The Small Business Credit Card Challenge: Capturing The Large, Messy Opportunity

Abstract

NEW RESEARCH REPORT BY MERCATOR ADVISORY GROUP

This report explores the challenges of small business credit card issuing, a key strategic segment for card issuers seeking to grow payment volume at rates above overall industry averages and to add to their portfolio outstandings. The attractiveness of the market to issuers is high for a number of reasons:

• The payment volume of small business credit cards is growing at twice the rate of credit cards overall.
• Small business credit cards benefit from superior commercial card interchange and higher payment volumes per account than consumer cards.
• The small business segment is dynamic, with new prospects emerging continuously, and businesses growing in their financial needs.
• There is a major opportunity to leverage existing small business relationships, as well as prospecting within retail consumer credit card portfolios.

Key challenges of serving the market, as the report examines, are addressing the needs of the surprisingly complex sub-segments within the small business market, which include sole proprietors through firms up to 100 employees. For many large banking institutions, it is also a challenge to capture the opportunities embedded in their current retail credit and small business debit portfolio' s.

The small business segment may be messy from a segment viewpoint, but tools and techniques available to issuers to address the opportunity are improving, as the report illustrates. Rapidly growing data repositories and advanced analytic tools are helping issuers to identify prospects both at home (in debit and retail credit files) and through direct marketing.

Understanding the emerging role of small business debit in the segment is critical. Ken Paterson, Director of the Credit Advisory Service at Mercator Advisory Group and the author of this report comments that; "An important strategic issue for the future is the influence of debit in the small business market. Seemingly little attention has been paid to debit in this segment, yet there are about 8 million small business debit accounts in place - perhaps one of out of three small businesses. Just as debit growth is affecting credit card growth on the retail side of the equation, debit is of growing importance in the small business credit segment. Positioning small business credit offerings with regard to debit, and perhaps offering dual debit/credit programs will be of increasing importance."

Table of Contents

TABLE OF FIGURES

Introduction

I. A Snapshot of the Commercial Card Landscape

• A Competitive Market
• Small Business Market Dynamics

II. Small Business Segments and Implications For Issuers

• Segment Structure
• Segment Challenges
• Matching Needs With Features

III. Capturing the Small Business Opportunity

• Identifying Prospects From Data Repositories
• Identifying Prospects in Retail Card and Debit Portfolios
• Rediscovering the Branch/ Leveraging Debit
• Competing For The Middle
• Another Plug For Charge

Strategic Implications

TABLE OF FIGURES

• Figure 1: Commercial Card Products Represent a $364B Volume Market
• Figure 2: Commercial Bank Card Product Share Is Spread Among Large And Small Players
• Figure 3: Small Business Credit Represents 43% Of Commercial Bank Card Volume
• Figure 4: Small Business Volume Grows Strongly; Debit Jumps From The Sidelines
• Figure 5: 2005 Small Business Debit Growth Explodes
• Figure 6: Small Business Debit Grows Quickly On Its Expanding Base
• Figure 7: Small Business Credit/ Charge Products Represent A $180B Volume Market
• Figure 8: Outstandings Partially Attributable To Business Cards Have Grown Modestly
• Figure 9: For Business Debit Issuers, A Coordinated Small Business Strategy Is Critical
• Figure 10: Major Issuers Have Sizeable Debit Bases For Credit Cross-Selling
• Figure 11: The Estimated 25MM Small Businesses Are Diverse
• Figure 12: Companies With Employees Are Less Than One Fourth Of The Potential Market
• Figure 13: Incorporated and Partner-Based Non-Employer Firms Have Higher Value
• Figure 14: Business Churn Creates Opportunity And Risk
• Figure 15: About One Third Of The Small Business Market Is Currently Penetrated By SB Bank Cards
• Figure 16: Small Business Prospects Follow A Business Growth Cycle
• Figure 17: Small Business Prospects Have A Range Of Needs And Identification Channels
• Figure 18: Full Business Card Reporting Capabilities May Be Overkill Versus Segment Needs
• Figure 19: Small Business Card Offerings Vary Widely