Card rebates are at the highest since their inception
(BTN, March 15, 2004), but the inflated rebate bubble may be set to burst in the coming years. Although buyers for the moment enjoy newfound leverage to maximize cashback options, the desire for rebates has spurred the emergence of reverse auctions, which some said blinds bidders to contract details that yield an effective corporate card program.
Bankcard executives expect interchange rates—the overwhelmingly dominant source of income for bankcard issuers—will decline in the coming years, causing rebates to sink.
According to an e-mail survey conducted and published by trade publications Credit Card Management and Card Technology, nearly half of 621 charge card executives said MasterCard and Visa interchange rates will be 20 percent lower within 10 years. Although 31 percent disagreed or strongly disagreed with the premise and 19 percent were unsure, the prevailing outlook shows a decline.
"It is a buyer's market to a certain degree, but there will be a certain time where issuers just say, 'No more,' " one bank issuer said. "There will be a significant pull back in rebates."
Following year-over-year growth in rebates, issuers said too much focus has been put on price, ushering the use—albeit limited—of reverse auctions for card negotiations and yielding what one issuer called the "commoditization of a service industry."
Card issuers, consultants and some buyers bemoan the use of online bidding technology and reverse auctions for corporate card negotiations. The negotiation techniques, issuers said, underscore the convergence between travel and procurement.
"Reverse auctions have been going on for about the past three years. It has slightly increased, but I would not say that it is overwhelming. One of the challenges is that commercial cards are not a commodity and it's very difficult to take a service like commercial cards and quantify it to the extent where you can take the auction mentality to pick a provider," one commercial card executive said, echoing the stance of every card provider asked about the process.
While some companies have had success with reverse auctions in hotel negotiations, agency selection and areas of corporate procurement, payment vendors said the process does not fit card negotiations, and bidders sacrifice quality for price.
"With hotels, you do it because there are so many properties and it's so cumbersome," said David Hillman, president of New York-based consulting firm Hillman and Associates. "Quite frankly, hotels are so similar from property to property that you can use a uniform request for proposals. It can work, and you're not going to miss much, but when you get to something like cards, you're not going to be dealing with as many issuers. There are issues that are relatively sophisticated, like the technology, and it doesn't really lend itself to an electronic RFP."
Yet, unlike with hotels or product procurement, travel buyers primarily are using reverse auctions to narrow down the playing field of potential payment vendors, not for final decisions.
"There are two versions of what the auctions accomplish. Trying to go from 15 potential providers to five, where you kind of weed them out to find a group of folks that are in the ballpark from a pricing standpoint and then you pick best of class," said David Cramer, Visa U.S.A. senior vice president of commercial sales. "The second way is to narrow it down to three or four providers that you're fairly happy with and then do an auction to determine the best price. Both uses should consider the qualitative aspects of each issuer and not just price in order to determine the best total value."
"The problem with reverse auctions is there's no real qualitative decision making, it's all financial," said Gary Schneider, global business manager for Citibank commercial cards.
Although Schneider said that nearly 25 percent of the larger bids Citibank has seen have used some form of online bidding or reverse auction, most buyers still are sticking to traditional bidding and negotiating processes, seeking to maximize both quality of service and quantity of rebate.
American Express' Anré Williams said only a nominal percentage of prospective commercial card clients have used auctions or online bidding technology.
Columbus, Ohio-based American Electric Power is going out to bid this year, foregoing the online auction process for traditional contracting. "We would have far too many questions that couldn't be handled through that type of process," American Electric Power manager of employee expenses Steve Quincel said, noting the precedence service and data quality take over rebates.
In a recent study of 110 companies that use its card product, American Express demonstrated the savings a properly executed commercial card program can yield, showing that companies can save upwards of 9 percent on total T&E spending through card data-driven supplier negotiations and process efficiency. Williams noted that any savings yielded from a properly executed commercial card program would far outweigh concessions on price and rebates, which according to BTN data average only a fraction of a percent of total card volume.
Additionally, American Express told BTN in a statement, "It's shortsighted to use rebates as the sole basis to select a partner for expense management."