WASHINGTON — The subprime credit card market, long down for the count, may finally be poised for a comeback.
A team assembled by ex-regulator Raj Date is preparing to launch a plastic card for Americans who don't qualify for mainstream credit.
Over the last five years, that segment of the market has been hollowed out by shifting economic forces and an overhaul of regulations. It's a segment that also has largely been ignored by credit unions — and one that some payment analysts think could be a sound way to grow portfolios while providing a much-needed memeber service.
The fledgling subprime credit card venture is owned by Fenway Summer LLC, an advisory firm that Date founded after he left the Consumer Financial Protection Bureau a year ago. Date's team is partnering with a bank — the identity of which has yet to be revealed — that will issue the cards. Its goal is to start offering the product to consumers within six months or less.
In an exclusive interview with American Banker, an affiliate of Credit Union Journal, Date said that for many cash-strapped consumers, subprime credit cards are a better option than payday loans.
And for financial institutions, subprime cards can offer an attractive risk-adjusted return, despite regulatory changes that have reined in certain fees.
Barney Moore, senior portfolio consultant at Card Services for Credit Unions (CSCU) in Tampa, Fla., agreed that the community can do a lot in this market, noting that without offering subprime borrowers a card members turn to payday lenders.
"That is a poor option for consumers, especially credit union members," Moore said. "Credit unions have a great opportunity to provide much-needed credit to their members who fall into this category."
While many credit unions employ risk-based pricing, what Moore said he typically sees is a significant percentage of a credit union's card portfolio concentrated at the high-end of the credit spectrum.
"Credit unions need to go beyond the risk score and the debt-to-income ratio in determining qualified credit loan applicants," said Moore. "They are in a position to give these members much better options and to grow their card loans by going deeper into the credit spectrum. Credit unions were formed for the purpose of providing credit to their members. It's time they embrace it fully."
Brian Scott, VP of sales at The Members Group in Des Moines, Iowa, said CUs often ignore this segment of the market because either the board is risk averse, the CU is opposed to charging higher rates, or both.
"Neither of these things puts the member first, which is what the credit union movement is all about," said Scott.
Many credit unions have an "imperfect understanding" of what risk and high rates actually mean, according to Scott. "When the view of risk is confined almost entirely to credit score and does not include the myriad of other factors that impact a member's ability to repay, valuable services that could make a real difference in the lives of members are ignored," he said.
Scott contended credit bureau scores should be used to price a loan, not determine qualification for the loan. "It's important to understand these scores are not measures of a member's current ability to repay. They are merely a look at history. Others in the financial industry, competitors to credit unions, are taking notice and targeting those with a low score who demonstrate an ability to repay."
Details To Be Determined
Many details regarding the pricing, branding and structure of the new subprime card are still being determined. But the card is likely to carry a fee and offer no rewards, and to be targeted at consumers with credit scores around 620, according to Fenway Summer executives.
The subprime card is being designed for consumers who have been relying on payday loans, or other high-priced sources of credit, and are showing signs of an increased ability to manage credit responsibly.
Since the start of the recession, it has become harder for consumers with low credit scores, low incomes, or both, to qualify for a credit card. The volume of direct mail marketing for cards with a fee and no rewards fell by 85% between the fourth quarter of 2007 and the fourth quarter of last year, according to data from Mintel Comperemedia.
Factors that drove the industry's contraction include the 2009 passage of the Card Act, which limited card issuers' ability to charge late fees and over-limit fees, and changes in accounting rules that made the subprime card business more capital-intensive.
What's more, at a time of high unemployment, consumers have been more reluctant to take on debt, while card issuers have also become more risk-averse.
Today, the subprime market still includes Capital One, which bought HSBC's subprime card business in 2011, but the combined firm's footprint is smaller than it used to be. Specialized lenders like First Premier Bank in Sioux Falls, S.D., and Merrick Bank in South Jordan, Utah, also compete for subprime borrowers.
If a number of subprime card offers appear outside the CU space, Jennifer Kerry, VP, credit issuer processing at CO-OP Financial Services, Rancho Cucamonga, Calif., is concerned about how consumer-friendly the offers will be.
"Credit unions can best serve their members by learning about the new subprime lender tactics and offers as they emerge so that they can convey accurate information to their members and provide them with responsible alternative lending vehicles," she said.
Subprime Going Prime Time?
At the $85 million-asset Omega FCU in Pittsburgh, CEO Troy Garvin sees the subprime card space heating up.
"I think that the battle for the subprime member is just beginning and this is one of the first products designed especially for them. I think that the falling loan losses coupled with an improving economy has created an opportunity where this segment can be served, and also be profitable for the financial institution."
Garvin said that traditionally credit unions have not done a great job in this market, but believes that will change as CUs focus more on yield.
"Non-FIs have traditionally focused on the subprime market and made money doing so. It is only natural that banks and credit unions go after this segment. Credit unions were founded on the 'people helping people' philosophy and I can't think of a better example than this type of consumer. With the proper controls in place this has the potential to be an extremely attractive market for credit unions."
