As traditional loans dry up, banks are funneling more of their small business lending through credit cards.
By Catherine Clifford, CNNMoney.com staff reporter
Last Updated: October 31, 2009: 5:18 PM ET

5 evil things credit card companies can (still) do

NEW YORK (CNNMoney.com) — Want a loan for your business? Hit the plastic. That’s about all banks are going to offer — and the terms are much less favorable than traditional lines of credit.
In one notable example, JPMorgan Chase (JPM, Fortune 500) last month unveiled its Ink suite of four new small business credit cards, with interest rates as high as 30%. Meanwhile, the bank has slashed other small business lending. Its lending through the Small Business Administration’s primary loan program fell 80% this year, from 6,100 loans in 2008 to 1,250 loans in the SBA’s 2009 fiscal year, which ended Sept. 30.
Unlike credit cards, which carry variable interest rates and credit limits that can be cut or changed at the bank’s whim, SBA loans offer a fixed amount of money at an interest rate capped by the government. They’re safer than credit cards, but these kinds of traditional loans have dried up throughout the recession.
What credit remains is coming most often from credit cards. Almost 60% of small business owners have used a credit card in the past year for business capital, according to a recent survey by the National Small Business Association (NSBA), an industry trade group. In contrast, 45% of those polled had a bank loan.
“Today’s entrepreneurs are severely limited in their ability to finance new business ventures by leveraging the value of their home, borrowing from friends and family, or securing a traditional loan,” NSBA Chair Keith Ashmus wrote in an accompanying report. “This leaves one clear, often unattractive option: credit cards.”
A shifting market
Credit cards have always played a big role in helping entrepreneurs get new ventures off the ground. What’s changing, analysts say, is that other options are disappearing.
The number of small business loans for $100,000 to $1 million fell 23% in 2008, according to an SBA analysis released in May. But the number of loans under $100,000 rose 16%. Charles Ou, the report’s author, attributes most of that increase to an increase in credit card accounts.
Pinning down the details of the shift is challenging. “The data is not that precise,” said Ou, who recently retired from his post as a senior economist with the SBA’s Office of Advocacy. “That is the biggest problem.”
In the various reports they send regulators, banks aren’t required to separate credit cards from other loans they make to small businesses. Consequently, analysts are left guessing about what percentage of small business lending goes through cards.
Fewer loans
JPMorgan’s Ink launch comes as the industry’s overall small business lending is dropping. Since April, when the Treasury Department began requiring big banks that received government aid to file monthly reports on their small business lending, the 22 reporting banks have cut their lending by $8 billion.
Chase’s own small business loan balance has steadily declined, falling a bit further each month. By August, the bank’s balance — which includes both traditional loans and credit cards — stood at $25.7 billion, down 1.7% from April.
JPMorgan chalked the drop up to the weak economy. “We have seen a weakness in demand, which is natural since during a recession businesses tend to save their cash or use it to pay off debts,” spokeswoman Christine Holevas said. “While we tightened credit standards, we also continue to lend.”
Enter Ink. “This is something that we are pursuing because we think it is a significant opportunity,” said Richard Quigley, president of Chase Business Cards. “We think small business owners are really the ones that are going to turn around the economy.” Chase declined to comment on how many Ink cards it plans to issue.
Chase’s aggressive credit-card push is hitting just as its rivals in the space are dropping away. Advanta, which dealt exclusively in small business credit cards, shut down its lending in May. And American Express (AXP, Fortune 500), long a major player, is trying to shore up its balance sheet by cutting credit lines and reducing its lending. Between April and August, Amex cut its outstanding small business loan balance by almost $1 billion.
Chase has clearly taken note. One of its new cards, Ink Bold, is the first pay-in-full change card the bank has ever offered — a direct challenge to a market American Express traditionally dominated.
Analysts say it’s a smart move. With small business owners desperate for credit and rivals pulling back, Chase has the opportunity pick off the most attractive borrowers. “They can get the crème of the crop,” said Adam Jusko, founder of industry news Web site IndexCreditCards.com. “There has almost been a moratorium in the landscape as far as small businesses are concerned, and you have to figure there are some good, good credit customers out there.”
Chase isn’t the only one eying that pent-up demand. Barclays and Citibank (C, Fortune 500) have noticeably stepped up their direct-mail marketing for small business cards in recent months, and Bank of America (BAC, Fortune 500) had held steady with a blizzard of mailings, according to Mintel Comperemedia, a market research firm.
Maxed out and praying
Small business owners unable to obtain traditional loans say they have little choice other than to use credit cards. Charles Brooks, the owner of a 29-year old construction company in Detroit, has maxed out 11 of them to keep his business running.
“We are hanging on by a hope and a prayer,” Brooks said. “We are trying to stay alive in the business.”
Brooks’ company, Unique Construction, specializes in home improvement. But Detroit has been slammed by plunging home values and one of the highest unemployment rates in the nation. Few in the area are spending money right now on upgrading their homes. “It is really, really, really slow in Detroit. I have never seen it this bad,” Brooks said. His one-time staff of four has dropped to a team of subcontractors that only get paid when there’s work.
Brooks applied for two business loans with Chase, first in 2007 and then again in 2008. Both applications were denied. While he had always had credit cards, Brooks never had to depend on them before: “We just never really used them — they were just there.” But toward the end of 2008, Brooks started paying bills and suppliers with his cards.
Now, he’s hit the limits on nearly a dozen cards. Brooks isn’t sure where to turn to next to keep his business running.
“We are praying,” he said. “We are praying for a better Detroit, a better world.”

