Small banks risk losing ground in business credit cards

Vincent DeWitt/BLOOMBERG NEWS

The opportunity to build scale within the small-business credit card market is knocking. But many banks aren't answering.

With more than 33 million small businesses in the U.S., according to Small Business Administration data, there's substantial revenue potential for banks to build or expand their business credit card offerings — a market that's currently dominated by several large banks and fewer than 20 fintech challengers, according to data from Fintech Labs, a resource for small business owners.

Here's what banks need to know about developments within the small-business credit card market.

Opportunity abounds

JPMorganChase, Capital One, Citigroup, American Express and Wells Fargo are among the biggest players in the small business credit card market, along with regional players such as TD Bank and Regions, said Brian Riley, co-head of payments at Javelin Strategy & Research. But that doesn't preclude opportunities for smaller banks looking to build or shore up a presence in the small-business card market, he said. Javelin estimates that small-business credit card spending will approach $800 billion this year across all brands.

Many small businesses intermingle their personal and business expenses, which isn't advisable. A business-only credit card allows companies to keep tabs more effectively on business costs. It also offers owners another option for building credit, and it can provide spending controls and protections to employees who need to pay for business expenses.

A recent report from the Atlanta Fed showed credit cards are the card type most used by businesses, with an average purchase of $259. That's almost three times the average credit card payment by a consumer. The opportunity for banks to tap this market is likely to increase as small businesses continue shifting away from paper checks.

Potential buying and partnership opportunities

Fintechs such as Ramp, Brex, BILL and Expensify offer corporate cards to small businesses. There's also a potential acquisition opportunity for banks, given that a handful of fintech players in the space have been acquired in the past few years, including U.S. Bancorp's purchase of Bento for Business.

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Aside from acquisition potential, banks should consider partnering with fintechs for digital onboarding and other services, said Michael Seaman, chief executive and co-founder of Swipesum, a payment processing consultancy and software provider. Digital onboarding is critical for many small businesses, and not offering it could result in lost opportunity, Seaman said.

The biggest constraint for small companies is lack of time, said Petr Marek, co-founder and chief executive of Invoice Home, a billing and invoicing service for small businesses. Most business owners don't have the time to go through complicated applications and long approval processes. Banks need to "make it super simple to sign up," Marek said.

It's worth noting that banks don't necessarily have to build business credit card capabilities in-house. Seaman offers the example of Cross River, a fintech that helps banks build and scale debit and credit card programs.

Embrace AI

Banks should also embrace AI tools for underwriting small business accounts, which can be more complicated than on the consumer side.

Banks can leverage tools to instantly connect with a business's payment processor or its accounting software, for example, to accelerate the underwriting process, Seaman said. Fintechs have been significantly quicker at underwriting than banks have, which presents another potential partnership opportunity, he added.

Focus on features and rewards

Small businesses appreciate features such as the ability to create virtual cards, which fintechs like Brex and Ramp offer, Seaman said. Fintechs also offer expense-management tools, which small businesses find attractive.

Rewards can also be important. Small businesses may appreciate cards that offer bonus rewards on certain spending categories including office supplies and online advertising. "Small businesses rely on credit-card rewards for everything from emergency expenses to holiday bonuses," a spokesperson for the Small Business Payments Alliance, wrote in an email. To be sure, these rewards may be at risk if the Credit Card Competition Act comes to fruition, but at least for now, they are a competitive advantage when it comes to wooing small businesses.

Seaman also recommends banks become more adept at offering tailored credit solutions. These could include targeted offerings for start-ups, more established businesses, or top-tier small business customers.

Look for expansion opportunities

Business cards can be a stepping-off point for banks to expand their small business relationships, Javelin's Riley said. The profitability of a card gets multiplied by the other relationships a bank successfully develops, he said.

Beyond business cards, ancillary services such as payroll and ACH to pay employees and vendors, as well as external account-to-account transfers allowing small businesses to seamlessly move funds between business and personal accounts, can be important to small businesses, according to data from Keynova Group, which offers insights about consumer and small business digital services.

Banks shouldn't strive "for just one account. They want 10 accounts," Riley said.