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Issuers seeking growth opportunities in the saturated United States credit card market are setting their sights on the small-business sector as the next frontier for generating new accounts.
American Express Co., Discover Financial Services, JPMorgan Chase & Co. and Wachovia Corp. are among the issuers stirring up the marketplace with new card programs that offer faster ways for small businesses to earn rewards and rewards programs tailored for certain types of small businesses. And the newest twist to help small-business owners control expenses and manage their capital is to enable them to use debit and credit cards to pay their bills.
The flurry of activity means the small-business card niche quickly is becoming a hotbed of competition and product innovation, as issuers jockey for leadership in one of the few segments that shows sizable growth potential.
"The [small-business] credit card market, while smaller, is growing at rates well in excess of consumer cards," says Frank Martien, a partner with Linthicum, Md.-based First Annapolis Consulting. "Such growth, coupled with historically lower charge-off rates, ... has attracted significant marketing and product-development investment."
Visa Inc., MasterCard Worldwide and American Express Co. each offer at least six different basic small-business card programs that issuers may further customize.
One of the basic reasons issuers are eyeing the small-business credit card sector is the widely cited fact that about 90% of all small-business payments are made using cash or checks. Analysts say credit card issuers are eager to convert more of those transactions to plastic.
Noting the low level of small-business spending allocated to credit cards, Gordon Smith, CEO of Chase Card Services, told analysts earlier this year that there is a significant growth opportunity in the small-business market by "taking from our competitors but also from penetrating [routine business spending], which is not on plastic."
Chase offers a suite of small-business credit card products, including some such as the Chase Contractor Cash Rewards Visa card that are tailored to specific industries. The issuer would not provide details of its plan to capture more cash-and-check spending with small-business credit cards.
Niche Is Growing
The small-business card market boasts about 17 million credit card and 9 million debit card accounts, analysts estimate. But this niche is growing, with small-business card-spending volume increasing by about 27% annually, according to the most-recent research from Mercator Advisory Group, a Waltham, Mass.-based consultancy. The estimated purchase volume of small-business credit and debit cards carried by the four major card networks was about $300 billion at the end of last year, Mercator says.
"Small-business credit card volume is on the rise as issuers move more payments from checks to cards, and we anticipate significant growth opportunities for issuers within the sector," says Ken Paterson, Mercator director of credit advisory services.
A typical business ripe for a small-business credit card is one with $10 million or less in annual sales and one to a dozen employees, says Michael Carbone, global practice leader for commercial consulting at MasterCard Advisors.
Monthly spending for a small business can be erratic, but Carbone says it is common for a small-business credit card to generate five to 10 times the monthly spending of a consumer card. That increased spending can equate to higher interchange revenue, he says.
"An ideal scenario for an issuer seeking growth might be a business with three or four employees and about $25,000 a month in spending for equipment and supplies," Carbone says. "These are construction firms, landscape companies, import-export businesses, and any other type of operation that buys and sells a lot of goods. Many of these companies are still doing business by invoice, not credit card."
Card issuers also view tinier operations–"micro businesses" with annual sales of less than $1 million and no more than two employees–as a big target market. Carbone says as many as 30 million such companies operate in the U.S., and the vast majority use a consumer credit card for business-related spending of up to a few thousand dollars per month.
"Credit card issuers are going after small businesses of all sizes, promoting the benefits of separating business and personal spending for tax purposes and of using credit cards to manage cash flow instead of invoices and checks," Carbone says.
Just as credit lines are bigger, so are the risks an issuer assumes with a small-business credit card. So far, however, small-business has not been prone to losses higher than those of consumer cards, although losses can spike when a small business folds.
When extending credit to a small-business owner, many issuers examine the company's track record and Web site. They also examine the business owner's personal credit record.
Issuers also consider lists of bank-deposit customers and consumer card portfolios fertile territory for finding small-business customers, Carbone says. "Many small-business card prospects are consumer card customers who may not be aware of business-specific card products," he says.
An issuer raiding its own consumer card portfolio to find "new" small-business card customers may sound like cannibalization. But it could be a net win for the issuer, says Paterson. Adding a small-business card to an existing customer relationship can generate greater loyalty, while the additional card can become the source of new fees and revenue, he notes.
