Strategies to Serve Your Small Business Relationships Heather Fraser Vice President, Commercial Sales
Today we will cover: Small Business Market Overview Small Business Trends and Concerns Attracting, Retaining & Expanding the Small Business Relationship Advantages for Small Businesses to use Cards Q&A
Segment Is Highly Dynamic And Provides Significant Growth Opportunities Small Business segment drives economic growth 27.9 million firms with fewer than 100 employees Firms with no employees consist of 80% of the overall small business universe Represents 99.7% of all firms in the U.S. Employ 57% of the countries private workforce Small Business spend domestic focused 62% of spending today is on Checks 83% of Business owners use cards; 60% use Business Cards; 18% use both Personal and Business cards $600 $500 $400 $300 $200 $100 $0 Business Charge and Credit Spend ($Billions) 2007 2008 2009 2010 2011 2012 2013 2014* 2015* 2016* Small Business Card spend estimated to be $600B by 2016 *Forecasted
Small Businesses Are An Important Revenue Stream For Financial Institutions Small Businesses are Loyal 2 financial providers for both loans and deposits Businesses operating for two decades or more have had the same primary provider for 15 years or longer 50% consider their Small Business primary FI to also be their personal primary FI Continued Growth is Anticipated They currently spend more than $500 billion a year on financial services, This number is expected to increase to $600 billion by 2016 Small Business Owners are more profitable Small Business owners can be between three and seven times as profitable as general customers The tend to be more affluent, have higher credit lines, hold higher deposit balances, and use more banking services than general customers Source: Optimizing Small Business Channels, Synergistics, June 2013
Significant opportunity within the small business segment to drive card spend U.S. Small Businesses with $0 - $10MM in Annual Revenue Total Spend Estimate $4.8T 1 10% approximately of total small business spend is currently captured on cards. Cardable Opportunity Carded Volume $0.5T 3 $2.4T 2 $2 Trillion gap exists between cardable expenses and carded volume. This translates into significant revenue opportunity. Sources: 1. Federal Reserve, 2011 2. B2B International SME research, 2011 3. Packaged Facts, 2013
Segment Is Diverse With Spend Concentrated Among Several Clusters MasterCard conducted research to understand cardable spend patterns within the US small business segment Small Business Segment Business Builders Larger and established companies, Higher spenders Employers Community Pillars Small companies working locally, high card spend Many tradesmen Family owned Planes, Trains, & Entrepreneurs Small companies, high card spenders, travel a lot Sole props Professional services Traditionalists Low card spenders operating in small town America Conventional Family owned SOHO s Sole props working locally, low card spend, Professional services Family owned Mom and Pop s Older companies, older people Small, retail companies Conventional % of U.S. Small Businesses % Value of Cardable Spend 21% 48% 10% 17% 11% 16% 19% 8% 28% 10% 11% 1%
Agenda Small Business Market Overview Small Business Trends and Concerns Attracting, Retaining & Expanding the Small Business Relationship Advantages for Small Businesses to use Cards Q&A
An Unprecedented Amount Of Changes Are Disrupting The Marketplace Unprecedented amount of changes are disrupting the marketplace Owners are looking for a trusted advisor to help navigate the new operational landscape
Taxes And Government Regulation Remain The Biggest Issues For Small Businesses Per NFIB s latest Small Business Survey, taxes remain the single most important small business problem, increasing from a year ago. Sales became less of a concern versus prior year as the index number dropped from 17 to 13. Problem Aug. 2014 Aug. 2013 Taxes 24 23 Government Requirements Single Most Important Small Business Problem 19 21 Poor Sales 13 17 Quality of Labor 11 5 Quality of Labor became more of a concern: Cost/Availability of Insurance 8 8 56% Of the owners hired or tried to hire in the last three months 46% Reported few or no qualified applicants for open positions Other 8 4 Comp. from Large Businesses 7 6 Cost of Labor 4 6 Inflation 4 7 Source: Small Business Optimism Index, NFIB, September 2014
Business Owners Are Leveraging Technology To Run Business 78% Of owners use Smartphones 40% Of owners use Tablets 79% Of owners are on Social Media 37% Small Business Owners Social Media Use 2 (% of Owners) 35% I use this to promote my business I use this to interact with suppliers 63% Websites Are Still Important (Most Recent Channel Used to Research a Supplier, % of Owners) 8% 6% 19% 3% 15% 6% 15% 13% 6% 1% 1% 1% LinkedIn Facebook Twitter Google+ Website Phone In Person Email Mobile Website Mobile App Social Media
Small Business Trends Small Businesses are optimistic on future of their business and the economy Small businesses are getting financially healthier Big banks are increasing loans to small businesses & alternative lending competition is increasing Small business use of credit cards as a source of revolving credit is increasing Small business are starting to use alternative channels when interacting with banks
