The Stalwart KPIs of Commercial Cards

Navigator Edition: February 2012
By: Frank Martien

Commercial charge card programs have been a strong and steady performer in recent years. With the exception of operating cost de-leveraging challenges triggered by 2009’s 5% contraction in commercial card spend, most commercial card issuers have demonstrated robust program growth and good profitability each year. For purposes of this article, we explore selected KPIs in more detail with “commercial cards” generally defined as 30-day cycle/ pay-in-full/ general purpose charge cards and virtual cards issued to organizations with more than $10 million in annual revenue or 100+ employees. Consequently, small businesses are excluded since small business card performance metrics vary significantly from commercial card metrics.

For commercial card issuers, marketing is principally focused on signing up organizations and encouraging these organizations’ employees to use commercial cards for business expenditures. A first step in evaluating potential for an organization is to size the program. Based on RPMG Research Corporation survey figures, First Annapolis has prepared Figure 1 depicting typical travel card and purchasing card (“p-card”) usage patterns across mid-market, large corporate, and Fortune-500 sized organizations. While statistics vary across organization size ranges and card products, a general rule of thumb is that the corporate travel card or purchasing card spend potential for a given organization approximates 1% of revenue – meaning that a provider able to get both the travel and p-card program should seek to achieve 2% spend penetration. By way of example, an organization with $100 million in annual revenue should have the potential to generate $1 million in travel card spend and $1 million in p-card spend.

Figure 1: End-User Organization Program Sizing KPIs

Source: Figures released by RPMG Research Corporation and First Annapolis Consulting analysis of same.

Travel card spend potential will vary significantly based on how many travelers an organization has; how frequently they travel; where they travel; use of central travel accounts for airline tickets; relative robustness of online account access, controls, and reporting; and an organization’s ability and appetite to mandate a corporate travel card solution versus travelers’ personal rewards card preferences. P-card potential has historically varied based on metrics such as indirect spend; however, the emergence of virtual card solutions for which walking plastics cards are not issued (e.g., buyer or supplier-lodged ghost cards, single use account numbers, transactions initiated by buyers directly with their suppliers’ acquirers) have the promise of capturing a meaningful portion of larger ticket direct / strategic spend categories.

Turning to the P&L component of KPIs and as shown in Figure 2, a typical commercial card program is driven by transaction-based fees with most other key metrics on the income statement representing deducts from interchange. Walking down the P&L, most commercial cards do not assess finance charges resulting in negative net interest margins driven by cost of funds. After interchange, many organizations with at least a few million in annual spend receive signing bonuses and rebates, which are combined in the rebates line item and also collectively referred to herein as revenue share. Somewhat analogous to cash back, rebates range from a modest fraction of a percent on spend to well north of 100 basis points for larger organizations. Generally speaking, a typical large corporate may receive 75 to 100 basis points, for example. The reason why First Annapolis believes weighted average rebates across the market are substantially below 100 basis points is because of the vast number of mid-market organizations that benefit from commercial card programs but do not receive rebates.1 Continuing across, other fees include foreign exchange fees, overlimit fees, late fees, cash advance and convenience check fees, and online solution fees. Net charge-offs are typically low relative to spend given small businesses are not targeted for commercial cards and credit underwriting is typically conservative. Sales expense is often comprised of salaries and sales commissions paid to individuals for signing organizations. Operations expense includes implementation and technical specialists, card RMs who interface with card administrators at larger organizations, program management, data processing, and cardholder servicing expenses. Finally, fraud losses approximate figures experienced with other types of payment cards, including volatility to major data breaches.

Figure 2: Typical U.S. Commercial Card Performance on a % of Spend Basis


Source: First Annapolis Consulting general U.S. market observations.

As a result, a typical commercial card portfolio earns the issuer between 20 and 60 basis points in pre-tax income. Variation in performance is often a function of average client size as mid-market organizations tend to be more profitable than large corporates and multinationals. In portfolio sale situations, commercial card portfolios can command premiums of 20 to 30% of cardholder balances outstanding. These premiums vary based on profitability of the book as well as proprietary technology for online transaction initiation, account access, controls, and reporting.

Per Figure 2, our point estimate of pre-tax income as a percentage of spend is 39 basis points. Describing a 39 basis point return within a bank gets far more traction when figures are converted into pre-tax return on assets. Since a typical commercial card program’s annual spend is about 10x funded cardholder balances, 39 basis points on spend translates into a pre-tax ROA of 4%.

Key discussion points across the industry relative to commercial card profitability are a perception of ever-rising signing bonuses and rebates and questions about potential for interchange regulation. These two issues are interrelated. While easier said than done, it is incumbent on commercial card providers and their sales forces to compete based on capabilities rather than revenue share to assist organizations in making more prudent decisions.1 Without commenting on the probability of regulation, if interchange were regulated, reductions in revenue share would partially offset profitability impacts for commercial card issuers as demonstrated in part by a June 2011 NAPCP opinion poll where 80% of responding end-user organization clients indicated as such and an increasing portion of commercial card program agreements between issuers and organizations in which issuers retain contractual rights to adjust rebates if interchange rates are cut.

Although assets generated by commercial card programs are relatively low given the transactional nature of the product, the return on assets generated by fee income is attractive. Perhaps even more valuable is the relationship tie ins and increased brand awareness from a client organization’s executives regularly pulling the issuer-branded card from their wallets for business purchases. As with any other payment or banking product, commercial cards are subject to substantial risk and market volatility; however, the travel management, procurement process, and payment efficiencies generate enormous value.

1 First Annapolis believes organizations are wise to select their preferred commercial card program providers based on capabilities, fit, and ability to displace less efficient procurement processes and payments. Sizing the overall financial impact to an organization of process efficiencies and improved data transparency and availability often proves out that other criteria, such as revenue share, are of substantially lower impact.

For more information, please contact Frank Martien, Partner specializing in Commercial Payments,

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