Sleazy Credit: Providian Financial subprime ethics

By now consumers should not be surprised to hear that another large company has taken advantage of its customers and has used unethical business practices. As of late, it almost seems normal to be unethical in the business world. Presently, the most popular story concerning corporate fraud is Enron. Enron used an accounting style that is considered “superbly complicated,” Cisco developed an “aggressive” method of bookkeeping, and now Providian Financial has a method of keeping financial records that is labeled as “misleading, unfair, and deceptive.”

Providian Financial is a credit card company that sells credit to subprime customers. A subprime customer is a consumer who is considered risky. The chances of a subprime customer paying their bill are less likely than that of a prime customer. Due to the increased risk of lending to subprime customers, many credit card companies hesitate to approve them as customers. Providian saw this hesitation as an ideal target market. Providian’s instant success proved other skeptics wrong. In the short run, lending to subprime customers can be profitable. Yet, in the end, it will not be as successful as lending to prime customers. There are a limited number of subprime borrowers, who the credit company can allot credit and still make money.

Providian wanted to attract the ideal subprime customer. In their opinion, the perfect subprime customer cared more about low minimum monthly payments than high interest rates. These were consumers who would pile up debt but would rarely default. In the words of a former executive, “We found the best of the bad.”

Providian first attracted their customers by sending them checks. If the customer cashed the check, they automatically signed up for Providian’s services. Customers were charged an application fee, an annual fee, and an interest rate up to 24%. This was done for a credit limit starting at $300 and going up to $500. These are only a few of the unethical behaviors practiced by Providian. When Providian tried to run promotions, such as ‘No Annual Fee’, they still received money from their customers (i.e. charging a $156 protection fee). Simply, Providian was the only credit card company willing to sell credit to subprime customers, and were able to take advantage of their clients. In the eyes of Providian’s CEO, Shailesh Mehta, Providian was providing a valuable service in offering credit to customers whom other banks refused to serve.

When Providian began to serve subprime customers, there was very little competition. Between 1997 and 2001, the number of active subprime credit card accounts surged 215%, to 26.8 million. Wall Street quickly noticed the growth of this one-time small credit lender. Providian continued to grow for the next couple of years. Stock price paralleled growth of the company. Within two years, between 1997 and 1999, Providian reported an increase of earning by 187%. Wall Street and Providian forgot to question the subprime market. Rather than asking how long subprime customers will keep paying, Providian and Wall Street simply searched for increased growth.

Until mid-1999, Providian grew and experienced an increase in profit. In 1999, the Office of the Comptroller of the Currency opened an investigation on Providian. They accused Providian of using misleading, unfair, and deceptive practices to increase profits. It seems as if most other companies have developed a style of deceptive accounting; why shouldn’t Providian? In June of the following year, the O.C.C. ordered Providian to cease a portion of their marketing campaigns such as the ‘No Annual Fee’ promotion.

Since the annual fee was a large portion of Providian’s income, Mehta had to either confess to the critics on Wall Street that the growth would be slowing or find an alternative road of making money. Being a wise and greedy CEO, Mehta claimed that Providian could keep the earnings growing. To bring in more revenue, and compensate for recently lost income, Providian signed up any risky borrower who desired credit. This plan would have worked if all customers paid their balances. Due to the fact that not all subprime customers pay along with falling economy, Providian started to experience loses. Due to the falling economy, the subprime consumers were the first to feel its effects. At this time, the number of personal bankruptcies rose as quickly as Providian was falling.

Mehta insisted that growth was possible. Providian was on target to hit their long-term earnings-per-share goal of 25%. The reality as to how Providian accomplished this was reported to the public later. Providian made a change to its credit-loss accounting practices that effectively deferred about $30 million in credit losses into another quarter. This was great strategic planning, until it was the next quarter and there was $30 million dollars worth of debt. While doing this, Providian failed to inform their supports on Wall Street. Once again, as in most corporate downfall stories, the top executives of Providian started to sell their stock shares. Mehta himself netted nearly $3.7 million.

One day Wall Street finally caught on to Providian. Stocks in the company began to sell, and prices began to drop. Still on the verge of corporate bankruptcy, Mehta denied any problems. On the day of October 18th, Providian Financial announced that the third quarter earnings had fallen 72% over the years. This happened because Providian lost revenue from fees, as well as a higher-than-expected loan loss. On this day, Mehta also made public his decision to step-down as CEO and chairman of Providian. One week later, the stock price plummeted to $5 a share. Shortly after, the stock hit an all time low, lawsuits were filed against Providian, and its executives. These suits accused Providian and its executives of fraudulently misleading investors and using inside information for personal gain.

Joseph Saunders recently took over as CEO for Providian. His main goal is set on the survival of the company, and not growth. Providian has since moved out of the subprime market into the middle-market. Most credit card companies followed Providian’s lead out of this market, very similar to how they followed Providian into the market. Personally, I feel this is another example of human greed. The top executives of this company were capable of pulling off unethical moves to gain personal wealth and exercised their capabilities. I would get more satisfaction out of running a smooth, profitable company than I would by stealing money from people. These executives not only tarnished the names of their families, but the name Providian Financial as well. Providian is not the only culprit in this story. Wall Street is the greediest player in this game. The government should step in and try to take control from the money-loving players on Wall Street. It’s easy to say what should have been done, considering we are sitting in Annville, Pennsylvania. I would question my own judgment if I were in the same position as Mehta. Hearing how so many business executives get filthy-rich these days almost makes it seem more ethical to be unethical.

One thought on “Sleazy Credit: Providian Financial subprime ethics

  1. I WORKED FOR PROVIDIAN FOR MANY YEARS. INITIALLY, THERE WAS INTEGRITY. WE WORKED HARD TO EDUCATE OUR CUSTOMERS ABOUT CREDIT. BUT BECAUSE PROVIDIAN SERVED THE LOWEST & LEAST EXPERIENCED CREDITORS, IT WAS EASY FOR THE COMPANT TO TAKE ADVANTAGE OF THEM AND GREED TOOK OVER IN THE LATE ’90’s. SOME ACCOUNTS HAD $89 ANNUAL FEE FOR $100 CREDIT LINE WITH 31% APR. BUT THE EMPLOYEES WERE VICTIMS TOO. SHAILESH AND HIS TWO BUDDIES FROZE OUR PENSION ACCOUNTS IN AUG 2001 AT $142/SHARE. WHEN THE FREEZE WAS OVER IN OCT 2001, WE WERE FORCED TO SELL THE SHARES AT A VALUE OF $0.68 EACH . MOST OF THE US FACILITIES WERE SHUT DOWN IN OCT 2002 AND THE WORK WAS SENT OVERSEAS – PANAMA, INDIA, ETC. AS CEO, SHAILESH BLAMED THE 911 TRAGEDY – VERY CONVENIENT! – BUT I UNDERSTAND HE USED THE MONEY TO SET UP A BUSINESS SCHOOL OF MANAGEMENT IN INDIA. ONE OF HIS COHORTS BOUGHT A CARRIBEAN ISLAND. WE HAVE NO RETIREMENT & NO RECOURSE. WE WERE THE ENRON OF THE FINANCIAL SERVICES INDUSTRY.

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