Many of the small-business card programs major issuers offer are still refreshingly distinct from one another, but analysts say duplication of successful products is common. No-annual-fee cards for small businesses offering double points for travel purchases, once somewhat unusual, are ubiquitous today.
American Express claims to be the industry's leading issuer of small-business credit and charge cards, although the company would not say how many small-business cardholders it has.
"Small-business cards are a fast-growing area for American Express. And while we're seeing a lot of competition from other issuers now, I'd say most other issuers just slap the word 'business' on a consumer card offering, while we offer cards that are completely different from our consumer card products," says Raymond Joabar, general manager of credit card marketing and strategic partnerships for Open, AmEx's small business card-marketing division.
AmEx's core small-business products include its $125-a-year Business Gold Rewards charge card with its upscale Membership Rewards program, and its no-annual-fee SimplyCash Business and Blue for Business credit cards that provide discounts on business services such as FedEx (rewards-program membership is optional).
In September, AmEx went in a new direction with the launch of its Plum card, which is designed to encourage small-business owners to shift payments from invoice-and-check processes to credit cards. The lure was offering favorable early-payment terms similar to those businesses typically grant to one another, Joabar says.
Cash Flow Control
Plum customers can receive up to a 2% discount for paying their charge card bill in full within 10 days of the end of the billing cycle, or they can opt to pay 10% of the balance due and defer payment on the remainder of the balance, interest-free, for up to 60 days. Other payment options are also available with the card.
"The Plum card echoes the 2% discount available to businesses under traditional trade terms, which is our way of showing small businesses how they can gain more control over their cash flow and capital by using a credit card for regular expenditures," Joabar says.
Plum's target customers are businesses with high monthly spending for supplies, such as those that buy wholesale goods for manufacturing or resale; information-technology providers; and retailers, he says.
Small businesses have responded favorably to the Plum card, Joabar says, declining to reveal data to back that contention.
Discover ventured into the small-business sector halfway through 2006 with its Discover Business card. The card offers cardholders 5% cash back on office supplies, 2% back on gasoline and 1% back on all other purchases. Last year the company added the Discover Business Miles card, which offers cardholders two miles per dollar spent on gasoline and travel purchases and one mile per every other dollar spent.
When Discover's first small-business card debuted, it offered business owners the ability to use a Web site to raise or lower the spend limit of employees using the company card at any time. The feature was somewhat unusual at the time but other issuers, including Bank of America Corp., now offer it on their MasterCard small-business cards.
The Discover Business card primarily targets startups and businesses with fewer than five employees, and it is designed to be more practical than prestigious, says Sastry Rachakonda, director of Discover's business cards. "Some other issuers focus on prestige with their small-business cards, but we target 'Main Street' types who are more interested in benefits than in prestige," he says.
Ironically, although Rachakonda says Discover shares the goal of other issuers–to capture more check-based business expenditures– the company is forced to bridge one of its own marketplace gaps with checks.
"When a cardholder's supplier doesn't accept Discover, we provide a book of checks that works just like the credit card, at the same interest rate," Rachakonda says, adding that the "purchase checks" have generated a significant amount of spending.
Although Discover does not disclose the number of its small-business card customers or total spending in the segment, Rachakonda says Discover Business Card is one of the company's most-successful products. "We growing fast, both through new customers and balances."
Response To Demand
Wachovia Corp., which re-entered the credit card market in 2006, added small-business credit and debit cards last year in response to demand, says Bob Ryan, director of the company's card services division. Through the Wachovia Possibilities rewards program, cardholders can combine the points earned through their consumer or small-business credit card into one account, which has proved popular with many customers, Ryan says.
"Small-business owners want flexibility, whether it's in the way they earn rewards or the way they manage cash flow with a credit or a debit card," Ryan says. "We see an enormous growth opportunity in the small-business card sector."
As the search for profitable new credit card customers intensifies, more issuers are likely to cultivate the small-business sector. If rewards and incentives become compelling enough, a larger share of small-business payments may permanently migrate to cards. CP
