Small Business Credit Card Risk Abates

Navigator Edition: March 2014
By: Frank Martien

On a quarterly basis, First Annapolis tracks small business credit card net charge-off rates using four monoline issuers’ C&I loan reporting and Bank of America’s quarterly financial supplements as a proxy. As shown in Figure 1, annualized net charge-off rates for small business credit cards have continued to decline through 4Q 2013 and are currently tracking in the low single digits for many issuers. As a result, most small business credit card issuers are enjoying after-tax ROAs in the mid-single-digit range.

Figure 1: Small Business Credit Card Annualized Net-Charge Off Rate

3- Figure-1_-Small-Business-Credit-Card-Annualized

Note: Figures for total C&I loans except for BofA, which is for small business credit cards.
Source: Bank of America; FDIC call reports sourced via SNL.

Many factors have resulted in improved credit risk performance, including:

  • Cancellation of dormant and subprime accounts as well as reductions in credit lines dating back to the 2009 to 2010 timeframe.
  • Measured improvements in the housing market, which has re-opened some liquidity for entrepreneurs from sources such as refinancings and home equity lines.
  • Re-focus on rewards and marketing to relationship customers as a strategy. Even for monolines, “relationship customers” can be found in co-brand or agent bank partners’ customer bases as well as cross-selling small business credit cards to existing consumer cardholders who demonstrate propensity for business spend on their cards.
  • Avoidance of aggressive marketing techniques (e.g., balance transfer offers, convenience checks) to promote small business credit card balance growth.

Looking forward, we anticipate small business credit card risk will continue to be more volatile than consumer and thereby more vulnerable to future economic downturns. Fortunately, the difference in credit volatility between consumer and small business credit cards has been measurably reduced through more caution, including factors referenced above.

In summary, now is a generally favorable time for prudent investment in small business credit card programs.

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

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