In its heyday, Providian Financial Corp. boasted of its proprietary and scientific approach to credit card lending, saying the expertise it had developed in its screening systems enabled it to shun off-the-shelf risk assessment products like those offered by Fair, Isaac & Co.
But now that a lot of the loans Providian made to higher-risk customers — who were selected through those proprietary models — have gone bad, Providian has decided to bolster its decision-making capabilities by outsourcing some of the work to Fair, Isaac. The management team that signed the contract with the credit scoring vendor — which was announced Thursday — is different from the one that developed the proprietary system in the first place, so there is presumably less pride in ownership.
Warren Wilcox, the vice chairman of planning and marketing at Providian, said in an interview Thursday that the new reliance on Fico scores and other Fair, Isaac capability is intended to augment, not replace, Providian’s models. He said the relationship gives his company something that other prime issuers lack: access to great middle-market proprietary lending models (its own) plus “best-in-class tools that are available in the general market” (Fair, Isaac’s).
“This is supplemental and complementary. There will be no reduction” in Providian’s own risk management department, Mr. Wilcox insisted.
He said the decision was made early in his involvement with the company and that it was a product of Providian management, not bank regulators, who in November reached a deal with the then-ailing company to keep it in business.
“This is a strategic decision we made because we think it is the right decision,” Mr. Wilcox said. “We are not abandoning what we have done so well, but supplementing it with what Fair, Isaac has to offer.”
That said, Fair, Isaac employees will take their places at desks alongside their Providian counterparts to help integrate their products. According to a news release, the credit scoring company will provide credit prescreening, account management, and “custom analytic and consulting services to support the integration of Fico scores with Providian’s consumer card portfolio of over 12 million customer accounts.”
On top of that, Mr. Wilcox said, “we will be taking a look at other products and services they have available.”
Shailesh J. Mehta, Providian’s founder and longtime leader, used to describe Providian as a company of engineers because of the highly scientific way it identified creditworthy borrowers shunned by other banks. As the company explained in its 1999 annual report, “Rather than rejecting credit applications from those people for whom it is difficult to make a risk assessment, Providian has developed algorithms and models that give us the ability to safely — and profitably — say yes to creditworthy people other companies may overlook.”
After Mr. Mehta’s empire started faltering in the third quarter of last year, he resigned and was replaced by Joseph W. Saunders, formerly head of FleetBoston Financial Corp.’s card operation, who brought his top deputy, Mr. Wilcox, with him. The problems facing the new team include a chargeoff rate that topped 17% in March.
When the Office of the Comptroller of the Currency and other regulators reached their agreement with Providian, they ordered the issuer out of some of its highest-risk market segments. Some of Providian’s lending segments, which it categorized as “high risk/starter,” “low/very low,” and “no credit,” to name a few, were singled out by the OCC for elimination. Providian was also instructed to establish “tightened credit standards on all higher-risk accounts.”
What Providian’s own analytic tools do well is manage accounts in the middle market, Mr. Wilcox said. Fair, Isaac will help it become more competitive with a wider range of potential customers. “Others rely very heavily on Fair, Isaac products and services, sometimes to the underweighting of proprietary development,” he said. “We are coming from the other point of view.”
Bradley Ball, an analyst with Prudential Securities, said the agreement was a good step that will probably please investors. It amounts to an “admission that they need to improve their credit scoring skills as they look to get the company on track,” he said. “It may make more sense to outsource that process than try to build from within.”
He said that, though Providian still has “a way to go,” the agreement with Fair, Isaac “will enhance their abilities to expand with higher-quality customers.”
Fair, Isaac, a 46-year-old publicly traded company in San Rafael, Calif., right near San Francisco-based Providian, has nearly 100 financial institution clients. Its Web site features testimonials from Citibank Europe, Barclays Bank, and HSBC Holdings PLC about Fair, Isaac’s widely used Triad software that automates risk-based decisions. Fair, Isaac customers also include another card issuer that has stumbled in subprime lending, Metris Cos., and, before it went out of business, the Internet-based issuer NextCard Inc.
Until this announcement, Fair, Isaac’s customer roster did not include Providian, which “traditionally was very much an organization that developed a lot of technology and tools internally,” said Cheri St. John, Fair, Isaac’s vice president of global data repositories. But even in Providian’s proprietary system, “they were actually making use of Fico scores in a very limited way,” she said.
Ms. St. John said her company had “always wanted to work more” with Providian, which is just across the Golden Gate Bridge from Fair, Isaac’s headquarters. But analytics “was something the previous management defined themselves by, and prided themselves on,” she said.
It was not until Mr. Saunders, Mr. Wilcox, and Susan Gleason took over that Providian became committed to integrating Fico scores into its operations, Ms. St. John said. Members of the new regime were already familiar with Fair, Isaac from their previous positions at Fleet Credit Card Services, a major client of the analytics firm.
Providian subscribes to Fair, Isaac’s PreScore and ScoreNet products, which are billed as improving a lender’s prescreening process and management of credit data. Those products come with a consulting service that Providian will need so that it can introduce the Fico standard into its systems. “They wanted to get moving quickly with the Fico scores, so this was the first step,” Ms. St. John said.
The relationship, she said, is not a limited engagement. As Providian becomes ready and willing to integrate more Fair, Isaac products — such as the newer NextGen Fico scoring model, aimed at subprime accounts — Fair, Isaac will dispatch more experts.
“Because Providian is right down the road, it’s easier to spend a fair amount of concentrated time with them,” Ms. St. John said.
Fair, Isaac does not make strategic decisions for lenders, she said, but provides them with the technology to make better decisions for themselves. “Even though we can provide some general guidance, by and large it’s the management team that defines the operations,” namely figuring out, “how much risk we can take, and is it priced accordingly?”
Lenders attempting to do everything by themselves, however, can find it “very difficult to maintain that level of innovation strictly internally,” Ms. St. John said. In particular, when a lender decides to pursue a new risk segment, it may not have the resources to apply the right modeling, she said.
But “at the end of the day, there’s only so much we can do,” she said. “We’re not like a management consulting firm where we come in and run the show.”
