How Do High Rebate Corporate Cards Work?
Updated: May 4
Have you ever considered why an issuer (the bank listed on the front of your corporate card) would offer you 2% cash back on your purchases? Why would a bank pay you more than it makes? In reality, they don't. Your corporate card's economics may not work in your favor.
The first thing to understand is how credit card transactions work. For a primer, see this post. Then, once you know the basics of card transactions, read on for a breakdown of corporate card economics and why banks set up their card programs this way.
Reason #1 - Loss Leader
The card may be a loss leader. Although rare, banks may set up the card as a loss leader because they want to bank your company. Like a low introductory APR in the consumer world, banks want to establish a relationship with your business and have found that a tempting offer often starts the process. Banks want to expand their relationship with you for deposits, treasury services, loans, and business services, so they give away some or all of the card profits during the first year. Rest assured, the bank is not losing money in the long run.
Reason #2 Credit Products
Almost all corporate cards with rebates are credit products (credit card or charge card) - a fact which has the following implications:
Credit cards cost the merchant more to process. A merchant can pay 2-3% or more to accept your credit card payment compared to cash and debit. Those fees get shared by several players in the card processing chain, but the most significant cut goes to the issuing bank. Why? The issuer has underwritten you or your company as the account owner, and they carry the risk of you not paying your bill. In addition, they have the administrative burden of issuing cards, generating and printing detailed statements, and providing customer services to you, such as lost card support.
Liability can rest with the individual cardholder or the company. Who is on the hook for payment depends on the product and the application process. When the individual holds the liability, that individual is underwritten during the application process. The credit decision is based on the individual's credit and payment likelihood. When the liability rests with the company, the issuer underwrites the company, and the documentation requirements are often much more arduous (e.g., detailed audited financial statements, tax records, and the like). The corporate underwriting process can be very time-consuming for a company.
Reason #3 - Annual Fees
High cash rebate cards often have an annual fee from $95 to $150 or more. Here is an example of an actual high cash back corporate charge card from a bank:
Annual fee: $150
Late Fees: 2.99%
2% back sounds excellent but look closely. With this card, your "break-even point"- at which you have earned more cash back than the annual fee- is $7,500 in spend. In addition, if you have 100 cards for your company, you've tied up $15,000 in cash every year in perpetuity for the privilege of using this card, which is a negative when speaking about cash flow. Some cards offset this annual fee and "break-even point" with tiered rebates and "kickers." For example, you may earn $1,000 back as a statement credit after you spend $50,000 in the first six months. Of course, that bonus is only available for the first year for qualified purchases if you pay your bill on time. So again, the bank is betting on the long term and winning.
Reason #4 - Fees on Balances
The issuing bank can earn fees if you are late with a payment or carry a balance. Both charge cards and credit cards have these additional fees. As shown in the example above, this charge card has a 2.99% late payment fee, notably more than the 2% cash back reward you earn on purchases. Also, late payment can disqualify you from earning the cash back reward. Why? Remember that the issuing bank carries the risk and has already fronted the money to the merchant's bank for your purchases. Your issuing bank is in the hole at this point, so they will not be too keen on providing you a cash rebate when you are slow to pay your bill.
Fees on credit card balances are even worse. You don't have to be a mathematician to figure out that even a small balance at 18% APR quickly eats up any cash rebates you may earn with the card.
As you can see, while providing a valuable service, the issuing banks are not "giving you money." They are making a calculated decision with high rebate cards. Take a long hard look at the economics of your card programs and evaluate whether you are coming out on top.