May Martin Joseph rest in peace. Patrick Manning’s seven-year national security minister haunted me watching the budget debated.
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Credit card company takes aim at Small Businesses
If small businesses use e-commerce for their business transactions, will they be better off? MasterCard’s head of commercial product development and management, Paulo Fernandes, said they can be. Speaking with the Sunday Business Guardian at the Hyatt Regency hotel after the Chamber of Commerce’s Business Innovation-the Caribbean Experience seminar, Fernandes said this can happen through the use of business credit cards.
“The key reasons for small businesses to get a card is they need to separate their expenses. They need to keep their personal expenses separate from their business expenses. For accounting purposes, you want to see how much you are spending on your business and that gives you better control, better transparency and better operational efficiency.”
Looking at small business in T&T, Fernandes said, “there are about 18,637 formal businesses registered with the Chamber of Commerce. These small businesses spent $670 million on cards (credit), half on personal and half on business cards. Out of these business cards, a third was spent on cross-border transactions or import/export.”
The potential market
Sebastian Barletta , MasterCard’s vice president, territory head for the Eastern Caribbean, who was also present at the interview, told the Sunday Business Guardian, that T&T ranks third in the Caribbean credit card market. “The three biggest markets in the Caribbean are: Puerto Rico, Dominican Republic and T&T for business credit cards.” Each of these countries have a population of 3.7 million, 10.4 million and 1.3 million, respectively.
For the people at MasterCard, this signals a very large small business market in the Caribbean, which they have included in the Latin America region. Referring to small businesses in the region, Fernandes said, “small is the new big.” He said, by his company’s estimate, there are 65 million micro-entrepreneurs in Latin America and the Caribbean, who provide two-thirds of the region’s jobs. This estimate takes into account formal (registered) and informal (unregistered) businesses.
Fernandes gave a further estimate as to what those numbers are: 22 million are formal and the other 43 million are informal. “If we take a deeper look at the small business segment in Latin America, you find that they provide a third of the GDP, but employment of up to 67 per cent.”
Issues and obstacles
The six types of small businesses MasterCard has identified are: the mom-and-pop shop, the community pillar (area contractor), the planes, trains and entrepreneurs (those who travel for business) ,the business builders (entrepreneurs), the single owner home office and the traditionalist (family owned).
Data presented by Fernandes showed that for the Latin American region, these categories of small businesses collectively spend around US$1.5 trillion. Of this amount, they consider US$163 billion to be “cardable,” meaning, there is opportunity for small businesses to use credit cards. The number of small businesses in the region using credit cards is increasing 35 per cent per annum, he said.
“The issue is that two-thirds of them don’t accept cards and 95 per cent of them use cash and cheques. Those that do use it, basically use it to buy the wholesale trade. Forty-two per cent of their purchases are goods that are going to be resold,” Fernandes said.
According to Fernandes, one of the obstacles to small businesses increasing their card usage, is the concern that their cards will be used fraudulently. Another obstacle he identified from research MasterCard has done, was that small businesses have difficulty using the Internet because of the high cost in some areas and lack of knowledge in others. The biggest obstacle, however, is that local small businesses have difficulty accessing credit.
“Banks need more information on small businesses before they can actually provide them with a card. This is why there has been a challenge for growth in business card (credit) in T&T and the rest of the Caribbean; the access to credit information, access to documentation that enables a bank or a branch manager to make a credit decision.”
The credit issue does not only come from a lack of data, but also because many businesses are not registered. Fernandes said, “when small businesses are not registered, it is a challenge because when they go and try to get a loan at the bank, they are not a part of the formal economy and it’s difficult for them to get a loan because they don’t have the legal paper work. It’s not really a regulatory issue, it’s more of a lending practice issue that the banks have, which is understandable. The bank’s position: ‘I can’t lend money to just anyone that walks in through the door, I need to have data.’”
The difficulty accessing credit creates problems for e-commerce. Fernandes said MasterCard is trying to help the region in this area. The commercial development and management head described some of the solutions his company has to assist local banks in making it easier for T&T’s small business sector.
“What MasterCard has that is important to T&T,” he said, “are tools to help banks make better financial decisions in credit scoring small businesses. This is one of the reasons MasterCard has been ranked by Fast Company in the US, as the 8th most innovative company in the world for their ability to provide solutions that the other brands do not.”
Fernandes displayed a tool called “Simplify Commerce” which is a Web application that enables small businesses to go online, set up their e-commerce Web site and start accepting payments. “This tool, he said, “is available in the US and we are launching it Brazil. We still have to determine the interest of the local banks in T&T to determine how ready they are to bring that in.”
He also said they have a tool to help small businesses manage their buying and selling operation. “What this does is manage the cash management efficiency of the back office.” Fernandes explained the MasterCard business network which he said, “is a Web site that you can think about as a small business toolbox. You, as a small business can go in there and get information on trade, which is something very important for this area; travel; how to get rebates; controls foreign payments; expense management and so on.”
Fernandes said that through the network, MasterCard has set up controls on their issuing banks’ Web site. Here, the small business owner can control and monitor card usage by setting merchant categories, type of transaction and geographic location where the card can be used. Business owners can receive alerts when a transaction occurs as well. This product has already been launched in the US and Brazil and MasterCard is looking to launch it in the Caribbean early next year.
Fernandes also touted the benefits of having a card given the high level of import/export transactions the Caribbean does through the Internet. He said that payment via card was more convenient, more efficient given the fast pace of the small business environment and cost less than cash. “There is a cost to cash, cost of counting cash, handling cash and securing cash.
We’ve done some studies with some corporations as to how much time they actually spend counting cash, reconciling cash, writing on a piece of paper. It takes a lot of time and controls. Imagine if you can do all of that electronically and that was all automated. You can increase your sales because you can be out there selling more and you can actually increase the operation of your business. In buying, you can see which suppliers are the most efficient.”
“When you look at a small business, look beyond just payment to what keeps a small business up at night? What are the key things a small business looks at?” Drawing his conclusions from MasterCard’s research, Fernandes said small businesses are looking at: identifying new customers, dealing with the escalating cost of goods and managing cash flow. He said MasterCard is ready to work toward assisting banks to help small businesses in these three areas.
“It is key that a bank understand its portfolio of small businesses, segment the portfolio and develop a value proposition for each one based on their need to buy, operate and sell.” Fernandes does not only see MasterCard’s mission as improving small business and bank operations but he said the cards can also help governments formalise the business economy and understand business cash flow from a legal stand point by providing information that cash transactions cannot provide.