Is This Card for Business Or for Pleasure?

  Despite issuers' attempts to attract entrepreneurs to business cards, many small-business owners still use their consumer cards for work expenses. CCM reviews some marketing efforts aimed at changing that.
  Holders of cards for small businesses use their cards more often than consumers do, and their average transaction is bigger than the average consumer's. Despite this, small-business owners often go unnoticed.
  In fact, business owners frequently put their business purchases on their consumer cards. Without a transaction filter to scan spending or a profiling program to cite characteristics unique to small businesses, issuers don't know who uses consumer cards to finance businesses.
  "They are tough to identify," Scott Strumello, associate with Westbury, N.Y.-based Auriemma Consulting Group, says of the estimated 23 million-plus small businesses in the United States. That estimate is based on business income reported to the Internal Revenue Service.
  "A lot of issuers don't have the experience to offer a small-business card to consumers who need it," he says, noting that credit reports may not identify a consumer running a small business. "You can't take it out of a textbook. It is learned."
  Some issuers do put heavy emphasis on the small-business market. Strumello points to American Express Co., New York, and Spring House, Pa.-based Advanta Corp. as the dominant players in small-business cards. "They have huge files of business banking records with 'DBA' (doing business as) classification," Strumello says.
  Advanta, which has 1.3 million cards in circulation, focuses exclusively on small businesses. And AmEx, as a closed-loop network that does its own processing, holds the unique advantage of owning all of the data related to its business customers' card transactions. American Express did not respond to requests for an interview.
  But direct-mail numbers show that other issuers court these faux consumers, too. In 2003, AmEx and McLean, Va.-based Capital One Financial Corp. mailed 30% and 26%, respectively, of small-business card acquisition pitches, according to Chicago-based Comperemedia. Advanta was next with 9%, followed by Chicago-based Bank One Corp. with 8% and New York-based Citigroup Inc. with 7%, according to Comperemedia's estimates based on captured samples of small-business card solicitations.
  For issuers to target consumer accounts that they suspect are being used for business purposes, they have to "convince small-business owners that they need to have a special small-business card versus just a card in their wallets they're using for various purchases," says Strumello.
  To do this, "the majority of top issuers focus on the added value of convenience, i.e., the card will assist in better management of business expenses, monitoring of employee spending and benefits from select small-business services," says Sara Kwiecien, research analyst at Comperemedia.
  Jean Burkhart, vice president of Visa Business at San Francisco-based Visa USA, says direct mail and other recent marketing efforts from business card issuers and trade associations inform business owners that issuers have developed products specifically for them.
  "Some business owners may feel they do not make enough expenditures in a month or on an annual basis to warrant the need for a business card," she says. "They believe their personal card is sufficient for their needs."
  Growth Market
  Approximately 70% of small businesses have fewer than five employees and less than $1 million in revenue, she says, but commercial card volume has grown more than 20% annually over the past few years. Many of these business owners clearly qualify for commercial cards.
  "Our small-business customers in general spend almost double of a typical consumer," says David Weinstock, chief accounting officer at Advanta. "Industry estimates predict that business credit card receivables will grow at a compounded annual growth rate of 10% to 12% over the next five years. This growth reflects the increased use of credit cards as a payment vehicle for businesses as well as the migration of business spending from consumer credit cards to business credit cards."
  For the traditional bank issuer, not a monoline like Advanta, the branch plays a huge role in that migration.
  "We employ two levels to tell if customers have the right product in hand," says Rob McKay, first vice president of small-business credit cards at Minneapolis-based U.S. Bancorp, the largest issuer of bank commercial cards. "First is the retail branch. Hopefully it is working with and making sure customers take advantage of the products we have. The retail branch is extremely important to us to move our products. Second is direct mail" sent to the bank's own customers and prospects on purchased lists.
  Savvy
  McKay says U.S. Bank's small-business customers "are pretty smart, pretty savvy. They make sure they look for the best opportunity"-a card that's easy to apply for, offers the same or better benefits than their personal cards and is competitively priced with consumer cards. U.S. Bank, therefore, has designed its commercial card applications to look nearly identical to consumer card applications. It also accepts them online.