By Catherine Clifford, staff reporterJanuary 18, 2010: 2:50 PM ET

NEW YORK (CNNMoney.com) — The nation’s biggest banks cut their collective small business lending balance by another $1 billion in November, according to a Treasury report released late Friday. The drop marked the seventh straight month of declines.

The 22 banks that got the most help from the Treasury’s bailout programs have cut their small business loan balances $12.5 billion since April, when the Treasury began requiring them to file monthly reports on the tally. The banks’ total lending has fallen 4.6% in that seven-month period, to $256.8 billion.

As Wall Street megabanks return to health — and celebrate with lavish bonuses — President Obama and his administration have been pushing financiers to help spur a Main Street recovery. Small business owners are still reporting difficulty finding banks willing to extend the credit they need to launch, run and grow their ventures.

In December, the President met with a dozen CEOs of the nation’s biggest banks to pressure them to reverse their small business lending declines.

Hitting bottom: There are some signs the credit drop may be at or near its nadir.

Five of the 22 banks reported higher small business loan balances in November than they did in April. At others — such as Wells Fargo (WFC, Fortune 500), by far the biggest small business lender — the totals have fluctuated month to month.

But 10 of the 22 banks have cut their small business balances every single month since April. That list includes firms such as JPMorgan (JPM, Fortune 500) that are now posting monster profits. In the past seven months, JPMorgan’s small business loan balance has dropped by almost $962 million, or 3.7%.

On Friday, JPMorgan Chase reported earnings of $3.3 billion in the last three months of 2009. JP Morgan said its compensation expenses rose 18% during the year to $26.9 billion, much of which will be distributed as bonuses.

JPMorgan was the first major bank up to bat to report financial results. Later this week, Citigroup (C, Fortune 500), Bank of America (BAC, Fortune 500), Wells Fargo, Goldman Sachs (GS, Fortune 500) and Morgan Stanley (MS, Fortune 500) are all slated to release their fourth-quarter and full-year numbers.

Bonus backlash: American taxpayers are sour on the idea that the bankers they bailed out are pocketing super-sized end-of-year bonus checks.

The day before JPMorgan reported its earnings, President Obama called on Congress to tax the largest banks in a so-called “financial crisis responsibility fee.”

