Thoughts on Small Business Card Growth Projections and Discover’s Return to this Market

By David Schmidt

US credit card volumes went through some growing pains after the recession, but have rebounded nicely and are generally thought to be healthy according to a Mercator Advisory Group study[1].  Nevertheless, growth appears to have plateaued with Mercator reporting 63 million new accounts in 2017 with the same number forecast for 2019.

Small Business Cards, however, are expected to grow to about $700 billion by 2022 from the current level of $536 billion in transactions.  The biggest opportunity in the small business sector is with small businesses employing fewer than 20 people.  These businesses often rely on the owner’s consumer cards, but in doing so forego account controls, reporting, and rewards tailored to businesses.

Discover’s return to the small business market clearly looks to take advantage of this projected growth.  For the same reason, banks should be looking to grow their card portfolios as well as the profitability of their small business customers.

We have found that small business accounts can be a very profitable segment for banks when commercial account holders subscribe to more than two financial products.  Getting a commercial customer to add a credit card account can therefore be a good way to seal the relationship.

Here are several suggestions on how best to proceed:

  • The benefit of promoting cards to existing business customers is increased account longevity, thus multiplying profits over time.  However, you will want to focus on businesses that are either in a growth or mature lifecycle stage, and avoid businesses that are in the static/decline stage due to the associated higher risks and lower profit potential of these firms.

  • In addition, identifying business owners from a bank’s retail file, who are not commercial account holders, provides an opportunity to acquire new accounts at much lower costs than campaigns directed at external prospects.

  • When reaching out to external prospects, your targeting should include selectors that indicate proximity to your branches, less than 20 employees, a growth or mature lifecycle stage, acceptable credit risk and significant wallet potential.

OX2 Solutions Corporation can help optimize your small business outreach by providing insights on internal and external prospects that are proven to drive marketing efficiency.

[1]U.S. Small Business Credit Card Forecast, 2017-2022:  Healthy Market, Room for Improvement” – Mercator Advisory Group, March 2018.

The Keys to Reaching 'Near Bankables'- the Underserved Small Businesses

 

Online and other alternative lenders benefit from providing lending services to the small businesses that are underserved by the traditional banking community.  The challenge is identifying those small businesses that are credit-worthy but unable to secure the lending facilities they require from their bankers. To be able to market efficiently, alternative lenders need to target small businesses that have a high probability of needing a loan as well as acceptable risk characteristics.

Finding these prospects requires going beyond standard demographics.  Business size, which is often used as a primary selector, can be misleading.  Businesses in different industries are subject to different financial dynamics that affect demand for loans, so a smaller firm in one industry can both have a greater demand for lending services and require larger lending package than a bigger firm in another industry.  And because almost all small businesses are captive to the characteristics of their local markets, local economic trends will also affect their demand for loans.

Targeting underserved small businesses requires a multi-step process that overlays analytics and enhanced selectors such as loan demand and financial indicators.  Here’s what you need to do:

1.    Target:  Identify the businesses in your target segment that have a high probability of needing a loan and that also offer acceptable risk characteristics

2.    Prioritize:  This pool of small business candidates then needs to be prioritized based on those businesses that display the highest loan potential with the least amount of risk

3.    Select:  From this prioritized pool, you can then select the top candidates for your marketing efforts

The benefits of this approach, compared to the use of standard demographics to generate a marketing list, are higher response rates, translating into more loan applications received.  In addition, a higher percentage of loan applications will be approved due to the pre-screening, and those loans will be bigger as well. The result is greater marketing efficiency and lower underwriting costs.