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					Debit Wars: PIN Vs. Signature | Telcos: Who Needs Banks?
February 2009 Vol. 22 No. 2

Illustration: Dave Cutler

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BY NADIA OEHLSEN

RISKY

BUSINESS
ISSUERS OF SMALL-BUSINESS CARDS ARE CONTROLLING THEIR PORTFOLIOS MORE TIGHTLY THAN EVER. BUT CRITICS SAY MANY BUSINESS CARD ISSUERS SHOULD LOOSEN UP.

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ARILYN LANDIS SPENT MUCH OF 2007 EXPANDING HER business. Landis, president of Basic Business Concepts Inc., a Pittsburgh-based consulting firm for chief financial officers, had hired two staff members and opened two additional offices. She used her Bank of America Corp. business credit card to purchase some $5,000 worth of computer equipment. On her BofA business cards, she charged more than usual for travel expenses to visit clients around the Northeastern United States and in cities where she was opening the two branches. Clients would reimburse Landis for many of her travel expenses, and Landis says she planned to pay off the balance for her computer purchases during the several months that her BofA card’s introductory rate was to remain at 3.99%. Landis always paid the minimum or more on her balances each month and never paid late, she says. In normal times, many business card issuers might have welcomed Landis’ interest-bearing but timely payments as responsible use of revolving credit that earned them a little extra profit. But times have changed. Commercial card issuers are nervous about restrictive legislation and the potential for the current recession to trigger more delinquencies and defaults, and many are changing how they manage business card accounts accordingly, sources tell Cards&Payments.

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ADVANTA BUSINESS CARD CHARGE-OFFS ry, AmEx executive vice president and In December 2007, BofA in(Net principal charge-offs as a percentage of average chief financial officer, confirmed the formed Landis it was increasing the managed receivables.) issuer is holding a tight rein on smallannual percentage rate on her BofA business card spending. card from 3.99% to 27%. The rate 10 “We continue to acquire cardhike applied only to new purchases, 9 members with positive economics, not to her existing balance, but Lanand we encourage creditworthy dis considers it an unreasonable in- 8 cardmembers to spend. But we are terest rate nonetheless. 7 managing small-business spending “They said my credit score had very closely,” Henry said. “Credit opchanged because my other credit 6 erations is limiting or stopping cards were getting close to their lim- 5 spending on customers with high its,” Landis says of BofA’s explanation 4 probability of default.” for the increase. Executives of Advanta Corp., a Around the same time, American 3 U.S.-based issuer that specializes in Express Co., with whom Landis has 2 small-business credit cards, have deheld a consumer credit card since 1 scribed in even more detail how they 1989, notified Landis it was halving her are changing the way they manage credit line, which AmEx had recently 0 the issuer’s portfolio. raised to $11,400. The letter told Lan“So much has changed in the dis AmEx based the decrease on its asSource: Advanta Corp. world, it would be folly to believe we sessment that she was carrying too Note: Advanta Corp. is not the only business card issuer could continue to manage and orhigh of a revolving balance on her 20reporting higher charge-offs, but it reports its card data in a category separate from other loan types, providing a much clearer picture of its portfolio than do other business ganize our work the same way we did AmEx and other cards, that she had 18card issuers. a year or two ago,” Dennis Atler, Adtoo many recent credit inquiries and 16 vanta chairman and CEO, told anathat she recently opened other accounts in the past year. Another reason for the credit decrease, lysts during a conference call in October to discuss 14 AmEx said, was “our analysis of the credit risk associated with third-quarter earnings. 12 The issuer has reorganized itself “to better align our efforts customers who have residential loans from the creditor(s) indiagainst three disparate groups that make up our portfolio,” cated in your credit report,” according to Landis. 10 A Plea To Congress Atler said. Those groups include those that generate very high 8 Landis told her story to members of the U.S. Senate Com- profits for the issuer, those that generate “good-to-excellent” mittee on Small Business and Entrepreneurship in April in profits, and those that are “relatively high risk, unprofitable or 6 her capacity as chair of the National Small Business Associa- marginally profitable.” 4 Advanta will embrace and work to nourish and grow the tion. Landis would rather not rely so heavily on credit cards 2loans have become two profitable groups, according to Atler. “The last group will for business debt, but small-business to increasingly difficult for entrepreneurs0 obtain, especially be segregated, sequestered and surrounded, and we expect businesses such as hers that do not hold many physical as- our exposure to them will be reduced greatly in a variety of ways,” he said. “We believe that managing these groups sepsets to front as collateral, she tells Cards&Payments. BofA has reason to be nervous about the health of its arately and having a discrete team dedicated to each group small-business credit card accounts. The issuer in October will enable us to best meet their particular needs and ultireported that its net charge-off rate on small-business loans mately maximize the benefits for the company.” Advanta gained from Landis what she contends was a sigissued in the United States, including credit cards, had risen to 10.64% of receivables in the third quarter ended Sept. 30, up nificant amount of business card revenue, according to her 526 basis points from 5.38% during the same period in 2007. Senate testimony. In November 2006, she received a cash adAmEx representatives did not provide an interview for this vance on her Advanta card of $14,318. She paid a $50 fee and article. But during a conference call with analysts in October 11.49% interest on the advance. Landis paid the $455 minimum regarding the company’s third-quarter earnings, Daniel Hen- due on the balance on time each month, but her December

