Subprime credit card lending is suddenly hot.
At least five companies have formed plans within the last few months to market credit cards to people whose accounts have been charged off by other banks.
And those among the top 50 card issuers that already target risky customers are wooing more of them.
Many banks still will not touch these types of accounts, but those that do say there is a healthy profit in catering to people who want to repair damaged credit histories or who have never established credit in the first place. Issuers that find the higher-end credit market saturated see subprime as a new frontier.
"We would like to think of our business as credit rehabilitation," said Alan Colberg, chief executive of lending operations for Commercial Financial Services Inc. of Tulsa, Okla. "Our customers are prime customers who have fallen, but will be prime again."
Mr. Colberg's company-like most of the newer subprime lenders-is a collections firm that recently purchased a bank to do lending of its own. It believes its heritage makes it expert at managing risk.
Statistics from RAM Research Corp. of Frederick, Md., indicate it is a growth market: Subprime receivables are growing 45% annually, compared with 16% for cobranded cards. Noncobranded cards have lower growth rates.
For the estimated 30 million households that fall into the subprime category, secured credit cards-which require a deposit in exchange for a line of credit-used to be the only option. Today there are as many, if not more, unsecured cards going to these borrowers.
While subprime issuers are quick to defend their work-some describe it as a kind of public service for people having hard times-the business has many detractors, including regulators and bankers.
The Consumer Federation of America said in a recent editorial for the Scripps Howard newswire: "Subprime loans are bad for most borrowers and a disaster for others. These high-priced loans add substantial debt to already overburdened consumers."
Regulators have been waving yellow flags. And amid controversy in Washington over bankruptcy reform and underwriting standards, some bankers are reluctant to concede they are pursuing subprime customers.
"Banks are making riskier loans by charging higher fees, which is not a bad thing if you know what you are doing," said Kathy Kalser, section chief of the insurance division at the Federal Deposit Insurance Corp.
At least two companies have failed miserably. In July, BestBank of Boulder, Colo., was shut down by the state Banking Board for having just $23 million in capital and $134 million in card debt. According to the agency's report, losses "resulted from a concentration in subprime credit card receivables (and) continued to increase at an unacceptable pace."
In September, Los Angeles-based Fidelity Federal Bank FSB quit the subprime card lending business after delinquencies on its accounts soared to 11.9%. (By comparison, even Metris Cos., which views high delinquency rates as a byproduct of doing business in the subprime market, had only a 7.40% delinquency rate in June. The average among the top 20 bank card issuers was 4.21%, according to a report by Donaldson, Lufkin & Jenrette Inc.)
"BestBank and Fidelity got infatuated by their growth and never adequately understood how to manage their business," said Donald M. Berman of Cardholder Management Services of Plainview, N.Y.
Mr. Berman's company, which manages secured card portfolios for three of the top 10 credit card issuers, recently bought Merrick Bank in Salt Lake City, which has enabled it to buy subprime portfolios.
Mr. Berman says he believes smaller companies are diving into subprime because larger card issuers are "not taking a big position in the industry, at least not directly."
Mr. Colberg of Commercial Financial Services put it differently: "What is forcing others to go after the subprime market is that they don't have the scale to go head-to-head with players in the prime market."
Mr. Colberg's company owns four million accounts of people who have not paid their card bills in several years. Its specialty is convincing them to pay off at least a portion of their debt, promising they can improve their credit record if they do so.
Soon Commercial Financial Services will hold out an additional incentive: After closing a deal to buy Corning Savings and Loan in Corning, Ark., the company will offer a new credit card to people who are reducing their debt.
"We would give them a better credit offer than they would get in the marketplace," Mr. Colberg said.
But Commercial Financial Services is going up against some of the largest and savviest subprime lenders. Capital One Financial Corp., the ninth-largest bank card issuer, says its "information-based strategy" lets it offer a full range of products-secured and unsecured-to consumers of all demographics.
Providian Financial Corp., the 10th-largest, has identified people with impaired credit histories as one of several constituencies it hopes to serve more broadly. Metris, the No. 17 issuer, has courted this market for years.
These hard-core specialists say they believe their experience with subprime customers will shield them in an economic downturn. "We pride ourselves in really learning the market," said Seth Barad, executive vice president of Providian.
