Magazine article American Banker

Rethinking Card Company Threat

Magazine article American Banker

Rethinking Card Company Threat

Article excerpt

As recently as 1990, small business customers basically belonged to banks-and lucrative customers they were, generating a steady stream of fees and interest income from checking accounts through credit products. But some of that territory has been slipping out of their grasp.

"What the banks have not been proactive about is pricing credit," says Libby Chambers, a New York-based partner at McKinsey & Co. "They've been inflexible, for instance, in pricing credit lines, which opened up a window for credit card companies. They've also been unsophisticated in extending credit based on the fundamental credit characteristics of the proprietor."

Slipping into that window: American Express, which opened its small business services division in 1987, offering a range of credit products and business services that allowed it to chip away at the banks' empire. American Express' small business customers total some 1.7 million in 1998, say company officials. "Small businesses are a relatively under-served segment in the U.S.," says Steven Alesio, president of the Amex unit. "Banks and financial institutions have paid a lot of attention to individuals and large companies, but the small business sector got lost in between."

One major way that Amex has exploited this business without sustaining crippling losses: Proprietary credit scoring and decision support technology that lets it find the line between risk and reward in individual small business customers, and measure it against what Alesio calls acceptable default rates. He declined to quantify them. …

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