As the backlash gained steam, one representative in Congress proposed a bill that would siphon money from Wall Street bonuses directly to into small business coffers.

Rep. Peter Welch, D-Vt., introduced a bill on Thursday calling for a 50% tax on bonus compensation in excess of $50,000 at banks that received government assistance. All revenue raised from the tax would go directly to the Small Business Administration to fund a new direct lending program. Twenty-three members of the House of Representatives co-signed the bill.

“With double-digit unemployment in a recession they helped cause, there’s no justification for seven- or eight-digit banker bonuses,” said Rep. Lloyd Doggett, D-Texas, one of the bill’s co-sponsors.

SBA-backed lending has begun to rebound from last year’s wipeout. The agency’s flagship program funded 37% more loans last quarter than it did a year earlier, totaling $3.8 billion.

Chicken or egg? Banks say they are lending less for two key reasons: Small businesses are risky borrowers, and fewer entrepreneurs are looking to borrow and take on more debt in the face of slower sales.

But small business owners tell a different story. They say that tighter lending standards leave too many viable businesses unable to access the credit they need to grow or finance routine operations like buying materials to fulfill customer orders. Lending standards have been growing steadily more restrictive for nearly three years, according to the Federal Reserve’s most recent Senior Loan Officer Study, released in October.

Edward Yingling, CEO of the American Bankers Association, says that finding the right balance between caution and investment is critical to spurring economic recovery.

“Bank regulators need to be prudent without being so punitive that they choke off lending in communities across the country,” Yingling said last month. “Just as too much risk is undesirable, over-correction will impede economic recovery if banks are prevented from making good loans to creditworthy borrowers.”

By Catherine Clifford, staff reporter May 13, 2010: 10:21 AM ET

NEW YORK (CNNMoney.com) — The biggest Wall Street banks slashed their small business loan portfolios by 9% between 2008 and 2009, more than double the rate at which they cut their overall lending, according to a government report released Thursday.
The Congressional Oversight Panel report spotlights the role banks, especially the largest ones, played in the credit crunch that has plagued small companies throughout the recession.
“Big banks pulled back on everyone, but they pulled back harder on small businesses,” Elizabeth Warren, the panel’s chairwoman, said on a conference call with reporters ahead of the report’s release.
Warren’s oversight committee was established to keep tabs on the federal government’s financial stabilization effort, the Troubled Asset Relief Program (TARP). The committee’s May report focuses on the role TARP played in improving credit access for small companies.
The grim conclusion: It failed.
The biggest TARP program pumped billions in low-interest capital into banks, but did not require that banks lend that money back out. When it came to extending credit to small firms, most big banks took a knee.
In the seven months that the Treasury required the 22 biggest TARP recipients to report their small-business lending, the banks collectively cut their lending by 4.6%, reducing their outstanding balances by $12.5 billion.
The problem remains an urgent one. “Small business credit remains severely constricted,” the report’s authors concluded. “Unable to find credit, many small businesses have had to shut their doors, and some of the survivors are still struggling to find adequate financing.”
Mapping the problem: Just how bad is the small-business credit shortfall? It’s impossible to tell, thanks to lax data collection and regulatory reporting requirements.
The definition of “small business” varies widely — even the government’s Small Business Administration uses different measures for firms in different industries — and what banks consider a “small business loan” includes everything from traditional installment loans to credit lines and credit cards.
The Treasury briefly required the biggest TARP takers to report monthly on their small-business loans, which offered a good snapshot of lending trends through the second half of 2009. But banks were allowed to stop reporting those numbers once they paid back their TARP loans. That left Warren’s commission scrambling through piecemeal data sets.
The government needs to step up its data collection “so that in the future policymakers will not be forced to make decisions with too little information about what is actually happening,” the report says.
Warren called the data problem “enormously frustrating,” adding that it is “virtually impossible to get a clear assessment of these programs when you don’t have good data.”
Within the limited data available, a pattern is clear: Small companies can’t get the credit they need. Federal Reserve data shows “a precipitous drop in lending to small businesses in the last quarter of 2008, and conditions that remained tight throughout 2009,” the report notes.
One bright spot in a bleak credit landscape has been SBA lending. Thanks in part to government incentives, the number of SBA-backed loans rebounded from last year’s lows and is approaching pre-recession levels. The agency’s flagship program backed almost 29,000 loans in the past six months, totaling $7.5 billion.
But SBA lending represents only a sliver percentage of the overall small business credit landscape: about 4%, Warren’s report estimates.
The Treasury is attempting to jumpstart other lenders with new plans to pump inexpensive capital into financial intuitions, especially small banks and community lenders.
Warren’s report criticizes many of the plans being discussed. Supply-side solutions may be doomed to failure, it suggests, because small banks have limited reach and megabanks simply won’t start lending again until it’s in their financial interests to do so.
But if the federal government does move forward with new lending incentives, Warren wants to see them tightly focused and tied to measurable goals.
“Our experience with TARP has shown that giving money to banks without strings attached does not produce the advertised result,” she said.

