Credit cards are a way of life for consumers, for the businesses that rely on them and for small business owners dealing with the volatility of day-to-day cash flows. But the traditional credit markets are showing some troubling trends for people in the U.S. with relatively lower risk scores and, by extension, small business creation.
As noted in a report released last week by a duo of Harvard researchers, titled “Out of Reach: Regressive Trends in Credit Card Access,” credit access is not as easy to come by as some might surmise.
In an interview with PYMNTS, Marshall Lux and Robert Greene — the report’s authors and senior fellow and research assistant, respectively, at the Mossavar-Rahmani Center for Business and Government at Harvard’s John F. Kennedy School of Government — said that regulations and legislation tied to the credit industry have had a number of unintended consequences.
Chief among those consequences, according to the data: As regulatory restrictions catapulted higher, by 250 percent since just before the financial crisis, there has been an attendant dwindling of credit card originations, to the tune of 50 percent, over the same timeframe, as measured by credit extended to Americans with lower risk scores. There’s also a disparity here, noted the report, as credit card originations to consumers with relatively high scores actually moved higher with an average of 1.3 million new originations annually.
Though the report focused on the impact of regulations on credit at the consumer level, there are indeed impacts felt within the small business arena, too.
Personal credit card use can, at times, be a lifeline for a small business, especially among the very smallest firms within the United States, such as those with fewer than 10 employees. The authors noted that as many as 1.5 million of these smallest of small business owners (or 20 percent) use personal cards in a business setting, as found by the National Federation of Independent Businesses.
Offering up one hypothetical example, Greene noted that “a food truck business, with just a few employees, could find an unexpected need for credit” in order to finance, say, equipment, inventory or repairs, any of which would be critical “in order to keep the business afloat.” Moreover, said the authors, the difficulties of obtaining personal credit (and, by extension, providing some cushion to a small business) means that many businesses never get off the ground in the first place.
Personal credit often leads down a pathway to business credit. Greene noted that “it is one thing for policymakers” or other observers to say that entrepreneurs looking to finance new ventures “should just use a business credit card,” but the reality obviously is different. Said Lux, “The perception that lower income, millennial or immigrants have seen a kickstart in access to credit is totally wrong,” even in an age where Big Data and other facets of credit scoring driven by technology purport to actually help originations in the face of traditional scoring models.
Restrictions in place are one barrier to credit card originations (and, by trickle-down effect, small business creation and expansion), but there’s also a knock-on effect of “unpredictable enforcement” on the part of agencies such as the CFPB, which can have a chilling effect on originations and also the amounts of credit lines that are extended to those deemed higher-risk prospects. According to Lux, the question should be asked of the CFPB and other regulators: “What’s the mandate? Is it to promote safe lending and educated lending, or is it to issue 200-page warnings that people don’t read?” The vast majority of non-prime or low-prime credit users, even using credit on a revolving basis, do so responsibly and typically do need a cushion against unforeseen events.
In the wake of their findings, Lux and Greene have recommended that at least some of the bans in place currently on risk-based pricing (as mandated through legislation such as the CARD Act) be shelved, as should the Durbin Amendment. Basic banking services have become more expensive (and, by extension, the cost of using credit has become more expensive) as Dodd-Frank has taken effect. Among other policy recommendations: A bipartisan commission should look into how banking regulations can be streamlined in an effort to bring those basic services to more U.S. households.