Will the interchange cap on consumer cards boost commercial cards?
Commercial cards, consisting of Business, Corporate, Purchasing and fuel cards, benefit businesses by controlling expenditure and reducing cash handling costs. Nevertheless, according to RBR’s new study Commercial Cards in Europe 2015, in many countries the sector is still not well established, and represents a major, unexploited opportunity for banks. Looking ahead, the issuance of commercial cards will be boosted by their exclusion from the interchange fee caps applicable to consumer cards in the EU, but established payment practices, as well as limited acceptance among suppliers, will continue to hamper growth in some countries.
Commercial cards have significant potential
There were 45 million commercial cards in issue at the end of 2014 in the 15 markets surveyed by RBR, a rise of 5% compared to 2013. 2.0 billion commercial card payments worth €215 billion were made in 2014. With the volume and value of commercial card payments increasing more quickly than card numbers, at 7% and 8% respectively, it appears that such cards are being used for a broader range of transactions than in the past. Nevertheless, B2B payments for the procurement of goods and services represent a small proportion of spending in most countries.
Commercial cards were found to account for less than 4% of the total payment card base – only 2% if fuel cards are excluded – and a similar proportion of the number of payments. This indicates considerable potential for further growth in issuance and usage. Commercial cards represent a much higher percentage of total payment card expenditure, as they are typically used for relatively high-value transactions.
Commercial debit and prepaid cards are increasingly being issued to SMEs
RBR’s study shows that the majority of commercial cards are charge cards – around two thirds of the sector in the countries surveyed. The proportion is expected to fall as the fuel card sector, consisting mainly of charge cards, faces limited future growth.
In countries such as Poland, commercial credit cards are in demand because of the extra flexibility they provide compared to charge cards. In other markets, Denmark for example, the availability of business loans for long-term credit will inhibit commercial credit card issuance.
Commercial debit and prepaid cards are forecast to become increasingly common, especially among SMEs, because they are easier to apply for and provide even greater control over employee spending than pay-later products. That said, issuers have expressed some concern about the profitability of prepaid commercial cards.
Share of Commercial Cards by Type, 2014
Source: Commercial Cards in Europe 2015 (RBR)
Ability to control business expenditure drives commercial card growth
The RBR study reveals that the main driver of growth in the commercial card sector is control over business expenditure, aided by increasingly sophisticated reporting tools which improve visibility.
Some issuers now enable company administrators to view spending by geographical area and merchant category. Reporting also commonly allows companies to monitor compliance with spending policies, cancel cards, set spending limits, and block the usage of cards in certain merchant categories. Online tools permit administrators to filter transactions by type (e.g. hotel reservations, flight tickets and car hire) and to generate their own customised reports.
Other benefits of commercial cards include reduced cash handling costs, increasingly attractive insurance offers, loyalty features, and, particularly in the case of premium commercial cards, access to first and business class airport lounges.
EU interchange fee regulation to drive issuance
The interchange fee regulation due to take effect in the EU in December excludes commercial cards, for the time being at least. Since commercial card interchange fees are already significantly higher than those for consumer cards, the gulf will widen once the consumer interchange fee cap is imposed, which will be 0.2% for debit cards and 0.3% for pay-later cards. At least in the short term, this should drive further commercial card issuance, particularly in countries where consumer cards are wide1ly issued to small businesses currently.
Ingrained payment habits and low supplier acceptance are challenges
Despite the many reasons commercial cards are finding favour, businesses’ ingrained payment practices will continue to hamper growth.
Credit transfers and, to a lesser extent, direct debits are frequently used for settling business payments. Credit transfers are a simple and inexpensive means of making payments and are not subject to the same transaction limits as cards. Cheque usage is declining, but it is still relatively common for B2B payments in some countries, such as France, while promissory notes are also used by small businesses (e.g. in Turkey). Card acceptance among suppliers in some countries will need to increase before the use of cards for B2B payments can achieve its potential.
Another inhibiting factor revealed by the RBR study is the abolition of the ‘Honour All Cards Rule’ for products that are subject to different rates of interchange within the EU, as some merchants choose to accept only consumer cards. Nevertheless, for merchants where commercial cards are most commonly used, the gain from these typically high-value transactions generally outweighs the cost of accepting them.
Issuers to focus more on commercial cards
RBR’s report concludes that there will be a greater focus on the commercial cards sector by issuers once the consumer interchange fee cap comes into force at the end of this year. Whether this will kick start the sector or whether businesses’ established payment practices continue to prove a major obstacle remains to be seen.