Surprise, surprise – lawmakers and regulators didn’t get it right.
While that sentiment could apply to any number of issues these days, I’m specifically referring to the unbalanced regulatory environment in which the credit card market has been mired since early 2010, when the landmark CARD Act took effect.
This Great Recession-era credit card law has been hailed as an unmitigated success by most experts, and its reputation is well-deserved as far as the general consumer population is concerned. No longer do we have to deal with bait-and-switch pricing, out-of-whack fees, or unfair profit-driven accounting practices.
Unfortunately, not everyone is equal under the eyes of this particular law, as its protections do not extend to credit cards branded for business use.
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Yes, even though banks review small business owners’ personal credit reports when making approval decisions and then ultimately hold them personally liable for all account spending, the small business community is considered too corporate to count when it comes to credit card user protections.
Nowhere is this policy divide more significant than as it relates to cost-of-debt stability. Consumers are now able to finance big-ticket expenses secure in the knowledge that issuers cannot raise rates on existing debt unless they become at least 60 days delinquent on payment.
Small business owners, on the other hand, are entirely at the mercy of card issuers. If a bank executive decides to raise rates, for whatever reason, there’s nothing that a small business credit card user can do but fork up a higher monthly debt payment.
Sure, small business owners who find themselves in this situation could theoretically transfer their balances to other issuers and allow free market principles to gradually change credit card company policies for the better. But in an industry in which the seven largest players control more than 70 percent of the market, that’s practically unlikely.
Credit card issuers tend to make major policy decisions as a cohort, and we’ve seen this pack mentality work against small business in the past. During the Great Recession, for example, issuers continually raised rates on small business accounts for little or no reason while simultaneously eliminating attractive balance transfer offers from the market, thereby forcing accountholders to pay whatever rate was put in front of them.
We therefore have to ask ourselves whether we really want the backbone of our economy – small businesses employ nearly half of the private workforce in this country and are responsible for roughly 60 percent of the new jobs added over the past 20 years, according to the U.S. Small Business Administration – to be treated like second-class citizens, especially when the pre-CARD Act, anything-goes regulatory environment has already been deemed unsafe for the average person.
Are small business owners somehow uniquely positioned to overcome such challenges?
The answer to both questions should be a resounding “no.”
Debt instability hampers business growth, and we can’t afford to support anything with such an effect in this day and age. And while it’s impossible to quantify the extent to which small business debt instability may have already delayed our economic recovery, we can take steps to mitigate its impact moving forward.
As things currently stand, credit cards are the third most popular financing source among small business owners, with 31 percent of companies having used plastic for such a purpose in the last 12 months (35 percent used business earnings and 33 percent used a small business loan), according to the National Small Business Administration’s 2013 Mid-Year Economic Report.
Ultimately, credit card-centric small business owners will prove to be their own biggest allies in the fight for regulatory equality, and there are three primary avenues through which they can spur change.
The first is simply to use personal credit cards for funding purposes and hope the corresponding loss of business provides a wake-up call to issuers. The second is to gravitate toward forward-thinking issuers like Bank of America that have proactively extended the most important components of the CARD Act to their suite of business offers. Finally, you can put some pressure on Congress to pass the Small Business Credit Card Act of 2013 – which has already been referred to committee – or a similar alternative.
Until we truly get the message across to those in a position to bring about lasting change, small businesses in this country will continue to operate at a distinct disadvantage.
Odysseas Papadimitriou is CEO of the personal finance websites CardHub and WalletHub.
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