To increase acceptance of its cards and get a piece of the largely untapped small-business market, Discover Financial Services LLC will announce today that it will start offering a credit card for small businesses.
Cardholders will be able to write checks against their credit lines to pay suppliers and vendors that do not accept Discover cards. The company will not charge a fee for writing or accepting the checks, which have the same grace period and annual percentage rate as card transactions. However, the rewards for card purchases will be richer than those for payments made with the checks.
"We will actually get the merchant names, the vendor names who currently don't take credit cards, and then ... approach them and get them on our platform," Sastry Rachakonda, the director of the Morgan Stanley unit's business card division, said in an interview last week. "This, we believe, will put us in the leadership position in the small-business space."
Discover has the lowest acceptance and sales volume of the four major card networks.
Mr. Rachakonda and Roger C. Hochschild, its president and chief operating officer, said offering a "unique" product to penetrate the small-business market was a logical choice, because only 10% of small businesses use plastic.
Discover spent a year surveying small businesses, and the card's features are tailored to their needs, said Mr. Rachakonda, a former American Express Co. executive.
The card will offer online quarterly and annual statements by spending category, and customers will be able to set customized spending limits for each of their employees.
The cash-back rewards for card purchases include 5% on office supplies, 2% on gas, and 1% on all other purchases. Mr. Rachakonda said the bigger rewards are for purchases small businesses make most often.
The check option is important to small businesses, because many suppliers and vendors do not take credit cards, he said.
Discover can offer the features because it will issue the card directly, he said.
"The small-business market has been so far underserved … because it's been catered to by players who are catering to prestige or by people who've taken their consumer card and put a 'business' label on it," Mr. Rachakonda said. "There hasn't been anyone who's gone in there to learn what the core business issues are and understand the market."
Visa U.S.A, MasterCard International, and Amex have offered cards for small businesses for years, but Discover executives said it is not too late to enter the market.
"It's pretty hard to say you're a latecomer when 90% of the market is wide open," Mr. Hochschild said. "I think we wanted to make sure we can come in with a superior product that leverages a lot of our competitive advantage."
Howard K. Mason, an analyst with AllianceBernstein Holding LP's Sanford C. Bernstein & Co. LLC, said card companies have become "excited" about the small-business market and learned to treat it differently than the consumer market.
"By segmenting what was essentially an amorphous market … [with] consumers on the one hand, small business on the other, and then using that segmentation to drive product designs that appeal specifically to small businesses, you get better usage and activation," Mr. Mason said.
American Express' Open card for small businesses offers cash-back rewards for purchases from vendors that small businesses often use, like car rental companies.
