Business Credit Card Issuers Face Competition but Also Opportunities in BNPL

Credit cards still dominate small business spending but the attractiveness of buy now, pay later and other installment plans keeps growing. Meanwhile, higher interest rates could hurt laggards but help the nimble.

Small business interest in purchasing via nonbank buy now, pay later programs and bank card issuers’ flexible financing/installment loan options both accelerated in 2023 and could grow even more in 2024, according to J.D. Power research. BNPL in particular is both a new source of competition for business spending and a potential way for banks to gain share of purchase volume.

The J.D. Power study indicates that card issuers could take advantage of significant appetites for more such borrowing among small businesses in the year ahead — if they introduce installment purchase options as part of their business credit card offerings, or do a better job promoting payment plan choices that they may already offer.

An example of the BNPL provider competition: In November 2023 Amazon Business and Affirm announced a joint effort to provide businesses using the ecommerce seller’s business platform the ability to pay over time using the BNPL provider’s services. This service was designed exclusively for sole proprietor purchasers at this time. (Purchases include interest charges under the installment plans.)

Just a month earlier, Galileo Financial Technologies, owned by SoFi, announced a partnership with Mastercard Installments to enable bank lenders to offer installment programs to small businesses.

The study found overall satisfaction with bank small business credit card programs was up over 2022, but a sticking point is the competitiveness of the interest charged. “Revolvers” — buyers who roll balances over from month to month — reported that increases in interest rates charged hit a three-year high in 2023, which should only fuel growing attention to payment plan options.

Digging into the Potential for Bank Cards to Power Business Installment Plans

Credit cards were the top option for business purchases among respondents to the 2023 J.D. Power U.S. Small Business Credit Card Satisfaction Study. The report found that 91% of firms surveyed use a business credit card, 49% a debit card, and 42% cash.

Next come two variations on paying over time. The first are buy now, pay later plans offered by nonbanks, like that offered by Affirm and Amazon Business, which 31% would consider using. Nearly as many — 30% — would consider using flexible financing and installment loan options offered by banks, typically under their business credit card programs. (Only 25% of the sample would consider personal loans or lines of credit.)

The research firm asked small businesses if their bank credit card issuer offers flexible payment or installment plans. Just short of a third — 29% — said yes and that they had used the plan option at least once. Another 35% said yes, but they hadn’t used it. And 12% said their issuer doesn’t offer the option. But fully a quarter — 24% — said they didn’t actually know if their issuer offered such options.

“There’s a lot of green space there for issuers to get more engagement with those features,” says John Cabell, managing director, banking and payments intelligence, at J.D. Power. Those that don’t have a program to promote can build one.

Cabell thinks inflation has caused more small businesses to consider using such options, in part because of rising interest rates on revolving business credit card debt.

J.D. Power research indicates that 41% of business credit card holders are “revolvers”; 59% are “transactors,” card holders who use the card for convenience but not as a credit instrument. Installment options could serve the interests of both groups.

Cabell notes that the percentage of transactors is higher than among consumer card users because the “instant gratification” which helps drive consumer rollovers isn’t relevant to business purchases. People don’t buy paper clips and yellow pads on impulse.

The leading uses for business card charges in 2023 were purchases of office supplies (78%), operating expenses (70%), travel (65%), gasoline (60%) and inventory (55%). Spending on all of those categories was up significantly over 2022. Figures from Intuit QuickBooks cited by J.D. Power indicate that small firms are now putting an average of $13,000 of spending on their credit cards each month.

Read more: What Small Businesses Want from Mobile Banking Apps (But Don’t Get)

Pinpointing Targets for Bank Card Installment Options

The study found that three types of business customer were most likely to be attracted to nonbank BNPL purchase plans and bank-offered flexible financing and installment plans.

These were “upper market” small businesses, which are the largest in size; revolvers; and small firms that have multiple product relationships with the provider of their business credit card. The study found that 36% of upper market business card holders had used the products, versus 29% of the overall survey sample.

While business card issuers may have an “in” for purchase plan financing with their small businesses bases, they may not enjoy that exclusively.

Cabell explains that many small firms have two business credit card providers. He says this can be due to the rewards programs offered by each issuer . For example, one card could chiefly be used for discounts it provides at a specific supplier, while another card could be a small business “go-to” for travel booking.

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An Unexpected Twist: Small Businesses are Upbeat about the Economy

Something that surprised Cabell was the high degree of optimism about the economy that respondents shared.

“We hear a lot of noise in the media about uncertainty in the economy and, certainly a year ago, inflation was a big news story,” says Cabell. “But that seems to be in the past, at least in terms of the thinking small businesses currently have.”

The study found that 38% of small firms say they are better off financially than they were a year ago — up four percentage points from the previous report. (To put that in perspective, 51% of companies surveyed in 2019 felt that way, so there’s still pre-pandemic ground to make up.)

Cabell suggests that the year-to-year improvement comes from “more clarity that we’re not going to have a recession.” Mid-sized and “micro” small businesses have significant exposure to increased debt and higher rates, he adds, which may be a brake on the rising optimism.

Read more: 4 Surprising Charts on What’s Buoying the U.S. Economy

Another Surprise: Firms that Pay Annual Fees are Happier

The issue of annual fees for business credit cards is a bit different from the same matter for consumer cards because small firms can earn reductions in annual fees when they charge high enough volumes.

Cabell says that it can seem counterintuitive, but cards with annual fees earn the highest satisfaction ratings in the study. “You might think that no-annual-fee cards would be the sweet spot for satisfaction,” he says, “but in fact they’re not.”

He credits issuers who work hard to provide enough features and rewards that cardholders feel that they are getting their money’s worth for the fees they pay.

On the other hand, firms that hold cards that don’t carry annual fees tend to look at features solely, and find the no-fee cards to be wanting.

See all of our latest coverage on payments.

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