Today We Will Cover: Small Business Market Overview Small Business Trends and Concerns Attracting, Retaining & Expanding the Small Business Relationship Advantages for Small Businesses to use Cards Q&A
Majority of spend is focused on running the business with large opportunity to displace checks $4.8T total U.S. Small Business spend 96% in procurement categories 62% of this spend is currently on check Current carded Small Business spend is estimated at $400B, which is projected to exceed to $600B $4.8 TRILLION Small Business Expense/Procurement Category $2.4T $.4T Total Spend Card Spend $2.0T Card Opportunity Overall Wholesale Trade 39% Insurance 15% Utilities 13% Telecoms & IT 8% Fuel/Petrol 7% Professional Services 5% Repair & Maintenance 4% Office Supplies 3% Sources: Kaiser Associates Global Commercial Market Sizing Study, 2011; B2B International Global Commercial Cards Study, February 2011
Sizeable Proportion Of Business Spending Currently Resides On Personal Cards; Volume Is Potentially At-risk To Competitors 83% of businesses use a payment card of some sort for business expenses. Most card ownership is in terms of business cards. There is relatively little overlap between companies that have both forms of payment card (18%). Any Who Use A Personal Payment Card For Business Expenses 40% (60% do not use personal cards) 22% only use personal cards Use Both Business & Personal 18% 42% only use business cards Any Who Use A Business Payment Card For Business Expenses 60% (40% do not use business cards) 17% do not use either personal or business cards for business expenses Q11. Do you, or do any of your colleagues, use business payment cards to pay for business expenses? Q13. Do you, or do any of your colleagues, use personal payment cards to pay for business expenses? Source: Kaiser Research Commercial Study, 2011 Base: 628
Our Understanding of Small Business Fuels Your Innovation We know that spend among U.S. small businesses are spread between both Personal and Small Business Cards Small Business Segment Personal VS Small Business Card Use Business Builders Larger and established companies Higher spenders Employers Community Pillars Small companies working locally High spenders Tradespeople Family owned Planes, Trains, & Entrepreneurs Small companies High spenders Frequent travelers Sole props Professional services Source: MasterCard Commercial Cards Study, 3/11
Small Business Credit Transactions Are Growing Faster Than Consumer Business general-purpose credit card payments increased from 2.3 billion in 2009 to 3.4 billion in 2012 Businesses use of general-purpose credit cards increased at a higher rate than consumers use from 2009 to 2012 General-purpose credit card transactions increased from $87 in 2009 to $93 in 2012. Business transaction in 2012 was $196 compared with $76 for consumer transactions. Source: 2013 Fed Payments Study
Business Purposes For Using Credit Cards More than 60% Business T&E Vehicle expenses Day-to-day supplies Equipment Business svcs 46% 54% 54% 52% 64% of SB owners use credit cards for T&E related items MRO (Maintenance, Repair, Operational) expenses are commonly placed on credit cards. Inventory purch Pay bills Recurring payments Credit line Ins payments OD protection Cash flow 18% 17% 12% 10% 27% 38% 37% Payroll 5% 0% 10% 20% 30% 40% 50% 60% 70% (Base = 444 use credit/charge cards for business purposes) Source: Synergistics Research Corporation
Business Payments Product Profitability Rate the profitability of your bank s business payments product offerings Business Debit Cards is the #2 ranked product in terms of product profitability Average unregulated interchange rate for debit is approximately 2.40% Business Credit Card is the #5 ranked product 16% 11% 9% 6% 29% 36% 32% 43% 37% 47% 53% 58% 64% Source: 2013 ICBA Community Bank Payments Survey
Business Purposes For Use Debit Card More than Day-to-day supplies Online purchases 56% 65% 60% Pay bills 51% of SB owners use debit cards for day-to-day supplies Inventory equip Vehicle expenses 48% 45% Business Debit was rated as Very Profitable by Community Banks with over $501 Million in assets Business services Recurring payments Business T&E 37% 35% 45% Petty cash 26% 0% 10% 20% 30% 40% 50% 60% 70% (Base = 476 business debit card users/prospects) Source: Synergistics Research Corporation
Reasons For Using Personal Credit Cards For Business Purposes Many SB owners do not see a need for a separate SB card No fees/low fees are preferred over a business card which may have higher fees associated to them Earning rewards from their consumer card is a contributing factor Perception that benefits are superior from business card products Not need No annual fee Combine rewards Lower fees Better benefits Lowever interest rate Easier application Better credit limit Not offered one Prefer personal liability Better cust svc Online acct svcs better Not qualified Unaware of Image of card brand 2% 4% 6% 8% 8% 13% 11% 16% 15% 20% 23% 26% 31% 41% 53% 0% 10% 20% 30% 40% 50% 60% (Base = 113 use personal credit/charge cards only) Source: Synergistics Research Corporation
Small Business Debit economics are very favorable to a large number of issuers Blended Interchange Rate $ per Transaction Monthly Transactions per active card Months per Year Gross Interchange Revenue Per Active Business Card Business Debit Regulated $0.25 14.1 12 Exempt $1.49 16.3 12 $43 per Active Card per Year $291 per Active Card per Year Consumer Debit Regulated $0.23 18.3 12 Exempt $0.41 18.7 12 $51 per Active Card per Year $92 per Active Card per Year Despite the economic potential, portfolio penetration rates are still low Source: 2012 Debit Issuer Study, Pulse
