Ally makes new run at credit card business with $750 million deal

Ally Financial, long known for auto lending, is taking another crack at entering the credit card business after the pandemic derailed its last deal.

The Detroit-based company has agreed to buy the subprime credit card issuer Fair Square Financial in a $750 million all-cash deal, which Ally expects to close early next year. Ally executives said Thursday that the acquisition aims to fill a “gap” by adding a consumer banking product — the credit card — that is central to many customers.

Ally will now "offer every single product and service for our customers," Chief Financial Officer Jennifer LaClair said in an interview.

Ally, which was spun off from General Motors in 2006, has sought to diversify beyond auto finance, with products that include high-yield savings accounts, mortgage loans, unsecured consumer loans and investment services.

The deal marks another foray into credit cards for Ally, which offered cards indirectly through a partnership with TD Bank that ended in 2019. In February 2020, Ally sought to offer credit cards directly through a plan to acquire CardWorks for $2.7 billion. But the companies called off the deal in June 2020, citing the uncertainty of the COVID-19 pandemic.

Much like CardWorks, Fair Square Financial focuses on customers with below-prime credit scores. Fair Square has roughly 658,000 card customers with an average FICO score of 657. The company’s loan balances are currently around $763 million, up from $300 million in 2018.

The below-prime segment of U.S. consumers presents opportunities for growth and is often “underserved” by banks, said LaClair, who noted that major credit card issuers compete heavily for super-prime borrowers seeking premium rewards.

Ally’s auto finance borrowers had an average FICO score of 683 in the third quarter. Prime credit scores fall between 660 and 719, while super-prime borrowers have credit scores of 720 or above, according to the Consumer Financial Protection Bureau.

Assuming the deal closes on schedule, Ally will not rush to offer Fair Square’s credit cards to its millions of customers, according to LaClair, who said the roll-out will happen over time.

“We don’t want to slow them down whatsoever on the path that they’re currently on,” she said.

Fair Square offers credit cards through its Ollo brand, including a rewards-free offering called the Ollo Platinum card. The company also offers a rewards card that offers 2% cash back on some purchases and a version for nurses and educators that provides 2% cash back on all purchases. Fair Square recently launched a pilot program for a credit card that offers 2.5% cash back.

The Ollo card that offers higher rewards will be particularly attractive to Ally customers with higher credit scores, LaClair said.

Ally has a “strong opportunity” to cross-sell the rewards card to its more than nine million customers, she said. But Ally does not have a timeline for doing so and is not baking that strategy into its projections for the merger, LaClair added.

The higher-rewards Ollo Optimum card charges an annual percentage rate of 24.99%, with a 15-month introductory period in which some borrowers pay 0% APR. Ollo’s other cards generally charge APRs between 24.99% and 27.99%, above the industry average of about 16%, according to CreditCards.com. Ollo’s cards are currently available on an invitation-only basis.

Ally’s arrival in the credit card business will add to the competition for subprime borrowers, said Ted Rossman, senior industry analyst at CreditCards.com. Competitors include fintechs such as Chime and Revolut, as well as buy now/pay later companies that offer short-term installment loans.

“It doesn’t have to be the next Amex or Chase to be profitable or to be additive to their business,” Rossman said.

Fair Square, which was founded in 2016, was partly backed by a $100 million investment in 2018 from the Orogen Group, the investment firm led by former Citigroup CEO Vikram Pandit.

Citi was Ally’s lead financial advisor on the deal, with Goldman Sachs also providing advisory services and the law firm Sullivan & Cromwell giving legal advice. JPMorgan was Fair Square’s financial advisor, and the law firm Skadden, Arps, Slate, Meagher & Flom was its legal counsel.

During the third quarter, Ally’s net income attributable to common shareholders rose to $683 million, up from $476 million in the same quarter last year, as higher financing revenues and lower credit loss provisions helped offset an increase in noninterest expenses.