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App Maker Talks Facebook Product Listings

Over the years, Facebook has grown into much more than a social network, including a place to shop. More and more brands are placing product listings on their Facebook Pages, a phenomenon, we’ve discussed more than once within the last week or so.

WebPronews had a chat with Doron Simovitch, co-Founder, President, and CEO of comparison shopping site Sortprice, which has a Facebook application for product listings that recently surpassed 1,000 stores.

We asked if it is an exaggeration to say Facebook is going to change the face of e-commerce. “We don’t think it’s an exaggeration at all,” replied Simovitch. “Facebook is now the most-trafficked website in the country, with an audience of hundreds of millions of people that is growing every day. That’s an enormous base of potential customers that cannot be ignored by online retailers. And they’re not. More and more retailers are experimenting with tools to reach these Facebook users, and incorporate social networking into their operations overall.”

–
Is Facebook going to change the face of e-commerce?

By Los Angeles Times
Monday, March 15, 2010

LOS ANGELES — U.S. citizens reported losing more than $550 million in 2009 in Internet fraud, falling prey to a variety of increasingly sophisticated scams, according to a report by the Internet Crime Complaint Center.

The loss was more than twice that reported in 2008, according to the agency, a partnership of the FBI and the privately funded National White Collar Crime Center. The center, based in West Virginia, tracks Internet crime around the world.

“Criminals are continuing to take full advantage of the anonymity afforded them by the Internet. They are also developing increasingly sophisticated means of defrauding unsuspecting consumers,” said Donald Brackman, the center’s director.

Part of the increase can be attributed to a change that allowed more cases to be included, but another possible factor was the increased use of the Internet, which has broadened the pool of perpetrators and victims, said Charles Pavelites, an FBI special agent.

More complaints were reported by California residents than by residents of any other state, the report said. Common fraud included the nondelivery of merchandise ordered through Web sites and “advance-fee scams,” in which victims were persuaded to make small payments to receive windfalls that never arrived, the report said.

Typical of the cases reported last year was a scam in which a Miami Beach man advertised vacation rentals on Craigslist.org but stopped communicating with customers after they made thousands of dollars in down payments, according to the report. Police arrested a suspect in that case, saying he stole more than $30,000 from 16 victims.

Another common fraud in 2009 was the “hit-man scam,” in which threatening e-mails were sent to victims. The e-mails purported to be written by hit men who had been paid to kill the victims. They said they would let the victims live if they paid them thousands of dollars. Many of those threatening e-mails were traced to West Africa, Pavelites said.

“Internet crime keeps going up. It’s cheaper. It’s faster. It beats the old method of knocking on your door and trying to get you to give them money,” Pavelites said. “If you send out 1 million e-mails and even a minimal number of people return money, you’ll make more money than a working person would in a very long time in a legitimate job.” Computer viruses capable of secretly downloading passwords and account numbers are also a problem, Pavelites said. Spread through e-mail attachments, the viruses allow criminals to steal from bank and credit card accounts.

