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This story appears in the April 2009 issue of Cards&Payments.
Not surprisingly, financial institutions and card networks favor small businesses shifting cash and check payments to commercial credit cards, which can help cement relationships with customers. They also generate interchange revenue, which can run as high as 2% of the sale. Merchant acquirers pay interchange to card issuers to cover their cost to provide card programs. They then pass the expense on to their merchant clients as part of the discount rate.
However, recipients pay much more for business-to-business card payments than they do to accept checks.
For example, for a $50,000 check transaction, both the buyer and the seller pay between 25 cents and 50 cents to initiate and accept the payment, says Judson Murchie, an analyst with U.S.-based Aite Group. But for a card payment of the same amount, the buyer pays nothing (and often receives a cash rebate of about 2%), while the seller could pay $1,000 or more in interchange and other fees.
Despite that drawback, card issuers and networks say small and midsize businesses are driving strong growth of commercial cards for B2B payments. And analysts say some small businesses tend to rely more heavily on commercial cards as financing tools to manage cash shortfalls during economic crises.
In North America, the use of commercial cards among small and midsize businesses is steadily replacing check payments because cards are more efficient, says Kareem Chouli, director and head of commercial solutions in Canada for Visa Inc. "Switching outgoing payments from checks to commercial cards is a convenient way for many small businesses to make the shift away from paper, especially during challenging economic conditions."
Larger companies also are shifting more B2B spending to commercial cards because of the enhanced transaction data Visa offers. "We are continually adding new vendors to the list of suppliers that provide enhanced data to commercial card customers, Chouli says. Enhanced commercial card data provides "better visibility about exactly who is spending what within organizations."
U.S.-based SunTrust Banks Inc. forecasts growth over the next few years in commercial card use among small and midsize businesses, which are its core customers, says Robert Blair, SunTrust senior vice president, commercial card services. SunTrust is one of the nation's fastest-growing issuers of Visa-branded commercial cards, partly because of the intensive customer service and consulting the bank provides to smaller businesses about how to manage B2B payments with commercial cards, he says.
"As the pressure mounts to reduce check usage, we are showing small businesses how to shift more of their accounts-payable processes over to commercial cards," Blair says.
Despite the revenue opportunities commercial cards represent for issuers and acquirers, SunTrust also is exploring the possibility of offering simplified ACH-based B2B-payment services to its small-business customers, alongside cards, says Nick Alex, SunTrust senior vice president and director of product management for treasury and payment solutions.
"We are laying the plumbing now for systems that will provide our small-business customers with a full range of integrated electronic-payments options, including ACH payments," he says.
Though Alex would not provide further details or a timeframe, he says the goal is to provide end-to-end payment-consulting services to small to midsize businesses. "We plan to be payments integrators for our customers and for all types of payments, not just cards," he says.
Such an approach could be crucial to banks' survival. Though commercial cards are relatively convenient and provide good transaction information for smaller businesses, their costs are "way out of balance" with all other payment vehicles. As a result, many sellers are unwilling to accept them, Murchie says.
