Why is the Fed so bank-friendly on credit cards?
Shahien Nasiripour has found an interesting report from the Federal Reserve, looking at whether the credit-card rules which apply to individuals should apply to small businesses as well. The Fed, weirdly, fudges the question, but it’s clear to me that small businesses deserve all the same protections that individuals get.
At the same time, I’m impressed with how conservative small businesses are when it comes to credit cards:
Despite the widespread use of credit cards, only a minority of small businesses—18 percent—reported borrowing on credit cards… In 2003, when 24 percent of small businesses reported borrowing on credit cards, credit card debt accounted for just 1.4 percent of all debt held by small businesses and the majority of credit card–borrowing firms reported borrowing less than $5,000 in total on all their credit cards.
Available evidence indicates that relatively high-risk firms, as measured by their business credit score from Dun & Bradstreet, are less likely than relatively low-risk firms to use small business credit cards. Nonetheless, higher-risk firms borrow more frequently on small business credit cards than lower-risk firms. Higher-risk firms also have a greater propensity to use and to borrow on personal credit cards compared with lower-risk firms. But again, total credit card debt accounted for less than 2 percent of higher-risk firms’ total debt in 2003.
Small businesses, it seems, are like large businesses: they’re fundamentally conservative, and the overwhelming majority of them pay off their credit cards in full every month. These businesses wouldn’t be hurt at all by any marginal increase in interest rates that card issuers might (or might not) impose should they be forced to comply with the Truth in Lending Act (TILA). And the rest, of course, would be protected by the provisions of the act.
Yet somehow the Fed can’t bring itself to the obvious conclusion:
If, however, the Congress were to consider the application of these provisions to small business cards, it would be important to recognize the potential for adverse effects on the cost and availability of small business credit cards. For example, because credit card issuers have more difficulty assessing the creditworthiness of small businesses than of consumers, restricting issuers’ ability to adjust interest rates may lead to higher initial interest rates, which would harm those firms that borrow on small business credit cards. In addition, if credit card issuers were to reduce credit limits in response to such restrictions, even those businesses that use credit cards for transactions and cash management would be harmed. Thus, it is not apparent that the potential benefits of applying substantive restrictions similar to those in TILA to small business cards outweigh the potential risk of increased cost and reduced credit card availability for small businesses.
I really don’t buy it, and I say this as someone with a small business credit card myself. I got the card from American Express when I was a freelance journalist: that was all they needed in terms of me being a small business. (And the ease with which individuals such as myself can get these cards only goes to underline the necessity of treating all credit cards equally.) The credit line on the card, when it was first issued to me, was embarrassingly enormous — many multiples of the credit line on my personal Amex card. I’ve never come remotely close to using the credit line I was given, I’d never want to, and if it was reduced that wouldn’t harm me in the slightest.
The card companies love issuing these cards, because they carry the biggest interchange fees of all. And if these cards continue to be carved out from TILA requirements, you can be sure that more and more individuals will end up applying for and using them: they’ll act as an obvious loophole for the card issuers to take advantage of.
So let’s make sure that all credit cards are treated equally, and let’s keep an eye too on the Federal Reserve, which still seems to be unduly captured by the very institutions it should be regulating. This paper doesn’t bode well for the Fed having much teeth going forwards.