In April 2009, the Internet Crime Complaint Center linked 103 cases in which victims reported paying for vehicles and motorcycles that did not arrive. The victims lost a combined $360,000 that was sent to a fraudulent financing center suggested by the seller, the report said. Consumers can take precautions to avoid being victimized, Pavelites said. They should install up-to-date computer firewalls, use only reputable payment centers to make purchases online, and not respond to unsolicited e-mails or pop-up ads, he said.

American small businesses are behind on their payroll taxes, to the tune of about $58 billion. That’s the amount that an estimated 1.6 million small businesses owe in unpaid federal payroll taxes and penalties, according to the most recent government report.

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MARTINEZ, Calif. — Martinez police have arrested two men in connection with a suspected “skimming” scam that bilked $20,000 a day from Northern California gas station customers who paid with debit and credit cards.
David Karapetyan and Zhirayr Zamanyan of Southern California were arrested last week on suspicion of installing illegal data-capturing devices inside card readers at gasoline pumps.
Investigators say they found 11 skimming devices, each loaded with information for as many as 400 to 500 credit and debit card accounts, inside the car the suspects were stopped in.
Police have recommended prosecutors file 32 counts of identity fraud, conspiracy and enhanced charges related to gang activity against the suspects.

“A Rebound for Credit Cards Online Will Slow Gains ” (18 Feb, 2010)
By: Digital Transaction News

(February 18, 2010) Various payment alternatives will continue to grow in volume and claim more share of Web-based sales, but the dramatic gains of recent years will moderate as credit cards stage a partial comeback, according to a forecast released this week.

Alternative payment methods, which have proliferated in variety over the past couple of years and include such systems as PayPal, Google Checkout, and eBillme, accounted for $33 billion in online sales last year, up fully 50% from 2008, according to Javelin Strategy & Research, which issued the forecast. That’s good for a 16% share of total online commerce, compared to 12% in 2008, Javelin says. But while alternatives will continue to enjoy robust growth in coming years, their share gains will be far less dramatic, says Beth Robertson, director of payments research and consulting at Pleasanton, Calif.-based Javelin and author of the firm’s forecast. “There’s going to be some stabilization of share for all [payment] methods, partly because of the rebounding of credit,” she tells Digital Transactions News.

Robertson says an improving economy will lead some consumers to return to higher usage of credit products, which they have cut back on since the onset of the recession and credit crunch in 2008. This retrenchment led in part to a surge of usage of cash-like products online, including some alternative payment methods. But Robertson expects credit cards will begin to rebound next year, “though not to the levels [where] it used to be.”

For alternative payments, that means online dollar volume will continue to grow at high rates, but these companies, which include a number of startups as well as established players, can’t expect to absorb share of Internet sales at the rates they enjoyed in recent years. Javelin projects alternatives will account for $40 billion in online sales this year, a number that will almost double to $79 billion in 2014. Share of all online sales will level off, however, at 17% this year and next and rise only to 19% in four years, Javelin says.

Javelin includes online auction sales and travel-site commerce in its computation of total Internet sales volume. By this measure, it projects overall online volume grew to $205 billion in 2009, up from $185 billion in 2008. It will hit $237 billion this year and exceed $400 billion in 2014, the firm forecasts.

A rebound for credit cards online, however, means the cards will slow the erosion of their share of online commerce rather than re-establish their former dominance of the Web channel, where they were once practically unchallenged as the sole payment method. Javelin says the struggling economy pushed online credit card volume down to $89 billion in 2009 from $101 billion the year before. That cost the cards fully 11 points of market share, as they slid from 55% to 44%. The rebound will see credit cards climb to $99 billon this year and $121 billion 2011, Javelin projects, before reaching $162 billion in 2014. Share of online volume will continue to slip, but at a much slower rate, going from 42% in 2010 to 39% four years from now.

