When it comes to finance, simplicity is key. The tax code is a great example. The more complex it is, the less efficient it is, the more loopholes there are, the more ways there are to cheat. But if something is stated simply and clearly, it’s very easy to assess whether it’s fair or not.
Nowhere does this logic apply more than with corporate cards, and in particular how they reward spending. Why do some cards offer different rates of rewards the more you spend? Why are the multipliers higher for certain categories of spending? Why are there different redemption rates for different categories? Why are you offered points, effectively another currency, rather than cashback? Why can the value of those points change or expire over time?
If any of these things are true of a program, the card issuer is going to optimize for what's best for their business. And that’s rarely what's best for your business.
Ramp is committed to simple cashback, not complex points
A key decision we made early on at Ramp was choosing cashback over points as the way to reward our customers. Compared to a points-based system, with industry standard features like confusing multipliers, cashback is simple, unambiguous, and transparent.
I worked at Capital One with my co-founders, Karim and Gene, after they acquired our last startup. That gave us a front row seat to see what was happening in the card industry, not just at Capital One but at behemoths like Amex, Chase, and Bank of America. It always amazed us how much effort went into optimizing how credit card rewards programs work. For example, the industry realized there was a huge difference in cardholder behavior when you framed rewards as multipliers (i.e. 2x/3x) rather than percentages. Suddenly everyone was very interested in buyer psychology and what makes customers perceive things as valuable.
"Compared to a points-based system, with industry standard features like confusing multipliers, cashback is simple, unambiguous, and transparent"
We realized that on one side of the card business you had very smart people creating programs to reward customers with points. But somewhere else there was a team of equally smart people thinking about how to value those points, and maybe even how to devalue them. That’s not surprising in a for-profit organization. If you give smart business people a lever to go and make more money by giving away less value or devaluing what you've already given away, they’ll do it. Incentives work.
But those incentives also ensure innovation in the card industry is not focused on creating value for customers and hasn’t been for decades. Instead it’s focused on things like holding onto a bigger slice of customers’ spending and getting them to spend more by making them think they’re getting increased rewards for it.
Disrupting the broken business model of corporate cards
This thinking is pervasive even amongst card issuers that, at first glance, seem to be disrupting the status quo. Many of them offer these very high point multipliers, which sound impressive. If you're an early stage startup taking Ubers all the time and buying the software and tools you need to get things off the ground, those multipliers look attractive. But later, as your business grows, you realize rideshare and software are a tiny percentage of your overall spending.
Our competitors also know points are under-utilized compared to giving straight cashback. For example, Henrique, my opposite number at Brex, has pointed out, “A lot of businesses have all these unredeemed points that just stay there doing nothing forever.” Even if you try to convert points to cash, the redemptions often have a bunch of asterisks, which make points less valuable, e.g. Brex customers have to buy into some of their other products, otherwise they only get 70% of the value of their points converted to cash.
"With smart software at the back-end, you aren’t just giving your team cards and leaving them to manage their spending while being manipulated by deliberately complex reward programs"
Credit cards were invented for personal use in the U.S. in the late 1950s. Points programs were a construct designed to incentivize consumer spending. That model has been ported over to the business world with almost no changes. This warping of points into the corporate world encourages businesses and their employees to behave like consumers. It plays off ego and greed, which are very powerful levers for individuals. It works on everybody, for better or for worse, as opposed to some of the more rational dollars-and-cents-based thinking. But which approach is more likely to result in a well-run business?
In contrast, Ramp was built for business from the ground up. With smart software at the back-end, you aren’t just giving your team cards and leaving them to manage their spending while being manipulated by deliberately complex reward programs. When your expense policy and your card are actually fused, it changes the way cardholders behave. You can issue cards to employees for specific merchants, with rules in place to ensure the card can only be charged to that merchant. Daily, monthly, annual or even one-off limits can be set specifically for that card. Or you can simply choose a template depending on what you want the new card to be used for.
Aligning your corporate card with your business interests
At Ramp we’ve 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.
Cashback isn’t just better for your bottom line; it encourages prudent spending by everyone on your team.
Cashback encourages Ramp to innovate
So why did Ramp go the expensive route of giving 1.5% cash back on all purchases? Rather than a complex points program that would have allowed us to give away less?
Because in the long run it's the right thing to do. It incentivizes us to innovate and break out of the rut the card industry has languished in for decades. Committing to 1.5% cashback on all customer purchases means we have to pull different levers to grow our profits. If the margin on transactions is fixed, it’s logical for us to focus on saving money for our customers, because that grows the size of the pie for both parties.
"Having thousands of businesses making purchases on the same platform allows us to understand and spot spending patterns. Over time, that data on spending will open up opportunities to help our customers maximize the value of their spending."
Since we started publicly issuing cards in February 2020, we’ve saved our customers $16 million by identifying wasteful spending. That doesn’t even include additional savings opportunities we identified but which customers have not actioned. But we want to continue to really push the boundaries on savings. A useful analogy for where Ramp is heading is the navigation app Waze. A map app that gives you directions to your destination is great. But layer on top real-time traffic data, based on other users’ experience, and it gets a lot more useful. In Ramp’s case, having thousands of businesses making purchases on the same platform allows us to understand and spot spending patterns. Over time, that data on spending will open up opportunities to help our customers maximize the value of their spending.
As well as cashback, we want to provide perks that are relevant to the businesses that choose Ramp. We're not trying to get everyone a ticket to a buffet in Topeka, Kansas, although you might find that on your Amex card if you go through the list of perks! Instead we want to understand what the most important categories of spending for our customers are and go source offers in those areas.
Why don't the financial services incumbents or even challengers encourage their customers to spend less? Well, for American Express with a $130 billion market cap, this approach would be strictly money losing. They are the largest issuer of credit cards to small businesses in the US and have relationships with almost two thirds of the Global Fortune 500. If they help their customers cut their spend by 2%, they would shrink the entire market. There isn't much incremental market share for them to pick up, so it’s not surprising a lot of incumbents don't have any incentive to do this.
Switching the focus to innovation for our customers
The business model of arbitrage on points has come to its logical conclusion. It has ensured there has been minimal technical or product innovation for the last 30 years. What’s more it has removed the focus from the customer.
Ramp is a challenger, so we live and die by our reputation. We want you to feel like you've never had a better credit card experience. We’re maniacally focused on the customer experience, which is why our ratings and reviews have been so strong compared to our competitors.
For too long the industry has been focused on getting customers to spend more, not less. The question Ramp is asking is how can we help you generate more value as a business? The software we’ve decided to build, our business model, the teams we’ve chosen to hire, are all designed and optimized to answer that question for our customers.
We’re looking forward and believe we’re only starting to scratch the surface on what we can do for our customers. Ramp’s incentives encourage us to become a larger business, because when we do this, there is more data about spending on our platform. With that data we can bring more insights and value back to our customers.
Other card issuers continue to bluff and confuse their customers with complex reward programs. They are trying to keep a bigger slice of a very small pie of savings. In contrast, Ramp is committed to increasing the size of the pie for everyone.