For most of his career Shailesh J. Mehta could do no wrong.
A brilliant student and scholar, he decided in his youth to apply his talents to business rather than academia, and used his prosperity for philanthropic purposes, endowing, among other things, a graduate school in his native India.
Shy but likable, he is described by present and former colleagues as a quiet mentor whose deft analytical mind and astonishing recall of numbers leave others feeling humbled.
Today Mr. Mehta, 53, the architect of the Providian Financial Corp. credit card empire, is the humbled one. On Thursday he announced that he would step down from his position as Providians chairman, president, and chief executive officer, in light of its widening gyre of financial woes.
In a brief prelude to Thursdays conference call, in which the company announced its third-quarter earnings, Mr. Mehta, who once represented the pinnacle of lending expertise, gave a stark mea culpa:
During my time as CEO at Providian, we have done many remarkable things together, he said. During the last few months we have not delivered earnings or credit quality we have projected. As an individual, I am frustrated by a failure to meet expectations.
He noted that J. David Grissom, a longtime Providian board member, had assumed the chairmans title, and that the board was searching for a successor to take the president and CEO titles.
The decision to initiate these management changes was mine, Mr. Mehta said. The board and I are united in the belief that these steps are important. Providian remains a vibrant company. He did not participate in the remainder of the call.
Only very recently has it been true at Providian that things began to fall apart and the center could not hold. This year Mr. Mehta was making the rounds of media outlets and East Coast conferences, giving speeches to attentive audiences about how great it was to be Providian.
He exhorted industry executives to follow his technology-heavy business model for issuing credit cards, warning that otherwise they would face eventual extinction. Some called his manner arrogant, but Providians nearly unparalleled rise from its 1997 spinoff as a midsize issuer, with 4.5 million customers and $9.9 billion of managed loans, to the countrys fifth-largest credit card issuer, with more than 17 million accounts and $32.2 billion of receivables, gave him some bragging rights.
One of the best-paid executives in the industry ($27.1 million of cash and incentives last year), he enjoyed besting bigger, brand-name companies.
In a June interview at American Bankers offices in New York, he spoke about why Providian had done so much better than some of its competitors.
You can make assumptions in your business model, but in the long term how will your assumptions hold? he asked. When they made assumptions and the reality was different that is why we are seeing consolidation.
But now that summer has given way to fall, Mr. Mehtas own assumptions have crashed into Providians new reality: disastrous chargeoff rates from the subprime customers it boasted about serving; a monumental failure to diversify into new markets; and sinking profits from its fee-based products, which were the subject of a landmark fine a year ago.
Other card companies that also use technology-based strategies and serve subprime customers, like Capital One Financial Corp. and Metris Cos., have flourished, while Providian has foundered, and the contrast helped push Mr. Mehta out of the company he created.
He was a successful student at IIT Bombay, one of Indias most prestigious technical schools. Sudhir Shetye, a former classmate who earned a mechanical engineering degree in 1971, says that even then Mr. Mehta reveled in competing against the top students. He recognized other talents and learned from them, Mr. Shetye said in an e-mail interview.
Years later Mr. Mehta donated $2 million to IIT Bombay to set up a graduate school of management, which is named for him. He also participated in a venture fund that sought out Indian entrepreneurs.
After graduation he moved to the United States and enrolled at Cleveland-based Case Western Reserve University. His PhD dissertation described the type of behavioral modeling that he would later put into practice at Providian, but in the meantime he applied his brainpower at the old Ameritrust Corp. before joining Providian Corp., then First Deposit Corp., in 1986.
At the time the Louisville company (which later changed its name to Providian Corp.) was primarily an insurer, and its small card-lending division was known internally as Bancorp. But after Mr. Mehta took charge of it, that division began fueling its parents profits.
By 1994, Mr. Mehtas stock had risen so high that Providian Corp.s chairman, Irving W. Bailey 2d, brought him from Bancorps San Francisco base to Louisville as the companys president and chief operating officer.
In an interview shortly thereafter Mr. Mehta said, We have transferred a lot of ideas, practices, and some people from Bancorp to the insurance operations.
By 1997 he sensed it was time for a corporate restructuring. Providian Corp.s insurance arm was sold to Aegon of the Netherlands, and the card business was spun off as Providian Financial.
A year later he freely boasted about his 50 consecutive quarters of earnings growth, continual flow of new products, and advanced risk management techniques. Providian is one of the few companies that can serve a market segment from as low as a 1% loss rate to as high as a 12% loss rate, he said in 1998. Give us any segment, and we have a product.
