Print this Article By Michael Carbone

I n uncertain times, it can be tempting to hunker down and weather the storm, with an eye to reducing risk and costs and foregoing new business efforts. But banks that do so face a bigger risk: missing out on promising, untapped high-growth markets. The fact is, new opportunities to expand your card payments business are out there—if you know where to look.

One such bright spot MasterCard Advisors is helping clients pursue is the vibrant small business market, which we define as companies under $10 million in annual sales. There are some 25.2 million small businesses in the U.S. (using the Census Bureau's data), though most of these firms have less than a handful of employees (see Figure 1).1

In the U.S., these businesses spend $4.9 trillion annually, but less than 10 percent of that is put on a credit card2, as the bulk of spending is still cash and check. That leaves a huge opportunity to convert more small business spend to cards.

What makes these small businesses so attractive? For one, business cardholders tend to be more profitable: They spend three to four times as much as the typical consumer cardholder, spending more than $2,400 on average each month.3 The net worth of the self-employed entrepreneur is five times greater than individuals who work for someone else.4 Finally, given the greater transaction-based revenue for banks, business cardholders are three to four times as profitable as consumer cardholders.5

Many small businesses, such as consulting, interior design, architecture, legal services, and advertising firms have high levels of business expenses. Although the businesses themselves may be small, they run up huge purchases to support their day-to-day operations. That not only translates into more revenue for banks, but means that managing cash flow is critical for these customers, who can benefit from the robust spend management tools available with business cards.

Small business is one of the few card segments experiencing double-digit growth. Going forward, small business card purchases in the U.S. are expected to rise from $427.2 billion in 2007 to $740.2 billion in 2010 (see Figure 2).6

Demand for business cards is also growing, along with spend. TowerGroup notes that while small businesses split their card spend evenly between personal and business cards in 2002, by 2009 business card use will triple, while personal card use will grow modestly.7

There is a compelling case to be made to small business owners who do not yet have, or are not fully utilizing, a small business card. A business card can help separate business spending from personal spending, and cut down on the time and costs associated with paper checks. The reporting and control functions these cards provide become more important as small businesses grow. Additionally, as they add employees, small business owners want to track employee spending as well. A dedicated business card may also offer appealing perks such as cash back benefits on select purchases or rewards points.

Prospects Are Closer than You Think

Finding these prospective small business customers is not always easy, however. Many fall under the radar of traditional list sources. A good many small business owners are already consumer cardholders—19 percent of them say they use a consumer card for business purposes8, although banks or traditional small business credit reporting companies may not be aware of their business status. Still other prospective small business customers may be out there waiting to be found.

Many small business owners, especially of "micro" businesses with annual sales of $1 million or less, use their personal card for business expenses. To identify likely small business owners in your consumer card portfolio, Advisors recommends analyzing your cardholders' spending and transaction patterns using sophisticated propensity models to uncover patterns in recency, frequency, merchant type, and other parameters.

MasterCard Advisors developed its Small Business Propensity Model to help banks capture a bigger proportion of the 90 percent of purchases these firms are still making with cash and check. The model translates differences between known small business spending patterns and consumer spending patterns to identify likely small businesses that are currently using a consumer credit card to support business activity. A propensity ranking is assigned to each cardholder based on the expected probability of his or her being a small business.

Using our Small Business Propensity Model, we've discovered that consumer card portfolios typically contain 15 to 25 percent likely business owners. In a recent engagement, MasterCard Advisors uncovered twice as many probable business owners in a major bank's consumer card portfolio than the bank itself had previously identified. We then used the outcome of our data analysis to help the bank refine its algorithm and target a much larger universe of prospective small businesses. By cross-selling a business card to this population, the bank acquired many more new small business cardholders and ultimately increased its share of customers' overall purchases.

Another worthwhile avenue is to analyze your bank's current business banking portfolio and the payment needs of these demand deposit or business loan customers. Existing banking customers are typically the best small business card prospects—they generate the highest response to a bank's business card offers, and are less costly to acquire than non-customers. In addition, they have a known credit history and therefore represent lower risk. Most banks that Advisors has worked with have rich information on their business banking customers including tenure of relationship, balance history, type of business, business banking product ownership, and customer profitability tier. This data is invaluable in segmenting and profiling the customer base, prioritizing opportunities, and devising a cross-sell strategy.