Debit card activity online, meanwhile, will rise from $67 billion this year to $105 billion in 2014, while their share drops from 28% to 26%. Javelin’s figures refer only to signature debit, since PIN debit is only beginning to emerge online. Indeed, Robertson doesn’t see any significant traffic for PIN debit online until after 2014. “It’s a longer-term thing,” she notes. Prepaid cards will grow nicely online, Javelin forecasts, rising from $15 billion and a 6.5% share this year to $38 billion and a 9.3% share in 2014.

Online merchants have been attracted to alternative payments because, in some cases at least, they are less costly to accept than credit cards. Robertson says merchants that want to encourage consumers to use alternatives will want to emphasize discounts and rewards along with transaction security. Price discounts, in particular, appear to carry a lot of weight with consumers. In asking online users why they consider a new form of payment, Javelin found discounts on purchases came in first at 54% of respondents, compared to 29% for loyalty or rewards programs. Security-related benefits, including protection from fraud or misuse of information and ability to keep identity private, also scored high, at 46% and 41% respectively. “These are all ways of generating interest, of getting a consumer to try that [alternative] out for the first time,” Robertson says.

New PCI Phone Rules: A Number Spoken Is Just As Risky As One Typed
Written by Evan Schuman at www.storefrontbacktalk.com
January 28th, 2010

Last week, PCI changed its policy on audio recordings. It now instructs retailers to treat a digital audio capture exactly the same as if it was written. This means that all of those call centers asking for credit card details over the phone must dispose of those recordings, or at least the parts that store the prohibited data, immediately.
The PCI community has been debating the audio rules for years, with our first story on it back in August 2007. (No, we won’t say that this is the first sound decision from PCI in years. Plays on words and data security stories rarely mix well.)
The issues go beyond the literal digital audio capture ruling that PCI just issued. Another key concern are overheard snatches of conversation. In theory, that is where a cyberthief calls a call center with a series of long questions. The thief records the call and later extracts the sound of other call center operators reading back credit card numbers, expiration dates and CAV2/CVV-2/CVC-2/CID details. Call centers can erase their own recordings as often as they want, but that won’t impact consumer recordings. Sound-proof cubicle dividers may be expensive, but they could help protect sensitive data.
Let’s look at what PCI actually did. “It is a violation of PCI DSS requirement 3.2 to store any sensitive authentication data, including card validation codes and values, after authorization, even if encrypted,” the new FAQ says. “It is therefore prohibited to use any form of digital audio recording (using formats such as wav, mp3, etc.) for storing CAV2, CVC-2, CVV-2 or CID codes after authorization, as card data can easily be extracted using freely available software.”
The council made an exception that will impact an extremely small number of retailers, possibly even zero. It said that analog recordings—cassette tape or reel-to-reel systems—are exempt from this rule and can be used to retain sensitive card data post-authorization “as these recordings cannot be data mined easily. However, the physical and logical protections defined in PCI DSS must still be applied to these analog call recording formats.”
Cameron Ross, managing director at Veritape, a company that specializes in audio captures, said that the use of analog today—especially in retail—is extremely rare.
“Practically nobody uses cassette tape these days, in bulk. There are some small uses of it when a company just wants to run ’spot checks’ against Agent behavior and they plug in a manually operated cassette recorder to the Agent’s phone,” Ross said. “However, this is ineffective as a monitoring tool, as the Agent’s demeanor on the phone changes markedly. Unsurprisingly, they tend to be on their best behavior and stick to the scripts exactly. So, in practice, cassette tapes are not used.”
The PCI ruling that such data cannot be retained can be accomplished three different ways: not recording such calls; transferring the customer to another system for the card data to be shared; and splitting the recording into sensitive and not-so-sensitive portions.
Ironically, in the early days of the Web, call centers taking card information were originally pushed as a secure alternative to consumers who were fearful about typing their data into an anonymous Web site.