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tral bank charges on loans to other financial institutions) has dropped to 2%, its chancellor and governor “must 18 16.41% and can take a very serious look at 16 capping of interest rates charged on 13.95% credit cards,” Wright continued. 14 The call from the federation came 13.90% 12 weeks after UK issuers, facing pres11.59% 10.83% sure from the government, said they 10 10.46% would tweak rules to allow cardhold9.77% 8 ers more time to pay card debts and to protect consumers from sudden 6 interest-rate increases. 4 Wright also called for banks to re2 lease more credit to “viable” small businesses, especially given the “bil0 Not Alone lions of pounds poured into” British Source: CreditCards.com Landis is not alone in her combanks in recent weeks as part of finanNote: The average annual percentage rates for business credit cards advertised on the credit card comparison Web site plaints about changing business card cial-aid programs. CreditCards.com. terms and shrinking credit limits. AcThough the Bank of England’s cording to the National Small Business base interest rate has dropped, cardAssociation, more small-business owners use credit cards as a lending costs have not necessarily followed suit, according to source of financing than they do any other source of funding. payments association APACS, a group that represents UK isBut the association reported in December that 57% of small- suers. “Although base rates have recently fallen sharply bebusiness owners say their credit card terms were worsening. cause of the way credit card lending works, the risk of lending In a statement released in December, Todd McCracken, has not fallen and may have actually increased,” says an president of the National Small Business Association, praised APACS spokesperson in response to Wright’s comments. the approval in December of new Unfair or Deceptive Acts or Credit card annual percentage rates represent the total cost Practices rules by the Federal Reserve Board, National Credit of credit being granted, including the cost of operating an openUnion Administration and Office of Thrift Supervision. The rules ended line of credit and the costs of managing bad debts and apply to consumer credit cards, not business credit, a Fed fraud. Therefore, “base rates are only one factor in the calculaspokesperson confirms. But many small-business owners use tion of an APR,” the spokesperson notes. personal and business credit to cover business expenses. “In discussions that the credit card industry has recently Association members are disappointed the rules will not go had with government around best practices, the level of APRs into effect until July 2010, but its members are pleased the rules has not been up for debate,” she continues. “Having said that, address many of the card-industry practices small-business anyone lending money in these exceptional times should be cardholders consider unfair, McCracken said. willing to actively explore best practices, and we exhort small Business groups outside the U.S. also are calling for gov- businesses who are relying on their credit cards to speak to their ernment to more-tightly regulate practices of business card credit card companies.” issuers. Landis says she understands the need for business card “We know that entrepreneurs use both personal and com- issuers to carefully manage the risks of revolving credit. “But pany credit cards to finance their businesses,” John Wright, they’re evaluating my credit card use for business as they national chairman of the Federation of Small Businesses in would for a consumer,” Landis says. “They’ve chosen not to the United Kingdom, wrote in his New Year message for 2009. base their credit on the cash flow of my business.” “Over 26% use their personal credit card, and over 23% use In fact, issuers of credit cards to small businesses typitheir company credit card.” cally consider the personal credit health and habits of busiGiven that the Bank of England base rate (interest the cen- ness owners in their decisions about how much and how to 2006 bill showed the interest rate for cash advances on the card increased from 11.49% to 20.01%. “Equally surprising was that my average daily balance, for which I was paying 2.99%, had dropped to $1,779.86, while the rest of my outstanding balance, for which I was paying 19.99%, jumped up to $17,333.50, with no explanation,” Landis testified. Such changes to terms of business card accounts make it difficult for company owners to plan responsible debt management and repayment, she says.
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BUSINESS CREDIT CARD ADVERTISED RATES

