Plastic seeking edge over paper
Credit card companies see big bucks in the small-business market.
Discover Financial Services, which launched its first small-business card last June, will unveil a card today designed to lure small-business owners by offering high frequent-flier miles rewards and few restrictions.
It is just the latest in a string of credit cards tailored for small-business owners.
The draw for card companies: Although small-business owners spent $4.9 trillion in 2006, less than 5% of that was with the aid of a credit or debit card, according to Visa USA research.
“Our competition is essentially checks. That’s what we are trying to dislodge from the small-business owner’s wallet,” said Raghav Lal, senior vice president of small-business products for San Francisco-based Visa USA.
Visa and other card companies are concocting products tailored to the elusive but potentially lucrative small-business market. Credit card issuers want to break out of the traditional travel and entertainment sector and expand into all areas of small-business daily spending.
Many of the new cards offer 5% cash-back rewards on office supplies and gasoline purchases, as well as discounts on orders at overnight shippers and other companies a small-business owner would tend to use.
MasterCard, which has offered a small-business card for years, last year launched its first industry-specific card, -- one for construction companies that allows longer payment cycles. MasterCard also extended zero-liability protection to its small-business credit card, the first card company to do so, it said. This year it plans to introduce a card for affluent small-business owners.
Visa, which says its small-business card sales jumped 32% to $103.5 billion in the 12 months ended June 30, recently added its third small-business card product, which has a higher spending limit of $25,000.
Discover’s new products, its first commercial cards ever, come with checks that allow small-business owners to pay vendors, the majority of whom don’t accept credit cards, by tapping their Discover credit. At least one of its competitors, Visa, offers a similar program.
Discover gets to capture a share of the huge business-to-business market and its merchant division uses information gathered from the checks to contact vendors and try to persuade them to accept the Discover card in the future. American Express hosts high-end networking events for its small-business cardholders, as well as offering a number of payment options and expense management programs through its Open small-business unit.
This “ambitious focus on migrating small-business purchases to plastic products,” is driving the growth in the overall commercial credit card market, according to the “Corporate Credit Cards in the U.S.” report issued in March by Marketresearch.com’s Packaged Facts. The report forecast double-digit growth for small-business credit cards through 2010, when sales volume on those cards is projected to hit $740.2 billion.
“This is just an enormous untapped market and that’s why all major card issuers are scrambling to capture it,” said Ben Woolsey, director of marketing at CreditCards.com, an Austin, Texas-based website that allows consumers to compare credit cards and apply for them online.
Getting the attention of that market hasn’t been easy, despite the flurry of new offerings and billions spent on advertising.
Lolita Carrico, who started Los Angeles-based ModernMom.com in 2002, says she receives business credit card offers in the mail several times a week. She ignored them until recently, too busy to bother and wary of falling into debt.
“Very recently, in the last year, as we expanded our business to have a larger team of employees that have expenses, I went with American Express,” Carrico said.
Tearing up the weekly mail solicitations also has been the strategy for Phillip Cook, who heads a financial planning firm in Torrance with one employee.
“I don’t want to take the time to find out where the ‘gotchas’ are,” said Cook, who prefers to pay his business expenses online, debiting them directly from his business checking account. He also has a business line of credit as a safety net.
Although Cook agrees with card proponents that a business credit card can help a small-business executive separate business and personal spending, he’s not convinced the potential cost is worth the possible convenience.
Proponents also say a business credit card could help a small-business owner by providing a 30-day float, essentially a loan, before payment is due.
In addition, credit card companies typically send quarterly and annual billing statements that categorize payments by type and vendor, which could help small-business owners at tax time and during vendor negotiations.
Some card companies e-mail reminders to their small-business customers to pay their bills, a service which isn’t widely available to consumers and large businesses.
Discover declined to disclose sales figures for its new small-business card but said results have been above expectations.
“We are seeing significant incremental spend,” said Sastry Rachakonda, director of Discover’s business card.
The growth of small-business cards could be slowed if vendors continue to resist taking credit cards as payment. Unlike retailers, most haven’t seen the need to swallow the interchange fees that credit card issuers charge, because most of their customers don’t use credit cards, said Jeffrey Green, editor in chief of Cards&Payments;, a monthly trade magazine.
An industrial paper vendor, for example, might have a small number of transactions in a month, but each might be worth from $100,000 to $1 million, he said.
“Could you imagine the interchange fee they’d have to pay the card issuer?” said Green. Those fees amount to about 1.7% of a transaction, he said.
For small-business owners like ModernMom.com’s Carrico, who don’t have to worry about six-figure purchases, a small-business card has proven helpful.
Carrico, who has four employees and uses two-dozen freelancers, gave one to her vice president of marketing, who is based near San Francisco. The employee uses it for office supplies, travel and client lunches or dinners.
“It’s really easy for us to track,” Carrico said, “and our accounting person can see where we are spending really well.”