Analysts See Big CU Market in Cards for Small Biz

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One of the biggest and potentially most lucrative credit card markets is still largely untapped, and some are saying credit unions are well positioned to take advantage of it: small business credit cards.

"There are about 16 to 17 million small businesses (defined as those with 10 employees or fewer) in the country, and only about 7% of them use credit cards for purchases," said Glenn Lee of TNB Card Services. "So this is huge opportunity for credit unions."

Citing a different set of numbers, in St. Petersburg, Fla., PSCU's Stephen Thompson agreed. "According to industry statistics from CUNA, there are 10.3 million small businesses with annual revenue of $10 million or less, and that is growing about 5% to 10% annually," he related. "We currently have 62 credit unions offering a small business credit or debit card, and I think there is an ever increasing interest in offering a small business suite of services. This is becoming an increasingly attractive market for credit unions."

In fact, the CUNA statistics from September 2003 indicated that of those 10.3 million small businesses, 27% of the business owners are already members of a credit union, Thompson noted. "The small office/home office segment is growing," he said. "About 14% of small office/home office businesses say their primary financial provider is a credit union. This is a great way to deepen that relationship."

A Better Fit

And in a world where convenience is king, credit cards are an important offering. "The business card fits better than most of the other tools available, like unsecured loans and lines of credit," Lee suggested. "This is a product that enables business owners to have multiple cards issued to the business owner and employees with individual embossing. As with our other programs, credit unions can set their own fees and rates. They can add rewards and discounts if they want."

With more credit unions delving deeper into member business loans and other business services, interest in a small business credit card offering is high, not only because of member demand for such a product but also because of the potential benefits to the credit union.

"The card associations decided to offer a significantly higher interchange on business cards than on consumer cards. They saw less risk with these cards, and they want to entice card issuers to offer the cards," Lee explained. "You typically see more activity on a business card-both in terms of greater number of transactions and higher amounts on those transactions-than with consumer cards. And they're a huge loyalty driver."

With a higher interchange and bigger and more transactions, the potential income is greater. "For example, the average transactions per month on the platinum card, which is typically the highest of the consumer cards, is 4.25," Lee observed. "It's 6.5 per month for business cards."

While part of that is because most people have multiple personal credit cards but just one business credit card, it's also because of the greater transaction levels on the business card.

Of the small businesses that do use credit cards for purchasing, about 33% are using their personal cards for their business spending, Lee said. The trick, then, is getting those business owners to convert to a business card.

"The small business cards do earn the credit union a higher interchange fee, but they have to be designated as a business card, not a consumer card that is being used for business expenses," Thompson pointed out. "You have to look at the suite of products you are putting together and how to price the product. One feature that may help motivate members to convert to a business card is that you get an enriched, enhanced reporting system."

Separating Expenditures

Lee agreed, adding, "The business card allows them to separate out their business expenditures from their personal spending, and it gives them an easy way to track those expenditures. And the credit card offers much more convenient access than unsecured loans or lines of credit, which are typically tied to a checking account or require a trip to the lobby to access funds."

It also offers employers who wish to empower employees to make business purchases to do so in a fashion that allows the employer an easy way to track employees' spending, and employers can put restrictions on certain types of transactions on the sub-accounts as well as protections for the employer if the employee misuses the card.

Like any type of loan, small business credit cards require good underwriting, Thompson said, but if a credit union has already rolled out member business loans, the credit card product isn't any different.

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