The euphoria ended in June 2000. For the first time in its life, Providian Financial was front-page news across the nation, thanks to a record $305.5 million fine it was ordered to pay by the Office of the Comptroller of the Currency after an investigation by the San Francisco district attorney revealed that Providian had been lying to consumers in its mailings and telemarketing practices.
According to the OCC, in some instances telemarketers promised consumers lower interest rates if they transferred their accounts to Providian, but refused to say what the new rate would be and then found an excuse to charge a higher rate instead. In other cases Providian sold no annual fee cards without revealing that instead of paying a $60 annual fee, customers would be charged $156 a year for Credit Protection, a credit card insurance product that was laden with restrictions.
Providian admitted no fault in the settlement, but the publicity sent its stock down 40% in a matter of weeks. Instead of being defensive, Id rather put my energy into turning lemons into lemonade, Mr. Mehta said at the time about his decision not to dispute the charges.
The company then put its energies into reinventing its marketing approach. It made hundreds of changes in accordance with the Office of Thrift Supervisions consent order far more, in fact, than it was required to do, Mr. Mehta said.
Among other things, customer service representatives were given a new script that required them to ask customers, Are you satisfied? before hanging up the phone. Providian began putting its name on all manner of charity races, financial literacy programs, and other good causes.
In May it entered and won the Quality Cup customer service competition sponsored by the Rochester Institute of Technology and USA Today. Mr. Mehta touted the award, for which it beat out 145 other companies, as proof of the improvements Providian had made since the OCC crackdown.
To improve relations with consumer advocacy groups Providian hired Chris Lewis, a former executive at the Washington-based Consumer Federation, who described his task as to build a two-way street, making certain the company heard advocates and advocates knew where company was.
Stephen Brobeck, the executive director of the Consumer Federation, says that Mr. Lewis involvement was critical in his decision to partner with Providian on two research projects. When Chris called me up to talk about the possibility of a project, I was skeptical, because Providian is in the credit card business, and we are quite critical of some of those practices, Mr. Brobeck said.
The card company and the consumer group found common ground in two projects that focus on getting Americans to save money. Providian sponsored the research and donated $200,000 to financial literacy initiatives.
Mr. Brobeck said he genuinely liked Mr. Mehta and, to his surprise, enjoyed working with Providian. We found them to be an excellent partner, which is not true with all companies. The reason it works is we are both interested in useful research.
Mr. Mehtas innate curiosity delighted Mr. Brobeck. He runs his business experimentally, by developing a hypothesis and testing it, Mr. Brobeck said. I know many CEOs, and he is unusual in that regard.
Providians image improvement strategy includes trying to get consumer activists to pick on somebody else.
They have pitched to me that they think they are improved, and that others deserve greater scrutiny, said Ed Mierzinski, the consumer director of the Washington-based U.S. Public Interest Research Group. They say they have cleaned up their act, and others should be looked at. I dont know if they are better, but I have not seen any recent complaints about them in any great numbers.
Dennis Brady, an executive vice president who has spent 11 years at Providian, now runs the call center operation. He said his goal it to make sure there are fewer action complaints those that would prompt an angry customer to call the media, a regulator, or consumer group this year than there were last year. Why should they have to go to regulators if we respond?
Unfortunately for Providian, potential cobranding partners, such as airlines or hotels, have been reluctant to tie their names to a company that has been the target of consumer action groups.
Providian has had to pay for each of its two cobranded credit cards. The first, its GetSmart card, came about because Providian bought GetSmart, a Web site for comparison shopping on consumer loans. The second, its PayPal card, came after Providian made an equity investment in the person-to-person payments company.
One analyst suggested that Providians run-in with the OCC hurt it in the subprime market, because it must be more circumspect in marketing lucrative fee-based products, and in the superprime market, because of the lack of cobranded products that appeal to that market.
Drops in fee-based income have been a major source of the companys recent financial problems, and Mr. Mehta acknowledged that efforts this year to build superprime balances had fallen short of the companys goals by $1 billion.
In the end, the introvert who likes to let the numbers and his deputies do the talking was forced to make a statement to the public.
In the news release announcing his departure, he is quoted as usual expressing optimism: Providian remains a strong and vibrant company, and management and the board stand united in our commitment to restore investor confidence and return the company to its recent successful growth performance.
