Competition is intensifying among global commercial card providers, especially for several large U.S.-based issuers seeking growth in markets abroad.
The U.S., which dominates commercial card issuing worldwide, continues to generate new card accounts for many issuers as more domestic corporations gradually shift business-to-business payments from checks to less costly and more efficient electronic channels, including cards.
But the commercial card segment’s most promising growth during the next few years likely will come from international regions, particularly Eastern Europe, Asia and Latin America, observers say. In many such recently developed economies, commercial cards are a relatively new phenomenon, presenting new-business opportunities.
Moreover, many of the world’s largest global corporations are looking to centralize their commercial card use with a single, global card issuer to gain efficiencies, instead of dividing their card programs among issuers in various regions and continents, issuers and analysts say.
“The largest commercial card issuers are looking at the global market as the next step for growth,” says Judson Murchie, an analyst with Aite Group LLC. “There are some huge differences in how key players are approaching international card-growth opportunities, and offerings vary, but competition is heating up on an international level.”
Among the four largest U.S. commercial card issuers with broad international offerings are longtime leader American Express Co. and its chief rival Citigroup Inc., which has steadily increased its international commercial bankcard operations in recent years, including expanding its global card-processing platform last year to 10 new countries.
JPMorgan Chase & Co., another rising competitor, last year unveiled plans to expand its international commercial bankcard offerings, including increasing the number of markets where it directly issues commercial cards in local languages and currencies.
And this year Bank of America Corp. also announced intentions to expand its commercial bankcard products to new markets overseas. Its goal is to bring commercial card programs to clients of Merrill Lynch, the investment banking subsidiary it acquired in 2008 for $50 billion, say BofA execs.
“With our Merrill Lynch acquisition and the expansion of our global corporate client base, it became apparent we needed to expand our global commercial card footprint,” Kevin Phalen, commercial card and comprehensive payables executive at Bank of America Merrill Lynch, tells PaymentsSource.
Many of BofA’s clients “are looking to consolidate their commercial card programs with one provider that can deliver it globally, consolidating transaction data to negotiate better deals with suppliers and overall getting better transparency and controls for corporate spending,” he notes.
The top four issuers’ existing core global commercial card program offerings vary widely (see chart). And it will be difficult for newcomers to expand market share against entrenched players in international markets, analysts suggest.
“I foresee Bank of America facing some very tough competition,” says Aaron McPherson, a research manager for payments with IDC Financial Insights. But commercial cards are one of the few areas where issuers can count on growth, he acknowledges.
AmEx and Citi executives agree there is plenty of room for growth in the commercial card arena. But Citi’s top commercial card exec dismisses Chase’s and BofA’s bullish international expansion plans as a lot of talk.
“With the exception of AmEx, all this discussion of competitors going into local markets is largely aspirational,” Paul Simpson, Citi’s global head of treasury and trade solutions, tells PaymentsSource. “Our other competitors are not really on the same international map we’re on.”
Any new competition among the top international commercial card players is likely to center on the breadth of payment services each provider can offer corporations, and the quality of customer service and the ability to issue cards in local currency in key markets, observers say.
The commercial card sector encompasses charge cards employees typically use for corporate travel-and-entertainment expenses (T&E cards) and procurement (purchasing cards). Corporations around the world increasingly also are making use of “virtual” account numbers, which are preauthorized for one-time-use bankcard transactions to provide greater control and security.
Prepaid cards for specific business purposes, such as emergencies, meetings and employee incentives, also are a smaller but fast-growing area within the commercial card sector, including abroad, issuers say.
Government agencies in the U.S. and abroad are heavy commercial card users because the cards controls enable organizations to restrict purchases to specific merchants, locations and amounts, to control spending and avoid fraud and misuse.
Government use of commercial cards often spawns further use of commercial cards within the private sector, especially in emerging markets, Murchie says.
Commercial cards are less widely used in Western Europe, where the majority of buyers and suppliers rely on noncard electronic-payment channels for many business-to-business payments. But Eastern Europe and many other still-developing economies are more receptive to commercial cards, Murchie says.