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“ISSUERS’ KNEE-JERK REACTION IS TO PULL BACK AND PROTECT THEMSELVES FROM LOSSES, BUT IT’S GOING TO BE AT THE EXPENSE OF FUTURE GROWTH.”
Edmund Tribue, Risk Management Practice Global Practice Leader, MasterCard Advisors

lend, says John Ulzheimer, president of consumer education at Credit.com Educational Services LLC. “It’s not only appropriate but perfectly legal for the business lender to delve into the business owner’s personal credit reports and scores to help them make decisions on how to manage their accounts,” Ulzheimer says. “No one likes that, but that’s the way it is right now.”

Preventing Future Growth?
Edmund Tribue, global practice leader for the risk management practice of MasterCard Advisors, agrees that assessing personal credit of small-business owners is appropriate given that small-business owners often draw from personal and business accounts and credit for business expenses. However, issuers are doing their customers and their own

bottom lines a disservice by overreacting to economic turmoil in recent months, he says. “Their knee-jerk reaction is to pull back and protect themselves from losses, but it’s going to be at the expense of future growth,” Tribue says. Community banks are doing a better job of managing small-business credit card risk because they have closer relationships with their customers, Tribue says. But even large issuers can use common sense to determine whether a spike in spending and balances on a business card is a sign of trouble or is normal given business expansion or the seasonal nature of a business’ spending needs, he says. For example, an issuer may reasonably be concerned about a sudden spike in the credit card balances of a small electronics store, but seasonal spikes in credit use, even for large cash advances to meet payrolls, are normal for many small landscaping companies, Tribue says. Tribue recommends issuers call business cardholders to discuss changes in credit card use instead of assuming the worst and automatically lowering limits or canceling accounts. Those issuers may be able to offer cardholders card or noncard loans that are more appropriate to the type of spending, thereby enhancing cardholder loyalty and ensuring future profits from transaction fees and interest, he says.

CORPORATE CARD RISK IS RELATIVELY MORE DIFFICULT TO ASSESS
ommercial card issuers generally consider small businesses a greater risk for default than mid-size and large corporations. But the rapid meltdown of large, formerly respected corporations, such as the oncevenerable Lehman Brothers, in recent months has highlighted the fact that no company is immune to insolvency. But card issuers lack the tools to adequately assess the financial health of their corporate card clients, according to a recent report by Mercator Advisory Group LLC, a U.S.-based consultancy. “The unique nature of this segment classifies it as, on one hand, a ‘niche’ card segment, but one where uncontrolled risks could make it more than ‘niche’ in its consequences for a bank,” writes report co-author Patricia Hewitt, a Mercator senior analyst. One challenge of corporate card accounts is that corporations have

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more-sophisticated financial statements and debt loads than do consumers or small businesses. Corporations may hold several commercial loans from several issuers. Large corporations may have to issue detailed financial reports to investors, but mid-sized corporations may be privately held with no such reporting requirements. That means issuers often have “blind spots” in their timely views of the combined risks of a corporation’s commercial and card loans, according to Hewitt. Many corporate cards are limited to purchases at specific merchants and have lower charge or credit limits. But other cards, particularly for travel-andentertainment expenses, have high limits and are more susceptible to employee misuse. “The credit limits are high and can get higher very quickly,” Hewitt tells Cards&Payments. “There isn’t always someone validating employee corporate

