Thursday, April 1, 1999
The very name provokes envy in the hearts of marketing divisions across the country. How could a company that does not cajole and solicit new customers with slick advertising campaigns, marketing promotions, or even a 1-800 number, find itself among the nation’s largest issuers of Visa and MasterCard, currently serving more than 8 million customers?
Even though Providian Financial Corporation is not a household name, it’s one of the most dynamic and successful companies in the financial services industry. How did it become a leading issuer of secured credit cards? How is it the twenty-first largest employer in California’s bay area, with $14 billion in assets?
Fresh Approach
The answers to the questions are simple: by being radical, shrewd and savvy in their strategy. Providian Financial doesn’t push their services to all possible consumers, in a blanket like approach, such as the one used by other well-known companies. Instead, it works to pull select consumers in. And what really makes Providian Financial different is the unique way it links business insight with technical expertise. By using an innovative blend of engineering and technology, Providian can customize a range of lending products and offer deposit products that provide financial solutions to its customers.
Founded in 1981, Providian Financial Corporation existed in apparent inactivity as it conducted R&D, until it issued its first credit card in 1985. It continued in relative inactivity until 1986. Since then it has seen phenomenal growth, becoming a multibillion-dollar institution serving millions of customers nationwide. 1998 has been a phenomenal year for Providian — it reported a record fourth quarter net income of $94.9 million or ($0.66 per share) – a 78 percent increase over earnings per share from 1997’s fourth quarter. Total net income, from 1997, rose 55 percent, from $191.5 million to $296.4 million. New accounts also flourished in 1998, with over 1.9 million customer relationships established during the last quarter.
Making Its Move
In June 1997, Providian Financial Corporation came to independence by completing its spin-off from the company formerly known as Providian Corporation. Its stock began trading on the New York Stock Exchange (PVN), and it also joined the S&P 500 Index, in the Consumer Finance Industry Group. Although they continue to provide traditional banking services in their home state of New Hampshire, Providian now offers a variety of consumer lending products nationwide.
Today, Providian’s corporate headquarters are located in San Francisco, and it has a number of operations centers in California and in Kentucky, New Hampshire and Utah. These centers provide customer support for Visa and MasterCard credit cards, lines of credit, home equity lines and high-yield deposit accounts.
“We’re #11”
Although Providian has an unusually low visibility in the consumer market, Shailesh J. Mehta – chairman, president, and CEO of Providian Financial – maintains that the company has always enjoyed high visibility and considerable respect within the financial services industry. Providian was an entrepreneurial company, explains Mehta, and the management was extremely apprehensive of being run out of the market by big banks. Keeping a low profile required a “#11 strategy,” which meant remaining largely out of sight.
Purported or not, the “strategy” has worked. In the business of consumer lending, too much visibility can indeed be costly. Consumer advocates tend to gravitate towards companies that experience a greater level of success, and the Attorney General’s office may hold the company accountable to certain business practices, such as charging poorer customers with higher risk, and higher rates of interest.
So Providian maintained low visibility – they did not chase press interviews and did not attend conferences. It was after 1997 however, that people began to take notice. Once the company went public, the “#11 strategy” was put out of commission, and Providian began to really show its clout.
Computing Customers
Ten years ago – long before anyone else – Providian began combining technology to consumer lending, targeting customers that other credit card issuers tend to overlook – the low-credit risk people who are mislabeled and put in higher-credit-risk groups. In the Providian’s “unbanked” segment, people who don’t have a prior credit history aren’t necessarily high-risk. It developed extensive data mining and analytical tools that gave it an almost uncanny understand of potential customers, enabling it to target attractive financial products at them. To avoid getting get caught up in the “commoditization” of the product, Providian brainstormed the concept of “mass customization.” By creating niche markets for different segments of customers, Providian created a whole new approach to lending. The results soon showed that they could do it better than anyone else in the market.
Noting that candidates with higher risks yielded higher returns, the company established a niche market by taking poorly performing customers, such as those who have filed for bankruptcy or have other major credit problems, and developing a program that induced them to pay their bills on time. If they fail to pay on time, a technical infrastructure closely monitors customers who are delinquent in their payments, and follows up frequently.
In April 1998, Providian bought a $1 billion portfolio of under-performing credit card loans from First Union Corporation, making Providian the tenth largest credit card issuer, right behind Bank of America. At the same time, Providian’s return on equity is currently one of the highest in the industry, despite the fact that it writes off 6.4 percent of its consumers’ loans – a full percent higher than the industry norm. To achieve this, the company uses sophisticated mathematical modeling techniques to identify low-risk segments within high-risk populations.