Local card issuance has become an important factor in global commercial card programs because corporations prefer the convenience of cards offering local customer support for their employees and the ability to make routine payments in local currencies, thus avoiding foreign-exchange fees.
While most large U.S. banks offer commercial cards, relatively few have the resources to provide complete local issuance of cards abroad because of the logistic and legal complexities of setting up local card-issuing agreements in multiple markets, analysts say. Instead, many banks offer commercial cards usable internationally, with the plastic issued in the U.S. or through a regional hub in Europe or Asia.
AmEx has built a rich network of local card-issuing resources over several decades, while Citi in recent years steadily has been working to close the gap by expanding the number of markets abroad where it issues cards locally.
Executives at both Chase and BofA say they plan to add local commercial card issuance in certain markets over the next year and regional issuance in other new markets. Both issuers say they plan to execute the expanded coverage through a combination of proprietary and third-party services.
Citi’s Simpson suggests that some of his newest international card competitors may be underestimating the challenges involved in establishing global card-issuing platforms around the world. It can take three to 12 months to set up a local commercial card-issuing program in a typical country, with startup costs of $200,000 to $500,000, he says.
AmEx worked for years to build proprietary local card-issuing operations in every major global market, and each is directly linked to its global network, says Lydia Schultz, AmEx vice president of global commercial cards.
“Many of our competitors are providing (global commercial card services) through a network of bank partners and third parties,” she says. “All of our commercial card products are delivered through our own network, enabling us to offer greater consistency of products and services.”
But size and scale also are becoming increasingly important levers in winning global commercial card business, which could prove to be an advantage for giants such as Chase and BofA.
Although commercial card spending as a whole decreased globally during the recession, the segment has remained a relatively lucrative niche that carries far fewer risks than do other types of commercial lending, observers say.
Issuers earn revenue from commercial cards’ merchant fees, which are very attractive to issuers and their corporate clients. Through a system commonly called “rebates,” suppliers typically pay issuers an interchange fee of 1% to 2% for each transaction, a portion of which the issuer passes to its corporate card customer, industry observers say.
In recent years rebates have become an increasingly important revenue stream to issuers and corporations, Murchie says. “Corporations have begun to take rebates for granted as part of their commercial card programs,” he says.
Suppliers, on the other hand, are looking to cut costs by using lower-cost electronic channels such as payments through the automated clearinghouse network and other types of prearranged payments among buyers and suppliers. Most large banks offer their corporate customers a smorgasbord of such electronic payments, in addition to commercial cards.
ACH-based business-to-business payments are growing at about the same rate as commercial card payments in the U.S., Murchie says.
But corporations nevertheless prefer using cards to pay for large numbers of routine corporate expenses, especially those subject to price negotiations or adjustments, Murchie says.
As payment choices become more diverse, opportunities for large global banks to leverage commercial cards strategically within their overall commercial banking offerings are also expanding.
“A bank that has broad relationships with a large corporation can package various types of bank products and loans together with a commercial card program to their mutual advantage,” Murchie says.
That logic is working for Citi, as its broad banking services around the world increasingly are helping it win more global commercial card business, Simpson says.
“Large clients are looking to consolidate their services with one global bank, and as the economy has contracted over the last two years, our ability to offer our corporate customers broader lines of business credit has proved to be an advantage in winning more commercial card accounts,” Simpson says.
Alan Koenigsberg, head of J.P. Morgan Treasury Services’ international commercial card and e-invoicing business, says Chase has “a great coverage model” for commercial banking, and the bank consistently is expanding the commercial card programs it offers to existing global banking clients.
Its rivals’ ambitions aside, AmEx’s Schultz says the company is not directly threatened by newcomers in the commercial cards arena. “We don’t need to work through another card network to run our commercial card program; we can go directly to our clients and structure things exactly how they want to do it, which gives us a great deal of flexibility,” Schultz says.
Entrenched card issuers such as AmEx and Citi could face serious pressure from large bankcard issuers hoping to leverage their broad global banking relationships to gain international commercial card market share in promising new markets. But competition for new corporate customers also will center on the quality of card programs and the execution of local card issuance in foreign markets, which poses challenges. PS
Thoughts on this article? We'd appreciate your feedback. Please click here.