10900 Wayzata Boulevard
Metris provides its consumer credit card products and enhancement services primarily to consumers traditionally overlooked by other lenders, including moderate-income households/individuals and the U.S. Spanish-speaking population. In doing so, the company provides opportunities for these individuals to establish credit.
Metris Companies Inc., a financial products and services provider, has risen quickly in the industry by targeting the low- to moderate-income American consumer. The company issues credit cards through its subsidiary Direct Merchants Credit Card Bank, N.A. Besides consumer lending, Metris generates revenue through the sale of enhancement services, such as membership clubs and credit and purchase protection. Hard times in the early 2000s have hit both Metris and the consumers it serves, leaving the company with the challenge of regaining the profitability it had once enjoyed.
Data-Driven: 1940s to Early 1990s
Metris Companies Inc. was born out of Fingerhut Companies' obsession with data. Established in 1948, Fingerhut started out selling car seat covers on credit. From the get-go, the company kept detailed information on its customers. "Even as its product offering increased, Fingerhut did not use outside credit cards, did not seek payment histories from outside credit agencies, and did not report payment histories of its customers to any outside credit agency, which made its customer database proprietary in the truest sense of the word," explained Eric J. Wieffering in January 1994.
Fingerhut was also resilient. The direct marketer weathered the economic storms of the 1970s, capitalized on the consumer mail-order sale boom of the 1980s, and continued to grow and modernize its database. By 1994, Fingerhut was a $1.8 billion company with ten million households on its records. Of those, 6.7 million were deemed active buyers, according to Wieffering. To further exploit its database, the company had begun testing a range of financial products, such as life and property insurance and cobranded credit cards.
Fingerhut customers fell in the moderate- to low-income bracket, folks with little or no access to consumer credit. In 1994, Fingerhut tapped Ronald N. Zebeck to create a credit card program to serve that segment of the population. He formed the Direct Merchants Credit Card Bank and began offering MasterCard branded cards the next year. The Fingerhut Financial Services Corp. unit had 1.1 million cards and $1.06 billion in loans outstanding by mid-year, according to American Banker.
Needing capital for continued growth, Fingerhut renamed its financial services unit Metris Companies Inc. and sold 17 percent of the company for $16 per share in an October 1996 initial public offering. Its new name derived from a word denoting measurement, Metris held exclusive access to Fingerhut's database of households, where it drew more than half its card customers. Not limited to marketing credit cards, Metris used information gleaned from Fingerhut to market extended-service plans, membership clubs, card registration, and third-party insurance.
Prior to joining Metris, Zebeck had driven the highly successful introduction of the General Motors MasterCard in 1992. Partnered with Household Credit Services, the auto company issued a million cards in its first month. As CEO and president of a much smaller entity, Zebeck had to scale back his goals. Still, the fledgling company, whose typical customer earned between $15,000 and $35,000, made a sharp impression on the market.
"Metris has grown more rapidly than we assumed it would," said Joseph LaManna, an analyst with William Blair & Co., in a September 1997 American Banker article. "Its management team is very ambitious and we expect the company to be a lot bigger than it is today."
The company's growth was helped by card registration deals with two big card issuers, Bank of America and Household. The move put Metris into competition with CUC International, the dominant provider of such fee-based card enhancements. Besides diversifying its revenue stream, Metris built its core credit card business through purchasing the credit card portfolios of other financial institutions. Year-end 1997 net income was $38 million, up 90 percent over the prior year, and Metris common stock traded at about $34 per share.
Spun Off and Climbing High: 1998-99
Metris stock continued to climb skyward, trading as high as $80 per share in the summer of 1998. Fingerhut spun off its creation in September; the 83 percent it still held given as a dividend distribution to stockholders. The spinoff took a significant chunk of Fingerhut earnings, and the business would have to find new ways to grow.
Meanwhile, Zebeck continued the tenacious pursuit of his goals. Metris held the 20th spot among credit card issuers in the country with nearly three million customers and $5 billion in receivables, according to Corporate Report Minnesota in November 1998. Profitability, not size, was Zebeck's main concern.
Zebeck continued down a path other financial institutions sought to avoid. "He wants the person who's gone through a messy divorce and whose card was maxed out by an angry ex, or people who have not been offered a bank credit card in the past, such as the high school graduate who has recently entered the work force. He's also interested in attracting the Asian-American and Hispanic population, one of the fastest growing markets," wrote John Rosengren.
Metris's direct mail response was higher than the industry average. By and large, its potential customers were not receiving many other offers in the mail. On the down side, the company's write-off rate on bad debt exceeded the industry average. To compensate, Metris charged the majority of its customers annual fees, set higher interest rates on credit balances, and established relatively low credit limits. Its extensive Fingerhut data had allowed Metris to develop sophisticated statistical models to gauge risk.
Moreover, nearly 65 percent of Metris employees worked in the collections department. Their success rate was so good, Metris had bought portfolios of bad debt on credit card accounts from other financial institutions.
Metris's choice of target market was itself the source of some skepticism. While Zebeck maintained that lower income Americans had just as much right to carry credit cards as did their more affluent counterparts, critics said people living paycheck to paycheck could ill afford to carry expensive debt.
