Providian's Quality Control

Not many people may have noticed the news outside of Louisville, Ky., when consumer credit card company Providian (NYSE: PVN) announced yesterday that it was shuttering its Louisville facility and putting some 300 workers out of a job. One news organization reported that this was done "in spite of" improving performance at Providian.

That's not quite right. It's because of improved conditions at the company that it's able to lay off these workers.

The facility primarily housed hourly workers whose jobs were to make collections calls to delinquent holders of Providian credit cards. Providian had grown rapidly in the 1990's specifically by targeting consumers with poor credit records.

The strategy paid off handsomely -- until it didn't. In 2001, sudden increases in loan-loss provisions nearly tanked the company, as its targeted sub-prime market had done what higher-risk businesses occasionally do: bitten it squarely on the behind with rapidly rising delinquencies and bankruptcies among its clients.

Providian scrambled and made a decision to exit much of the sub-prime market. In the interim two years, the company has sold off much of that business and now focuses on providing consumer credit in the lower-risk strata. It also has embarked on massive cost reductions, dropping employment rolls from roughly 13,000 down to little more than 4,000.

The operations in Louisville were a part and parcel of this retrenchment. These employees were charged with collecting as much as they could from cardholders who had defaulted. After a period of time, though, most of these cases would naturally have resolved themselves: either the debtor has paid off an agreed amount or will have filed for bankruptcy, or some other conclusion. When the company's lending practices generate reduced levels of bad debt, there's less collection activity, and this group's responsibilities can be merged in with ongoing credit collections operations elsewhere within the company.

Investors who entered into the fray when Providian's viability was in question have been well rewarded: stock trading at $2 is now well over $12 a stub. Even investors who stood aside while the company righted itself have done well -- Providian's stock trebled in 2003.

Of course, the problem with Providian's new strategy is that it's pushing credit cards at the same clientele that nearly every other bank and card company also covets : American Express (NYSE: AXP), BankOne (NYSE: ONE), Motley Foolcredit card providerMBNA (NYSE: KRB), Citigroup (NYSE: C) Capital One (NYSE: COF), and on down the line all seek to attract the high credit quality client as the main parts of their businesses.

One of the attractions of Providian was that it was treading markets others were not willing to touch. As results showed, they demurred with good reason.