  In nearly mirrored reward programs, the bank offers small-business converts from consumer to commercial cards the opportunity to earn free travel and merchandise so that the business owner feels no disadvantage in converting from one card type to the other.
  U.S. Bank's direct-mail efforts aim not only to inform small businesses about the bank's commercial cards but also to appeal to owners' sense of being in charge.
  Steve Harrison, vice president of product management and development at Purchase, N.Y.-based MasterCard International, agrees. "MasterCard research shows that small businesses are highly focused on control," he says. "Businesses expect vendors and partners to enhance their business' ability to maintain and even increase control."
  MasterCard a year ago developed a suite of products and services called MasterCard Working for Small Business to reinforce these benefits. The suite includes credit and debit business cards as well as rewards programs issuers can use, and online content. MasterCard also has applications such as MasterCard Smart Data Express, which helps small businesses organize, analyze and manage financial data from cards and cash transactions, and even assists the development of business plans.
  Searching for Patterns
  MasterCard research shows that 46% of small businesses use personal payment cards. "Over time, using a personal card for business expenses becomes the status quo," Harrison says.
  MasterCard Advisors, the association's consulting unit, works with member banks to educate those who influence small-business owners-accountants, bank branch managers, lawyers, industry associations and personal financial advisors-and identify hidden pockets of owners within the bank for targeted cross-sales of commercial services, including cards.
  "MasterCard Advisors takes a bank's retail banking and consumer card information, overlays it with information from its U.S. data repository, and looks for frequency of purchases, types of merchants shopped and other patterns of usage to profile consumers who may be entrepreneurs using their consumer cards as small-business cards," says Mike Carbone, vice president of corporate payment solution consulting at MasterCard Advisors.
  For instance, multiple small-ticket gas and convenience-store purchases point to an upstart courier business. MasterCard Advisors has applied the model to retail banks and monoline issuers for about a year.
  "We tend to homogenize small businesses," Carbone says. "As we get more refined, we hope to get to a point that we can score a small business and determine what kind it is so we can speak to it and know what its challenges and needs are. We want to have the capability of defining the business down to the microsegment."
  In a successful test of a customized small-business product, MasterCard and Wilmington, Del.-based issuer MBNA Corp. have achieved more than 50% penetration of Professional Golf Association players with the PGA Tour Players MasterCard, a business card with benefits specifically for pro golfers. Two years ago, the PGA approached MasterCard, a sponsor of the Tour since 1995, with a list of athletes' needs and 20 representative players to assist in the design of a niche product.
  In January 2003, the two associations and MBNA, the second-largest issuer after Citigroup, introduced players to the cards through placement of locker-room marketing tables at tournaments. Now 200 out of a total of 320 PGA players carry the card.
  "PGA Tour is a little unique in the world of professional sports," says Sheila McLenaghan, vice president of marketing for the PGA. "All of our players are independent contractors. There is no team."
  As such, the golfers take responsibility for their own travel arrangements and all expenses. Most used consumer cards to cover their purchases.
  "I kept two consumer cards, one for business and one for personal expenses," says Tim Clark, a player with the Tour since 2001 and a professional golfer since 1998.
  Tax Returns
  For six years, he fumbled to change cards between dining and shopping for souvenirs but also chafed in meetings with his accountant when he had to turn over expense receipts itemizing them not only by category but by geography. Some pros file as many as 30 state tax returns, depending on where they compete and what they win.
  The PGA card's Smart Data Express feature sorts data in myriad ways, including by state, tournament, leg of a trip and expense type. It also transfers information into several financial-management software packages such as Quicken and Microsoft Money, and functions in 12 different languages, a godsend to the increasingly international PGA Tour membership.
  MasterCard added a high-end restaurant component to its standard small-business rewards product. MBNA, meanwhile, is working with individual players to adjust their credit lines or payment schedules to reflect their financial needs and heavy travel schedules.
  U.S. Bank's McKay says "we absolutely need ongoing marketing and advertising" to inform business owners about what specialty cards can do for them.
  MasterCard's Carbone, meanwhile, recommends that banks appoint "holistic relationship managers" to handle cross-over customers making the leap from pure consumer to entrepreneur. "You'll see these coming down the road," he says. "Some of the banks now are developing this role."