Tag Archive | "CARD Act"

Fed: Small Business Credit Card Reform Not Worth Costs

Giving small businesses the same credit card protections that consumers now have is not worth the potentially higher costs and reduced credit, the Federal Reserve Board said in a report reported on by Businessweek.

Small businesses typically have higher credit lines than consumers, and it’s harder for banks to evaluate the risk of business borrowers, the Fed report said, so restricting banks’ ability to raise interest rates could mean higher costs and tighter credit up front:

[C]redit card issuers have more difficulty assessing the creditworthiness of small businesses than consumers. Therefore, the willingness of issuers to extend the relatively large credit card lines that small businesses require may depend importantly on issuers’ ability to adjust prices in the future, as they learn through experience about businesses’ ability and willingness to pay. Restricting the ability of card issuers to adjust interest rates may lead to higher initial interest rates, which would harm those firms that borrow on small business credit cards.

The report was due to Congress May 22 as part of the CARD Act, the consumer protection law passed last year. The CARD Act limits some practices by credit card companies most criticized by consumer advocates, like raising interest rates on existing balances and applying payments in a way that maximizes interest costs to the borrower. Those changes do not apply to small business credit cards, which account for about 15 percent of payment card spending, according to an estimate by Ken Paterson of research firm Mercator Advisory Group.

Bank lobbyists praised the Fed report. The American Bankers Association opposed the original credit card reform, warning that parts of the law “will undermine the availability of credit.”

Still, it’s not clear how much restricting banks’ ability to raise rates on old balances will curtail credit. Bank of America announced in April that it would voluntarily give small business cards the protections extended to consumers under the CARD Act. The bank doesn’t expect the change to hurt its ability to extend credit, spokeswoman Betty Reiss told me in April.

There’s some evidence small businesses could benefit from a ban on retroactive rate hikes. Advanta, the now-bankrupt credit card lender which once had 1.3 million small business customers, last year settled with regulators over accusations of “unfair and deceptive practices” involving repricing balances. That settlement affected at least 138,000 borrowers who signed up for cards at low interest rates that later jumped after they had run up balances. Some of them are still paying off charges at APRs over 30 percent.

Some more useful context from the Fed report: Most small businesses pay their cards off each month, rather than using them as a source of credit. Only 18 percent of firms with fewer than 50 employees carried a monthly balance on their credit cards in 2009, the report says (citing a survey by the NFIB). That’s about the same as in 1998, and less than the 23.6 percent that borrowed on credit cards in 2003, according to Fed surveys. The share of business owners that carry a balance on small business credit cards (rather than personal cards) has more than doubled from 5.9 percent to 12.3 percent since 1998, the report says.

Still, the Fed doesn’t recommend giving that growing share of business card borrowers the same protections consumers got through the CARD Act.

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What The CARD Act Means for Businesses

At the end of last year, the interest rate on Susan Moriarity’s Visa business card from Chase was about 13 percent. A bit high, she thought, but her law firm in Santa Barbara, Calif., was busy. Then, in January, when business slowed, Moriarity began to carry a balance — and her interest rate climbed to 27.9 percent, SmartMoney.com reported.

When she called a customer service representative, she was told the hike reflected risk in the overall market: “I said, ‘so this has nothing to do with anything we’ve done wrong, you’re just raising the rate because you legally can do so?’ And she replied, ‘well, I wouldn’t put it that way… but yes.'”

Furious, Moriarity decided to pay off the card’s balance and discontinue using it. (JPMorgan Chase declined to comment on her case.) At that point, the Credit Card Accountability, Responsibility and Disclosure Act was scheduled to go into effect in February, and Moriarity hoped that would help her get a lower rate. But she learned that business cards were not going to be covered by the new law, and Moriarity instead opted to dedicate one personal card for business use.

The CARD Act, which went into effect on Monday, has been hailed for the protections it extends to consumers. But what does it do for small-business owners? They, too, have been struggling with ballooning interest rates and rising fees — not to mention the increasing cost of accepting credit and debit cards. As it turns out, not much. Indeed, as credit-card issuers look for ways to make up for lost revenue from consumer cards because of the law, advocates say business cards may become a target for added fees, higher interest rates and other billing tactics.

Resorting to consumer cards to access protections granted under the CARD Act — as Moriarity did — isn’t advisable, says Gerri Detweiler, a small business credit adviser with educational web site Credit.com. Not only might intermingling personal and business expenses on a card limit an owner’s ability to deduct interest or annual fees on the card, doing so many also put their corporate structure in jeopardy. In addition, “the credit activity and debt of the business shows up on the owner’s personal credit, which can lower the business owner’s personal credit score,” she says.

For those sticking with business cards, it may be a while before any significant changes show up, says Molly Brogan, a spokeswoman for the National Small Business Association in Washington, D.C. However, in time, “new fee tactics, high interest rates and confusing bills will [likely] get worse,” she says. “There is a whole revenue stream that has been shut off to credit-card issuers. They may look to small businesses to make up that revenue,” Brogan says.

Among the more troubling revenue raising tactics that issuers may turn to is beefing up credit- and debit-card acceptance fees. The domestic credit-card interchange rate — a transfer fee set by issuers such as Visa and MasterCard, but paid to the cardholder’s financial institution every time a Visa or MasterCard payment product is used — rose from between 1.25% and 1.91% in 1991 to between 0.95% and 2.95% in 2009. MasterCard’s rate also jumped from between 1.30% and 2.08% to between 0.90% and 3.25% last year, according to a recent Government Accountability Office report on credit cards.

Last fall, thousands of 7-Eleven convenience-store franchisees collected about 1.6 million signatures for a petition calling on Congress to limit credit-card networks’ and card-issuing banks’ ability to charge merchants’ high transactions fees. Similarly, Rachel Wallace, the president of the Chamber of Commerce of La Junta, Colo., and owner of two small gas and convenience stores in the area, has repeatedly written to a number of her representatives. Wallace, who pays between $3,000 and $5,000 in card acceptance fees each month, says doing so is unsustainable. “I tried offering five cents off per gallon of gas when customers paid cash, but that didn’t really pan out,” she says. “With everything in the economy, people would constantly ask ‘what else can you offer me?'” Wallace says.

Despite the potential for higher fees going forward, business owners might also benefit from a potential spillover effect from the CARD Act. In some situations such as offering consistent billing periods and payment allocation, card issuers may apply standardized policies for all of their card holders — not just consumers, says Nessa E. Feddis, vice president and senior counsel for the American Bankers Association in Washington, D.C. “When a computer-oriented change is required, for example, it may be easier and more efficient to apply the same rule.”

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