This story appears in the February 2009 issue of Cards&Payments.
Commercial card issuers generally consider small businesses a greater risk for default than mid-size and large corporations. But the rapid meltdown of large, formerly respected corporations, such as the once-venerable Lehman Brothers, in recent months has highlighted the fact that no company is immune to insolvency.
But card issuers lack the tools to adequately assess the financial health of their corporate card clients, according to a recent report by Mercator Advisory Group LLC, a U.S.-based consultancy.
"The unique nature of this segment classifies it as, on one hand, a 'niche' card segment, but one where uncontrolled risks could make it more than 'niche' in its consequences for a bank," writes report co-author Patricia Hewitt, a Mercator senior analyst.
One challenge of corporate card accounts is that corporations have more-sophisticated financial statements and debt loads than do consumers or small businesses. Corporations may hold several commercial loans from several issuers. Large corporations may have to issue detailed financial reports to investors, but mid-sized corporations may be privately held with no such reporting requirements.
That means issuers often have "blind spots" in their timely views of the combined risks of a corporation's commercial and card loans, according to Hewitt.
Many corporate cards are limited to purchases at specific merchants and have lower charge or credit limits. But other cards, particularly for travel-and-entertainment expenses, have high limits and are more susceptible to employee misuse.
"The credit limits are high and can get higher very quickly," Hewitt tells Cards&Payments. "There isn't always someone validating employee corporate credit card use, but the company is always required to repay that card debt."
Collecting on corporate card debts can be difficult if a corporation declares bankruptcy or goes out of business, Hewitt notes.
Edmund Tribue, global practice leader for the risk-management practice of MasterCard Advisors, agrees that issuers lack well-developed analytic tools for keeping tabs on corporate cardholders' fiscal health. He recommends issuers structure corporate card contracts to require companies to submit comprehensive financial statements quarterly or even monthly, especially if those companies are privately held and do not have to issue quarterly reports.
And issuers should look for corporations to implement spending curbs on their cards, such as limits on where cards can be used based on the
business needs of the cardholder, Tribue says.