RA006 Miles vs Cash Back
Small business owners who want to efficiently manage and track their business expenses are increasingly eschewing expensive and inefficient cash, check, and bank account transfer payment approaches in favor of a type of credit card. These often come with rewards, similar to the perks on consumer airline credit cards, designed to attract customers. Like retail cards, these can come in one of two varieties.
There are two types of rewards Some of these travel rewards credit card issuers offer rewards points or miles that can be used for flights, access to airport lounges, upgrades, travel purchases, hotels, rental cars, gift cards or retailer discounts. Other card issuers offer flat cash back provisions.
It can be difficult to determine which is the better deal, because the value of the points and miles programs is not directly comparable to the value of the cash back programs. They often give more points or miles to those who direct their spending toward the things the card issuers want to encourage. For example, a particular airline might offer frequent flyer miles that add up to 2x a given amount spent by a cardholder on its own flights, but only 1x times that amount if spent on a competitor’s flights.
In this article we will explain how both the miles programs (a term we will use as a proxy for both miles and points programs) and the cash back programs work, what their pros and cons are, and why it turns out that cash back incentive programs are the better option.
A credit card reward is simply a perk that cardholders receive for every dollar spent with that card. They are meant to increase cardholder loyalty, and their cost to the card issuer is often negligible when compared with the value of return business and the interest revenue an issuer can reap if a client starts carrying balances.
The way you gain the miles or cash depends on the specific policies of the reward program, and each reward program will typically come with bonus rewards for certain types of spending. Notice, however, that these bonus rewards and other provisions can obscure the value of the rewards.
· For cash back credit and prepaid debit cards, the value of the reward is usually just the amount you spend multiplied by the cash back percentage that the program offers. If you put $100,000 of your corporate expenses on a card with a 1.5% cash back reward, you earn $1,500 for the month.
· For miles credit cards, the rewards value is the amount you spend times a multiplier (e.g., 1x, 2x, 3x…), which determines the number of miles you earn. You then have to determine what a mile typically costs to travel, or the cost of what you would purchase with the points, and adjust your estimate accordingly.
o Bear in mind: In an economic environment characterized by high inflation like the one being experienced in many countries in H2 2022, an important exogenous variable is price volatility. The most generous miles program can quickly seem parsimonious in real terms if the price of tickets or goods shoots up before the miles or points are paid out.
There are other policies that are common to both types of cards, which a potential cardholder should investigate before choosing a card.
· Signup bonus rewards – Many corporate credit card companies will offer you an immediate signup bonus to entice new customers. Credit card companies might also require a certain minimum credit score to qualify for these membership rewards, although if the card is structured as a pay-as-you-go debit card, this might not be the case. These perks often come with strings attached—for example, the cardholder only gets the rewards if he or she spends a minimum amount in a certain number of months or within the first year. For example, an issuer might state that, “New business card users get 10,000 bonus rewards miles if they spend $15,000 within the first 3 months of the card being issued.”
· Spending at specific vendors – Corporate rewards credit cards may limit the spending areas or vendors (airlines, hotels, car rental agencies and so on) at which you must spend to receive credit card rewards miles or cash back.
· Spending on specific categories – Cards may limit or increase rewards by spending on specific categories, such as travel, IT, legal, or other services.
· Spending time frames – As with the signup bonus, you may be required to spend a certain amount in a certain time frame to receive greater multipliers.
· Cash back on all purchases – More straightforward cash back programs allow you to earn cash on all your purchases, no matter the vendor or spending category.
· Redeeming rewards – Many card providers have redemption options that require you to spend a certain amount or be an active customer for a year before you can redeem rewards. For that reason, you may be spending money to earn miles that you cannot use in a particular accounting period. How you account for these payments is, to an extent, a matter of preference. The best cash back programs will apply your cash back as a statement credit each month. Other programs, however, may place restrictions on the times that you can redeem your cash back. Again, here is where inflation can eat away at the value of your miles or cash back.
Remember that miles and cash back provisions are only perks – yes, they are nice to have, but not mission-critical. Here is a quick run-down of some business tips and the benefits of using prepaid credit or debit card, which should be the primary drivers of your decision to adopt them. They allow you to:
1. Eliminate the approval process, speed invoice processing, and consolidate business expenses on one card;
4. Minimize the opportunity for employee fraud;
5. Eliminate lengthy employee expense reimbursement times;
6. The best rewards credit cards generate cleaner accounting records, cash flow statements and balance sheets, which are particularly useful for tax filings;
7. Provide any rewards programs to employees as incentives.
Let’s look at a typical cash back program, then list the structure’s principle pros and cons.
