After long being cast in the same category as Limburger cheese and leisure suits, the subprime retail lending market is coming into its own.

This market is a growing area of opportunity. Credit card companies are realizing that - despite some of the inherent challenges - the consumer who doesn't have A credit can be profitable, and that there are significant benefits to be gained by issuing to this market segment.

The subprime market consists of three groups: those with no credit, those with bruised credit, and those recently ousted from the A group because of tighter criteria.

One appropriate product for this market segment, which is getting increasing attention from issuers, is the secured credit card.

"The majority of our ethnic and minority groups are still without one of the most important financial tools - a credit card," said Wesley Buford, founder of First Freedom and prospective secured card marketer.

"We're launching the Freedom card to help underserved communities," he added. "Understanding the needs of different groups in these communities is the key to profitability and growth."

Issuers are soliciting subprime consumers at a rapid pace. Here's why:

*Securing deposits permits less stringent credit criteria; consequently, approving the majority of applicants becomes a reality.

*Existing banking relationships can be cemented by cross-selling a secured card.

*Community Reinvestment Act requirements are supported, as the majority of the community can be approved for a secured card.

*Many secured card issuers eventually graduate cardholders to an unsecured product as a reward for responsible usage. In addition to customer goodwill and loyalty, this transfer also provides a steady stream of new accounts into the unsecured portfolio.

Along with the benefits of stronger banking relationships and good will, secured cards have much to offer issuers financially. Capital requirements are significantly lower: 2% compared with the usual 10% for unsecured accounts.

Furthermore, secured cards can generate high returns on assets and provide cheap and stable deposits, because the security deposit typically overfunds the card receivables.

"A secured card makes sense for us," said Irving Levin, chairman of Orchard Bank, of Oregon. "We want to serve the needs of our community and our shareholders. With a secured card we can do both.

"This product provides us with income, doesn't overly impact our capital needs and builds an intensely loyal customer base," he added.

Secured cards present special challenges.

The product requires significantly more in servicing and cardholder education. Risk management and strategies are quite distinct, and there are also important differences in marketing communications and integration of the branch, deposit, and bank card system.

As a result, many issuers - even larger ones such as First Union and Travelers Bank - are turning to service providers who offer the expertise, systems, and resources to service their portfolios.

"Outsourcing our secured card was the best option for us," said Scott Saltzman, vice president of Travelers Bank in Delaware. "We hadn't had previous experience issuing a secured card product.

"We wanted to limit our initial expense to develop and support the product; we wanted to bring the product to the market quickly, and we wanted to minimize any potential credit risk. We simply wanted to be able to say 'yes' to as many applicants as we possibly could."

Secured card applicants are demographically different from other market segments. Nearly 50% of the new entrants to the subprime market have no credit, and nearly 25% of the existing secured cardholders reside in Texas, California, and Florida.

These differences call for distinct marketing distribution and strategies. Branch systems, cross-selling, piggy-backing on other communication pieces, and local advertising are viable marketing options .

Direct mail is generally less successful, partly because a secured card is not an impulse purchase. Prospective customers rarely receive a solicitation piece when they need the card and have the funds available for the deposit.

Other marketing strategies to be considered are partnering with community, minority, and ethnic groups. Historically, these groups have been underserved and are difficult to solicit.

Servicing a secured card places special demands on an issuer. The card is often the cardholder's only credit card; consequently, the account is much more active.

For every 100 secured card accounts, issuers can expect on average 120 phone calls from customers, compared to an average of 7 calls regarding 100 unsecured cards. The calls take longer - an average of 2.5 minutes per call, compared with a minute to 90 seconds for unsecured-card customers.

These factors significantly affect traditional call center productivity measures and training.

Staffers must be able to educate the cardholder about the account. And because some issuers are targeting ethnic groups, multilingual service is essential.

Secured card issuers find that servicing an account can cost up to $80 a year, almost twice the cost of an unsecured account.

Risk management differs from unsecured cards. Delinquent and overlimit conditions occur more frequently and with greater severity. Securing funds provide protection, but a proactive collection strategy is vital, as annual losses may range from 5% to 15%.

There might be as many as 17 million prospective secured-card candidates in the United States. While growing rapidly, this market is still underserved. Issuers are beginning to realize that, despite the challenges, competitively priced products can be successful.

Overpriced products affect not only the success of a product but also the respectability of the secured card industry. Consequently, issuers are treating the secured card consumer with more dignity and respect.

Ms. Swann-Ingram is director of sales with Renaissance Bankcard Services, Portland, Ore., a major provider of secured cards.

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