A new report from US payment
consultancy Aite Group highlights the growth potential of small
business credit cards despite difficult economic circumstances. As
Charles Davis reports, the
decline of cheque usage is opening up an opportunity for issuers to
increase penetration and spending.


In the midst of a lingering recession that
has hit small businesses especially hard, small business credit
cards remain a growth opportunity, perhaps because of the tough
economy, according to a recent report from US payment consultancy
Aite Group.

A survey Aite conducted in July 2009 concluded
that 20 million small US businesses spend $4.8 trillion a year,
representing 23.8 percent of all commercial spending, but credit
cards account for just a fraction of that market – 4 percent of
business-to-business transactions among small companies.

Aite estimates that if small business credit
card spending increased from its current 4 percent market share to
14 percent of small business spend, interchange revenues from small
business credit card usage would increase by more than 300 percent,
representing more than $10 billion in new revenue.

Small businesses treated as

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The key lies in filling the ‘no
man’s land’ that small businesses have fallen into between the
retail consumer and Fortune 500 companies. Small businesses
typically are run by their owner, and reflect the owner’s financial
habits. In fact, the survey found that as many as 25 percent of
small businesses use a personal account to manage their business,
and bank most often at the branch. For these reasons, banks tend to
align small businesses more closely with the retail side of their
bank than the commercial side – a mistake given the more lucrative
services available on the commercial side of the bank.

“Despite the shared tendencies with the retail
segment, small business payment behaviours often more closely
mirror those of larger companies, especially when it comes to
cheque usage,” the report said. “While consumer retail payments are
highly electronic, small businesses tend to be more prone to cheque

Thanks to accounting needs, small businesses
still rely heavily on cheques, as credit card payments today
require more time and effort than they are worth – some business
owners told Aite that in order to reconcile a credit card payment,
they have to print out a dummy cheque reflecting the payment, enter
it into the accounting system, then void the cheque.

Newer credit card reporting systems are easing
the burden, and the report found that better technology, coupled
with fears about security and the increasing popularity of online
procurement, will drive greater small business card growth in the
near future.

Aite estimates that small business credit card
spending is currently growing about 25 percent per year – but
remember that figure is based on only 4 percent of total small
business spending.

Declining cheque usage an

To really begin to capture
meaningful spending volume, providers must move beyond the
“low-hanging fruit” presented by declining retail cash and cheque
transactions and begin to take some of the larger cheque payments
out of the system.

That will happen, Aite said, as declining
cheque volumes and the difficult credit environment combine to
place real pressure on businesses to embrace card-based payments.
As cheques decline, Aite believes there is a real opportunity for
issuers to focus on the value cards offer when compared to

“For example, smaller card issuers might focus
on educating customers on the security of credit cards compared to
cheques – especially for online purchases – or how credit cards can
be leveraged as a way to provide working capital during short-term
gaps,” the report said. “Another strategy may be to remind small
businesses that cheques often come with a per-item fee for each
cheque written, while credit cards do not incur transaction

Cheques account for about 65 percent of small
business transactions, while cash and other types of payments
account for 31 percent of transactions. Bank of America, Citigroup,
JPMorgan Chase and Wells Fargo together account for an estimated 36
percent of small business credit card spending, while American
Express accounts for 38 percent and other banks, including regional
and community institutions and credit unions, account for the
remaining 26 percent share, Aite said.

Given that those percentages reflect a
fraction of all small business spending, there is ample opportunity
for new entrants to capture meaningful market share. The bigger
issuers control a large share of a tiny market at the moment, and
small business customers are unusually loyal to their primary
institutions – so offering small business banking clients a card
and reporting software is a compelling offer.

The declining cheque environment presents a
real opportunity for card issuers to increase their small business
issuance, the report said, but other, more obvious advantages also

Flexibility and convenience of

Respondents told Aite that the
number one reason they use credit cards is because they are easier
and more secure to use than cash or cheques. In a particularly
time-pressed segment of the market, ease of use is no small matter.
Some 72 percent of small business owners said credit cards are
“easier and more secure” than cash or cheques, while 58 percent
said they prefer credit cards to other instruments for paying

When selecting a small business card,
respondents told Aite that they worry far more about interest rates
and fees than about rewards levels. As fees and interest rates vary
little from issuer to issuer, small businesses are much more likely
to make their decision based on other criteria. Nearly twice as
many small businesses rated the transparency of the contract and a
high level of customer service as critical or very important to
their decision.

Small businesses do value rewards – just not
as highly as value and service. When asked which reward scheme they
prefer, 37 percent rated cashback rewards as their most preferred
type of rewards – three times as many number one ratings as any
other category. In total, nearly half of all small businesses gave
cashback a number one or two rating.

Aite is confident that if issuers more
aggressively pursue the small business market, it could reach 14
percent of small business spending in relatively short order.