." GSA has separately contracted with TRX to handle travel data warehousing for the E-gov Travel Services program.
Meanwhile, interested banks must provide ad-hoc transaction data reporting and other specified reports to help government agencies analyze their spending patterns and "adopt strategic sourcing capabilities that enable [them] to combine their buying power to achieve significant savings, negotiate favorable terms and conditions and receive the best value possible for the government."
Banks also must offer enhanced 24-hour customer support, including foreign-language support for overseas cardholders. Moreover, "improvements in tax recovery are required to facilitate recovery of taxes paid by agencies/organizations on tax exempt government transactions."
"To view these cards as simple 'payment tools' is to miss much of the value proposition they offer to the government and the value offerors need to bring to the competition," GSA told bidder banks.
A primary consideration for that value proposition, of course, was the rebate (refund), which in FY06 totaled $156 million across all participating agencies (up from $123 million in FY05). Determining what that refund should be for the newer program was an "exercise in mathematical gymnastics," Shea said. The RFP states contractors "shall offer a minimum sales refund of eight basis points for each business line on all charge card, debit card and prepaid card transactions to each agency/organization. GSA's industrial funding fee of four basis points of the net charge volume is deducted from this sales refund."
Though he did not divulge the actual agreed upon "tier 1" refund rates, Shea suggested that winning bidders were well clear of the floor set by the government. "The breadth to which the government has applied the rebate
issue is unique in the world," he said. "When I meet with reps from other
countries or commercial reps, the rebates under SmartPay strike them as rather generous."
Bidders also had the opportunity to offer higher tier 2 rebates and value-add components, based on pay performance and an agency's use of electronic reports
and cardholder statements.
Meanwhile, GSA remained cognizant of pending federal legislation that could impact the charge card program. Sen. Susan Collins (R-Maine), for example, this year introduced a bill meant to, among other things, eliminate "purchase card waste." If signed into law, the bill would require the Office of Management and Budget to set guidelines covering purchase card expenditure analysis, cardholder behavior, discount negotiations with vendors, communication to cardholders on discount availability and "best practices and successful strategies for achieving savings in micro-purchases." GSA would be required to improve communication with card issuers, "actively pursue point-of-sale discounts with major vendors accepting the purchase card" and submit reports on "all first class and business class travel" by federal employees. A congressional committee report on the proposed legislation, issued in October, said that last item stems from Government Accountability Office findings "that agencies have made improper use of first and business class travel."
Separately, Sen. Chuck Grassley (R-Iowa) this year introduced the "Government Credit Card Abuse Prevention Act," which would include mandates for checking the credit of federal employees who are issued travel cards.
GSA's June 2007 SmartPay newsletter noted that while these pieces of proposed legislation are subject to change, "it is evident that legislators are increasingly concerned with improving government charge card programs."
| Year |
Sales Volume |
Transactions |
Cardholders |
FY01 |
$5.4 billion |
39.2 million |
2.2 million |
FY02 |
$6.4 billion |
46.2 million |
2.1 million |
FY03 |
$6.3 billion |
39.3 million |
1.8 million |
FY04 |
$6.8 billion |
40.2 million |
1.9 million |
FY05 |
$6.5 billion |
42.8 million |
1.9 million |
FY06 |
$7 billion |
40.9 million |
2 million |
Source: U.S. General Services Administration
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The Travel Card
The travel card component of SmartPay 2, like the larger program, has characteristics unique to the federal government. For example, it is the only card for which federal employees can obtain proper discounts through the Citypair Program, which provides discounts oftentimes exceeding 70 percent for airfares on participating airlines. The government in FY06 reported $2.8 billion in savings through that program. The SmartPay 2 travel card also facilitates the FedRooms lodging program covering more than 5,000 hotel properties that meet certain government criteria.
| $1.5 billion |
Army |
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| $1.3 billion |
Air Force |
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| $1.1 billion |
Navy |
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| $636 million |
Homeland Security |
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| $291 million |
Defense (independent agencies) |
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| $247 million |
Justice |
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| $245 million |
State |
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| $205 million |
Agriculture |
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| $188 million |
Treasury |
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| $133 million |
Transportation |
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| $119 million |
Health and Human Services |
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| $102 million |
Postal Service |
Source: U.S. General Services Administration
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The travel card accommodates net billing (allowing merchant discounts to be deducted at the point of sale) and the wide array of data needed to effectively manage a travel program, including airline ticket numbers and class-of-service codes. It also provides government employees with auto rental insurance and such travel emergency services as accident insurance, lost luggage assistance and medical services.
Other program requirements include wide acceptance with travel vendors and ATM access for travel cards and travelers checks (for both domestic and international use) as "an integrated part of the travel card program." Data and reporting specifications call for account activity, statistical summary and airline credit/refund reports, as well as other transaction information.