In September, Forbes named Ink Business Unlimited Credit Card its best cash back credit card for 2022. The judges cited the following advantages:
· Unlimited 1.5% cash back rewards on purchases
· No annual fee
· Generous $750 welcome bonus
· 0% Intro APR on Purchases for 12 months
The prepaid credit card for business has a variable APR between 15.49% and 21.49%, and it requires a FICO of 700-749
· Simplicity – If you know what you spent, you will know what cash you are due back, which leads to the second benefit...
· Transparent pricing – The value of a cash back reward is simply the amount you spent multiplied by the cash back percentage which leads to the third and fourth benefits…
· Less inflation risk – The program has an embedded self-hedging aspect to it. Inflation might drive up prices, reducing the value of each dollar of your cash back payment, the item you purchased with the card in the first place was rising in price when you bought it, so you get more of those dollars back. This price stability benefit leads to the fourth benefit…
· Easier accounting– Cash is denominated in, well, cash, the ultimate GAAP benchmark. Miles programs are denominated in, who really knows what? Translating miles into cash for accounting purposes takes some heroic assumptions.
· Long-term value – You do not have to worry about the vagaries of a particular industry or sector getting decimated by an unanticipated factor, as the travel industry was by Covid.
· Reward caps – The advantageous simplicity’s flip side is that you will never see an unanticipated windfall from a cash back program with a fixed percentage structure.
· Often poor sign-up bonuses – These are less generous than their miles counterparts’ signing bonuses.
Now we’ll do the same for business travel credit cards.
The same month, Forbes named the Capital One Venture X Rewards Credit Card the best travel rewards credit card for 2022, citing its lower-than normal ($395) annual transaction fee and easy to use airline miles which cardholders can use for a variety of travel benefits. It provides a 75,000-mile welcome bonus and charges an APR between 18.49% and 25.49%. It requires a minimum FICO of 750.
The magazine’s best travel credit card demonstrated the specie’s advantages:
· Exciting sign-up offers – These are usually more generous than cash back cards;
· Flexibility – These cards are often backed by big hotel or airline chains, in partnership with leading banks, so they can offer attractive packages.
· Complexity – These are more convoluted than cash back cards, which causes…
· Nontransparent pricing – It is hard to determine just what 75,000 miles is worth in dollar terms. Users have to take the issuer’s word that the pricing is appropriate. This leads to…
· Accounting difficulties – For assets that are not marked to market, this is a perennial problem. Also…
· Generally higher annual fees – and…
· Varying usage requirement to secure use of the miles.
Simplicity, pricing transparency, ease of accounting, fungibility across purchase types – on all these important measures, cash back cards prevail. While the miles cards have their advantages and could be of great value to some users, cash back is the better option for most entrepreneurs and small businesses.
These advantages came to light during extensive research Ramp conducted while developing its cash back business credit card. Ramp analyzed well over a thousand card statements on behalf of our customers. In just 1% of cases, i.e. 10 cases total, were points worth more than 1.5% cashback. Our analysis was very clear—points are worth less to your business.
Not only are they worth less, but consider what points and multipliers incentivize your staff to do. They want to do what's in the best interest of the company but your card provider is designing incentives to distort that behavior. By choosing those cards you're implicitly telling staff to take more Ubers, go to more restaurants, and go buy more software, because there's a multiplier or incentive rewarding them for that. It really reduces your credibility as a leader to say, "We're trying to keep things simple and optimized,” when you're invested in a program that deliberately distorts what employees are rewarded for buying.
The resulting savings are significant. Ramp customers get 1.5% cash back on every purchase and save an average of 27% on SaaS contracts. One client, Candid Co CEO Nick Greenfield, said that Ramp, “Found over $250,000 in savings right out of the gate. That is far more valuable than any points program.”
This is why Ramp is dedicated to the cash back model. It works for our clients, and we believe it will work for you.
The principle difference is that a cash back credit card pays your award in cash, which you can use anywhere, has a transparent value and is easy to manage in company accounts. Miles pays your award in nontransparent, nonfungible assets that are not marked to market and rise and fall arbitrarily in value.
Integrating a rewards card into an small business accounting software system will allow entrepreneurs to efficiently manage and track their business expenses, and improve their relationships with employees, customers, and vendors.
Use the card for as wide a range of expenses as possible, to ensure all your payments end up properly accounted for. You can also use a virtual cash back card, which does not require a physical card, and can improve security in situations with high employee turnover, many bespoke payments, and other situations.
<h3> What’s the difference between cash back vs points?
*Link out to our in-progress article on cash back vs points here (brief)
Hi Luis – I didn’t quite understand what you wanted with this last FAQ. If you could clarify I can pop a couple lines over tomorrow, or if you just want to write it yourself… Best, DC