Segment and Differentiate

To make a cross-sell strategy work, a small business product must be sufficiently differentiated from consumer card offerings, particularly those targeted at high-end consumers. That's why it's essential to understand the fundamental economics of different types of small businesses, and to tailor your value proposition to their needs. Segmentation is the foundation for cardholder insights. At Advisors, we start by looking at a bank's particular trading area and the distribution of small businesses there. Which are the most fruitful prospects? What segments are emerging? What are the buying behaviors and needs of each sub-segment? What features have they responded to in the past? By answering these questions, banks can identify the right products for the right segments of the small business market.

We also recommend profiling the competition within a bank's branch distribution footprint. This analysis enables the bank to better understand its competitors' distribution capabilities and business card product offerings relative to its own. The analysis can also compare the relevant banks' branch distribution coverage to the small business prospects based in a particular trading area, so that the proximity of branches to prospects can be factored into the bank's acquisition channel strategy.

This analysis makes it possible to identify underserved small business segments, uncover their product needs, better understand product gaps, quantify and define cross-sell opportunities, and determine the value propositions that meet those needs. Advisors weighs all of this information in helping banks establish market priorities, product development plans, and customer acquisition channel strategies to achieve maximum wallet penetration.

Using our Small Business Propensity Model, we've discovered that consumer card portfolios typically contain 15 to 25 percent likely business owners.

Different types of small businesses exhibit different characteristics and needs. As Figure 3 shows, there are a range of potential products suitable for different industries within the small business market, each product having particular relevance for a vertical's spending needs and patterns. Along the card feature axis (from "Feature Rich" cards with many benefits to "Functional" cards with fewer perks and lower fees), for example, businesses that would typically prefer a "functional" card include the nonprofit, manufacturing, and construction industries. Along the "Spend" vs. "Lend" dimension, businesses that are typically transactors and carry no or low balances include professional services, financial, and nonprofit businesses. On the other hand, construction, manufacturing, and wholesale trade businesses are more likely to be revolvers seeking business card solutions that allow them to carry larger balances.

Advisors uses both firmographic data (spending profiles based on company annual sales, type of business, tenure, etc.) and card behavior data to develop unique segmentation schemes for each bank we work with. Whether targeting new small business customers or boosting share of wallet from existing small business cardholders, firmographic analysis helps uncover opportunities to increase small business spend.

Recently, Advisors collaborated with D&B Global Analytics to conduct a study of small business purchase habits. By analyzing purchase data, we were able to uncover the supply categories that were most prominent in select small business verticals.9

For example, we can see that a typical architectural firm spends a high proportion of its operating budget on office supplies, computer equipment, and utilities, while construction companies tend to spend on lumber, gas, pagers, and hardware. By comparing the expected spending patterns of different small business verticals with the actual spend your bank is capturing from such customers, you can determine where incentives could be applied to boost card spend in high-priority categories.

The Case for Cross-Selling

Banks considering whether to pursue the small business market are often concerned about cannibalizing their consumer cardholder business or their business banking lending business. The payoff from successful collaboration across the bank is to extract the greatest economic value by deepening relationships with small business customers. After all, everyone's goal is to increase total wallet share, and cross-selling business card products to consumer cardholders and business banking customers will take you a long way toward that goal. To that end, MasterCard Advisors often helps devise and rationalize a cross-sell strategy that is a win-win for your entire organization.

In a recent engagement, Advisors worked with a bank in the Asia-Pacific region that suspected many small business owners were relying on its rewards-heavy consumer card, resulting in sub-optimal revenue and higher redemption costs for the bank. Advisors helped develop a business case for converting select, high-value (that is, small business) customers, and then identified and validated the target customers using Advisors' data analytics capabilities. We designed an internal process to ensure seamless conversion, including internal communications and branch training tools, which focused on managing product migration with bank customers. Within four months, more than 85 percent of the target customers were converted, and more than 90 percent of the balances converted to the small business product. The result: $10 million in incremental annual revenue.

A Multi-Channel Approach Brings Acquisition Success

Once prospects have been identified, banks must consider how best to reach them. Since small business owners are typically consumer cardholders, banks may want to utilize their traditional direct marketing channels, branch networks, and underwriting relationships to woo these lucrative prospects. Indeed, retail branches and the Internet represent two of the most effective channels for targeting small business. Although branch cross-sell rates are increasing, banks are still not taking full advantage of the retail branch channel to reach business prospects.

