As access to credit tightened in recent years, many small businesses were forced to use personal credit for business. This trend has created demand for a small business credit card offering, providing credit unions with an important growth opportunity.
The use of small business credit cards has increased dramatically since their introduction about 20 years ago. In a 2013 report, Mercator Advisory Group estimated that $6 of every $10 of small commercial and industrial loans was generated by business cards, with the expectation that as demand for credit increased, business cards stood to benefit. Consider that 79% of small business owners use credit cards as a source of financing, according to the National Federation of Independent Businesses. Small business owners are increasingly looking to unsecured credit, rather than traditional loans, as a faster, more convenient funding mechanism. Business credit cards enable small businesses to better manage cash position and expenses, to enjoy additional purchasing power through rewards offerings, and to benefit from real-time access to cardholder activity.
Few Options Available
Only the largest financial institutions once offered small business credit cards, leaving business owners with few options. Today, credit unions can use this tool to build broader relationships, encourage greater loyalty and establish an ongoing dialogue with small business members. Small business credit cards also enhance cross-selling opportunities and greater adoption of more services, resulting in longer, "stickier" and more profitable relationships.
Typically, small businesses have multiple cards per account, and use them as a credit line to extend cash flow, resulting in more high-volume purchases and greater spending. Because credit unions can potentially leverage existing consumer infrastructure, many will reduce operating costs and improve risk management measurements for small business credit cards.
Small business credit cards also present an opportunity to increase non-interest income and improve revenue streams. Interchange income is higher on commercial card bank identification numbers (BINs) than on consumer BINs. And business credit cards can command higher fees than those typically expected or permitted on consumer cards because they offer enhanced capabilities such as rewards programs, monitoring and reporting features, and customizable limits on spending and expenses.
Given the current economy, most small business members will likely continue to keep a tight rein on expenses. A robust card offering will enable them to track and monitor expenses with an eye toward controlling costs and ensuring the card is used exclusively for business spending. The card product can be designed to allow the business owner or other authorized user to view card activity online 24/7, restrict card use to certain expense types and set customizable spending limits by individual employee.
Credit Cards A Mainstay
Business credit cards can serve as a borrowing mechanism for business members in the absence of, or in addition to, traditional loans and lines of credit, while improving cash management. By aggregating monthly expenses and taking advantage of the typical 30-day billing cycle for credit cards, businesses can delay paying for a purchase for as long as 45 days in some instances, or even choose to pay over time. If the card offers a grace period during which no interest is assessed, the business member can use it as a short-term, interest-free borrowing mechanism.
To enhance relationships with existing business members and attract new businesses, credit unions need credit card solutions that directly respond to their specialized member needs. A small business card will require a different underwriting approach to accurately assess the credit worthiness of the company and may require unique features and services expected by the member, such as customizable spending limits and more detailed statements that categorize expenses. It's important to maintain pricing flexibility to ensure adequate coverage of the cost of capital and compensate for the level of credit risk posed by each member business. Keep in mind, too, that small business credit card solutions are most effective when used in tandem with a robust rewards offering, enabling business members to accumulate rewards based on increased card usage and spending levels. Features like these will help credit unions to fill an unmet need in the credit market and serve the unique requirements of business members.
Vikas Bansal is vice president and credit product leader for Fiserv. He can be reached at vikas.bansal@fiserv.com or 407-513-5559.
