Untapped Opportunities in European Small Business Cards

January 12, 2015
By: Allan Reynolds

Small business cards have long been under-penetrated in Europe, but based on the outcome of pending interchange regulation, issuers could find themselves eager to accelerate issuance of small business cards in pursuit of a €1.5 billion revenue opportunity (see Figure 2 for opportunity sizing). European interchange regulation could drastically shift the rationale for issuing small business cards if commercial cards (which are inclusive of small business, corporate T&E, and purchasing cards) ultimately are excluded from the regulated interchange caps applied to consumer cards. Corporate T&E cards are fairly well established in Europe but credit card issuers have largely decided to forgo small business card issuance. Based on our research, most European issuers simply market consumer cards to small business owners and do not market specialized small business products. Regardless of the outcome on interchange regulation, small business lending remains generally under-penetrated, particularly in the aftermath of the financial crisis (a recent ECB survey found that among the 25% of SMEs that applied for a bank loan, 11% were rejected and 10% received less credit than requested). Small business cards could become an effective interchange hedge as well as a means to penetrate the small business lending opportunity.

Figure 1: Online Promotion of Small Business Cards by European IssuersFig-1_Online-Promotion-of-Small-Business-CardsSource: Analysis of business credit card products of 43 issuers selected from top 3-5 issuers in each market performed by First Annapolis Consulting.

Figure 2: Estimated Business Credit Card Interchange Revenue Conversion Opportunity in Europe1
(In € Billion)
Fig-2_-Estimated-Business-Credit-Card-Interchange-Revenue-Conversion1 The analysis assumes that 5% (white above) to 10% (blue above) of issuer’s consumer card volumes migrate to commercial cards.
Source: First Annapolis Consulting analysis and estimates.

First Annapolis recently evaluated the business card offerings of issuers across major European markets and our findings confirmed that the small business card opportunity is vastly under-penetrated. Based on 43 issuers across markets, First Annapolis found that:

  1. Few issuers market small business cards via online channels
  2. Even when there is a product, promotion and new account incentives are virtually non-existent
  3. Small business cards do not have superior value propositions in comparison with equivalent consumer cards (despite having higher interchange)
  4. Most issuers lack a sufficient online management tool, which is an important requirement for small business owners

Small businesses in Europe overwhelmingly use consumer cards. Our estimates suggest that 5-10% of all active consumer credit cards in Europe are held by small business owners/proprietors which could be better suited using a small business card. Put differently, in the U.S. where small business cards are more prevalent, best-in-class small business card issuers can achieve a product penetration of 30% of the bank’s total small business base; in Europe, most banks are below 10%.

The interchange upside from converting small businesses from consumer cards to commercial cards is huge. We estimate the total revenue upside for issuers in Europe to be €1.5 billion annually. This is based on 1.0% interchange upside on incremental spend of €150 billion. The accessibility of this €1.5 billion opportunity is in the hands of regulators, with mixed messages arising from political circles on the inclusion of commercial cards in the regulated interchange rate cap. The most recent version of the bill (adopted by the European Parliament on 3 April 2014) included commercial cards under the cap, but market chatter suggests that there is still a chance that commercial cards will ultimately be excluded.

In the case that commercial cards are excluded from the cap, issuers would be well-served to invest in the development of a small business credit card product and to actively market this product, both into their own consumer card base and broadly into the marketplace. Issuers must of course deal with the challenges that accompany small business card issuance (many of which have contributed to the current state of under-penetration).

Being quick and nimble to underwrite and issue business cards in an increasingly internet-based and real-time distribution environment remains the key challenge. Best-in-class issuers have developed streamlined approaches which lean heavily on consumer practices while also controlling for the extra risks and requirements that accompany a business account. Best-practice marketing and underwriting tactics include:

  • Create an easy, short-form application
  • Utilize pre-approval for bank customers and instant decisioning for new applicants
  • Provide digital documents and signatures
  • Underwrite the business principals and use personal guarantees
  • Include inactive cards in all business package offers
  • Upsell a superior value-proposition on business cards

For those banks challenged to invest and to build small business issuing capabilities, there is the option to use an agent bank partnership with a scaled and experienced small business card issuer. Such agent bank arrangements are common for corporate T&E cards. Under an agent bank model, the agent bank is responsible solely for card marketing, while the issuing partner handles the remaining processes, which include underwriting, issuance, pricing, customer support, and customer billing. Particularly as a means to enter the market quickly and to learn the product before self-issuing, the agent bank model can be a good fit for banks lacking the operational expertise in-house.

Figure 3: Small Business Card ChallengesFigure-3_-Small-Business-Card-ChallengesSource: First Annapolis Consulting observations.

Small business cards are a significantly underpenetrated opportunity for issuers in Europe, and are prime candidates for investment and focus given potential €1.5 billion revenue opportunity if commercial cards are excluded from the EU interchange regulation. Alternatively, if commercial cards are included in the regulation, the opportunity is less clear given the challenges of operating a small business card product and the fact that interest revenue alone struggles to support the product’s business case.

For more information, please contact Allan Reynolds, Associate, allan.reynolds@firstannapolis.com, specializing in Credit Card Issuing in Europe.

This article was recently featured by Commercial Payments International, January 12, 2015.  The original article was published in the September 2014 Navigator by First Annapolis Consulting.