Commercial Card Rebates in the U.S.: A Wild Ride

For years I have wondered how U.S. card issuers could sustain the very generous revenue share incentives offered to eligible end-user organizations. I have come to realize, though, that Commercial Card rebates are not as simple as up and down. There are twists and turns on this ride, and there is a bigger question and better option—beyond basis points—that deserve our focus. Keep reading to see what is it, including a that-was-then/this-is-now comparison.

That was Then

Revenue share began modestly with U.S. card issuers in the 1990s typically offering organizations well under 100 basis points as the maximum possible incentive. The structure tended to be one dimensional; a program had “X” dollars in total annual card spend, so it earned “X” basis points. Rebates did not garner much attention, at least not until organizations experienced their first check (or ACH) payment. Purchasing Card programs were originally sold—and implemented—for their ability to revolutionize the procure-to-pay process and yield substantial process savings. In the previous post, Mark Silverman of PayTech Group described how other countries still focus on the broader value of card programs, not rebates.

This is Now

Today, the maximum possible revenue sharing incentive for eligible organizations might easily exceed 100 basis points for “regular” purchases; that is, transactions not associated with a special low interchange rate, such as large ticket, as defined by the different card networks. I asked Mark why he thinks revenue share has climbed so steadily in the United States and he noted, “As long as we keep calling commercial cards ‘cards,’ business customers will continue to expect the rewards or rebates they expect on the consumer side.” Certainly, the demand by end-users is there.

As for the supply side, issuers have responded by being generous, but some Commercial Card programs are too small to have any revenue sharing opportunity (based on the particular criteria an issuer uses). Modest-sized programs are usually offered modest incentives. And on it goes. This leaves just a portion of end-users that have crazily high basis points on the table.

Nevertheless, the demand has, in many cases, turned an end-user’s request for proposal (RFP) process for a card issuer into a bidding war. Some select an issuer primarily or even solely on monetary incentives, sadly overlooking issuers who cannot offer as much money, but still offer much in terms of service and technology. Then I wondered, regardless of what is offered and to whom, what percentage of the collective rebate-is-possible organizations actually earn the top tier specified in their contracts?

I spoke to one industry expert whose data indicates around 22% of companies hit the top quarter of tiers (above the 75th percentile). The majority of end-users fail to fully capture what their issuers offer, thereby keeping the lucrative revenue share offerings sustainable, at least for now. Do end-users not care as much about rebates as it would appear? Do they actually place more value on the other benefits of card programs, which Mark touched on in the previous post? Unfortunately, I don’t think so, as the buzz around rebates has not died down. This leads to the bigger question.

The Bigger Question

Why have so many end-user organizations failed to maximize their Commercial Card programs to take advantage of all the possible benefits, including earning the highest tier of revenue share offered to them? On top of it all, issuers are increasingly beefing up their services (e.g., helping end-users on-board suppliers) and providing more robust technology solutions for program management. The benefits are almost too good to be true. Instead of speculating about why end-users fall short (but it really boils down to decision making), I’d rather provide some tips on how they can improve.

Tips for End-users

The following serves as a starting point.

  1. Hire the right person or people to manage the program. A strong foundation will support growth and naturally lead to reaping more benefits.

  2. Bring the stakeholders and decision-makers together, ensuring they understand all the benefits of Commercial Cards and where the organization is currently missing out.

  3. Paint the picture of what the procure-to-pay processes would look like (and cost) without cards.

  4. Strengthen the relationship with your issuer. If they will not help you optimize your program, it might be time to think about seeking a new partner.

As interchange, and therefore rebate structures, become more complex, it is more important than ever for U.S. organizations to change their focus. Committing to improving process efficiencies and adopting electronic payments whenever possible is the best ride of all—one that can be sustained no matter what the external/market forces.

U.S. Commercial Card rebates have been on a wild ride. The industry would be better served by refocusing on process efficiencies, which is the best ride of all.

U.S. Commercial Card rebates have been on a wild ride. The industry would be better served by refocusing on process efficiencies, which is the best ride of all.

About Interchange

As a refresher, card issuers earn interchange revenue, which help fund rebates to end-users. Interchange is the largest component of the fee suppliers pay for card acceptance. (See more about card acceptance fees). Lower interchange means less revenue for issuers to offer to end-users in the form of rebates. However, the benefit is, it can make suppliers more receptive to card payments, including purchases at higher transaction amounts.



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About the Author

Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With 20 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more

Payments to the Card Issuer: Speed Up or Slow Down?

Has your organization made a thoughtful decision about the timing of payments to your card issuer? Does this deserve another look? There is more to it than not being late. For many organizations, revenue share (rebate) incentives are impacted by the speed of pay, also known as file turn. Even if this is not part of your contract, have you worked with your treasury/finance department to evaluate the benefit of paying the issuer quickly against the value of holding on to your cash longer? A recent survey by AP Now reveals the majority of organizations pay their Commercial Card issuer on a monthly basis soon after the cycle ends, but this is not the only option, as shown below. Nearly a quarter of the survey respondents wait as long as possible. Only 7% make payments more than monthly to increase their rebate.

