Credit Card Reform: Are You a Business, Consumer, or Both?

We got some great comments on our post yesterday about how credit card protections passed in the House won’t help small business cardholders. There’s a bigger theme here worth noting: In many ways, small businesses are more similar to individuals than corporate entities, but the law doesn’t protect small businesses the same way it does consumers.

For example, the new credit card protections are an amendment of the Truth In Lending Act (TILA), which is a consumer protection law that does not apply to business-to-business transactions. That’s also the case for laws that govern debt collection, telemarketing (as reader Gerard noted — he gets 70 calls daily), and other practices. They all exempt B2B transactions.

But if you’re a sole proprietor, especially if you have no employees, there is often no meaningful distinction between you and your business: you’re personally liable for claims against it. So why should transactions (like opening a credit card account in your company’s name, which is based on your personal credit score and which you are personally guaranteeing) be exempt from consumer protections?

This goes back to an issue we wrote about earlier this year: how laws often don’t account for the size of businesses. In those posts, we looked at regulations that create barriers to entry by forcing small artisan businesses to comply with clearly laws written for larger operations, like requiring any plant processing meat to have a bathroom exclusively for the federal inspector. In the case of the credit card reform, it’s a regulation that insufficiently protects small businesses by treating what are essentially consumer transactions as B2B transactions. In both cases, though, the law assumes that very small businesses or self-employed people are much bigger than they are.

It’s a tough issue that government hasn’t addressed sufficiently. I don’t think it’s necessarily intentional — it’s just easier to divide things into “consumer” and “business” without recognizing the gradations of people and entities in between. But more and more people fit into that in-between space, so as a society we need laws that will also work for them.

Finally, if you’re interested in the credit card issue, don’t miss this great story from this week’s magazine about why the typical credit card contract is 30 pages and nearly always includes a right to “change the terms at any time for any reason.” Here’s a taste:

In a November 1997 memo, MacDonald, then one of Citi’s most senior lawyers, warned against adopting Providian’s strategy of “penalty pricing,” which involved charging consumers who made late payments steep fees and hiking their rates. “I was asked to resign three days later,” he recalls. Penalty pricing became standard throughout the industry.
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