Once known as GMAC, Ally Bank has a deep background in auto finance, dating back to 1919. As the company modernized, it moved into mortgages and banking, and today it has an interest in deposits, home loans, insurance, investments, consumer lending, and corporate finance. Their Investor earning reports, published October 12, 2021, provides details.
Ally’s recent announcement to enter into the credit card business creates an opportunity to leverage existing products and expand into the profitable U.S. credit card business. In addition, their recent announcement to acquire Fair Square puts them into a highly competitive market, with a substantial upside. Fair Square reports $763 million in subprime balances, and since 2017, has delivered a compounded annual growth rate of 74%. Like many others, Fair Square focuses on the digital channel. The deal is set to close in 1Q2022.
As the American Banker put it, “Ally executives said Thursday that the acquisition aims to fill a “gap” by adding a consumer banking product — the credit card — that is central to many customers.”
The acquisition is an excellent opportunity, but it is not Ally Bank’s first attempt to get into consumer credit cards. Ally’s first move into credit cards started in 2016 with a TD Bank co-brand, which unraveled in 2019. According to the American Banker in 2019:
The card offered cash rewards of 1%-2%. Because TD shouldered the credit losses, Ally’s risk was limited, but the company also had less opportunity to earn money from the card.
In explaining why the company is now exiting the credit card business, Brown said that the partnership did not meet Ally’s expectations. He noted that the total loan portfolio was less than $100 million.
The second shot into consumer credit was with CardWorks and Merrick Bank, as COVID took hold. Ally Bank balked at the acquisition, which PaymentsJournal noted was a good strategic move at the time.
Now, round three into credit cards. Fair Square offers the Ollo Card, a sub-prime card by every measure. Credit card interest rates are 24.99% to 27.88%, according to the terms and conditions. The American Banker points out Fair Square’s sub-prime portfolio.
Much like CardWorks, Fair Square Financial focuses on customers with below-prime credit scores. Fair Square has roughly 658,000 card customers with an average FICO score of 657. The company’s loan balances are currently around $763 million, up from $300 million in 2018.
The below-prime segment of U.S. consumers presents opportunities for growth and is often “underserved” by banks, said LaClair, who noted that major credit card issuers compete heavily for super-prime borrowers seeking premium rewards.
We think there is an upside for Ally Bank if all goes well. Credit management is vital, and so is reputational management. Lending to subprime auto borrowers is one thing since you have the car as security. Keep an eye on net charge-offs because the annualized rate of 0.27% is not what you will see in unsecured lending.
The acquisition presents an opportunity for Ally Bank, but do not forget that the devil is in the details.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group