There is no way to fully assess the actual impact of the novel coronavirus (COVID-19) pandemic on commercial payments activity since the pandemic is unfolding in real time with very fluid information about its effects and with inadequate data. The next two months will provide a clearer picture of the social and business costs that will ensue. There will certainly be severe short-term economic challenges followed by longer-term issues to be assessed in due time. One can only identify the challenges and make assumptions about the severity of the consequences. This blog addresses some of the global implications of COVID-19 as it pertains to commercial payments, most specifically the commercial cards market space.
Corporate Cards (Travel)
Currently 140 countries have some form of international travel restrictions in place, which obviously is causing severe stress in the business travel sector. In Mercator Advisory Group’s 2019 research report on commercial cards in North America, we estimated that corporate card travel spend would grow by 4.2% in 2020. That is not going to happen. We also expected gains in corporate card spending in countries in the rest of the world to be about 9%, but again, this will be going in the other direction. A recent poll of more than 1,155 member companies conducted by the Global Business Travel Association (GBTA) provides clear insight on the dire situation around the globe (Table 1). Nearly all international business travel and a vast portion of domestic business travel are on hold, which leads to the obvious question, “For how long?” No one can really know at this point, but we can look at the travel situation in China, the first country afflicted by COVID-19, as a reference point. China started relaxing travel bans in the disease’s epicenter, Hubei province, at about the time the GBTA survey was conducted, March 23. That was two months elapsed from the initial lockdown affecting 60 million people in the province. Adding a few more weeks brings the time of travel restriction to three months — and that is just for domestic travel. International restrictions remain in place and are actually being increased because of the threat of reinfection due to inbound traffic from other areas affected by COVID-19.
International business travel, which represents a greater source of spending on commercial cards, will likely return in three months or so, although a lag effect will mean the uptick will be gradual. Travel may or may not return to prior levels in light of potential recessionary effects. The GBTA survey suggests a heavy impact on global travel for three months followed by slow uptake for the subsequent three months.
Purchasing Cards (P Cards)
Purchasing cards are payment instruments that historically have been used by commercial enterprises for maintenance, repair, and operations (MRO) expenditures, generally low value (< $5,000) transactions for ongoing office needs. Eighty-five percent of all global spending on these cards has been in the United States. There is continued business activity outside of the industries and segments most seriously affected by the COVID-19 pandemic (which include small business, leisure activities, and travel and entertainment), and much of that activity is taking place from home offices. Given the cascading consequences of business shutdowns and disrupted supply chains, it is reasonable to assume that spending on P-cards will slow in line with general economic growth projections. According to recent models discussed by Goldman Sachs, Morgan Stanley, and JP Morgan, there is wide variation of expectations but the U.S. could see a contraction of 10–30% lasting for up to two quarters, while the world economy will contract by 1% year over year (YOY). The various governmental stimulus packages should provide some offsetting relief, but rather than a pre-coronavirus 6–9% growth range, a negative growth scenario is likely.
Virtual Cards and Payables
Commercial business activity involving the supply chain will obviously experience impact from COVID-19, with recessionary expectations reducing the number of counterparty transactions for the next two quarters of 2020. This will directly affect virtual cards, where substantial growth in the past five years has helped fuel revenues of the commercial card issuers. Although in the post COVID-19 period we will likely see some increase in electronic processing as payments continue to be shifted away from inefficient manual methods, the lead time to shift to virtual cards requires a little longer than two quarters, so capitalizing on this shift is not likely to be achieved until 2021. We foresee virtual cards continuing in a growth mode but at a lower trajectory YOY than was originally projected. Card-based payments are typically used for domestic transactions, so any decline in general cross-border payments from trade in goods and services will be minimal.
Other types of commercial payments in this space include ACH and wires, so a general slowdown can be expected, but in the longer run a growth trajectory will be maintained. In a recent separate Mercator blog, titled COVID-19 and the Payments Industry, it was pointed out that noncash payments volumes (outside of credit cards and checks) continued to grow from 2006 to 2009, a period that encompassed the Great Recession.
There is also a large value-transfer category, both domestic and cross-border, that occurs to satisfy intra-corporate liquidity needs and foreign exchange, capital market transaction settlements, syndicated loans, and bank reserve transactions. These value transfers are generally not part of the various estimates of business-to-business (B2B) payment market value since they are not directly associated with the provision of goods and services. Using Mercator Advisory Group’s Worldwide Payments Model, we found that in 2019 there was a total of $1.35 quadrillion of value transfers in the United States, the vast majority of which occurred through wire transfers. Thus noncash payments of all types will continue regardless of blips in commercial trade.
Other Commercial Cards
Fleet card spending will be affected by the COVID-19 pandemic in similar ways since large transportation fleets are part of the supply chain, and the slowdown of manufacturing in China and other places ends up reducing the movement of goods. This ripple effect, along with the recent reduction in fuel prices, means that negative growth should be expected in 2020. Prepaid commercial cards is a mixed bag in Mercator’s definition, so the category of business time and expense, along with payroll, can be expected to decline as employment drops, offset to some extent by government benefits and insurance claims.
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