Key Federal Savings Bank is discovering what happens to a big fish in a small pond when the pond suddenly gets bigger, and so do the other fish.

One of the pioneers of secured credit cards, the $196.8 million asset bank based in Havre de Grace, Md., now has a lot more company than it did in 1982 when it began issuing secured cards under a former New York banker named Robert M. Bouza. Although competition has intensified, Key Federal is fiercely defending its position as a leading issuer of the cards that require a deposit as security for a credit line.

Mr. Bouza, president of Key Federal's card operations, is largely responsible for the aggressive marketing tactics, which this year included a flood of enhancements and lowered pricing. The a 42-year veteran of the banking industry, conceded that despite the perks he has added to Key Federal's cards, the entry into secured cards of some of the largest banks, like Citicorp and BankAmerica Corp., are a major competitive threat.

Mr. Bouza estimates that the cost to draw someone into Key Federal's secured card program has risen 30% over the last several years.

"As the market share race tightened, our advertising was pulling in less than 10,000 queries a month," compared with 13,000 to 17,000 a month in Key Federal's hey-day in the late '80s and '90s lamented Mr. Bouza.

Attrition also was a problem. By May 1993, Key Federal saw a 15% decline in the activation rate among its secured card customers. Most of those who fled did so because of the high interest rate, then 21.99%. Unwilling to watch his business erode, Mr. Bouza took steps to ensure the survival of his thrift's stake in the secured card market. In November 1993 Key Federal acquired a facility of a failed thrift in Rehoboth, Del., which enabled Maryland-based Key Federal to move its card operations into one of the most liberal state regulatory environments. Issuing cards out of Maryland restricted Key Federal's penalizing customers who made purchases exceeding their credit limits. Once in Delaware, the issuer was able to lower the price on its secured card by offsetting the cuts with additional fees.

In January, Key Federal reduced the interest rate on its secured card by 3.09 points, to 18.9%, and it spent about $500,000 on advertising to get the word out.

Key Federal's advertising objectives are two pronged. First it projects the image of a consumer-friendly bank. For example, in January the bank developed a product that helps consumers calculate the total cost of a secured credit card. In March it signed a contract with the Council of Better Business Bureaus that allows Key Federal to display the council's logo on all its advertising. The agreement stipulates that Key Federal will participate in the council's alternative dispute resolution program.

The other goal is to convince consumers that as a pioneer of secured cards, Key Federal has the experience and maturity to manage such a product.

Through the years, Mr. Bouza, 59, has earned the nickname "dean of secured cards," which is often cited in news releases prepared by the public relations firm McKamy Marketing Communications of New York. Key Federal hired the firm in 1992 in hopes of getting its name more in print. At the same time, an advertising company was hired to create and place the new Key Federal image in the appropriate media.

Advertising aside, Mr. Bouza believes bringing down the interest rate and continuing to pay 4% on the offsetting savings deposits are the smartest moves the bank has made.

Since the rate reduction, Key Federal has been receiving 15,000 queries a month, and its returned-application rate has increased 25%.

Key Federal also is increasing accounts and revolving balances. From January through June, the thrift boosted new accounts 10%, compared with a 5% increase between 1990 and 1993. That brought its total to about 60,000 secured and 15,000 unsecured accounts. Unpaid balances were at $49 million.

As Key Federal gains momentum, Mr. Bouza said it is also in the midst of evaluating whether it can afford to stay in the race.

"We are asking ourselves if we should continue to go head to head with the big players," said Mr. Bouza.

Key Federal is exploring the possibility of entering into a partnership with a company that could absorb the cost of advertising in return for a percentage of the profits. In the meantime, the bank is committed to its current advertising budget through September 1995, but if it doesn't see more growth in new accounts and receivables, Key Federal is prepared to map out another strategy.

"My gut feeling," said Mr. Bouza, "is that our results will not improve and we will look for other avenues of growth like portfolio acquisitions."

Industry experts say Mr. Bouza has the tenacity to keep Key Federal in the game, and they see a continued role for smaller financial institutions in the secured card market.

"The future for little banks has never been brighter," said Irving Levin, chief executive of Renaissance Bankcard Services in Portland, Ore., a marketer and servicer of secured card programs.

"Bouza is the prototype of the new way to play niches ... The big players don't serve everyone, they only target the people in the middle," said Mr. Levin, who contends that smaller banks will survive in the secured market if they differentiate themselves and focus on particular regions.

Brian Schwartz, MasterCard's director of new market development, believes when the secured card market matures, it could look very different from the conventional unsecured market, where the largest issuers control about 70% of accounts.

The New York-based association estimates that the card industry could attract up to 26 million secured cardholders, but currently only 1.25 million people own such a card.

The security deposit, which determines the amount a bank will lend a cardholder, could "give local community banks a competitive advantage," said Mr. Schwartz, because the largest consumer segment, people without a credit history, fear that they may never see their money again if they send it to a bank with which they are not familiar.

Key Federal has never been content with the two states in which it has a physical presence. Mr. Bouza is fighting national issuers with card enhancements and by leveraging Key Federal's solid reputation as a secured card issuer.

"There is this perception that Key Federal really knows what it is doing," said Robert B. McKinley, president of RAM Research Corp. in Frederick, Md. "It is not experimenting like some of the newer players."

Some of the perks Mr. Bouza has added this year, in addition to the Better Business Bureau alliance, include a prepaid telephone card and the launch of an affinity card promoting black-owned businesses.

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