Technology Techniques
When Mehta started working at Providian, he realized that while using technology to make electronic transaction updates and postings, he could also use it to dig for information and find opportunities for arbitrage, and to improve inefficiencies. This new technique opened up a whole new world where data stored electronically could be used to tap into a wealth of information.
At the same time, query systems using database technologies were introduced, providing the impetus to implement Providian’s ideas. With the improved technological capabilities, they could keep track of where their customers were using their credit cards. Says Mehta, “By analyzing the data, you can figure out what they really buy rather than what they say they will buy.”
The availability of this data allowed the company to create new rules for opening accounts using methods that were way ahead of its time. Proving to be more of a technology company than a financial institution in some ways, Providian used the tools developed by companies in Silicon Valley, implementing them to harness wealth creation in its huge market. That’s the fun part of it all, according to Mehta – applying technological tools to create greater value for shareholders. The ability to approve 5 percent more applications for instance, could potentially equal $2 billion of new wealth for the company. And data analysis tools that can do this miraculous work will only become more prolific in the coming years.
Providian takes the prowess of its software engineering to the next level by enabling its marketing organization to be seamlessly integrated with it. Data is reviewed by senior credit managers, who work together with marketing managers to reach profitable price points and eliminate poor credit risks. This enables the marketing people to make confident offers to customers, with the knowledge that the systems people can support them.
Mehta spearheads Providian’s marketing effort. Glenn Rifkin, in his recently released book, “Radical Marketing” (Harperbusiness, 1998) writes: “He (Mehta) eschews focus groups and traditional market research in favor of one-to-one customer contact . . . . His employees are his passionate missionaries, as enamored of the quantitative approach as Mehta is. And by choosing to do business in a market that others have shunned, he views the impossible as simply another business opportunity.”
New Battlegrounds
The future surely holds many paradigm shifts, and there is no doubt in Mehta’s mind that the competitive advantage of leveraging available information to create new products is not going to be sustainable. It will be reduced or gone, he says, just as the 70’s BackOffice efficiencies eventually gave way to the 80’s data collection, which caved in to the 90’s information leveraging.
“A lot of what we have done so far has been copied, reengineered and produced by high level competitors. And there is heavy consolidation in our industry. The top ten players control over 70 to 75 percent of the market share,” he says.
Adds Glenn Rifkin: “What Providian has discovered, in fact, is that the consumer tends to value simplicity above all else. “We are all pressed for time,” Mehta says. “Time is becoming a precious commodity to all income bracket groups. Those with lots of money need time to spend it, others need time to make it. Customers say, ‘I am willing to pay extra if my like can be simplified and my time can be freed up.’”
In coming years, Mehta expects to see companies leveraging the net economy and e-commerce in conjunction with the current channels. He also expects them to use it to fill information gaps. “There is a huge new market, of as many as 40 million people, who have information gaps,” says Mehta. “If you create the hidden variable that will allow you make informed decisions to plug those gaps, you will be one generation ahead of everybody else. If you take that and leverage it with the net economy, you can buy yourself another growth cycle until the next major paradigm shift.”
Providian has already begun to adopt technologies to access this new market. In 1993, they began building the proprietary data needed to create a variety of tests that Mehta calls “analogous attributes.” For example, an information gap exists in how companies can measure the effect of divorce on customer’s credit behavior. The analogous attribute has been found to forecast how to leverage the behavior resulting from divorce.
Providian has begun to build business in what is called the “unbanked market,” a market that consists of customers who are a good credit risk, but may have a lack of credit history, and thus be ignored. For example, for new immigrants to the US, building credit history can be a bag of tricks. To these individuals, Providian sends direct mailers promising an unsecured credit card, without running a credit check on them, or requiring a deposit. This comes as a whiff of creditability for the individual, and secures a long-term customer for Providian.
Mehta recognizes that survival depends on constant – and continuing – innovation. “The company has to reinvent itself every few years,” explains Mehta. “You need to reevaluate the market, your core competencies and competitive advantages.”
“Reevaluating core competencies” itself is a core competency at Providian. And with the King of (Credit) Cards at the helm, and an untapped market of millions of people without credit cards beckoning, this quest continues relentlessly.
