Visa U.S.A. and MasterCard International in April will increase the rate they pay to commercial card issuers, enhancing issuers' revenue and giving buyers an opportunity to share in that income through rebates. Vendors getting the brunt of the higher fees concede the development could mean heftier rebates for large corporate buyers.
Card networks pay bank issuers interchange, which is derived from fees paid by merchants. "I don't think there's any question that higher interchange feeds into rebate programs for the corporate side and rewards programs for the consumer side," said David Robertson, publisher of the Nilson Report, a card industry research newsletter.
At a time when the large T&E payment market has been considered by many to be saturated, vendors aggressively have been working to maintain and boost marketshare. In addition to bolstering acceptance, updating card functionality, enhancing reporting and adding a slew of online tools
(BTN, May 26, 2003), vendors have become increasingly competitive over rebate pricing.
One payment vendor said it is competing "solely on price" for a large contract. "It's going to be the largest rebate I've ever seen on a corporate program."
Requesting anonymity, the issuer said that although raising interchange "is increasing my revenue line across my portfolio," some bank issuers "will give most, if not all, of this increase away in the rebate," a move with which the issuer will have to compete.
Largely nonexistent for corporate card programs 15 years ago, rebates on average have been rising since their inception, buyers and payment vendors said. This move could start a new cycle of increases. "There's been a constant upswing in rebates," one commercial issuer said. "Anecdotally, I can say that rebates have tripled in the past 10 years."
Many factors affect rebates, such as a company's travel volume, spend per card, payment terms, average transaction size, losses and other performance factors. Although typical rebates average between 0.25 and 0.8 percent of a corporation's charge card volume, one issuer said it's not rare to see rebates in excess of 1 percent. Companies are paid in a lump sum quarterly, semi-annually or annually, provided that period's performance goals were met. Card issuers also will waive any fees associated with cards.
For large market companies—those with $12 million-plus in U.S. booked air volume—rebates are the second most important aspect in a card vendor relationship, after acceptance, according to BTN research
(BTN, Nov. 24, 2003). Yet, the importance of rebates decreases for companies in the small and midsize markets, since the ability to negotiate for rebates fluctuates in tandem with card volume.
Christel Peterson, corporate travel manager for Chicago-based Teng & Associates, said that with less than $1 million in air spend, the company is not able to negotiate for rebates. While there is no industry standard for when companies can begin to receive rebates, one issuer said he has negotiated rebates with companies with less than $5 million in card spend.
"What is happening is the associations [MasterCard and Visa] raise interchange, the supplier pays more and we give it back to our customers," another bank issuer said. "If interchange was set at a much lower level and there were no rebates—and no fees to the customer—then it will be back to the way it used to be, where the large customers negotiate with the vendors. The guy that really gets hurt on this is the small buyer—not the big buyer."
Since merchants pay for the cost of interchange, some said they are likely to pass along the cost to consumers
(BTN, Oct. 6, 2003). While large buyers ultimately will see any rate increase passed back to them through rebates, the issuer argued, small buyers will not be compensated for fees or price hikes from merchants.
The Visa and MasterCard announcements to raise interchange rates largely were influenced by MBNA's agreement this year to issue American Express cards, which marked Amex's first card relationship with a bank issuer in the United States
(BTN, Feb. 9, 2004)."Once MasterCard raised interchange, Visa had to respond for competitive reasons," Robertson said. "The other shoe hasn't dropped and that other shoe is American Express. It's expected that Amex will raise its rates."
In a weekly update published last month for its member banks, Visa U.S.A. announced that its intentions to raise interchange were "a result of MasterCard's recently announced fee increase, as well as American Express' appeal to banks based primarily on its higher merchant fees." MasterCard was less specific, saying in a statement the interchange increase "will help ensure the competitiveness of MasterCard's consumer and corporate credit programs."
Their decisions to close the gap between their merchant fees and those of American Express are expected to create something of an interchange war. "It's inevitable that we're going to see increases in commercial card interchange," Robertson said.
While Visa and MasterCard can adjust interchange rates every year, corporate card contracts on average last between three and five years.
The impact of interchange on a commercial issuer's bottom line is significant as interchange fees account for 90 percent of a bank issuer's commercial card revenue, according to Retail Banking Research Ltd., a U.K.-based research and consulting firm. One bankcard issuer said that percentage is even higher, tipping 95 percent of commercial card revenues.
American Express' merchant fees, which have been consistently higher than MasterCard and Visa's, have irked such travel vendors as British Airways and Ryanair. BA in 2002 began passing along Amex merchant fees to buyers on net fares
(BTN, June 24, 2002), while Ryanair last year stopped accepting the card as payment. Though irritating some vendors, the higher fees have meant higher rebates for companies negotiating contracts, according to some.
"They have richer pots of money," one of the bank issuers said. "If it's truly down to a pricing game and if customers are willing to forego acceptance for more rebates, they will always go with Amex because they have that bigger pot of money."
Amex in response said its corporate cards "cover more than 98 percent of a company's T&E spending globally." Additionally, Amex neither confirmed nor denied that it offers higher rebates but said in a statement, "It's shortsighted to use rebates as the sole basis to select a partner for expense management."
Buyers can enjoy their newfound leverage for the moment, though some expect a saturation point where the increasing rebates and price competition could stop. "It is a buyer's market to a certain degree, but there will be a certain time where issuers just say no more," a bank issuer said. "There will be a significant pull back."