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Business + commercial cards = banking Miracle-Gro?

Unlocking value
By Henry Pooley, Chief Commercial Officer

The banking sector seems to get more competitive by the day. New entrants and fintechs are bringing a raft of products to market designed to entice customers away from commercial banks.

Loyalty is a challenge, but long-established banks shouldn’t just be seeking to maintain the status quo. Growth is essential, and our latest research would suggest that commercial cards have the potential to deliver it.

In our latest whitepaper, Regional banks: Transformation and Growth, we partnered with Aite Group to gain insight into the current state of the commercial cards market, and generate projections for its future.

Our findings conservatively estimate that commercial card spending will rise to $582bn by 2020, an increase of 71% over 2013 spending levels, revealing a compound annual growth rate (CAGR) of 8%. Banks themselves report growth of 15% or more year on year.

Spend is growing on cards primarily because of digital integration and customer awareness. As companies move away from paper invoicing and inventory towards electronic procurement systems, they’re beginning to realise the added layer of value commercial cards can bring.

Full, real-time transaction visibility 

Specifically, cards bring a level of control to finance management that executives haven’t enjoyed in the past. Transactions are viewable on electronic statements in near to real-time; spending limits can be put in place and adjusted on a case-by-case basis; and cards can be used for items that would otherwise get stuck in an invoice processing cycle.

The latter case is particularly useful in managing working capital. Payment cycles have always been a bone of contention, both for payers and payees. Withholding payments for the full invoice terms period (typically 30 or 60 days) puts pressure on small businesses who rely on a high turnover of product and payment to survive. Late payments are a major cause of small to medium enterprise (SME) failure which, in turn, impacts the supply cycle of larger firms, and so on up the chain.

Alternatively, tying payments to 30-day terms may not allow for buyers to scale with agility. Lack of working capital makes seasonal spikes hard to respond to. Cards with favourable payment terms enable companies to extend invoice terms, in some cases doubling or tripling the payment date from the procurement perspective with no ill effects on suppliers as mentioned above.

Virtual card growth

Because of the growth in demand and changing use cases for commercial cards, new card payment types are emerging. The strongest performing of these is the virtual or e-payable card, which grew 195% in 2017. Often used to replace the equivalent paper invoice-based purchase process, virtual cards use an account number but have no physical card. These can be single-use numbers, issued for a specific purpose, or linked to an ongoing purchasing account.

According to our research, some banking executives still feel that virtual cards are only appropriate for larger scale enterprises of $20m annual turnover and above. As digital payments technology becomes more widely implemented across all business sizes we would expect this to change, but for the time being, businesses over $20m still represent a sizeable market opportunity.

Digittalised back offices are driving other card types too, including travel and entertainment cards that maintain strict purchasing rules and allow card users to keep personal and business expenditure separate. P-cards replace purchase orders and are physical cards given to field operatives to buy necessary supplies. Fleet cards give additional information to fleet managers about fuel purchasing and consumption, while rewards and executive cards use a more consumer-based loyalty mechanic to layer personalised benefits relating to business card use, such as travel miles or refreshments.

Executives interviewed during our white paper research concurred that card use was an important lever for customer satisfaction, as well as a driver of growth for commercial banks in a market where margins are tight and competition is high: “Plastic has been around a while, but once you get [businesses] adopting it into their payables, we’ve seen clients double or triple their card spend.”

Find out more about the benefits of commercial card by downloading the free white paper Regional banks: Transformation and Growth