What to Do

While every organization should ensure on-time payments to its card issuer, it is a best practice to identify the ideal timing to support your organization’s needs and goals. 

Review your contract to determine if speed of pay/file turn is part of the rebate calculation. If yes, where does your organization stand today? What would your rebate look like if your organization paid the issuer faster or more frequently? Evaluate different scenarios; for example, right after the cycle ends each month, twice per month, weekly, etc. Present your analysis to your management.

Regardless of your rebate incentives, consult with your treasury/finance team to determine the best payment strategy for your organization’s cash flow and overall financial position. Their opinion may also depend on interest rates, which can fluctuate, so it is worthwhile to revisit this topic from time to time.

As an added bonus, having a discussion with treasury/finance might lead to Commercial Card program expansion, such as the adoption of Virtual Cards to help extend float.

My Experience

I was fortunate to have worked for the Federal Reserve Bank. We could pursue the best possible rebate tier for speed of pay since cash flow was not an issue. However, to make this happen, I still had to figure out the right payment timing, which involved various calculations that took into account an average transaction age.

Finally, do not allow payments to your issuer to be delayed by cardholders’ reconciliation of transactions, which should be a separate process. Since your organization is required to pay in full by a certain date, waiting for cardholders to reconcile does not add value. The AP Practices Survey by AP Now shows that, unfortunately, 30% do wait. 



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About the Author

Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With 20 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more

Bring more focus to your next RFP.

In the life of every Commercial Card program, there will be a time—likely multiple times—when a request for proposal (RFP) process is required or desired. If you have already participated in such a project, then you probably have a list of lessons learned that will benefit future RFPs. Conducting a good RFP process helps establish a good end-user/provider relationship and, ultimately, a successful card program. Before you embark on another RFP project, consider the below tips from industry experts. 

The following content originates from sessions at the 17th Annual NAPCP Commercial Card and Payment Conference.

Preparing the RFP

Tips from the joint session by PayTech Commercial AS and Mastercard

  1. Do not reuse the same RFP as what you used before, especially if you are not happy with the current program/provider.

  2. Identify what matters most and pare down your RFP accordingly. Out of all the possible data points you can include, which ones are most important to your business case and future goals? I could not agree more. I think there is a tendency to ask too many things that do not impact the decision. The opposite problem is not asking key questions, such as ones pertaining to customer service.

  3. Evaluate your RFP for clarity. Unclear questions can result in bidding providers including more information than what is necessary, causing more review work for you and the project team.

  4. Save contract terms for the negotiation stage. When your RFP includes contract terms to which the provider must agree in order to submit a proposal, it will require them to obtain legal review first. This increases the time they need before responding and it could mean they cannot respond at all if your timeline is too tight.

  5. Provide details about your current card program(s), including as many metrics as possible. See examples...

Evaluating the Responses

Preparing a good RFP is just the beginning. Take equal care when designing the evaluation process.

  • Use a weighted matrix, developed in advance, to evaluate proposals. Place more weight on the items most important to your organization.

  • Each team member should evaluate/score the proposals independently before the team comes together to discuss.

  • Do not be swayed by “bright shiny things” that a provider might include within the proposal. These things can be distracting when they pertain to something that falls outside your requirements. Ensure the provider can meet core competencies first.

  • Proposals offering big checks/payouts can also be distracting. This leads to another important point, as described in the next column.

During your next RFP project, focus on what matters most to your Commercial Card business case.

During your next RFP project, focus on what matters most to your Commercial Card business case.

Dollars vs. Basis Points

Within his conference presentation, Frank Martien, Partner, First Annapolis Consulting, encouraged end-users to look beyond the basis points (bps) noted within a provider’s proposal. He makes the case that end-users can earn more rebate dollars with lower basis points if the provider helps you capture more card spend by acting as a key partner in your program. For example, how will a potential provider specifically help you:

  • convert more suppliers to card payments?

  • further automate internal business processes, as well as key suppliers’ business processes?

  • obtain program buy-in from your management?

  • increase your card usage?

More Information

For more RFP resources, visit the related webpage.

Your Experience

If you have RFP experience that you would like to share for possible publication by Recharged Education, please submit a contact form. I would love to hear your advice and lessons learned. Alternatively, provide a comment below.


Contacts

Greg Hamilton
Vice President
Public Sector Business Leader
Mastercard
Phone 303-617-9171
Mobile 303-621-4487
gregory.hamilton@mastercard.com

Vincent P. Eavis
MD, Partner & Global Practice Lead
PayTech Commercial AS
Mobile +44 7721 985700  
vince@paytech.no

Frank Martien
Partner
First Annapolis Consulting
Direct 410-855-8513
Mobile 443-994-1241
Frank.Martien@FirstAnnapolis.com


About the Author

Blog post author Lynn Larson, CPCP, is the founder of Recharged Education. With more than 15 years of Commercial Card experience, her mission is to make industry education readily accessible to all. Learn more

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