Andrew Kahr, a preternaturally intelligent and occasionally controversial architect of the credit card industry, has spent his career solving intricate problems for financial companies, often by finding loopholes in regulation.
After years of keeping a low profile, the consultant who created the cash management account, the nonbank bank and 0% teaser-rate offers is trying to innovate again, in an environment widely considered inhospitable to innovation.
The founding chief executive of the now-defunct card lender Providian Financial Corp., Kahr is focusing his energy on Credit Builders LLC, a firm he and three other industry veterans started to test and develop products for banks.
His timing could be providential. There's certainly no shortage of new rules to parse these days.
"I read the law, I read the regulations and they give me ideas," Kahr said in a recent, rare interview. "If there were no regulations … I wouldn't be able to generate value by coming up with a solution. … Therefore, from my personal standpoint, I love fairly intense regulation."
Kahr is a big reason so many issuers are located in states like South Dakota and Delaware. He pointed out to a finance company that, under the 1978 Supreme Court ruling in Marquette National Bank of Minneapolis v. First Omaha Service Corp., that if it located its card operations in a state with more lenient usury laws it could charge the same high interest rate across the country. Major banks eventually followed suit.
Kahr also developed the concept of the nonbank bank. Finding that the Bank Holding Company Act defined a bank as an institution that accepts deposits and makes commercial loans, Kahr determined that a finance company could make consumer loans without being subject to bank holding company regulation. That enabled companies that weren't in the banking business to issue credit cards.
Beyond Kahr's knack for identifying and exploiting ambiguities in regulation, Credit Builders is using technology to rapidly test consumer sentiment and track behavior, and apply that knowledge to new products.
The business has been up and running for about a year. Kahr has a few ideas he's actively pitching to banks. So far, though, no one is biting.
Credit experts say there is a great need for new products today, considering the regulatory crackdown — with everything from the Credit Card Accountability Responsibility and Disclosure Act to the forthcoming Consumer Financial Protection Bureau putting restrictions on the industry — not to mention the last recession, which diminished consumers' access to credit.
Most major retail banks "aren't going to be innovators" right now, said Eric Grover, a principal at Intrepid Ventures, a consulting firm in Menlo Park, Calif. "You've got an environment where management at most of these institutions [is] going to be hyper risk averse."
Kahr and his colleagues at Credit Builders understand this.
"It's a very challenging time for banks and most banks are not necessarily prepared to respond in an analytical way," said Ivan Rascanin, a principal at Credit Builders who has worked on consulting projects for major credit card issuers alongside Kahr in the past. "The industry is traditionally conservative and right now the rapid regulatory changes have created uncertainty. So the intersection of a conservative industry and uncertain times means things will take some time to sort themselves out."
But Kahr says today's environment calls for banks to act faster than they traditionally have.
"Between the time that I brought one client into the world of charging the same rate across the country to the time when 'the big banks' were doing it, two to three years passed," he said. "It was a very slow-moving era. … They didn't have to worry about some little guy getting out in front of them and siphoning off a lot of the business. But now it's accelerated. … To me it means we've got to not only think faster but test faster."
The adoption of Kahr's products could prove challenging for other reasons. Though Kahr is undoubtedly considered an innovator, his past is clouded by controversy.
For better or worse, Kahr is perhaps most well known for founding the predecessor to Providian, which grew to become one of the top 10 credit card issuers in the country, and was later bought by Washington Mutual Inc. for $6 billion in 2005.
But before it was sold, the business encountered legal problems, and a subsequent public relations nightmare. (Wamu is now a part of JPMorgan Chase & Co.)
Kahr was long gone from his post as the CEO when the business ran into trouble, but he was associated with the scandal nonetheless, having served as a consultant to Providian for a few years after he left. Some have linked him to the lending practices at the heart of the matter.
Among other things, regulators accused Providian of misleading hundreds of thousands of consumers by charging for services they did not request.
In 2000, after a yearlong investigation, the Office of the Comptroller of the Currency and the San Francisco district attorney's office levied a record $300 million fine on Providian.