Mr. Barad admitted that "subprime has a stigma," but defended his company's practice of making loans to people in bankruptcy. "There are people who use bankruptcy to restart their lives," he said.
Other large banks shun these customers or offer only a basic secured card. Among the top eight credit card issuers-which control about 60% of all accounts-none has delved seriously into subprime card lending.
Because of the large banks' reluctance, subprime accounts have historically been the bailiwick of smaller specialty financial institutions. Today some of these longtime lenders are feeling the squeeze from the newer entrants.
"The most dramatic thing I've seen in the (subprime) market is the speed with which credit card marketers are growing," said veteran secured card banker Robert Bouza of Key Bank and Trust (formerly Key Federal Bank) of Havre de Grace, Md.
Once one of the leading secured card issuers, Key Bank and Trust recently dropped out of the card-issuing business because of increased competition.
"Five years ago if I put out 10,000 pieces of mail, I got 10,000 inquiries. Now I might get 500," Mr. Bouza said.
"The stakes are rising rapidly," said Irving J. Levin, chief executive officer of Renaissance Bankcard Services of Portland, Ore. His company, which manages secured and unsecured subprime portfolios for five of the top 15 card issuers, has been in business for seven years.
Despite the competition, Renaissance's business-which includes secured and unsecured cards, primarily issued for other banks-has been growing like wildfire. Next year the company expects to double the number of accounts it handles and will open a second operations center.
Renaissance employs 500 people, 200 more than last year. The new facility in Kentucky will add another 300 workers, Mr. Levin said.
Other newer lenders posing a challenge to Renaissance include companies that specialize in buying charged-off card debt. Some of these are among the five companies that have recently stated their intention to enter the card-issuing business.
In 1997 charged-off card debt totaled $31 billion, according to The Nilson Report. The Oxnard, Calif., newsletter said that number is expected to reach $39 billion in 2000 and $52 billion in 2005.
Commercial Financial Services is the company most active in buying charged-off card accounts, and Creditrust Corp. of Baltimore comes in second. In September, Creditrust announced it would work with a bank-which it declined to name-to issue a MasterCard for people who need to establish a positive credit history.
Cardholders will be given a line of credit equal to the amount they pay down on their existing debt, and they must agree to a 36-month plan that garnishes payments electronically from their checking accounts. A six-month teaser rate of 9.9% will jump to 17.5%.
"Our objective is to give the customer an incentive to pay off his credit card," said Richard J. Palmer, chief financial officer of Creditrust.
The company also hopes to help its bottom line: Of the one million accounts Creditrust owns, only 25% yield profits.
Other companies have prospered using similar strategies. First Premier Bank of Sioux Falls, S.D., saw receivables grow 14% in the second quarter to $79.1 million, according to RAM Research.
Cross Country Bank of Wilmington, Del., doubled its receivables last year, said president Rocco Abbessinio.
"I expect we will continue at that pace," he said. Cross Country has been offering secured and unsecured cards since 1996 to people who have trouble qualifying for credit.
Compucredit Corp. filed a registration statement in August with the Securities and Exchange Commission for a $123 million initial public offering. The Atlanta-based company, which intends to target subprime customers, has already picked up 200,000 card accounts through Columbus Bank and Trust Co., a subsidiary of Synovus Financial Corp.
Compucredit's principals are brothers David Hanna and Frank Hanna 3d, who declined to be interviewed for this article. But their roots are in the collections business: their father, Frank Jr., ran Nationwide Credit, a collections company now owned by NCI Acquisition Corp. of New York.
Another subprime specialist launched this year, First Teleservices of Atlanta, manages a data base of charged-off accounts and plans to issue secured credit cards and other financial products. Its goal is to pick up a million accounts within three years.
"We think a lot of the people in this file are in there through no fault of their own," said John Cahill, president of the company since June. "We are trying to help them get back on their feet."
Mr. Cahill's credentials may stand First Teleservices in good stead: He joined the company from First Data Corp. and previously worked at Citibank.
First Teleservices has alliances with collections agencies, purchasers of charged-off receivables, and banks. It recently bought First National of Boca Raton, which will issue some of the new cards.
Some veteran subprime marketers view the seemingly sudden explosion on their turf suspiciously.
"It is an irony that we are getting toward the end of a remarkable economic cycle and people are jumping in and getting very aggressive when the market is getting very tired," said Mr. Levin of Renaissance.