credit card use, but the company is always required to repay that card debt.” Collecting on corporate card debts can be difficult if a corporation declares bankruptcy or goes out of business, Hewitt notes. Edmund Tribue, global practice leader for the risk-management practice of MasterCard Advisors, agrees that issuers lack well-developed analytic tools for keeping tabs on corporate cardholders’ fiscal health. He recommends issuers structure corporate card contracts to require companies to submit comprehensive financial statements quarterly or even monthly, especially if those companies are privately held and do not have to issue quarterly reports. And issuers should look for corporations to implement spending curbs on their cards, such as limits on where cards can be used based on the business needs of the cardholder, Tribue says.

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owners, through business and personal demand deposit accounts and other types of loans, are best able to cross sell those business owners appropriate business card products, including credit, debit and charge cards, Paterson says . “Small-business credit cards that are originated through those Marilyn Landis, branch-based relationships tend to perform better from a President, Basic Business Concepts Inc. credit standpoint,” he says. Many small-business owners try to avoid all types of debt, including revolving credit cards. But issuers could do more to encourage charge card use and to nudge depositors to make Getting Issuers’ Attention Many issuers have the tools to analyze cardholder behav- better use of the debit cards tied to their business checking acior but do not use them to their full extent, according to Total counts, he adds. As for Landis, she is making minimum payments on her System Services Inc., or TSYS, a U.S.-based processor that business cards and putting the extra funds she would have helps issuers manage several types of cards, including commercial cards. TSYS offers issuers a variety of software servic- paid issuers into deposit accounts as reserves for business exes to manage risk on originating and continuing card penses. She advises many of her clients to do the same. “It galls me when I see it,” Landis says of the extra interaccounts, including links to such credit-reporting agencies as Dun & Bradstreet Corp. and Fair Isaac Corp. Issuers may program TSYS software to allow, flag or deny credit based on “SO MUCH HAS CHANGED IN THE WORLD, IT WOULD BE FOLLY TO BELIEVE WE COULD CONTINUE TO the their own analysis of the credit data it gathers. Decreasing credit scores rightly gets issuers’ attention, MANAGE AND ORGANIZE OUR WORK THE SAME WAY WE DID A YEAR OR TWO AGO.” says Dale Davey, TSYS senior director of value-added prodDennis Atler, ucts. But many issuers also look for more-detailed indications Chairman and CEO, Advanta of how business cardholders are managing their credit lines: “What are you spending your money on? Is it purchases, or is est expense. However, she considers the strategy necessary for keeping funds accessible in case of further credit line it cash?” Davey says. Moreover, many issuers have been closing consumer cred- decreases. While Tribue agrees managing the cost of credit is imporit cards or reducing their limits because cardholders do not use the card often enough to justify the costs of guarding the card tant, he also agrees with critics who complain U.S. banks have against fraud, Davey says. He expects more business card is- not increased consumer and business lending after having resuers to follow suit. “Why deal with the liability if they’re not ceived part of the expected $700 billion assistance under the federal Troubled Assets Relief Program. Unfreezing credit going to use it?” he adds. Despite a challenging economy, issuers still have plenty of would be good for issuers and businesses alike in the long run, room to grow their small business card portfolios, says Ken Pa- Tribue contends. “There’s a valuable service these small businesses provide terson, principal analyst at Mercator Advisory Group Inc., a to the overall economy,” he says. “Issuers should realize it’s a U.S.-based consultancy. “In spite of the current economic environment, it’s still a symbiotic relationship.” very attractive segment,” he says. “Issuers that do a good job Economists expect card issuers and the businesses they managing existing relationships and originating new account serve to face continued economic challenges in the coming relationships during difficult times are going to be in the best months. Finding the right balance between credit risk manposition to grow when the economy improves.” agement and customer service will be part of that challenge. Issuers with deeper relationships with small business CP

“THEY’RE EVALUATING MY CREDIT CARD USE FOR BUSINESS AS THEY WOULD FOR A CONSUMER. THEY’VE CHOSEN NOT TO BASE THEIR CREDIT ON THE CASH FLOW OF MY BUSINESS.”

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