Since the economic slowdown, banks large and small have searched for new revenue sources, but for many of them small business credit cards remain an untapped opportunity.
Potential fresh market for some banks
There are about 28 million small businesses in the U.S., representing greater than 99% of U.S. firms, according to Small Business Administration figures. While many banks do offer small business credit cards, they don’t necessarily prioritize them effectively.
In fact, small business credit cards continue to reside in the “gray” space between retail and commercial banking. Many banks view their credit card portfolio in aggregate and do not evaluate consumer versus small business program profitability discretely. In effect they fail to understand the profitability of small business credit cards on a standalone basis.
A product small firms want—and use
And yet, as banks continue to search for new revenue small business credit cards represent an attractive and profitable opportunity. According to the latest available National Small Business Association (NSBA) survey, 37% of small businesses said they use a credit card for their financing needs.
These cards not only are important to small businesses, but they are valuable to banks as well. They offer strong revenue potential and can help solidify banking relationships.
With interest rates still hovering around all-time lows, small business credit cards are an opportunity to generate healthy interest and fee income. The same NSBA survey indicates that 50% of small business credit card customers revolve balances and these balances are typically high—24% of the survey sample reported carrying a balance in excess of $10,000.
Additionally, spend volume tends to be higher with small business credit cards because they are used for business purposes, and the higher spend coupled with higher interchange rates provides solid interchange earnings.
Small business credit card interchange rates can be as high as 2.4% versus 2.1% for top-tier consumer credit card products.
Another plus for banks is that small business credit cards do not fall under the CARD Act, which placed significant pricing and regulatory controls on consumer cards. With increasing regulation, higher compliance costs, and heightened competitive pressures on consumer card products, there are tangible benefits to placing a stronger emphasis on small business credit cards.
Delving deeper into small business credit card transaction data also gives banks access to a treasure trove of customer information. This usage data can provide insights and learnings for better relationship management, marketing, and risk management.
Making the gearshift to realize the potential
Succeeding with small business cards requires banks to recognize that small business cardholders have very different needs from consumers. It requires investment in a specialized commercial card processing system that can cater to small business requirements. This means customized parameters, enhanced reporting, and specialty account and portfolio management solutions.
Additionally, marketing, rewards, and value proposition needs to be custom-tailored to the small business segment. And, finally, emphasis needs to be placed in mobile and digital as well as in providing analytics at the company, account, and card level.
Building a strong credit card program, as part of an overall emphasis on the small business segment, requires commitment, investment, and focus. Indeed, the starting point is a robust small business banking program that encompasses deposit, lending, and payment solutions.
From a segment opportunity perspective, the business credit card should be viewed as the “tip of the spear.”
About the author
Ali Raza is a principal and payments leader at CCG Catalyst Consulting Group, working with clients on their strategic, business, and operating issues. He brings deep subject-matter expertise in retail banking, card issuing, merchant acquiring, and emerging payments. CCG Catalyst is a leading bank consulting firm providing strategic direction and focused guidance for banks in North America.
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