Fearful of getting burned in the subprime market, large banks are turning to smaller credit card specialists to issue risky products on their behalf.

Competition for marginal customers is heating up because most creditworthy people who want credit cards have them. The subprime segment- people with no credit histories or impaired ones-is considered a frontier, but some large issuers do not want to venture there alone.

Two niche companies with subprime expertise, Renaissance Bankcard Services of Beaverton, Ore., and Merrick Bank of Salt Lake City, issue secured and unsecured cards to higher-risk consumers on behalf of banks that do not want to do so themselves but still want a foot in the door.

In some cases banks work with these companies because they want to protect their images. Lending to the subprime market can involve high fees that inevitably attract the attention of consumer activists and legislators.

Chase Manhattan Corp., for example, asked Merrick Bank to issue cards to people it declines for credit. The cards, however, carry the Merrick name.

The risks are compounded by a new trend in the subprime market: Customers once considered eligible only for secured cards are now being offered standard credit cards.

Secured cards-whose credit lines are backed in part or in full by a bank deposit-are waning in popularity.

"Customers are getting better and better offers, making secured cards less competitive," said Ed Ebel, vice president of credit card marketing at First Union Corp.

First Union hired Renaissance in 1996 to manage its secured card business. Last week, First Union signed an agent banking deal with Renaissance that transfers ownership of the receivables to the smaller bank, but maintains First Union's brand presence on the cards. The arrangement is meant to raise First Union's marketing profile within this segment.

"We haven't had a strong presence in the subprime market, but hopefully that will pick up with this relationship," Mr. Ebel said.

Because First Union no longer shoulders the risk, it expects cards in its name to be issued to consumers with questionable credit. Such customers eventually use out First Union for products that are safer for the bank, the reasoning goes.

"Orchard takes all the risk, and we are able to get customers access to credit," Mr. Ebel said. "So when they need another banking product they might come to us. In the past, if someone was declined for an unsecured card, we couldn't do anything for them."

Irving J. Levin, chief executive officer of Renaissance, said that four years ago about half the offers that went to high-risk consumers were for secured cards. "Now, 90% of the offers going to the same type of people are unsecured," he said.

"There are very few people willing to send $500 to get a secured card today," said Robert Bouza, former president of Key Bank and Trust, a Havre de Grace, Md.-based bank that was one of the pioneers of secured cards.

Yet bankers can be ambivalent about approaching the credit card industry's castaways.

Chase Manhattan Bank, for example, struck its deal with Merrick Bank in September 1998. Customers who applied for Chase credit cards but were turned down are referred to Merrick, which can usually issue them either a standard credit card or a secured card.

Chase has marketing rights to the customers it brings in, a spokeswoman said.

Chase's solicitation letter includes a disclosure saying that if Chase cannot issue the card, the consumer is eligible for an offer from Merrick Bank. Merrick's offer appears on the back of Chase's letter, said the spokeswoman, Charlotte Gilbert-Biro.

Banks that work with Merrick "have the opportunity to build other relationships with a customer that they have referred to another institution," said Donald M. Berman, whose consulting firm, Cardholder Management Services in Plainview, N.Y., owns Merrick Bank and handles its back-office operations.

Cardholder Management Services took over Merrick's charter and gave it its current name in 1997; it had been an inactive bank.

Kelvin Andersen, president of Merrick, said it is working with other top 10 credit card issuers, but he declined to name them. The bank aims to become the chief marketer and issuer of subprime products for major card lenders.

Barely 5% of Merrick's portfolio is secured cards, said Mr. Andersen, a former First USA executive.

Mr. Levin said Orchard Bank also has customers who, like Chase Manhattan, do not want their names on the plastic.

"There may be issuers who believe that a subprime product would sully their image," Mr. Levin said. "The evidence is that Merrick Bank is branding some of their products with their name."

Merrick and Orchard Bank both charge annual fees of up to $100 for unsecured cards, plus "application processing fees" of up to $50. Most mainstream card issuers do not charge either type of fee.

Yet even the larger issuers are stepping up efforts to market products to subprime customers.

BAIGlobal Inc., a research firm in Tarrytown, N.Y., that tracks credit card solicitations, said subprime solicitations were a major reason that credit card mailings rose last year. BAIGlobal said 3.45 billion pieces of mail were sent in 1998, reaching 75% of U.S. households. In 1997, three billion envelopes reached 69% of households.

Providian Financial Corp. of San Francisco is an example of a secured card lender that has shifted its focus.

"Providian used to brag about being the biggest secured card issuer," Mr. Levin said, "but in truth, they have recently begun to market unsecured cards to this segment."

Four years ago, Providian offered only secured cards to risky consumers, said Seth Barad, executive vice president. "There was an assumption in the industry that all of these customers were bad credits."

Using credit scoring models, Providian is able to distinguish between highly and mildly risky customers.

"There is a difference between a doctor who filed for bankruptcy and an immigrant who has come over here to go to graduate school," Mr. Barad said. "Our models are more sophisticated today."

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