Earn What You Spend

I’ve written before about the challenges facing the credit card industry - and it looks like these challenges are now showing up in the balance sheets of these companies. Clusterstock summarizes what the rating agency Fitch had to say about the industry today: 

Rising unemployment will push up the losses on credit card portfolios while shrinking consumer spending hurts profits, Fitch says. As banks seek to reduce their exposure to credit card losses, participation in Federal Reserve programs designed to increase consumer lending will likely decline.  

In the same way it took a large-scale banking crisis for us to learn just how important bank credit is to keeping the economy running, it may take a similar crisis in the credit card industry for us to realize their importance.  Already, credit card companies are lowering credit limits and closing accounts in an attempt to stop the bleeding.  But there are some innocent bystanders caught in this process and the public relations blowback from such financial damage control is significant. 

Just take a look at today’s post from Fred Wilson, New York City’s most recognizable venture capitalist who runs the popular blog A VC.  Fred was caught in just this sort of crossfire: 

I’ve been a customer of American Express since 1983 and have never failed to pay a bill. Right now, between my business interests and family, I carry and pay for five American Express accounts …

The smallest of these accounts is an old Flatiron Partners account. We don’t use that account very much anymore, but we do still use it occasionally. A month ago, we were accidentally late paying that account. And as a result American Express shut down all of my accounts without notifying me. My partners in Union Square Ventures could not use their cards, I could not use my personal card, they shut off all of the accounts I have with them even though they were not in any way related to the Flatiron account. I suspect the accounts are linked because they all funnel membership miles into one single account.

Generally speaking, I think we have too much debt - but credit cards give companies the ability to manage their cash flow, hands down one of the most important things a company must learn to do.  Take away the credit card, and balancing expenditures with expected payments is significantly more difficult.  (My example of how this works is here).  The truth is that missing a single payment is shockingly easy to do.

Shutting down cards and lowering spending limits matters for more than just the credit card company and the individual card holder in question: the effects of such policies are far-reaching.   Having your normal business processes jeopardized because of what in some cases is a minor mistake is certainly not productive for our economy.  So while many of us continue to look for scapegoats in this recession, remember: these losses affect all of us.