Internal company documents, including memos from Kahr from the late 1990s, obtained by the San Francisco Chronicle "portray a company bent on misleading and manipulating its customers in order to soak as much money from them as possible," the paper wrote in 2002.
Reactions from credit card industry professionals to the news that Kahr was getting back into the game in a more meaningful way ranged from concerned to hopeful.
"His involvement in the credit card industry has been to advance some of the more deceptive and consumer unfriendly features," said Josh Frank, a former manager at Providian during the time Kahr was a consultant there who's now a senior researcher at the Center for Responsible Lending in Washington. "If he's returning to the industry, let's hope he's changed his philosophy on that."
Irving Levin, the CEO of Genesis Financial Solutions, a subprime credit card and student loan originator and servicer in Beaverton, Ore., was more diplomatic.
"I think that he has plumbed the gray area of the market successfully," said Levin, who crossed paths with Kahr when he sold a credit card business to Household International Inc., a consumer lender that Kahr did consulting work for. (Household itself was later sold to HSBC Holdings PLC.) "I think that his innovative streak … would be a great use to the industry now," Levin said of Kahr.
Kahr admits he's made mistakes. "I have clients that I'm sure will say I have not given them the best advice," he said. "You'll always have people who will want to blame me." But Providian's troubles were not of his making, Kahr said. "When I left it, Providian was highly profitable and growing," he said. "There were no regulatory or legal action pending, nor have I ever been the target of any regulatory action. While I was CEO, Providian had no subprime customers, which is not to say that I have anything against the subprime business. No one had yet figured out how to do subprime cards, and I hadn't tried."
Rascanin defended Kahr, disputing that he had any influence over Providian policies that were the most damaging. However Rascanin is up front about Kahr's complex personality, the reputation of which often precedes him.
"It is fair to say that it is in his character and his nature to push the envelope," Rascanin said. "He spends a lot of time thinking about how to be innovative. And innovation is always on the cutting edge and that means it can drive great successes and, from time to time, it also needs to be approached cautiously."
By all accounts, Kahr is a mathematical genius. As chronicled in Joseph Nocera's 1994 book "A Piece of the Action: How the Middle Class Joined the Money Class," Kahr was a child prodigy; he entered Harvard University at the age of 16 and by the time he was 21 he had completed a Ph.D. in math at the Massachusetts Institute of Technology. Later he spent time on the faculty at Harvard's business school.
Kahr's spent most of his career as a consultant, advising large banks, credit card issuers and brokerages like Merrill Lynch & Co. — now a part of Bank of America Corp.
At times, Kahr (who would not disclose his age) is avuncular in his demeanor, eager to tell stories from the old days and often chuckling at his own observations. And he's used to being ahead of the curve, even a bit misunderstood.
"When I invented the Merrill Lynch cash management account or Schwab One account, they were the first hybrid cards that could be used either to access credit … or to draw against assets like cash balance, money market fund balance," he said.
"People would say, 'Well what is this? Is it a credit card or debit card?' "
One of the products Kahr has created for Credit Builders is something he calls the Better Credit card. He designed the product with the goal of bridging the gap between two silos in the retail banking world: credit and checking.
The idea is to make the card available to consumers who may not be offered credit because of a thin or nonexistent credit profile, but who have checking accounts in good standing with few overdrafts.
"We view it as a way of attracting and maintaining desirable checking customers and generating additional fee revenue from providing them with a service they want really badly," Kahr said. "We're not trying to measure their credit; we're trying to make it possible for them to build their credit."
It could also be a customer acquisition tool, Kahr said, giving a bank the ability to offer the card to consumers with checking accounts elsewhere and potentially convince the consumer to move his or her checking account there.
Recently, though, Kahr has noticed banks aren't keen on gathering a ton of deposits right now while lending is still constrained, which could make selling the idea more difficult.
But his colleagues contend Kahr's persistence could bring Credit Builders success.
"He is relentless in his intellectual curiosity," Rascanin said. "He's very deeply interested in everything in our industry. That makes him a very challenging person to work with at times, because he can be very single-minded in his views. But he can also be a very exciting person to work with, too, because he brings perspectives that are sometimes quite startling and that come from deep experience and pattern recognition."
And, "he'll never fail to follow up."