Today we will cover: Small Business Market Overview Small Business Trends and Concerns Attracting, Retaining & Expanding the Small Business Relationship Advantages for Small Businesses to use Cards Q&A
Aligning With Small Business Priorities Small Business priorities are the key foundation for creating a strong brand and relationship experience Small Businesses seek advisory and guidance around day-to-day business finances and transactions Access to senior financial management & business thought leaders Proactive and personalized advice on budgeting and setting financial goals Though Small Business is thought of as one group - they represent a wide range of business types and their needs will very based upon revenue and organization size The ability to bank with an FI that is local and part of their community
MEAN Small Businesses Visit Branches Frequently Branch Visits Per Month 10 8 8.0 8.8 9.4 6 5.1 5.5 4 3.3 2 0 (Base = 777 total small businesses) Source: Synergistics Research Corporation, 2012
Consider Optimizing The Branch And Account Officer Relationship The branch channel has not been successfully optimized, and banks are challenged to increase business card penetration within their business banking customer base Only a small percent of Small Businesses have a card with their primary Financial Institution Only 35% of Small Businesses have an assigned Account Officer If the Branch Manager is the primary Small Business contact 55% were likely to consider to purchase again Improving branch small business financial and Business card sales requires an integrated set of actions to aggressively build sustainable sales success
Only a minority of small businesses have a credit relationship with the primary banking provider Financial Institutions have an opportunity to expand the primary banking relationship and consolidate wallet share Retail Division Branch staff reluctant to sell credit card; incentive limitations, SB creditworthiness, unfamiliarity with credit card product Small Business Credit Card Division Small Businesses unaware of banking integration opportunities* Alternative channels drive acquisition (e.g. direct mail) 31% Average Cross Sell into Primary Small Business Banking Relationship (Current Account)) 60% Best in Class Cross Sell into Primary Small Business Banking Relationship (Current Account)) Source: Synergistics Research Corporation, 2012; Comparative Cardholder Dynamics, 2012
Small Businesses provide numerous Cross Sell Opportunities including consolidation of business and personal relationships Those opportunities include: Growing the relationship within the business itself Personal business of the owner Business from the employees of the company The combined small business and consumer relationship contribute as much as half of total retail bank revenue Account retention is substantially higher when serving both the business and its owner Retail revenue from small business owners is more than $63 billion annually Incremental retail revenue from small business employees is more than $10 billion annually Source: Optimizing Small Business Channels, Synergistics, June 2013
Best Practice Branch Optimization Includes: Marketing Training Staff Engagement Customer targeting Communication materials In branch collateral Training sessions Training materials Coaching Branch staff Branch management The objective is to optimize retail channel business card sales performance, enhancing business banking customer relationships & driving long term returns
Revenue per Branch Lifting the credit card cross-sell ratio can yield significant Issuer financial benefits Revenue per Branch per Year Assumptions $90,000 $80,000 $70,000 $65,550 $72,105 $78,660 Customers Per Branch: 200 Average Annual Spend: $12,000 $60,000 $50,000 $40,000 $32,275 $39,330 $45,885 $52,440 $58,995 Average Interchange Rate: 2.45% Annual interest income: 10% $30,000 $20,000 $10,000 $26,220 Average Revolving Balances: $3,615 % with Business Credit Card with Primary Bank: $0 20% 25% 30% 35% 40% 45% 50% 55% 60% % with Business Credit Card with Primary Bank Average: 31% Best In Class: 60% *Current Average Cross-sell **Best in Class Cross-sell Source: Synergistics Research Corp, 2012; **MasterCard Advisors Comparative Cardholder Dynamics,2012
Summary Small Businesses are an Important Revenue Stream for Financial Institutions. Small Business priorities are the key foundation for creating a strong brand experience They seek trusted advisors who understand their industries, their value propositions, where they are today and where they are headed Adapting the current delivery system and branch channel strategy to be more appealing to Small Businesses will yield strong results Small Business Debit economics is very favorable for unregulated issuers Business Cards play an important role both for Small Businesses and their Financial Institutions
Agenda Small Business Market Overview Small Business Trends and Concerns Attracting, Retaining & Expanding the Small Business Relationship Advantages for Small Businesses to use Cards Q&A
References www.sba.gov BAI Research by ARGO The Financial Brand Barlow Research Associates CEB Research Shikatani/LaCroix Design Lounge