THE GREATER ADAPTION of Dennis Alter’s career, so far, may have been his recognition of a whole new type of credit market. “Business to business,” people called it, or simply, “B2B.”
A decade ago, there was more or less no such thing. A small-business owner who needed credit could apply for a traditional bank loan, or could use his personal credit card. Alter saw an untapped market there: a community of people who would likely use their credit cards constantly, and would have powerful motivations to pay them off on time. So when Advanta’s sub-prime mortgage adventure came to a close, Alter refocused his company on this narrow — but potentially lucrative — new field.
There had been two types of credit cards, previously. Consumer cards are the personal lines of credit that most people use in daily life, and are tied to personal credit history; the holder is responsible for payments. Corporate cards are custom-made for large companies or government agencies with fleet costs, extensive travel and so forth, and while employees may carry them, they’re not tied to personal credit; the company is responsible. This new category that Advanta embraced — small-business cards — sat somewhere between. Owners of small businesses could use their personal histories to access much larger lines of credit, to purchase inventory, make payroll in a pinch, and so forth; the holder was the company, and so was responsible for payments.
Big fat credit lines would mean big fat profits for Advanta. Sure, the loans came with some risk. But Alter cranked up Advanta’s old credit analytics machinery, and it spat out the names of one worthy candidate after another. A real estate broker in Rhode Island. A Hollywood producer. A Web designer from Oregon. Alter had discovered a vein of gold — or platinum, in some cases — and Advanta rushed to exploit it before giants like Citibank and Capital One could catch up. “These cards went from one percent of the overall market to 11 percent in the past decade,” said David Robertson, publisher of the Nilson Report, a credit industry trade paper. Advanta cannonballed into the deep B2B waters, focusing everything on the new niche. And why not? Alter’s computer models, manned by 75 analysts, showed that as long as the company picked the right customers, it would be fine.
The trouble was, it turns out that computers can’t read history books. This sort of credit card was so new that it hadn’t yet gone through even a single macroeconomic cycle. In previous financial downturns, no one had small-business cards, so the computers couldn’t predict how those people would behave during calamity. There were no such algorithms. And everyone seemed to overlook one critical factor: All those small- business owners with gleaming, high-limit B2B cards also still carried their own personal cards. So as the economy slowed down last year — before the crash — those customers faced two options:
1) They could prop up their business accounts with their personal cards. Or,
2) They could just let them crumble.
“People started borrowing money, using personal credit to pay the Advanta bill,” Robertson said. “So everything looked fine on the surface. And Advanta didn’t realize people were about to start dropping off the credit map” — which is to say, to stop paying their bills. “It was the first downturn in history where millions of small-business owners were holding business credit cards. They got hit in an extraordinary way.”
And now Advanta, like its agonized customers, faced a choice of its own: Prop them up. Or just let them crumble.