What Is The Basis Point Myth? #APAutomation
I like any other good red-blooded American likes a good old fashion conspiracy theory. You know, one that has a nameless – faceless group of high level individuals plotting in unison to insure their agenda is accomplished. Well, when it comes to basis points, that’s not the case. Sometimes instead of a conspiracy theory it’s simply lack of education.
What Is It?
A basis point is one-hundredth of one percentage, so if you have 20 basis points, that is the equivalent of .002. Basis points are the common language of credit card companies to assign you are rebate. If you have read any of my articles, lately I have been writing a lot about using credit cards as a method of paying your vendors, or better known as virtual credit card payments (you can read a few of my old articles if you need more information).
Where people have a tendency to go wrong, is when entering into a credit card relationship where basis points are the main factor. During the “getting to know you” process, companies will spend a lot of time trying to find the best return or the biggest basis points from the credit card company. There is nothing wrong with getting the best rate, but that’s where the myth starts.
As I wrote earlier, basis point returns are important, but they aren’t the single biggest factor in determining how much cash you will get. I hate to be so crass on focusing only on cash return, but what else is there? Well there easy of use, tracking and security, but when finance people look at rebates, they are thinking cash. The myth is that basis points are the only vehicle to produce the highest rate of return.
What Is the Fix?
If basis points don’t get the highest rate of return, than what does? Adoptions! That’s right, the key to a great returns on applying payments to a virtual credit card is adoption. Here are a few numbers. If you have 100 basis points on a pool of $500,000 you will get a return of $5,000. If you have a single event to raise the pool to $1M and use a very conservative basis point rate of 50, you will get the same return of $5,000. That’s what companies do, is they try a one time event over a few weeks to increase to the pool, and it will work. (However)
A Bigger Pool
The myth is only demolished when the pool is continually raised. If we take that same 50 basis points and applied it to a pool of $1.8M the return is $9,000 and growing. Think of it this way. Both the pool and basis points have a limit, but the basis point limit will always be reached faster than the pool’s limit. The pool has a much greater potential for return.
Want to know more? Buy My Books!
The Argument to Automate – How Innovation Can INSPIRE Not Fire – click here to buy
The 8 Pitfalls of Accounts Payable Automation – click here to buy