Having tightened consumer lending standards, credit card issuers are pulling back in a more dramatic fashion from the small-business sector, where the risks and rewards are amplified.
Small-business cards, which generally yield higher spending than consumer cards, greatly augmented issuers' profits in recent years. But in the current downturn, chargeoffs of small-business receivables have risen more rapidly than losses on consumer debt.
Issuers have lowered credit limits, raised interest rates, closed accounts, and reduced rewards for consumers and small businesses alike. But small-business issuers have gone further.
Citigroup Inc., for example, has discontinued a premium small-business card, the CitiBusiness PremierPass, "due to low demand in the current market climate," spokesman Samuel Wang said. The company started notifying cardholders about its decision last month, and is closing the accounts of those whom it deems unqualified to migrate to a similar product, the CitiBusiness Card with ThankYou Network.
American Express Co. has notified customers that two noncard small-business financing products will be discontinued on Jan. 15 "as a result of our increasing focus on our core set of card products," spokeswoman Rosa Alfonso said. Amex is also selectively applying the same interest rate increases of 2 to 3 percentage points to its small-business card portfolio that it is applying to its consumer card portfolio.
Advanta Corp., which specializes in small-business cards, has been raising some of its cardholders' interest rates, in some cases by 20 percentage points or more, after saying last month that it was taking steps to reduce its exposure to "risky" customers. Advanta also said last month that it would close 200,000 inactive accounts in the second half, in addition to the 10,000 it would normally close, rather than try to get those cardholders to resume spending on the cards.
Small-business cards are particularly risky because they are approved according to an applicant's personal credit history but extend greater credit limits than the applicant would be able to access as an individual.
"The line of credit is likely to be higher … with not much more than personal creditworthiness to hang on," said Gwenn Bezard, a research director at Aite Group LLC.
Sameer Gokhale, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said the steps small-business card issuers have taken "may be similar to the steps taken by the consumer credit card issuers, but they may have to pay even more close attention to managing loss severity associated with card accounts."
Frank Martien, a partner at First Annapolis Consulting in Linthicum, Md., who follows the small-business card sector closely, said: "The actions that are being taken are very broad and impacting some businesses that are not necessarily credit-challenged. … The mood out there is certainly one of hunkering down."
Funding for small businesses has tightened along with consumer lending. Many owners have been relying on their credit cards, including personal ones, for funds as home equity financing has frozen and government-guaranteed Small Business Administration loans have slowed. A Treasury plan announced Tuesday aims to increase the availability of credit to consumers and small businesses by financing investor purchases of asset-backed securities. (See related story.)
Curtis Arnold, the founder of U.S. Citizens for Fair Credit Card Terms Inc., which operates the Web site CardRatings.com, said more issuers have withdrawn their marketing from his site for small-business products than for consumer cards.
Issuers are not abandoning the small-business niche. Citi has about nine remaining small-business cards, including one that was introduced in June. Ms. Alfonso said Amex remains "committed to the small-business segment." And Advanta has rolled out two new premium cards since March.
Mr. Martien said small-business opportunities remain, especially for community and regional banks. "There might also be some strategic opportunities here for somebody nimble … to target those customers with a compelling product," he said. But "I don't think that would be enough to move the needle at the really big issuers."
Discover Financial Services and Bank of America Corp. said they planned no near-term changes to their small-business card lineups. JPMorgan Chase & Co. would not say whether it plans to introduce or discontinue any small-business cards.
Advanta, which charged off 10% of its receivables last quarter, is trying to reduce those losses with a carrot and a stick. Dennis Alter, the Spring House, Pa., issuer's chairman and CEO, said on a conference call last month that it was separating its customers into three tiers according to profitability: "The last group will be segregated, sequestered, and surrounded, and we expect our exposure to them will be reduced greatly in a variety of ways."
Advanta would not elaborate on how it would reduce that exposure. But consumer complaints about sudden hikes on its interest rates — sometimes by 20 to almost 30 percentage points, according to posts on consumer Web sites — have spiked this month. Jane Driggs, the president and CEO of the Better Business Bureau of Utah, where Advanta's issuing bank is headquartered, said last week that her organization has received 82 consumer complaints in the past month — almost 10% more than the total complaints received in the previous six months — about Advanta's "huge" interest rate increases.
At the same time, Advanta is trying to win business from the more profitable customers that Mr. Alter said "should be embraced, nourished, and grown." This year Advanta introduced a platinum card with no interest on purchases for 90 days, and last quarter it unveiled the Business World MasterCard with WhyWait Points, which pays out up to 200,000 rewards points up front and then requires cardholders to maintain a certain spending level in order to earn back those points. (Advanta will charge cardholders 1.5 cents per redeemed point if the cardholder does not "utilize" the account "sufficiently" within 15 months of activation.)
David Goodman, a spokesman for Advanta, said, "We have tightened our credit standards to reflect what is happening in the economy and these products are designed for customers who meet those enhanced criteria."
Mr. Arnold called the WhyWait card "an interesting way … to appeal to activation" — once the points are paid out, "you're kind of committed to using that card to pay back those points."
But he sounded uncertain about its long-term appeal to small-business owners. "If you're savvy about it, it's a great offer," he said, but "it's kind of hard for a lot of business owners to predict their spending. … If you knew what your spending was going to be for the next 15 months, great, but I'm not sure if the average small-business owner can, especially in this environment."