How to navigate the confusing world of corporate card rewards.

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 provide such generous cash back.

Who pays for the cash back when you spend money on a corporate card?

Most corporate cards are free, and some pay cardholders cash back or rewards when the card is used. So, where does that money come from? It’s called an interchange fee and is paid by 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 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. Some card issuers pass some portion of this fee back to their cardholders 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 — these are regulated by law. Both Visa and Mastercard publicly share the fees that apply to each of their card products. 

Why do some card providers offer points as rewards and others cash back?

The corporate card market is competitive. Card providers follow two primary approaches to incentivize customers to use their cards: cash back and rewards.

• Cash back: This will be a portion of the percentage that card providers make on each transaction. The rebate will depend on a variety of factors and the business model of the card company.
• Rewards: These add a layer of complexity by issuing points on each transaction that can later be redeemed for rewards. The end goal here is to give the appearance of a lot of value by disconnecting what is received from what it costs the card provider to give the rewards. Often, reward points seem generous, but can be difficult to spend effectively, or the point values change over time. Most consumers have encountered airline miles that have been quietly recategorized — the same number may be earned, but when it comes to spending them, each point is worth less than the previous categorization. That flight to Hawaii now requires a heck of a lot more points.

It’s a simple math game — the less card providers give you of their interchange revenue, the more they get to keep for themselves. So, there is a lot of incentive for companies to obfuscate how much they give you and how much they retain as revenue — which results in points, conversion ratios, category multipliers, and endless complexity.

Can I consistently 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 $155 in cash back on $15,600 of spend, which is an effective cashback rate of 0.99%. The 8x or 5x multipliers may seem very attractive, and that’s why they’re marketed that way. 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 get is much lower than your intuition would suggest. In a rewards example, 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 what they make in interchange fees 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 a good flat cashback rate, 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, you’ll find that there is small print in the agreement that allows the card provider to cancel your account. 

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 cash back across all spend and focus on building the business, which is where the real value is created.

To learn more about Airbase, contact us for a product demo.