Targeted efforts to promote the usage of
payment cards by small businesses could reap huge rewards for
issuers, according to a new report from Aite Group, and could
provide a rich stream of data for issuers to capitalise on.
Charles Davis reports.
In today’s hypercompetitive small business
banking market, every opportunity to gain an edge counts. A new
report from US payment research firm Aite Group highlights just
such an opportunity, calling on US financial institutions to use
small business credit card payment behaviour as a way to segment
small businesses and gain insight into the likely size and product
behaviour of the segment.
The report – based on an online survey
conducted in November 2007 of 303 US small businesses – indicates
that segmenting small business customers is a challenge for some
financial institutions. The potential for such targeted efforts is
huge, according to the report.
Small businesses, which account for more than
50 percent of the United States’ $13 trillion-plus non-farm gross
domestic product and represent 45 percent of total US private
sector payroll, are a growing contributor to the cash management
businesses at many banks.
Due to the sheer number, range of sizes and
varying industries of small businesses, segmenting them in order to
determine product needs and target marketing messages is a sizable
challenge to bank marketers. As a result, most financial
institutions segment small business customers by revenue.
Unfortunately two problems exist in this
approach. First, revenue is not always a good predictor of
financial product need among small businesses, and second, many
banks don’t have accurate revenue data on either small business
prospects or existing customers.
As a result, many financial institutions
struggle to effectively target small businesses with offers for
appropriate cash management products and services. An alternate way
to segment the group may lie in whether these businesses make
purchases using small business credit cards, personal cards or both
types of cards. The survey results show that the type of card used
serves as an indicator for the business’ size, annual sales, habits
and preferences.
Another problem is that revenue data about
small businesses often doesn’t exist, or isn’t readily available
within a bank’s systems. As one executive at a top 10 bank
indicated: “We know next to nothing about the revenue size of our
small business customers. We set them up in the system when they
open an account, and the branch manager may or may not get that
information. It is up to the branch banker to classify the
customer. Even after the initial meeting, we do nothing to track or
try to identify this information from them.”
When revenue data (and other data about a small
business) does exist, it’s often inaccessible to the persons in the
bank who could use it the most. The focus at the branch is on
gathering, entering and updating customer information instead of
learning more about customer needs and cross-selling, and asking
multiple times for this information may irritate customers who have
already provided information to the bank for credit purposes.
Business credit cards offer a better way to tap
information about small business customers, the report said. The
report found three predominant ways that small business owners use
credit cards to pay their bills, each with a key link to
understanding the market. Slightly more than half (51 percent) of
small businesses predominantly use a business credit card to make
purchases. While the card may be used for both business and
personal expenses, the account is carried by the business, rather
than by the individual.
Another 24 percent of respondents use their own
personal credit cards for their business needs. The card may be
used solely for the business, but the card account is under the
individual’s name, not the name of the business, and resides on the
financial institution’s retail platform. A quarter of small
businesses use both a business credit card and a personal card to
make business purchases.
The report found that the type of card a small
business uses is an indicator of the number of employees and the
annual sales of that business – the key indicator on which the
small business customer base is segmented. Small businesses using
only personal credit cards to make business payments typically have
far fewer employees than those using small-business credit cards.
As a group, 85 percent of personal card users have five or fewer
employees. Among these companies, 84 percent have annual revenues
of less than $250,000, while just 5 percent have revenues in excess
of $1 million.
On the other hand, more than 40 percent of
business card users, whether using it as their sole card or used
alongside a personal card, have 11 or more employees.
More than 55 percent of business card users
have annual revenues in excess of $250,000, while 32 percent of
them have sales in excess of $1 million. Dual card users are very
similar to business card users, with 51 percent having revenues in
excess of $250,000 and 33 percent in excess of $1 million.
Identifying the type of card a customer carries
can enable a product offering to be specifically targeted to the
customer’s business-specific needs. This offering can easily be
presented via an online delivery channel, e-mail or even at the
branch through a banker’s terminal. Reaching out to customers with
a targeted solution reveals a bank that understands their needs,
positioning the financial institution in the role of a trusted
“To achieve this, the most critical element of
this process is for product management, marketing and branch sales
staff to work together,” the report said. “By itself, grouping
customers by card type does little to support business bankers or
help them better serve customers during the busy lunch hour.
“Likewise, identifying customer types and
segments to develop targeted product offerings and sales approaches
has minimal impact if it isn’t communicated to business
“However, if product management and marketing
groups are able to identify the different types of credit card
users, develop segment-specific offerings and communicate this
effectively to business bankers, the cross-selling opportunities
for these valuable customers will significantly