EMERGE MASTERCARD PROVIDIAN ARTICLE from Providian shows they are in TROUBLE Tilton New Hampshire

Providian Financial Corp. was fighting for its reputation a year ago. Now it's fighting for its life.


With an overhauled management team and a restructuring plan blessed by federal regulators, Providian officials believe they can restore a credit card issuer damaged by the desire to boost revenues at the expense of a solid portfolio and customer relationships.

It may be -- as a slide in the new leadership's first presentation to Wall Street stated March 25 -- "the new Providian." But there's still a long way to go, company officials and observers say.

One matter is certain: It will be a smaller Providian.

"We have customers in our portfolio we would be happy to see our competitors take," said Warren Wilcox, Providian's vice chairman of planning and marketing since January. "But we also have some customers we'll defend until the cows come home."

Road map to recovery
San Francisco-based Providian's troubles stem from aggressive growth, especially among so-called subprime customers with bruised credit histories, if any at all. Using the Providian and GetSmart names, the company grew to the fifth-largest card issuer in the country, with $32 billion in receivables, 18.4 million accounts and 12,000 employees.

But Providian maxxed out as the economy went south. Its subprime customers were among the first to stop paying bills when the recession hit.

At the same time, the company was trying to emerge from the settlement of lawsuits that alleged that it sold ancillary products like credit line increases and credit insurance without divulging the fees.

It all came crashing down in the third quarter, when Providian reported a 71 percent drop in quarterly profit, to $57.2 million. The company lost $481.2 million the next quarter and earned only $38.9 million overall last year, compared with $651.8 million in 2000.

"At the old Providian, the emphasis was on growth, growth, growth, growth," Wilcox said.

Under new CEO Joseph Saunders, who oversaw FleetBoston's credit card program until jumping to Providian in November, the buzzwords are selectivity, pricing and integrity.

"Joe is all about integrity," Wilcox, who has worked with Saunders for 17 years, said in a telephone interview.

At Fleet, Saunders turned around a credit card portfolio bought from Advanta Corp. in 1998. Prior to that, he headed Household International's credit card business, based in Salinas, building dual-branded cards with General Motors and the like.

In January, Saunders brought on Wilcox as well as Susan Gleason, who also worked under Saunders at Fleet and Household, as vice chairman of operations and systems. Jim Jones, who Providian hired in 2000 from Bank of America, was shifted from chief of international operations to vice chairman of credit and collections.

"Joe Saunders and his team is very experienced in credit card marketing, and they'll use all that experience and know-how," said Art Clark, a partner at Business Dynamics, a Nyack, N.Y.-based consultant to credit card companies.


Since October, Providian's sold 3.3 million accounts with $8.2 billion in receivables to J.P. Morgan Chase & Co., agreed to sell its accounts in the United Kingdom and Argentina, closed a call center in Henderson, Nev., and laid off 800 people overall. It is also trying to sell $2.7 billion of "high-risk" assets.

The changes paved the way for regulatory approval of Providian's capital plan, essentially a road map for recovery.

"I think that went above everything else," said Matthew Park, an analyst with Thomas Weisel Partners, "because if the regulators don't like (the plan), they can't stay in business."

The capital plan gives Providian breathing room to rediscover its existing customers and build a more stable business in the middle and prime markets, Park said.

"Now comes the real managerial challenge," he said.

Filet mignon or hot dog?
What's left of Providian is $24 billion in receivables from 14 million accounts, which keeps it among the top 10 card issuers and as one of the largest so-called monoline companies that concentrate primarily on credit cards.

The sale to Chase meant sacrificing some of Providian's best customers for the survival of the entire company. It dropped the top-tier platinum segment of Providian's portfolio from 29 percent of $32 billion to 4 percent of $24 billion.

But the game plan is to build off the remaining base of platinum, mid-market and even subprime customers, Wilcox told analysts at the Banc of America Securities financial services conference in New York. Providian will purge its rolls of high credit risks and selectively offer lower interest rates for the best customers -- those with Fair, Isaac credit scores of 600 and above.

Wilcox disclosed no timetable for the remaining changes, but company watchers like the action so far.

They're moving quickly to put in place a number of strategies and programs to right the ship," Clark said. "Usually it takes six to nine months just to study things."
Providian mailed one of its first new marketing pieces to prime customers in March. Eventually, it wants to capture more of that safer, more stable market. But it must be smarter.

"We're still trying to charge 660 credit (scores) with 23.9 percent. That isn't competitive," Wilcox said. "Our competitors are undercutting us, and we get a selection problem because they're getting the better customers and we're getting the bad."

The old Providian tended to treat most of its customers like those in the subprime category, observers said, offering credit line increases and other products only when the company felt ready to do so -- and for a fee.

Customers complained, but former Chairman and CEO Shailesh Mehta never publicly admitted that Providian's disenchanted customers could be picked off by competitors like Capital One.

Wilcox sees it differently.

"We get people with new credit, reparative credit, unique credit. We help them build credit, and they get to a particular point, (then) guys like Capital One and some of the other competitors come along and steal them away," he said.

Providian tried to reenter the super-prime market in the late 1990s, but didn't adjust its pricing and product offerings to a pickier, more savvy clientele, Wilcox said.

"If you want to play in the prime space you better bait the hook with filet mignon," he said. "When we tried to get into the super-prime segment the last time, we baited the hook with hot dog."

More cuts to come
Providian is not finished with its cost cutting just yet, Wilcox said, despite $60 million chopped from expenses since October. Another 1 to 1.5 percent of costs still can be eliminated, he said.


One ripe area comes from redundant systems. Or as fellow new-hire Gleason calls it: Noah's ark.


"We've got at least two of everything: Two systems, two account-forwarding platforms, two different sets of customer service," Wilcox said. "That spawned operating locations that we don't necessarily need or have to have to run the business."

Read: more layoffs ahead.

So far, Wall Street likes what it hears. Providian stock has climbed from a low of $2 per share in early November to more than $7 in late March. That may not seem like much, unless it's a stock like Providian that shed 58 percent of its value from Oct. 18 -- when it announced third-quarter results -- to Oct. 19.

Providian traded at close to $47 a share a year ago.

But this is the same Wall Street that seemed to ignore the $305.5 million in Providian lawsuit settlements in 2000 and 2001, and instead rewarded the company for its aggressive subprime account growth. (Providian agreed in March to a $38 million settlement of a related securities fraud suit.)

The difference is that Providian plans to carve out its business over a larger base -- some subprime, some middle market, some prime -- which Wilcox said will offer more reasonable and conservative growth.

He didn't disclose the company's potential growth rate.

"If you're larger and trying to carve out 10 to 15 percent annual growth ... that's a much tougher thing to do," he said. "It's almost like the elephant phenomenon: You get forced into kind of having to eat every weed in your path in order to continue to make forward progress.

"We don't want to fall into that trap again," Wilcox said. "And I assure you, we won't."

Ron Leuty covers credit cards and e-finance for the San Francisco Business Times.

Tiffani
greenwood, Indiana
U.S.A.

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