Small Business Credit Cards: A Growing Market?

Mark Crawford, CUNA Councils
May 16, 2005

A recent research report by TowerGroup examined trends in the small business credit-card market in the United States. Regan Wong, TowerGroup’s director of research, indicates that about two-thirds of small business owners use credit cards for business expenses—an expanding market for lenders in the highly competitive field of credit cards.

“The small business sector has quickly become one of the most promising frontiers for credit-card issuers in a market where the personal credit-card business is already supersaturated,” states Wong.

TowerGroup estimates that, in addition to the nearly 25 million small businesses that already exist, about 500,000 to 600,000 more are started every year. “We believe that the number of firms will keep growing steadily at the compound annual growth rate of 1.3% through 2008,” says Wong.

Small businesses with employees (rather than single-person or “mom-and-pop” operations) are better targets for business credit cards because they typically make more money and have varied purchasing needs. Thus it’s more likely that larger employer firms will maintain balances on dedicated business cards.

Providing business credit cards to small businesses can be a lucrative part of business lending. “Interchange fees and discount rates on transactions on small business cards are higher than on consumer cards,” adds Wong. “Furthermore, at $169 per transaction, the average transaction value (ATV) is significantly higher on business cards than on consumer cards ($85). This means that even small business transactors who pay their balances in full every month generate more interchange income per transaction than do consumer cardholders.”

TowerGroup estimates that American Express leads the small business credit card market with 30%, followed by Citigroup (5%) and Well Fargo (5%)—which means there is plenty of room to compete.

“Small business spending on personal cards, which accounts for 41% of the available market, represents a significant opportunity for issuers to increase share,” Wong points out. “The challenge is for issuers to provide a compelling reason for personal card users to switch to a dedicated business card.”

TowerGroup predicts that small business spending will increase at an overall compound annual growth rate of 12.8% through 2009. It also predicts that business owners will increasingly rely on credit cards to pay bills and finance improvements. “From 2005 to 2009,” Wong indicates, “spending charged on dedicated small business cards will continue to grow at a faster pace (14% CAGR) than spending charged on personal cards (6% CAGR).”

Benefits that go along with many small business credit cards include low-rate offers with no annual fee, cash-back programs, rebates on business expenses, and various reward programs.

“The small business credit card market will be a focal point for many bank card issuers over the next few years as they shift their attention to this high-growth market,” concludes Wong. “For many issuers, near-term acquisition efforts will not be focused on creating new business, but on competing for established business cardholders and migrating consumer cardholders who use personal cards to pay for business expenses.”

For more information about Report V42:24K entitled “Small Business Credit Cards in the U.S.: High-Growth Segment or Limited Opportunity?” and its accompanying charts and figures, contact TowerGroup at www.towergroup.com or 781-292-5200.