Discover seeks to reclaim lost turf in small-biz payments

Discover is no stranger to small business, as it had been courting business owners in the mid-2000s as the market began to really take off. However, after the recession of 2008-2010 the company quietly backed away from the market.

Now with the September 2018 launch of the Discover Business It Card, the company is clearly seeking to capitalize on this market opportunity with a new Discover card for small businesses.

Serving the small-business market requires more than just rebranding a plastic card. There are certain functions related to expense tracking, for example, that don't come up in a typical consumer relationship.

“One of the biggest differences with how a small business operates differently than a consumer is on the back end, with the organization of purchases. We found that small business owners cite keeping track of expenses as a top concern,” said Meera Sridharan, director of small business at Discover Financial Services.

Rewards are another factor, but that introduces the balancing act of keeping Discover's own rewards expenses in check. In the fourth quarter, Discover reported that its rewards rate was 128 basis points, up five basis points year over year. This increase was due to both portfolio mix, which continues to shift toward the Discover It product with its slightly higher average rewards rate, as well as a decision to feature warehouse clubs in the 5% rewards, according to R. Mark Graf, Discover's chief financial officer, in an earnings call.

Despite higher potential reward costs, the small-business credit card market is very attractive to card issuers such as Discover, which are seeking growth outside of the hyper competitive consumer card market. Financial consulting firm Mercator Advisory Group predicts that the annual purchase volume from small business credit cards is set to grow at a compounded annual growth rate (CAGR) of 6.8% between 2017-2022. This CAGR will drive the annual purchase volume on small business cards from $493 billion in 2017 to $686 billion in 2022.

“It’s really a sweet spot for Discover. They were in the business card market before the recession and unceremoniously backed away from it. They did well with those cards so their new emphasis on it plays well,” said Brian Riley, director of the credit advisory service at Mercator.

According to Forbes, business cards carry higher risks than consumer cards for the cardholder since the product category was exempted from the consumer protections given Credit CARD Act of 2009. One straightforward example is that the business owner is liable for employee purchases, so it’s key to track all charges to a business card.

However, the ability to have multiple people on a single account is one of the key reasons small businesses are so attractive to issuers.

“The average small business card tends to have higher spend because you can get employees to use the cards. Also, small business cards have excellent reporting and controls, which makes it easier for business owners to manage expenses,” said Riley.

While Discover is actively mining the small business card market for growth, it’s not alone. American Express is seeking to staunchly defend its market share by launching new cards to meet the demand. The American Express Business Gold Card, launched in November, allows businesses to earn a reward incentive on the first $150,000 spent each calendar year. This card launch came fresh off the heels of an Amazon Small Business partnership American Express inked in October.

Visa sees a particularly strong opportunity in catering to female small business owners. It launched a small business networking program with handbag designer, Rebecca Minkoff; and debuted a global program to fuel networking among women business owners, while also connecting them to companies in the Visa ecosystem such as Square and Yelp.