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January 12, 2010

Small business spending on the rise

A new report from US payment consultancy Aite Group highlights the growth potential of small business credit cards despite difficult economic circumstances 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.

By Verdict Staff

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 consumers

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 payments.”

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 opportunity

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 cheques.

“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 fees.”

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 help.

Flexibility and convenience of cards

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 bills.

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.

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