For small-business credit cards, already tottering, Advanta Corp.'s decision to stop lending to its one million cardholders could be a fatal blow.
The recession has turned these cards, once so profitable for the high spending they generate, into one of the riskiest products in issuers' portfolios. Most issuers have reacted by dramatically cutting credit lines, increasing interest rates and withdrawing most of their marketing of such cards.
"The bottom line is, when you're offering credit lines that are double, triple, four times the size of what you offer to consumer cardholders, when there's an economic downturn, the loss severity can be much higher on these business cards," said Sameer Gokhale, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc. "When you have credit losses rising to" levels seen at Advanta, "which were not expected by the company and many others, it calls into question the whole business model."
Advanta, which specializes in small-business cards, had already sharply increased the pricing on some accounts, cut originations and closed accounts. But its decision, disclosed this week, to shut down all lending in its existing accounts on June 10 was the sector's most drastic pullback yet — one that observers said could reverberate beyond small-business issuers to increase losses across the entire credit card industry.
"It's definitely the death of the small-business credit card for now. I hope there will be a resurrection, but I don't know how soon it will be," said Gerri Detweiler, a credit adviser at the lead generator Credit.com Inc. Small-business owners "who really need to borrow right now are going to be looking at other alternatives. They may start charging business expenses on their personal credit cards, which makes those personal credit cards riskier."
Curtis Arnold, the founder of QuinStreet Inc.'s CardRatings.com, said Advanta "historically has been a bellwether for the whole business card market. This pullback has been beyond my wildest expectations."
Small-business cards are the most popular form of financing for entrepreneurs, according to a survey released Sunday by the National Small Business Association. But new solicitations for those cards have largely dried up.
Many issuers have reduced their marketing through Web sites like Credit.com and CardRatings.com, but small-business issuers have gone a step further. Arnold said American Express Co. was the only remaining issuer offering its cards on CardRatings.com; Detweiler said that her site currently has no small-business card offers.
Boaz Salik, the managing principal at the card consulting firm FischerJordan LLC, said it was too early to write an obituary for small-business credit cards, but "I think everyone's going to be holding their breath for at least the next couple of quarters to see if loss rates stabilize," he said. "If they don't stabilize, you'll probably see more competitors getting into trouble. It's not going to be a trumpet sounding all at once. It'll be more like a series of dominos."
Advanta has attracted widespread criticism for some of its risk-management efforts during the recession; since last fall it has raised interest rates on some cardholders' accounts, in some cases by almost 30 percentage points.
Despite such tactics, both Arnold and Detweiler called the issuer's current predicament "sad."
"For a long time they did a really good job. They really gave American Express a run for their money, when American Express really had that 'friend of the small business' reputation locked up," Detweiler said.
Before last fall, when it started "really raking some of its customers over the coals," she said, "Advanta was a great small-business credit card. They really were generous with low interest rates, generous with rewards and did a good job of managing small-business owners' experience. It's sad news both for the industry and for the cardholders."