How Airbase is able to provide the highest cash back in the market.
It’s no small task to navigate the confusing and small-print world of corporate card rewards and cash back. To help you determine which card will give your company the most value, we offer this Q&A on exactly how corporate card cash back and rewards work, and why Airbase is able to offer the highest cash back in the market.
Note that unless otherwise stated, we’re referring to charge cards, which are a specific type of corporate card that offers up to 30 days for repayment so that balances can neither be carried beyond month-end nor accrue interest payments.
Who pays for the cash back when you spend money on a corporate card?
Most corporate cards are free, and most pay card holders cash back or rewards when the card is used. So where does that money come from? It’s called an interchange fee, and it’s paid by the businesses that accept card payments.
Most merchants realize that letting their customers pay with a corporate card is a smart business decision and are willing to pay between 2% and 3% for this service. Some businesses add a 3% fee when someone wants to pay with a card, while others will adjust their prices to reflect this cost of doing business. In either case, it’s ultimately the purchaser who is most likely covering this transaction cost. These fees are paid to the card issuer to cover handling costs, fraud and bad debt costs, and the risk involved in approving the payment. However, most card issuers pass some portion of this fee back to their card holders in the form of cash back or rewards.
Who sets interchange fees?
The two largest card issuers, Visa and Mastercard, cap the amount of interchange fees that a business can be charged, and these fees are regulated by law. Both Visa and Mastercard publicly share the fees that apply to each of their card products. The bottom line is that a corporate card provider receives 2.4–2.5% of every transaction as a fee. For example, for a $100 transaction, the corporate card provider makes $2.50 as revenue. Card providers keep a portion of the $2.50 as their revenue and pass on the rest to you as cash back or to fund other rewards.
Why do some card providers offer points as rewards and others cash back?
The corporate card market is incredibly competitive. There are two primary approaches followed by card providers to incentivize customers to use their cards: cash back and rewards.
Since there is an upper limit on what a card provider can charge a merchant (roughly 2.5% per transaction), amounts paid out are literally a zero-sum game. The less card providers give you, the more they get to keep for themselves. So, there is a lot of incentive for them to obfuscate how much of the 2.5% they give you and how much they retain as revenue — which results in points, conversion ratios, category multipliers, and endless complexity.
So, is there any way I can make 5%, 7%, or 8% cash back on corporate card spend?
The short answer is no. Many corporate card providers will promise you category multipliers (like 8x points for rideshare spend, 5x for travel, etc.). If you make the simple assumptions that the card provider will allow you to redeem points for hard cash and will give you one cent for every point you’ve accumulated, the question you should ask yourself is: What is the blended cash back I’m getting on all my spend?
How do I calculate a blended rate?
In this scenario, you’re getting $170 in cash back on $15,600 of spend, which is an effective cashback rate of 1.09%. The 8x or 5x multipliers may seem very attractive, and that’s why they’re marketed that way, but for most businesses, the “everything else” category at 1x is where the majority of spend takes place. As a result, the actual cashback rate you end up getting is much lower than your intuition would suggest. In addition to that, if the card provider decides to change the conversion ratio of points from one cent per point to half a cent per point, your blended cashback rate will go down by half and you may not even notice.
It’s important to reiterate that a corporate card provider simply cannot offer a free product and run a sustainable business if the blended cashback rate is greater than about 2.5%, which is what they make on each transaction.
Can’t I mix and match the cards I spend money on to take advantage of the higher category multipliers that some cards provide?
You can absolutely do this. In the above example, you could put all of your rideshare and travel expenses on the card that provides 8x and 5x multipliers and everything else on a card that provides more than 1% (or 1x) cash back, increasing your blended cashback rate. You’ll get away with that if the amount you spend on rideshare and travel is relatively low. If you spend a lot, and the card provider is clearly losing money on your account because they can’t make more than 2.5% per transaction, you’ll find that there is small print in your agreement that allows the card provider to cancel your account. It’s like trying to trick the casinos in Vegas — you may get away with tiny wins, but the house always makes money at the end of the day, and it has way more time and money than you to invest in these optimizations.
Even more importantly, in a business context, trying to optimize cash back and rewards this way is probably not the best investment of your time. It is almost always best to pick the card that provides the highest blended cash back across all spend and focus on building the business, which is where the real value is created.
What kind of cash back does Airbase provide?
Airbase offers up to 2.0% cash back. We do not provide the full 2.5% since there is cost involved in managing the card program and in handling the fraud and losses that are unavoidable. The bottom line is that Airbase passes the vast majority of interchange revenue on to our customers.
Can the cash back offered by Airbase change in the future?
Yes, it can. The reasons are different for the pre-funded and charge card models.
With charge cards, the cost of capital that Airbase incurs to have a debt line and provide you a line and spending limit before you pay us back is tied to interest rates determined by the Federal Reserve. If those interest rates increase, so does our cost of capital, which means we’re paying more interest to be able to give you the line. That will require us to reduce the cash back we offer.
With pre-funded cards, we periodically analyze our cost to run the card program, and adjust it to ensure we don’t lose money.
How is Airbase able to provide such high levels of cash back and make money?
So, how does Airbase make money? We offer the #1 rated spend management platform that includes corporate cards, bill payments, reimbursements, approval workflows, accounting automation, and real-time reporting to manage all company spending. Our goal is to support companies from idea to IPO, and beyond. We help companies start off with the most feature-rich spend management platform for free (our Essentials tier), but we charge a subscription fee for our software platform as companies grow to hundreds of employees and need advanced features and functionality to manage spending.
This is our primary source of revenue and the reason why we’re able to offer the most competitive corporate card in the market. We’re not really interested in obfuscation, confusion, and gimmicks. We offer a valuable service to businesses from the day they get going and charge them for the value we add when they’re ready for a deeper partnership that involves access to advanced platform features, custom implementation plans, employee training, dedicated customer success managers, and the myriad requirements that larger companies have.
Airbase offers a one platform solution to manage all non-payroll spend. It provides oversight and control over spending with real-time reporting and automatic syncing directly to your general ledger. Control all payments – physical cards, virtual cards, ACH, and checks – from one place. Close faster. Empower employees. Control spend.
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