Metris began having its own credit woes as 1998 wound down. The accounting practices of one of its competitors had come under federal scrutiny, putting downward pressure on Metris stock. A third quarter correction amplified the damage and hampered its plans to acquire another credit card portfolio. Then, in December 1998, private equity firm Thomas H. Lee Co. arrived on the scene.
Thomas H. Lee infused $300 million into Metris. A 29 percent stake in the company went for $37.25 per share. Capital-strapped Metris added a dividend of 9 percent for seven years to secure the deal. Ultimately, Thomas H. Lee would own 40 percent of Metris without additional payouts, according to Buyout.
Fingerhut could have ended its data-sharing agreement with Metris when Thomas H. Lee obtained a large stake in the company. Instead Fingerhut, which was purchased by Federated Department Stores Inc. in March 1999, switched to a nonexclusive agreement commencing in late 2001. Reliance on Fingerhut had been diminishing, but about 35 percent of Metris's credit card accounts still came from its former parent company's database.
After pulling in $57 million in profits in 1998, Metris barreled ahead in 1999. The company announced plans to move its Minnesota-based headquarters into a larger space and make operational expansions in Oklahoma and Florida. Entry into the Internet, a marketing effort which promised access to a new customer base, was also in the works.
Metris subsidiaries kept pace. Direct Merchants Credit Card Bank bought a $1.2 billion credit card portfolio from GE Capital, gaining 485,000 accounts. Metris Direct Inc. and Metris Recovery Services Inc. made agreements to perform customer service and collections activities, respectively, for GE Card Services, a unit of GE Capital.
Fall to Earth: 2000-03
More broadly speaking, Metris stock price rose with the overall strength of the credit card industry, but those days began to fade in early 2000. The industry faced an assortment of problems: rising interest rates, stalled loan growth, consumer privacy issues, charges of predatory lending activities, and calls for stricter capital requirements on subprime lending, according to American Banker. Zebeck, however, stayed the course and during the year acquired Banco Popular Inc.'s U.S. credit card portfolio. Metris also cobranded a credit card with the Puerto Rico-based banking company. The year ended with $195 million in net profits on $9.3 billion in receivables.
Nonetheless, Matthew Swibel, writing for Forbes in 2001, wondered if Zebeck's formula for profitability was losing its effectiveness. The rise in the number of delinquent accounts and the rate at which they were charged off looked troublesome. Some of its sales and marketing tactics drew the condemnation of federal bank regulators.
As subprime competitors Providian Financial Corp. and NextCard Inc. faltered, Metris worked to distinguish itself from them. David Wesselink, Metris vice-chairman, told American Banker the company concentrated on drawing the "near-prime" consumer. David Breitkopf wrote, "Mr. Wesselink cited the Hispanic market as one example of a market with a healthy near-prime segment." Moreover, Wesselink took pride in the company's credit risk management system and "industry-leading" loss reserves.
Yet, Metris was vulnerable. Despite its limited relationship with Fingerhut, when Federated Stores announced plans to shut the company down, Metris stock took a 14 percent drop. The January 2002 downturn followed a 10 percent drop which occurred only days earlier. Fourth quarter financial results had raised concerns about bad loans--both in terms of rising numbers and how they had been accounted for in the past.
More bad news followed in April, according to the Business Journal. Metris lowered figures on expected earnings and increased the figure for the previous year's bad loan write-offs. Additionally, its Direct Merchants Credit Card Bank subsidiary agreed to make operational changes at the behest of the Office of the Comptroller of the Currency (OCC), the chief regulator of the credit card business. Metris stock fell more than 30 percent with the news, trading about $13 per share.
Metris, which had been profitable each year since going public, faced its first losses. In December 2002, Ronald Zebeck was fired, and David Wesselink succeeded him as chairman and CEO. The company cut the workforce and made changes in senior management, in January 2003. Losses for 2002 totaled $33.9 million. Stock traded between $1 and $2 per share.
Wesselink, who had worked with Advanta Corp. and Household before joining Metris in 1998, had his work cut out for him. Metris faced the prospect of insolvency by mid-2003 if new funding sources could not be found. The company's own credit rating had been downgraded as the quality of its credit card portfolio eroded.
"The company finds itself in this precarious position partly because of the economy but also because of a decision that was made in 2001 to extend the credit limits of the company's most profitable customers," wrote Julie Forster in the Star Tribune in March 2003.
Coinciding with its change in credit limits, companies such as Target and Sears sought out customers for their new credit cards, tapping into Metris's market segment. When the economy slumped following the September 11th attack on the United States, people had trouble paying all their bills. High-pressure tactics by Metris to collect on the debt failed.
A financing agreement put a halt to Metris's downhill slide. A new operating agreement with the OCC was made. Collection improved and troubled accounts were sold. But, the company was not off the slippery slope quite yet, posting losses in the first quarter of 2003. Wesselink told American Banker Metris had moved closer toward profitability but would not speculate when that time might arrive.
Principal Subsidiaries: Direct Merchants Credit Card Bank, N.A.; Metris Direct, Inc.; Metris Receivables, Inc.
Principal Competitors: American Express Company; Bank One Corporation; Capital One Financial Corporation; Citigroup Inc.; MBNA Corporation.
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