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.