Commercial card use in the US has risen dramatically, especially over the last couple of years. Spend volumes accounted for a total of $504.7 billion in 2018, making the growth volume reach a staggering 9.3% since 2017.
According to a recent white paper and webinar by fintech provider Fraedom, banks are “universally positive” in the growth opportunities of commercial cards at regional and super-regional levels, saying the market is the most active it has been in years. Nonetheless, commercial cards are far from being considered a commoditized product, leaving room for competition from banks of all sizes.
Furthermore, there’s still room for US banks to grab some market share between now and 2022 when Mercator predicts this market will really reach maturity. We see commercial cards growing another $343 billion by 2022, and this opportunity could be especially critical for smaller, regional banks in the never-ending race against super-regional and national competitors.
Let’s dig into the five key takeaways from the Fraedom research and explore what they will mean for regional and super-regional issuers who want to break into the big leagues.
Insight 1: Commercial cards are growing across the board.
If commercial card growth continues its current trajectory, US card spending will have nearly doubled between 2014 and 2021.
This is driven, at least in part, by a commercial shift away from paper-based payments and processes. Businesses of every size and in every vertical are investing in payments and pushing for broader digital capabilities.
E-payables and virtual cards were a business worth$68 billion in 2014. By 2021, Fraedom forecasts they will be worth $233 billion. Why? Largely because of the benefits they offer in terms of program management capabilities, control and visibility over transactions. They can be better integrated into existing business process flows.
Insight 2: Virtual cards are skyrocketing but are not the only driver of growth.
There’s no denying that virtual cards have been gaining significant momentum in 2018, with some banks reporting growth rates of 195% over the previous year.
It’s not hard to see why. Commercial cards increase security, help control spending and most importantly, simplify reconciliation. They also fit nicely into businesses’ ongoing efforts to digitize back office and core processes by helping to streamline, and by increasing automation and visibility of payments.
Insight 3: Rebates are not sustainable at current rates.
There’s growing pressure among issuers small and large to increase rebate rates to compete. Corporates and businesses are constantly demanding better rates. However, at the same time, interchange rates are going down, putting pressure on margins from both sides.
On top of demand for more rebates, today’s corporate customers want more out of their commercial cards: flexibility, personalized programs, spending rules, mobile capabilities, and all the latest interfaces. These demands must also be balanced against rebates.
In short, the old economies of scale and rebate rates are now flattening – and not in banks’ favor. Rebates are no longer enough of a differentiator, and continuing to offer bigger rebates (or more of them) will only add to the administrative headache of managing them.
Insight 4: Service is becoming the new advantage (listen up, small banks!)
As customer expectations shift, it’s becoming clear where regional and super-regional banks will be able to gain a competitive edge over larger players.
Study participants told Fraedom that their clients often feel ignored by large issuers. There’s a culture of “You get what you get, and you don’t get upset.” Conversely, commercial cards represent an opportunity for smaller issuing banks to expand their existing relationships.
Exceptional service is a value add, not just a bottom line like rebates – and because of that, it could save these smaller banks from having to raise the floor on rebates.
Insight 5: Customers need help with their data.
Businesses in every vertical are becoming more complex, thanks to technology infrastructure, automation, and streamlining efforts – all of which happen in tandem with efforts to reduce costs.
These new systems call for real-time data from a variety of sources. Here is where commercial cards could have a crucial role to play: by integrating spending data into industry platforms and services in real time, they provide greater visibility to help support other tech goals within the business.
Today, data is a differentiator. How banks collect, store, and use it matters. To get ahead, they must offer data flexibility and portability beyond the standard reporting that is currently available.
Other Factors and the Importance of B2B
To get even more specific, various macro trends in the financial space are pointing to B2B as the place to be within the rapidly growing realm of commercial cards. Consider the implications of trends such as…
- Increasing corporate travel budgets
- General business activity as measured by GDP
- More focused developments around technology innovation
- The pace of corporate adoption
- Digital transformation of procurement and payment processes, which is creating a natural niche for commercial card payment capabilities.
The implications are consistent with past research by Mercator, including our October 2017 report “U.S. Commercial Cards: The Drive Toward Mainstream Payables.” That report emphasized the opportunity – indeed, the need – for the industry to gain a faster rate of B2B payables spend share over the next five years as easier and faster alternatives continue to push paper-based solutions into obsolescence.
Those opportunities still exist.
In 2017, the U.S. commercial credit card volume for mid-to-large corporates reached $504.7 billion. We predict that volume will grow by another $343 billion by 2022, with much of that growth focused on the virtual card category as purchasing cards begin to lose relevance for high-end B2B spend. These numbers align with our July 2018 report “Commercial Mobile Payments Forecast, 2016–2025.”
What does this mean for small and regional commercial card issuers?
To summarize, the commercial card game is no longer just a race to the bottom – there are ways for regional banks to get a stake in the game (or even because of) their smaller customer base and (comparatively) limited resources. Customers recognize the value add of technology and service, which means that, despite rebates, this market is not as commoditized as one might be tempted to believe.
Therefore, issuers must continually advance their capabilities. Regional banks can compete and beat larger competitors. The question is: Have they, and if so, how?
Fraedom says the answer is “yes.” By understanding the opportunity left in the market by large issuers, regional and super-regional banks can – and have already started to – succeed. More specifically, regional and super regional banks…
- address gaps in their larger counterpart’s existing products and services, specific to key competitors in the regions where they want to grow.
- devise strategies that leverage technology as the key driver, bearing in mind that tech is a piece of a holistic strategy and not a solution in and of itself.
- successfully integrate commercial cards into broader treasury functions. For example, where key contacts overlap in treasury and commercial card customers, harmonious integration eliminates internal competition.
- embrace innovation and pursue third-party relationships with fin-serv tech firms and FinTechs.
In short, small and regional banks that are winning in this space differentiate based on service and support, and by embracing innovation that large issuers cannot embrace so quickly due to legacy systems and other internal impediments.