GSA has not yet studied the administrative efficiencies of the travel component of SmartPay. Shea noted that federal agencies' administrative cost avoidance--as compared with "using old, paper-based procurement requests and requisitions that needed to be signed by 16 people and then six months later you get what you didn't ask for"--for the purchase card alone totaled $1.8 billion in FY06 (or $53.77 per transaction). He said he is "very interested" in seeing if GSA could undertake a travel-related examination.
The largest users of the SmartPay travel card program include U.S. departments of Agriculture, Defense, Health and Human Services, Homeland Security, Justice, Transportation and Treasury; the United States Postal Service; and Veterans Affairs.
| 1. |
AirTran Airways |
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| 2. |
Alaska Airlines |
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| 3. |
American Airlines |
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| 4. |
Hilton |
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| 5. |
Homewood Suites |
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| 6. |
Delta Air Lines |
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| 7. |
United Airlines |
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| 8. |
America West Airlines |
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| 9. |
Hampton Inn |
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| 10. |
Hyatt |
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| 11. |
Midwest Express |
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| 12. |
Marriott |
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| 13. |
Continental Airlines |
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| 14. |
Holiday Inn |
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| 15. |
Northwest Airlines |
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| 16. |
Tri-Met Accounting |
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| 17. |
Enterprise Rent-A-Car |
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| 18. |
Hertz |
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| 19. |
Embassy Suites |
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| 20. |
Comfort Inn |
Source: U.S. General Services Administration
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Selection and Implementation
Unlike the implementation of the original SmartPay program, this time GSA firs tested the bidding banks' electronic access systems and their ability to receive invoices, monitor spending, reconcile and pay transactions. Because systems change over time and banks have been bought and sold, "we have to make sure they deliver what they promise they'd deliver," Shea explained.
Proposals were due to GSA by Jan. 8, 2007, and awards were announced five months later. GSA used several evaluation factors and subfactors (i.e., evaluation factor: technical excellence; subfactors: operational process, technical expertise, electronic capability and transition plan) to select incumbents Citibank, JPMorgan and U.S. Bancorp, and add the GE Money-Corporate Payment Services unit of General Electric Co. Meanwhile, Bank of America, which now handles about one-third of total program spending (including the huge budget at the Department of Defense) opted not to participate in the bidding. Having three incumbents and "all agency customers" return to SmartPay "is a sign of how successful this program has been," Shea said.
U.S. Bank said it would leverage its Access Online program management tool and PowerTrack, "an electronic invoice payment and presentment tool used by the Department of Defense and other government agencies." JPMorgan said it was able to "offer innovative value-added solutions, such as ExacTrac, our advanced settlement technology, and JPMorgan Chase Expansion Services, a team providing customized solutions to our agency customers."
Shea, who has been in the government charge card business for 12 years, managed the U.S. Department of Agriculture's card program and "lived through" implementation of the original SmartPay program, said awarding master contracts was "like climbing Pike's Peak."
Recognizing the work involved in separate agency bids and implementations, he added, "is like finding Mount Everest behind it."
Individual agency bids allow vendors to offer customized solutions and increase rebates. However, GSA cautioned agencies against over-emphasizing the rebate. Banks use their revenues "to fund their products, develop technology, and provide customer service to agencies/organizations and cardholders," according to GSA's SmartPay newsletter. "Receiving too much of it as cash back can limit the level of services that banks are willing to provide."
Some of the smaller agencies already have picked their banks and the transactions on the new cards could have begun as early as Nov. 30, 2007. But for some of the larger agencies, including 10 that account for 93 percent of all spending, "it will take just about all the time we have," Shea said.
GSA told bidders that some agencies would take "up to 18 months" to complete the transition, which requires re-issued cards; updated traveler profiles with new account numbers and bank identification numbers; adjusted spending limits (some of which were last changed eight years ago); and revamped interfaces between banks and agencies' financial systems.
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"The technology associated with cards and transaction processing is improving all the time. I am sure there are some uses for these cards that we haven't even thought of yet that we'll see over the next 10 years."
— GSA Charge Card Management Director David Shea
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Given these complexities, GSA required bidders to help conduct training "in the areas of finance, including but not limited to billing and payment, administration and management of card program requirements." Shea explained that GSA also developed a transition monitoring tool that can be used to chart progress and report to the Office of Management and Budget.
After implementing the new program by Nov. 30, 2008, agencies will explore future functions of SmartPay 2, as well as such newer components as contactless cards and stored-value cards.
"Agencies will work to get the new plastic out there and then come back and look at some of these new card technologies," Shea said. "The technology associated with cards and transaction processing is improving all the time. I am sure there are some uses for these cards that we haven't even thought of yet that we'll see over the next 10 years."
