Back in Black for U.S. Small Business Credit

Navigator Edition: February 2012
By: Frank Martien

The past five years have brought challenges to small business credit card issuers. As net charge-off rates for the industry peaked around 15% in mid-2009, many small business credit card programs were substantially underwater. Currently, the U.S. market is entirely different and solidly profitable for several reasons:

  1. APRs have increased substantially in the wake of rising charge-off rates as well as increased regulation.
  2. Cost of funds are at historic lows and even significantly less than 1% for some banks. Together with rising APRs, net interest margins are highly attractive.
  3. Usage has shifted meaningfully away from borrowing and towards spend, which enhances interchange and lowers credit risk. A potential accelerator to this trend could be banks shifting some emphasis from debit to credit to offset impacts from implementation of the Durbin Amendment.
  4. As referenced above, net charge-off rates are now less than half their mid-2009 peak and still declining. For sure, our current lower credit risk environment emerged from substantial hits issuers took a couple years ago when accounts were closed and credit lines were slashed.
  5. The above and other profitability factors are summarized below in Figure 1. In reality, we would characterize this “typical” view of the small business credit P&L as somewhat conservative as some programs are now achieving ROAs north of 4%.

Fortunately, this low-risk environment has staying power since most banks are more conservative in underwriting, have scaled back balance transfers, convenience checks, and overdraft protection and are generally navigating away from subprime. Consequently, this is a time for measured re-emergence and re-investment in small business credit cards for card networks and bank issuers. Meanwhile, product innovations already offered by some issuers, such as online expense reporting and mobile integration, can help small businesses continue to displace checks in favor of cards as a more efficient form of payment.

Figure 1: Typical General Purpose Small Business Credit Card P&L
(as a % of average outstanding receivable balances)


Source: First Annapolis Consulting market observations.

For more information, please contact Frank Martien, Partner specializing in Commercial Payments,

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