Small business owners should find out later this month how they might benefit from credit-card reform.
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Commercial credit cards, which make up about 15% of the market, were specifically excluded from reforms that took effect on Feb. 22, the most sweeping credit-card changes in nearly 30 years.
For consumers, Washington’s new regulations forbid issuers from raising interest rates on existing balances. They also offer relief from fees imposed for exceeding credit limits and force issuers to apply payments to the portion of balances with the highest interest rates.
The so-called Credit Card Accountability, Responsibility & Disclosure, or CARD, Act did direct the Federal Reserve to recommend to Congress additional protections for commercial cardholders by May 22. The request for recommendations is seen as an indication that Congress is willing to extend some provisions to business credit cards in the future.
“This is important, since 41% of our members tell us they use credit cards as their primary source of funding,” said Molly Brogan, vice president of public affairs for the National Small Business Association. “This is particularly true for the many startups we are seeing in this economy as a result of high unemployment. They often can’t get ‘seed capital’ from a bank.”
Brogan said 39% of NSBA’s members, in a January 2010 survey, say they can’t get adequate financing for their businesses, and “find it exceedingly hard to find any bank capital.” The NSBA survey also showed that 68% of respondents said their rates and terms on credit cards had worsened in the past five years. One-quarter said they pay 20% interest or more on their cards.
According to The Nilson Report, a monthly payment-industry newsletter, many small business credit cards have been canceled or their limits cut back as banks move to reduce their risk.
The Federal Reserve’s staff is working on its recommendations and expects to meet that deadline, but isn’t offering any hints as to what it will propose.
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“The Credit Card Act of 2009 directed the Federal Reserve to study how small businesses use credit cards and how these companies are protected from unfair practices,” wrote Fed spokeswoman Susan Stawick, in an email. “I regret that we're unable to provide information about the report before it is complete.”
In general, small business advocates favor adoption of the reforms imposed for individual cardholders. But card issuers – with some notable exceptions - warn it will prove costly and limit the availability of credit to small businesses at a time when lending is nowhere near pre-recession levels.
“The marketplace for small business cards is different than for average consumers,” said Peter Garuccio, vice president of public relations for the American Bankers Association. “It often involves much higher credit lines and the need for greater flexibility when it comes to repayment options. As such, small business cards involve more risk.”
Since the CARD Act restricts the ability of card issuers to adjust prices, either to reflect changes in customer risk or broader changes in the economy, “applying it to small business cards would have a negative impact on the availability of credit to small businesses,” Garuccio said.
Yet both Bank of America (BAC) and Capital One (COF) have voluntarily extended some of the CARD reforms to their small business customers.
Bank of America this month stopped raising interests rates on existing balances for its two million small business cardholders, and said it will extend other reforms in July. The bank also announced it will increase small business lending this year by $5 billion.
Capital One included small business accounts in many of the CARD-related changes it made in February.
Asked why two major card issuers have voluntarily extended reforms the ABA opposes, Garuccio said, “As a matter of policy, ABA generally does not comment on the business practices of any given institution/member. However, I am comfortable saying that this was a business decision BofA made likely based on the notion that certain practices would be attractive to their customer base.”
Brogan envisioned a scenario in which the voluntary extension of the credit card reforms to small business owners could come back to haunt proponents.
“One the one hand, legislation seems doable,” Brogan said. “On the other hand, there could be pushback based on Bank of America and Capital One already offering the reforms. Opponents to legislation could argue that two large banks already are doing it without legislation, so why pass it? We think legislation needs to be introduced and these reforms need to be codified into law.”