Commercial Cards: A Primer for Consumer Card Lawyers

For a consumer-card lawyer, working on commercial card agreements and disclosures (see the examples linked here and here) is somewhat like learning a foreign language. Many opportunities arise to use what you know, but many “false friends” require special care. Summarized below are some of the more notable differences and similarities:

• Typology/Utility: Consumer cards generally are either proprietary (i.e., non-retailer-branded) or partnership (i.e., retailer-branded), and partnership cards are either private-label cards or co-branded general purpose cards. All these cards are to be used primarily for personal, family or household purposes. By contrast, commercial cards generally are either purchasing cards, which company employees can tender in payment for office supplies and similar goods and services; fleet cards (a special type of purchasing card for drivers of fleet vehicles); travel/entertainment cards; or “one cards,” which are usable for both purchasing and travel/entertainment. (The networks also offer other, specialized types of commercial cards.) Often, commercial card program agreements will give the issuer or obligor the right to restrict use of the cards to selected MCC codes.
• Obligor/Underwriting: The obligor on a consumer card is typically a natural person. On a commercial card, however, the obligor is typically a company or a governmental entity. (Often, the employee using the card is jointly and severally liable with her employer.) Accordingly, the underwriting of commercial cards is far different from the underwriting of consumer cards. Also, a commercial-card program agreement typically requires extensive financial disclosures from the corporate obligor, as well as financial covenants. In this respect a commercial credit card agreement resembles a commercial loan agreement (or a consumer-private-label agreement, in which the issuer is acting as a one-card processor for the retailer partner), but differs from a cobrand agreement. Commercial card program agreement provisions regarding the issuer’s underwriting discretion are no less controversial than in consumer-card agreements, however.
• Regulatory Framework: Many provisions of law, regulations and network rules that apply to consumer cards -- for example many provisions of Regulation Z – do not apply to commercial cards. On the other hand, provisions such as Section 12(a)(1) of Regulation Z (regarding unsolicited issuance) remain applicable. Moreover, commercial cards are subject to a range of regulatory provisions that generally do not apply to consumer cards – for example, state-law provisions that would be preempted in the consumer context, and provisions regarding corporate or government contracting that apply because of the nature of the obligor. These differences in the regulatory framework impact every aspect of a commercial card transaction: the program agreement (which, for example, may include a company representation intended to shift to the company the risk of complying with Section 12(a)((1)); the cardholder disclosures; and the portfolio purchase agreement, which among other things will include different sellers’ representations regarding regulatory compliance.
• Data: The cardholder of a commercial card is not a “consumer” covered by the GLBA privacy regulations. Companies and governments expect very detailed data regarding their employees’ use of commercial cards, and the specification and pricing of these data elements are important issues in the negotiation of program agreements. (A key term in this area is “Level III” data, which denotes a high level of detail, such as – with respect to a travel/entertainment card – hotel folio information including minibar and health-club charges.) The availability of such data is also a major differentiator among networks.
• Economics: As in a consumer-card program agreement, a commercial-card agreement provides for the obligor’s payment of a range of fees and charges, and the specification and control over changes to these fees and charges are highly controverted issues. However, a commercial-card program agreement, unlike a consumer-card agreement, also typically provides for the issuer to pay “rebates” to the company or governmental entity. The rebates may be indexed to aggregate charge volume, per-card charge volume, individual ticket size, speed of payment, or other factors or combinations of factors. Rebates may be paid in arrears or pre-paid.

This summary merely hints at the many challenging and fascinating features of commercial card program agreements and disclosures. We look forward to addressing other aspects of these documents in future articles.