5 key trends for small business credit and debit cards in 2020

January 10, 2020 11:50 AM

A strong economy in 2020 could lift the small-business card market, which is an important source of lending and payments for entrepreneurs and local merchants.

Such a trend also raises the level of payment complexity for those merchants, as young businesses struggle with multiple employees having access to the business checking account through newly acquired small business debit cards.

Commercial cards, which include small businesses as an audience, is a segment where American Express is a strong force and Visa’s traditional card dominance is moderated. While rewards may be the most important card feature in the consumer segment, small business owners are much more demanding.

“The difference is that small business owners want more features to control and monitor the additional employee cards on the account,” said John Cabell, director of wealth and lending intelligence at J.D. Power.

Small business credit cards are a popular source of funding for running and expanding nascent companies due to their flexibility of spend and ability to be used for everyday purchases. Unlike supplier financing which restricts an owner to making purchases from that just that vendor or small business loans or lines which often have spend restrictions and minimums, business cards allow owners to take advantage of spur of the moment purchases such as sales events and can be used for a wide variety of purchase types and amounts.

According to the CFPB’s report Key Dimensions of the Small Business Lending Landscape, small business credit cards provide an approximately 16% share of the $1.4 trillion small business lending market and is one of the most flexible loan products being used. Almost all other small business lending forms have significant restrictions for example equipment leasing, supplier financing, factoring and merchant cash advance can only be used with one vendor or product.

Sensing the need for flexibility of spend and desire to be used for everyday purchases companies such as Discover have recently been making significant strides in attracting small business owners. While Discover has shied away from the segment following the 2008-2010 recession due to high losses, it is actively seeking to change its position and reclaim lost ground since it launched the Discover It Business Card in 2018.

The importance of small business credit cards has grown over the last few years as more banks and card networks have sought to grow this lucrative segment, which often provides higher annual fees and card management costs.

Last October, Visa retooled its small business card portfolio by expanding credit card lines, adding travel insurance and product-warranty extensions and making it easier for business owners to integrate card accounts with accounting software.

In 2018 Amex launched a new metal-based Business Gold Card designed to reward small business spending in key categories and offer extra management tools. This followed an earlier move in October where it entered a partnership with Amazon to expand the use and acceptance of Amex cards by Amazon's small merchants. The focus on the small business segment has been a major strategic shift in Amex's business to make up for the loss of its Costco relationship back in 2015.

Based on data from a Mercator Advisory Group blog post, small business credit card purchase volume is forecasted to continue a multi-year expansion experiencing a compounded annual growth rate (CAGR) of more than 6% between 2017 and 2022. Over this five year period, small business credit card purchase volume is set to expand from $493 billion in 2017 to $686 billion in 2022 - an increase of almost $200 billion in annual purchase volume.

When it comes to using credit products to run and grow a business, small businesses look to a wide variety of providers — including banks, card issuers, vendors, factoring firms, merchant acquirers and leasing agents, just to name a few.

According to the Federal Reserve’s 2019 annual Small Business Credit Survey, 85% of small business owners applied for credit in the past year and 80% of owners used credit in some form to run their businesses.

The No. 1 credit product sought by owners was a small business loan or line of credit with 85% of applicants requesting one in the past 12 months. Only 73% of business lines and 67% of business loans applied for were actually approved, according to the report. The second most sought after credit product was the credit card, with 28% of applicants seeking to add one to their business. No other credit product broke through the 10% level of applicant requests.

However, when it came to regular use of credit products, especially for day-to-day expenses, the venerable credit card delivered strongly for small business owners, almost tied for first place. About 55% of small business owners reported using a business loan or line of credit regularly, while 52% reported using a credit card regularly. Only trade credit achieved greater than one in ten usage level, at 13% of businesses who used credit.

While Discover may be a recent re-entry into the small business credit card space, its card and supporting services are definitely resonating well with small business owners. According to J.D. Power’s 2019 Small Business Credit Card Satisfaction Survey Discover came out on top with a satisfaction score of 878 (out of a possible score of 1,000) followed by small business card powerhouse American Express which garnered a score of 862.

“Discover has a lot of energy and resources that they are putting toward the business segment, so it could be expected that they would do well. American Express is also very strong in this segment so it’s no surprise that they were right behind them in second place,” added Cabell.

The segment has fewer issuers due to the higher demands of infrastructure needed to serve business owners noted Cabell. For example, the segment requires sophisticated cardholder management systems that allow owners to turn on and off individual cards, set spend controls for certain channels such as online or ATM withdrawals. Since offering these capabilities requires significant investment, only about eight major small business credit card issuers exist, compared to the multitude of consumer card issuers.

The feature-rich set of capabilities that comes with small business cards are important in keeping small business owners in a portfolio, however, issuers best be aware that owners also view rewards and cost of capital as important.

According to the Fall 2019 Visa Small Business Outlook survey of 1,000 small business owners, approximately 23% had recently signed up for a new business card. Approximately 68% of the new signups were among small business owners actively hunting for a new card while 32% of the new signups were owners that were enticed through an attractive business card promotion.

Better credit card rewards were the top motivator to acquire a new card by almost half (47%) of respondents. The next three top motivators to acquire a new business card had to do with the credit features of the card — a better credit line (34%), a better APR or interest rate (33%) and an improved ability to finance day-to-day operations (29%).

The survey, conducted in the third quarter of 2019, reported that approximately one-third (33%) of business owners were actively planning to sign up for a new business credit card in the next three months. This is down from 38% in the second quarter of 2019.