Small Business Credit Card Fallout

The recent decision by Advanta to stop lending to its small business credit cardholders from June 10 underscores the challenges faced by small business credit card issuers. Advanta is in a unique position insofar as it is 100% exposed on the small business market, and its managed charge-off rate of almost 16% in 1Q09 underscores the scale of its challenges. However, leading banks with large small business card portfolios are also under severe stress. In fact, the viability of small business credit cards in their current configuration is open to question.

Issuers are already changing key elements of the small business card offer to mitigate the significant default risk. We have seen huge increases in APRs and decreases in credit limits. But how much further will issuers go? Will issuers introduce annual fees? Will we see secured small business cards?

There is also evidence that banks that have significant small business credit card portfolios (Bank of America, Chase, Citi, Wells Fargo) are narrowing their focus to their small business customer base. This is seen in the dramatic reduction in small business credit card direct mail acquisition volume. In addition, some of these banks no longer accepting unsolicited online applications.

Credit or Debit?

How will the credit card industry be transformed, given rising charge-off rates and the credit card bill of rights that is expected to go to the White House this week? Some analysts are predicting higher APRs, more fees and less rewards for all credit card holders – even the (good) transactors who pay off their balance each month.

While card issuers will attempt to balance their costs with their profit through rates and fees, it seems uncertain that they will do so while not losing some of their best customers. However, rates have already begun to creep up, and many customers already feeling the pinch are starting to turn away from their credit cards to their debit cards.

This shift to debit may turn out to be good news for customers and banks alike, especially those banks that have extended rewards to debit card users to create deeper “enterprise” relationships. EMI research shows that approximately 25% of debit cardholders are already earning rewards on their debit transactions. And given America’s recent shift to thrift, we can expect to see more banks offering debit rewards to their customers to help encourage greater consumer spending and deepen the increasingly important relationship.

Interested in optimizing your rewards programs? For a copy of our whitepaper on the impact of rewards on program ROI, or to purchase our our full report, “The Evolution of Rewards,” call 617-224-1192 or email us at:

Are Banks Lending to Small Businesses?

The media has been quick to point out instances where banks have stopped lending to small business clients, either by reducing or eliminating lines of credit, changing terms, upping APRs, or simply refusing loans. The truth is that lending demand has also slowed appreciably, at the same time that banks are looking for ways to reduce risk.

But given all the bad press that is out there, banks are making sure that prospects and clients alike are seeing them less as the villains in a down economy, and more as partners who are in it for the long haul.

Today, to help manage its image despite its crippling losses, Citigroup announced that it is using its TARP monies to fund nearly $45BN in loans. While it is making loans to local governments, municipalities, universities and non-profit hospitals to stimulate local growth, Citi points out that it has been making loans to small businesses as well as consumers.  According to the report, “New lending to U.S. individuals and families, small and mid-sized businesses and large corporations, along with underwriting activity, totaled $120.1 billion in the first quarter of 2009, up from $81.2 billion in the fourth quarter of 2008.”

So what does that mean for small businesses specifically? According to Citi, small business loan balances outstanding rose from $1.1BN in March 2008 to $1.3BN in March 2009. Not much of an increase in the grand scheme of things, but $200MM is enough for Citi to report that it is lending, just like its peers.

The full report, which has the catchy title, “What Citi is Doing to Expand the Flow of Credit, Support Homeowners, and Help the U.S. Economy,” can be found on Citi’s website.