A Providian-Barclays Deal Could Fuel Transaction Innovation

The news that Barclays PLC is talking to Providian Financial Corp. about buying the San Francisco-based credit card issuer has some observers speculating that the merger could accelerate the development of new electronic transaction products both in the U.S. and in Europe, where Barclays is a major card issuer with about 8 million accounts. Adding Providian would boost Barclays global card base to about 19 million accounts. Though the two parties are said to be far from agreement on price, with any possible deal weeks away, the talks come as no surprise to card-industry experts. They come on the heels of two recent acquisitions of U.S.-based card businesses by British institutions?first, HSBC's $14 billion acquisition last year of Household International and, most recently, Royal Bank of Scotland's agreement to purchase People's Bank's credit card portfolio for $2.66 billion. And two years ago, Providian sold its U.K. card portfolio of some 500,000 accounts to Barclays. “This (Barclays-Providian negotiation) is very logical,” says John Gould, an analyst at TowerGroup, a Needham, Mass.-based consulting firm. “This is all part of globalization.” But longer term, the deal if consummated could drive significant development of transaction technology, some say. They point to the potential combination of Providian's renowned data-mining analytics, which has powered it and such monoline credit card issuers as MBNA Corp. and Capital One Services Inc. past most conventional banks in card accounts, with Barclays' strengths in Web-based banking, ATMs, and call-center servicing. “There's real potential there,” says Les E. Riedl, executive vice president at Speer & Associates Inc., an Atlanta-based consulting company. “Longer term it gives (Barclays) the platform to be a leader in transaction innovation” both in the U.S. and in Europe. Barclays could also use Providian to become a major issuer of debit cards in the U.S market, he adds. “At the end of the day, it boils down to execution” says Riedl. That's where Providian has fallen down before. Despite its vaunted analytical capabilities, it dove too deeply into the subprime end of the credit-risk pool in the late '90s, leading to soaring chargeoffs and a change in management. Former Household and FleetBoston Financial executive Joseph Saunders took over in November, 2001, and has been executing a turnaround strategy ever since, including sales of parts of Providian's portfolio. To grow the card business, however, the company needs to turn to outside sources of capital, observers say. “They need more (capital) than they could generate organically,” says Riedl. “They need a partner.” Providian's market capitalization is about $3.8 billion.