For example, we recently assisted a bank whose high-value branch network was not being leveraged, leading to sub-par sales. After reviewing the end-to-end value proposition and product fulfillment process, we helped develop sales materials, retrain branch personnel, and create a multi-tier incentive program to increase sales. Over a 90-day period, sales among targeted segments at various branches increased between 30 and 50 percent. In contrast, sales at a control group of branches dropped by 30 to 40 percent for the same time period. The bank then embarked on a system-wide rollout of the new approach.

Don't Forget Small Business Suppliers

There is another emerging strategy that banks can employ to expand their small business portfolios—selling to the small business supplier. A supplier "push" strategy aims to solve the pain of suppliers that have a significant small business clientele—food and beverage suppliers, pharmaceutical suppliers, construction and plumbing suppliers, and the like. Many of these suppliers extend business terms to their customers, and may not get paid for 30 to 60 days. Or, if they issue their own credit card, they bear the full risk and infrastructure costs. Outsourcing their receivables function to a bank may be an attractive proposition because it reduces their "time to money." Rather than wait 60 days to get paid, they receive payment in two days and get the receivables off their books.

By comparing the expected spending patterns of different small business verticals with the actual spend your bank is capturing from such customers, you can determine where incentives could be applied to boost card spend in high-priority categories.

A growing number of suppliers around the world have reached out to banks for solutions to address current inefficiencies associated with traditional accounts receivable and collections processes. For banks, delivering a receivables solution to suppliers benefits both the wholesale banking and card units; the wholesale banking organization maximizes relationships with its corporate clients while the card organization benefits from increased small business card portfolios and greater transaction volumes.

Globally, Advisors has worked with many banks and suppliers to implement these solutions. One recent engagement brought together a specialty equipment supplier and a major bank to successfully set up a co-branded small business card program. The bank was interested in increasing its small business penetration, while the supplier was focused on boosting sales, cementing relationships with customers, and developing new ones. Advisors helped the parties create a cash-back rewards product designed specifically for the supplier and its small business customers and prospects.

The acquisition campaign achieved a penetration rate of slightly over 10 percent of its target population. Customers with the co-branded card spent approximately four to five times more annually on their card compared to the average small business credit card within the bank's portfolio. In addition, the co-branded card customers spent approximately 60 percent more than their industry counterparts who did not possess the new card.

An Engine for Economic Growth

Clearly, the millions of underserved small businesses out there represent a bright and welcome opportunity for banks in the current economic slowdown. With less than 10 percent of their spending captured by payment cards, and double-digit sales growth, small business offers an engine of growth in uncertain times. Success in this lucrative segment will come to those banks that use data-driven insights to uncover the best prospects, make differentiated offers to select segments, build a sound business case to ensure profitability, and employ the most effective marketing channels.

1. Calculated from U.S. Census Bureau statistics, 2007. MasterCard Worldwide, MasterCard Small Business FAQ Guide, 2008.
2. MasterCard Worldwide, MasterCard Small Business FAQ Guide, 2008.
3. MasterCard Advisors, Comparative Cardholder Dynamics Small Business Study, 2008, and MasterCard Worldwide, MasterCard Small Business FAQ Guide, 2008.
4. Federal Reserve Board, Survey of Consumer Finance, 2004.
5. MasterCard Advisors, Financial Benchmark Study, 2003
6. Packaged Facts, Corporate Credit Cards in the U.S., March 2007.
7. TowerGroup, "Small Business Payment Cards in the United States," 2006.
8. MasterCard Advisors, Comparative Cardholder Dynamics Small Business Study, 2008.
9. MasterCard Advisors and D&B (Dun & Bradstreet), Study of Small Business Spending, 2007.

Michael Carbone is a Global Practice Leader for MasterCard Advisors' Commercial Segment business. He advises financial institutions on their commercial strategies and helps them develop implementation tactics that promote revenue growth and drive commercial card usage. He works with clients globally to address business challenges across the commercial segment, from small business to large market. Based in Purchase, N.Y., Mr. Carbone can be reached at michael_carbone@mastercard.com.

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