Today we’re focusing on small business and specifically Discover’s recent news and Mercator’s recent coverage of the space (in the Mercator Advisory Group research report titled U.S. Small Business Credit Card Forecast, 2017–2022: Healthy Market, Room for Improvement)
Small Business Credit Card Market Overview
Key takeaway of the total U.S. credit card business: It’s healthy. Although it went through some growing pains during the recession, the U.S. credit card market has rebounded well. We’re at a point where the market is pretty much saturated with cards. We see that leveling off over the next few years. We’re expecting to see about 63 million new accounts booked this year, and that’s consistent with 2017. As a matter of fact, it’s also our forecast for 2019, when we expect to see another 63 million new cards issued.
The small business credit card market is interesting. Even before we begin an analysis, it’s important to define terms: When you look at the U.S. as a whole, there’s a wide range of businesses. Certainly companies like Amazon and General Motors employ tens of thousands of employees, but the real volume for jobs and employees is in the segment of businesses that employ under 500 people. That segment numbers over 60 million distinct businesses in the U.S. Additionally, there’s the challenge of counting the microbusinesses that make up the small business segment. Among the 60 million U.S. SMBs, there are millions of businesses featuring fewer than 20 employees. That could be Joe’s Paint Shop, or a plumber who does house calls. And those individual businesses tend to use their personal credit cards for business transactions.
What’s to Be Gained as a Small Business by Using a Personal Credit Card?
Small business is a very specific market segment that requires highly specific solutions. One advantage of a using a consumer credit card as a small business owner/employee stems from the CARD Act of 2009, which ensures that issuers protect consumers in distinct ways, such as dynamically changing credit limits or the card’s APR. That comes in handy.
What Are Business Owners Missing by Using a Personal Credit Card?
Small business credit cards differ from consumer cards in a few important ways:
- They typically provide features such as account controls and reporting as well as rewards tailored to the business.
- Essential protections, such as those defined for consumers in the CARD Act, do not apply to businesses.
- Similarly absent are definitions surrounding payment hierarchy, delinquency triggers, and notification requirements.
What the business owners are missing by not using cards designed for small businesses is the opportunity to split their expenses and not have to pay an accountant. These products are designed to support small business needs and they’ve had steady growth, as can be seen in the Mercator forecast. We’re projecting that by 2022, spend will be about $700 billion, up from the current $536 billion in transactions spending.
Who Serves the Market –Discover’s New Release
A variety of issuers is serving the market: Hilton Honors, American Express business card, Delta Airlines card. Chase has an array of cards with Southwest, a United small business card. Citi has a long play going back to 1985 with a Citi business card for Advantage. And recently Discover is getting back in the game.
What’s exciting about today’s deal is that Discover is reentering the market. That’s significant because Discover had been dabbling in small business credit programs right around the recession, between 2008 and 2009, and then pulled them back. Really, they closed the program in 2014. By then, Discover left the market to Mastercard and Visa and now the new entrance is very exciting.
Current Discover Dynamics
When you think of the dynamics of a Discover card now, it is a little bit more down market than where a premium Visa card would be targeted – which makes Discover highly receptive to small businesses in that down market group. Returning to that channel is a true opportunity for Discover to serve a market where it’s well represented and hopefully do some cross sales and perhaps shift some of its consumer cards over to the small business side to get things rolling!
Literally the day following the announcement, I received a solicitation for the Discover small business card. I’m actually holding it in my hand right now. This is interesting for a couple of reasons: The last time that I had a small business was about 15 years ago. So they mailed it to an old list, which is less than optimal. But there are many ways an issuer can get updated lists.
Discover’s Latest Offering: Competitive vs. Amex vs. Capital One
But the product looks competitive. The form offers me a percentage cash back that’s very consistent with the market. Then there are free subordinate cards because in a small business card, you might want to have a card for the business owner, maybe one for an accounting person, and maybe cards for select employees. So the subordinate parent-child piece on a small business code is very important, but they come up with similar programs that let you break down expenses. Was the purchase at a restaurant? An airline or hotel? And so forth. And the card carries no annual fee.
As for competitors, the new program is coming out against American Express, which has its Blue business card credit plan and competitive interest rates, which ranges between 12.49% and 20.49% and no annual fee. Further, Amex Blue Business Card offers 0% introductory interest, an offer I don’t see on my Discover solicitation.
Spark Miles Select for Business from Capital One is a good example that offers a 20,000 points bonus up front. That’s based on $33,000 in spend and with the same point measure as Discover gives: 1.5X miles per dollar spent.
So Discover’s offer is very competitive and the net of what we’re saying is that the market is really prime for growth as we anticipate seeing growth of the market from that $536 million up to $686 billion in 2022. Some nice growth and Discover certainly has a possibility to chip away at some of that. Now that might cause the other players that are issued by Mastercard or VISA to get more active in the market.…
Six Requirements for Credit Card Success
- The first requirement is that the card be universally accepted. So having it work through a network is fine and Discover’s network is competitive with Mastercard and Visa as far as merchant locations accepted.
- The second characteristic noted in our recent report U.S. Small Business Credit Forecast, 2017-2022: Healthy Market but Room for Improvement is that it’s really important to have account-level controls. Say I’m a business owner and want to give a card to a line manager in my small business, but I want to make sure that he or she is not be able to shop in a particular vertical or that I can limit what they can spend on it so I’m not liable for it. That’s what we’re looking for in account-level controls.
- Effective pricing is essential. It’s got to be consistent with the market. A quick review of the recent Mercator research report on small businesses cited above shows that Discover small business card does have effective pricing.
- and 5. A credit card has to offer incentives. Discover is a long-time player in rewards, and to be successful a credit card has to have rewards. Rewards is number 5 on this list as well. Discover has a legacy of cash rewards, having introduced that feature. I’m not sure of the exact year, but it was in the 1987 range so that they’re very experienced in it.
So we’ve got the universally accepted card. We’ve got the account-level controls, the effective pricing, the incentives and rewards, and then we come to number 6.
- The card has to be able to transact in any common form. You want to have a card that can transact both online and in person. So we’re not just talking about a virtual card because you can’t use that in a face-to-face transaction and certainly not through the mobile app. The Discover mobile app is more than sufficient for small business.
- Finally, the requirement is to build a progressive relationship with the customer. You’ll see that with most established players in the industry where consumers come in at a certain range, reviewed for a credit line increase, and then you might get cross-sell products.
Those are the seven characteristics of a successful credit card today, and we think that Discovers entry is timely to the market. We think Discover has the ability to catalyze some of the existing volume and also through the real relationships existing their many customers to be able to loop back.
Looking for more information on Small Business Credit Cards? Check out these recent Truth in Data episodes: