Interviews: Shailesh Mehta

When you first joined Providian, was it called Providian?

At the time, it was called First Deposit Corp.

When you first joined the company, how big was it, and how many people? What was the volume? And when you left, how big was it?

When I joined, we had about 70, 80 employees. We had about 25,000 customers and about $60, 70 million in credit card receivables or assets. When I left, we had 12,000-plus employees, and we had about 18 million customers and $30 billion-plus assets under management.

And during that time, the whole industry was growing?

The industry did grow considerably during that time, ... but we grew much, much faster and bigger than the rest of the industry. A lot of other players grew by acquisition and consolidation. I think most of our growth was organic. That was the power of our business model.

Why did you grow so fast?

... Since we were only a single-product company, we had a lot more advantage in designing the products and identifying segments that were underserved. So the combination of the product design, targeting the right segments allow[ed] us a lot better response rate and a lot many more customers, whereas the competitors' product at the time, most of them have a basically identical product. There was no differentiation. Whether you buy a credit card from Bank of America or whether you buy a credit card from Chase, people didn't see much differentiation. People saw that, "Either I have a Visa card, or I have a MasterCard." ...

You say because you were not a regular bank, you just did cards?

… Prior to [when] we came into the scene, the credit card evolved from travel and entertainment cards into the convenience-of-payment mechanism, so I don't need to carry cash; I don't need to carry my checkbook. ... [A] credit card with the national brand became a much more convenient payment method. ...

So prior to that, if you wanted a $1,000 loan, you go to the local branch, you give your three years' tax returns, you fill out a loan application, it goes to the underwriting. There's a lot of paperwork to get the loan.

You have to prove your income.

You have to prove income and so on, whereas we saw that credit card, by going through the bureaus, analyzing the credit ahead of time, we can make it a convenient way to borrow the money. ...

And that's where we started our business model, to say that we are going to target people who borrow the money on the credit card, and we're not going to target the people who pay their monthly bills in full. ...

But the loan then becomes more profitable for you as well.

But for us, the loan becomes profitable. Exactly.

And you were able to grow faster?

[I was] able to grow faster. And we were also making our product, from a competitiveness point of view, more attractive to this segment of the credit card market ... who never paid their entire bill in full. They paid always installment payment.

So when the credit card came, ... some people pay off their entire bill in one check every month, just like the American Express.

So that's the charge card?

That's the charge card-type people. We call them "convenience users." They borrow the money for the time period, and then as soon as the bill came on, before the due date, they made the entire payment.

And then there are customers who have good credit, but they never made the full payment. They made partial payment. There are times they made minimum payment; there are times they made more than minimum payment. But they never paid the full payment. And we classify that segment as "borrower."

And at the time, the market, if you segment, about one-third of the customers paid their monthly bills in full and two-thirds were paying in installments. We decided to go after that market. And we didn't want to go into the one-third who paid in full, because to us, that market was not attractive.

It wasn't as potentially profitable.

It's not profitable, and we were using the borrowers' profit and subsidizing the full payers.

Because the people who paid in full, like American Express people -- American Express would then only make money off of the transaction charge.

See, American Express had a much better model than the Visa model. American Express was a closed system, so that American Express gave a customer an interest-free loan for a month roughly, ... but all the merchants who accepted American Express card were also American Express customers, and not any other bank's customer. ...

So for American Express, the business model was that they charged merchant 3 percent commission, so ... they collected 3 percent and kept it to themselves, and when I paid in full, they got their money back. So they were basically collecting 3 percent interest. So that was a 27 percent annual on every year they were collecting in form of interest.

Plus, by positioning the card as a charge card and a prestige card, they were collecting fees from me, which covered their billing expenses. So their business model worked by giving customers a free period and asking them to pay in full every month. ... So they were charging $15 to $12 to $18 annual fee to cover the expenses. ...

... So what you were going after were the people who were the borrowers who weren't going to pay their bill off in full.

Or in full, yeah. ... And if we do so, then we will be attracting the profitable segment of the credit card industry. ...

Right. And by allowing them to make 2 percent minimum payments, your hope was to keep them paying basically in perpetuity, right? You never wanted them to really pay it off.

Yeah. If they make the minimum payment, yes, then that loan will take almost 20 years to pay back. Absolutely.

And you make more money then.

We make more money.

And, of course, this was something that was criticized later on by some consumer advocates -- and understandably -- that, "Why would you put this monthly payment so low? You should increase the monthly payment and have the loan amortized faster." And that could have been done. The question is that we say it's a minimum payment, not a recommended payment.

But knowing human psychology, you would know that people who are borrowers would try to get away with the minimum expenses every month if they could.

Well, yes. But trust me, it was more of a gimmick to attract customers rather than that was the average payment. Our average payment was much more than minimum payment. ... Our average monthly payment was 7, 8 percent.

But when I am soliciting the customer, when they see the flexibility of monthly payment low, they find the product far more attractive. ...

[We did] two other things. In order to make the product better for borrower -- that my competitor at the time will not -- we offered 1 percent cash rebate on all the purchases. Nobody was offering [that] at the time. ... And second, we eliminated annual fee. So zero annual fee. Because we are making enough money on interest income, we don't need to charge the fee. ...

Now, if somebody pays their monthly bill in full, and zero interest income, and if you don't charge annual fee, zero fee income. So you have to make up everything from the merchant side, which you cannot. So what banks ended up doing is therefore they were subsidizing this whole group, because still two-thirds of the people were not making full payment. And that interest income covered the losses of the people who were paying in full.

So overall, the business looked profitable. But ... in a strange way, the banks were charging borrowers higher interest rates in order to give the wealthy people a break -- in a strange way, if you look at it, because the people who have money were paying in full, and they were getting the break at the expense of the people who couldn't pay in full.

So it was sort of an unintended transfer of wealth.

It's unintended, exactly. I don't think anybody thought through that. But correct. ...

So the three unique features we introduced for the first time ever in the industry -- one, we will not give a grace period, free interest period. So if you charge, you pay interest the day you charge, whether you pay in full or not. So there will be no more interest-free money.

So that period you might have with American Express or someone else where you had 30 days and you weren't paying any interest, that was gone with you?

We eliminated that from our product, but we said, "We'll give you 1 percent cash rebate." So if you still pay in full, you're getting that 1 percent back, at least 1 percent of that.

So number one was no grace period. Number two was 1 percent cash rebate on all purchases. Number three was no annual fee. And number four was low monthly payment, because we gave up to 2 percent minimum payment instead of 5 percent, [which] was the practice. Everyone else's product was identical, $12 or $15 annual fee, same interest rate across the board, 19.8 or 21.9. And everyone was giving a grace period, and nobody was giving cash rebate. ...

And what kind of interest were you charging?

We were charging 21.9 percent interest.

To start?

That's it. There was one price at the time, 21.9 percent interest. ... We were not the cheapest [on] the interest rate side. But when you add the 1 percent rebate and no annual fee, we were very, very attractive. At the same time, the no grace period is not relevant to the borrowers, because ... once you are in the credit card debt, there is no interest-free loan. So for them, not having a grace period was not relevant.

But at the same time, [to] the people who pay in full, it became a very unattractive product, even if it was a no annual fee and even if there was a 1 percent cash rebate. So that's the innovation that gave us very great response rate in the borrowers' market and very minimal response rate in what we call the non-borrowers' or the convenience users' market.

And so your business took off.

And our business took off.

Now, you also started securitizing your debt?

Yes. We had to convert a crisis into an opportunity, because ... they passed a local Competitive Equality Banking Act. There was nothing competitive about it. It was totally anti-competitive. They said that the non-bank banks cannot grow more than 7 percent a year.

Now, we had at the time $400 to $500 million on loan outstanding. And the loss is that we cannot grow more than 7 percent of that baseline, which means my annual growth was limited to $35 million. Now, if a large commercial bank has a portfolio of $20 billion, they have no restriction on growth.

So because you weren't a regular bank, you were restricted by federal law for how fast you could grow?

Correct. And that was an '87 act. And the funny thing is we were still supervised by OCC [Office of the Comptroller of the Currency] and FDIC [Federal Deposit Insurance Corp.], so there was nothing here that we were not regulated. Non-bank doesn't mean you are nonregulated. I want to make it very clear. ... We were regulated by both OCC and FDIC. ...

And at that point, we said, "How do we continue our journey, because we were having a very great success in the marketplace, and we have this law to deal with?" And that's when we engineered the concept of securitization and said that we will grow off balance sheet.

And therefore, we did a very large securitization in 1987. There were more receivables off our balance sheet than on our balance sheet.

So you set up a separate entity that you then sold your debt --

Loan.

-- your loan to that entity?

Right.

So therefore you could get around the restriction on your growth, because this other entity owned the debt.

Yeah. It was funded by the investors who bought those debts. And we had no recourse. So the bank wasn't giving any recourse, so that it was a complete sale of asset. And therefore, on-the-book assets will not grow more than 7 percent, but off-the-book assets can grow as much as it [can]. ...

It required quite a bit of financial engineering, but we did it. And it also started, beginning '87, the asset-backed securities market in the credit card and became a huge market in a few years.

It's now almost a trillion-dollar business.

Yeah. I don't know off the top of my head what the size of the market is, but I'm sure it's in that neighborhood.

And then you decided -- and explain this -- that there was a part of the population that couldn't qualify for credit cards. They were called unbanked people?

Yeah. We labeled them "unbanked." That was a word that came out of Providian, the unbanked market, and then it became like an industry-standard word.

What happened is that we realized that as the credit cards were becoming more and more prevalent in the society, they were becoming a semi-utility.

There's so many things a person cannot do without a card. ... You cannot easily rent a car without a card. If you go to a hotel and you want a room, and if you try to pay in cash, the look on the clerk is something different, right? …

So what we realized [is] that it's almost a semi-utility if not a utility. And there were 30 to 40 million potential households, prospects, have no credit card because of the way the underwriting was done and because of the credit standard that applied. We said, "How do we meet the needs of these people who do not qualify for a regular credit card?"

We're talking about people with no credit history?

Exactly. So we said that we already found the two uses of credit card. The one was the convenience of payment. Second use was a signature loan with minimal hassle. The third is that we think credit cards are becoming an ID card, because if I want to rent a car, even if I pay in cash or check, they still want my credit card. ...

So can we go into this market -- who are not having the card? And we called them an "unbanked" market, because many, we found out, did not have any banking relationship. They always use money orders and those kind of payment mechanisms.

So they're lower-income people?

So they're lower-income people.

Now, you asked me a very good question. What we found was there was quite a few people in that group who were really not credit risk, but they had a lack of credit history. They were new to the credit. As a matter of fact, they were a small group of people who never borrowed but were also considered bad credit, because if you don't have a credit history, it means you're a bad credit.

Now, you may never need to borrow the money. You tried to live within your means. You spend money less than what you made. It doesn't make you bad credit. And because you didn't borrow, you become a bad credit.

So we found in divorce, sometimes all the primary cards were in the name of one spouse, and if divorce happened, the second spouse had no primary card, no real history. So a divorced spouse may not get a credit card. Students, diplomats -- trust me, I had diplomats calling me, asking, because everybody needs credit cards. ...

So we found out this unbanked market was very diverse. There were bad credits, there were bankrupts, there were young credits, there were no credits -- all sorts of mix. ... And I said, "How do I give them credit?" ...

1996 is usually the year when people say fees got deregulated, late fees and so on. Did you start doing that as well?

Yes. You see, I started seeing a trend -- and even after I left, the trend continued. There are 190 million, 200 million, 240 million population, and 100 to 130 million households we have domestically. And there are more than, I think, 400, 500 million credit cards.

So the market started to get saturation, and really, the organic growth became harder and harder. The cost of acquiring account from 1986 to 1996 went from $35 to $300. ...

It would cost you advertising --

Marketing, advertising and all that. ...

So everybody started looking at buy versus build. So portfolio acquisition became another way to grow. ... Consolidation was starting to happen. MBNA came up with an affinity program, and they started telling smaller banks, you know, "Why don't we take over your credit card business, and we just put your name on it?"

So different people came with different ideas. ... [I think the] top 15 or 20 players already had 85 percent or 80 percent of the market share. So now it became the game of about 20 players, and you kind of steal each other's market share. ...

So then slowly the annual fee disappeared. … Everybody had to waive the annual fee to stay competitive. Everybody had to offer some sort of a rebate. Where do you make your money? You're giving a grace period; you're not charging annual fee; now you're giving customers money to use your card in the form of some rebate.

Everybody is competing for the same segment of borrowers.

[From] '92, '93 onwards, the industry started moving away ... from the traditional pricing [to] where they made it look like it's a giveaway, and took it back in the form of -- I used to use the word "penalty pricing" or "stealth pricing."

So the increase in competition led to the use of penalty fees, more penalty fees, bigger penalty fees?

Bigger penalty fees.

And you were operating with your penalty fees like everyone else.

Well, we all had to make up somewhere, because if everybody is charging no annual fee, then how do you differentiate, right? So everybody increased the late fees. Everybody started increasing the over-limit fees.

When people make the buying decision, they don't look at the penalty fees, because they never believe they'll be late. They never believe they'll be over limit, right? And when you bill them, they get irritated. And sometimes they pay and be upset, and sometimes bank waives, and sometimes they move on. But in aggregate, majority paid.

And then things started getting worse after I left the industry. ... People were increasing interest rate[s] on you if you are delinquent on somebody else's card, even if you're current and paying me on time. So if I have negotiated a contract with you, and I'm going to lend you money at, let's say, 21 percent, but in my cardholder agreement I said that, "If you are delinquent somewhere else, I have a right to increase your rate," now, you may be delinquent on someone else for whatever reason. Certainly my rate will shoot up from 21 to 28 percent.

That's universal default, it was called.

Universal default. Yeah. ... That wasn't there until '99, '98. It started coming afterwards, because they needed more and more stealth pricing, more and more penalty pricing, because they were giving zero percent teaser. They had the period for teaser increase that went from three months to six months to one year.

They said, "No annual fee." They were giving more and more rebates. They were giving miles; they were giving points.

By 2001, credit cards were the profit center for the banks, the number one profit center.

Right, because even if the cost of acquisition was going up, the margins were at such a high -- because the rates, when you added all these penalty fees, added all these late fees -- also, there's a lot of credit life insurance-type products. So add on product sale. When you add up everything, they were able to maintain their margins along with the growth.

Cost of funds came down a lot. In 1986, '87, we were paying 9 percent in money market account. In late '90s, in early 2000, interest rates on a wholesale level to the banks were down to 3, 4 percent, so cost of funds came down.

And kept down. And after that kept going down.

And kept going down, going down. And also, the other stealth pricing was a variable rate, where they said that -- let's say the rates are down today in the variable rate funding. We'll give you loan at 7.99, but that's the floor, which means if the rates go up, we have a right to increase your rate; but if rates go further down, we will not lower it. It's another form of creative pricing, OK?

Well, the criticism is that it's exploiting the customer, the fact that they don't really understand what's going to happen.

In a way, I will say yes. In a way, the pricing was designed that it will require a degree of some sort to understand how many different ways I'm paying and what I'm paying. So industry profit did go up. ...

I guess the question really is, the competition that was causing what you call "stealth pricing," it sounds like you were involved in that as well, in order to survive.

Absolutely, absolutely. But we were involved in the way everybody else was doing it, because we were not the creator of the teaser rates, but we had to deal with it. We were not the creator of $500 rebate for automobiles. We didn't have an automobile, so where do we give the rebate to? ... Citibank had a relationship with American Airlines and American Express with Delta. ...

So for us, players like us, it became harder and harder to match these benefits. And also, ... people were entering the markets that historically they didn't, because they were not getting growth in their prime market. So the so-called unbanked market or the so-called --

Subprime.

-- subprime market became now a market for everybody. And they were not realizing the risk in that market. ... So we had ignorant people coming in, marketing products ... without understanding the profit dynamics, but definitely creating a temporary dislocation on the pricing model.

I'm not exactly sure that people understand what "temporary dislocation of the pricing model" will mean. What are you talking about?

If all my life I'm selling credit card to a creditworthy customer, or a so-called high FICO score customer --

Who pays off at the end of the --

-- who pays [off], now I'm entering first time in a market the customer doesn't pay off, or first time entering market that their FICO score is very low.

Their so-called credit rating is low.

Credit rating low, or subprime. I'm going to price the product differently, but I'm not going to necessarily price the product accurately. ... After all, this business is an assumption-driven business, that I forecast what will be the losses; I forecast what will be the response rate; I'll forecast what will be the average balances; I forecast what will be the monthly payment; I forecast what is going to be the interest rate. ...

And if I'm new to the market, I don't have that information easily available, so I'm going to say: "Let's price this slightly higher. Let's do this." But my pricing is not based on the intelligence of the market; it's more based on my experience in an adjunct market, translating to, say, to slightly higher-risk market. ...

As market became saturated, our ability to find underserved markets became harder and harder, because everybody was entering in every market.

Every market? There was no underserved market anymore?

No underserved market in reality. Even in a FICO score 500, I had people giving solicitations.

So at one time, you were the only people soliciting people with a 500 FICO score?

Or whatever, FICO 550, 560, whatever. ...

Right. But then other people were doing the same thing.

Then everybody started. So people went below 650, then below 625, then 600. ...

They said that your company was holding checks that people sent and not depositing them so you could collect more late fees. Was that true?

That is absolutely wrong. I don't know how that got planted.

Well, the OCC said it.

I don't believe it. If that is [what the] OCC said, I'm willing to challenge them even today. Where is the source? I would never tolerate that as the chairman of the company. I don't think any of my senior managers would tolerate it.

We had 23 different processing centers. And if someplace, because of some operational reason -- it may be a particular day checks may not have been processed -- that's accidental, but we always backdated the credit back. So it wasn't that. When we processed, we backdated.

They said that you had processing centers, for instance, in New Hampshire, on the East Coast, but you had clients on the West Coast who had to send their checks there. So it took the longest period of time possible in the mail for it to get there.

Well, we had a processing center in New Hampshire right from the beginning, Concord. But again, we had outsourced our payment processing to Mellon Bank, OK, which was our handling --

Mellon Bank?

Mellon Bank, yeah. So I don't think we were designing purposefully those kind of things. We had 23 locations. So someplace it's going to be the distance. ...

In the public record, there's a large number of allegations about everything from that to deals changing, people thinking that they didn't have to pay for something and then they did, and they couldn't get out of various agreements. Do you accept that some of that was happening while you were there?

Not as a corporate policy or not as a style of management or not as a business strategy. We never allowed that kind of behavior. We believed that customer relationship was very premier to us.

As a matter of fact, I can say that I was one of the guys who were absolutely against this voice response unit. I said, "I want a person to talk to a person." ... I had the most in-house telemarketing and customer service people. I did not go and start building centers outside the country.

So proactively, the message was very clear: quality service. Yes, there are times where pricing was high.

What do you mean your pricing was high?

We may be charging higher interest rate, or we may be charging higher late fee than someone else. We were not the lowest priced provider.

How high an interest rate would you go?

I don't remember exactly, but we had to follow the usury limit. ... I don't think we went much higher than 26, 27 percent, maybe as high as 28 in certain cases. And also, that is to the people where we identified a very, very high-risk people. ...

You were fined what is now a record fine by the OCC supposedly to pay restitution to people who had complained.

We never paid restitution for all the so-called allegations that you just mentioned -- that holding the checks back or the Better [Business] Bureau complaints. We paid restitution on -- we had a product called "guaranteed savings."

What the guaranteed savings product was [was] that we offered customers to do a net consolidation with us. If you consolidate all your credit card debt with us, we will give you lower rate than what you are paying on your weighted average balances.

Now, what do I mean by "weighted average balance"? Suppose you have four cards. One card has $1,000 balance, and you are paying, say, 20 percent interest. Another card has a $500 [balance], and you're paying 30 percent interest. Another card has a $3,000 balance, and you're paying 22 percent interest. And we add up all your balance, and we add up your interest costs, and we normalize it and say that, "On the average, when your total balance" -- let's say you're paying 19 percent interest -- our computer and technology can do that math for you.

And we say that we will now give you -- and put $20,000 that you pay off all these guys. And if your weighted average interest is 19, we'll give you 18.5, 18.7 or whatever. So there is a lower interest you'll pay on the balances that you have, number one.

Number two, sometimes when you send a check and it gets posted by the other bank, and they may charge you some residual interest, then you will be paying us and them. So for first three months, we will [assign] you zero percent interest, which means you will not pay two interests at least. ... So that is a guaranteed savings.

The guaranteed savings is that interim period --

You're getting a lower rate. And the three months of the guaranteed savings is a protection, but you're also saving three months of interest. If you pay, everything works smoothly. ...

And by the way, that was the genesis of the universal default thinking, ... because each bank looks at its own balance and said, "This guy can do it, but he has five other cards." I said: "But now if we give them an $18,000 new balance, now he has $18,000 on our debt, and he still has available credit of $20,000 from other banks, so he can now go to $38,000. He can take $18,000 from us and go back borrowing elsewhere. How do we protect?"

So they said that we can make a condition that you have to close the account; otherwise his credit limit will increase. And we'll give extra $2,000 to $3,000 cushion. So if they're going to give you $18,[000] we'll give you $21,[000]. So that's the product.

Now, that is the product for which I had to pay restitution, not for any of the so-called other allegations. ...

But it made you the poster boy … for what's wrong with credit cards.

It made us the poster boy. We were the poster boy, correct. And we were told by the channels within the OCC that "You are a poster boy." ...

You think that this was at least objectively, if not consciously, a program to get rid of the independent credit card companies to the situation we have today, which is six companies basically have 80 percent of the business?

Correct. They reduced the competition -- precisely -- by creating an environment where it [had] become difficult for a monoline credit card company to survive.

Now, when you get solicitations today in the mail, what do they tell you?

... I haven't applied for credit cards for I don't know how many years. I don't need one. But I do look at the solicitations.

You get them in your mailbox?

I get them in my mailbox, and I get from the mailbox [from] companies I already have a credit card with. (Laughs.) So it's surprising how their system works.

But I always saw the deterioration in the way the stealth pricing, the penalty pricing kept rising. … And I said, "My God, who is going to understand all this thing?" I mean, borrow on a credit card, nobody knows what the real cost is. Higher and higher late fees and over-limit fees. …

Open this one for me and tell me what you think. That's from Bank of America. On the back it says, "Zero percent intro APR."

… But that is an asterisk, or whatever the mark. So I have to now read that footnote. So I go for the footnote. The footnote is in the letter. I will have to remove my glasses to read it. ...

It says, "For this, see disclosure summary insert for details." And now I have to find a disclosure summary insert somewhere for the details, right, … which is the one here. ... On the outside, there is no interest rate quoted. It says, "Zero percent intro APR." So now I'm going in here. And it says that my APR is 11.9, 15.9 or 19.9, right? And the APR you receive is determined based on your creditworthiness. So I have no idea which one I'm going to get when they approve me. …

But disclosure, you say, doesn't work. (Laughs.)

(Laughs.) As I said, look at how much time it takes for both of us to go through this.

Right, exactly.

... Your average consumer is not going to be able to translate to what the real pricing is, OK?

Now, you put out statements like this for Providian?

We did, we did. Absolutely. We did. I don't want to come across like I was the saint or not. Everybody did. …

[Some industry people will say,] "As long as I'm in compliance with what the government says, it's none of anybody's business to tell me what to do." That's the kind of mind-set with which ... some people work. ... "You make the stupid laws, I'll comply, and I'll make money. ... Tell me the rules, and then I'll outsmart you all." ...

We run into people all the time in our reporting who are [in] some cases upper-middle class, middle class, and they get into a cycle with the credit card company where they may run up a balance and then they're late on it, and then that fee then becomes part of the balance, and it keeps growing and growing and growing, and it's set up in a way as a trap that they can't get out of.

... I used to get calls; "I" means my customer service people. Some people said, "I can't stop spending." I had women crying on the phone, "Take my card away," and we used to cut their credit limit. We used to limit them to their debt. ...

The difficulty was even if I did it, next week they received a solicitation from somebody else in the mail, so they took that card. So the addiction or this thing cannot be stopped by one bank, because we didn't have a universal credit limit per individual. ...

What I'm getting at is, is that people get into these cycles. ... But you as the credit card issuer don't want them to go bankrupt, because you won't get anything, right?

Right. I agree with you. So there's no point in forcing somebody to bankruptcy. ...

There are two things that are wrong with the fees. ... If I'm at $10 over limit, does it make sense to charge $35 over-limit fee? That, to me, was not right -- too much. Or if I missed a $10 monthly payment, does it make [sense] to charge a $35 fee for that?

Late?

Late fee. And then again, in next month, you add another late fee. So already I'm late. So some of these things -- I don't know whether it's still cleaned up or not, but I think it should have been cleaned up. ...

Now, forcing people to bankruptcy is not going to get the recoveries. So I'm totally saying that it doesn't make sense to charge people who are already default[ing] so many fees. But at the same time, I'm saying that you also want to give some leeway to the people who are in that zone because of the life event. And life event has a greater calamity, driving to bankruptcy than just debt. ...

By the way, how profitable was Providian?

Providian was very profitable until the day I left. In the quarter that I left, despite all the hoopla, I still made over $180 million quarterly profit. …

Almost a billion dollars a year.

We were making a billion dollars a year.

In profit.

In profit, before tax.

So have you kept up on those new credit card rules and the new legislation?

I wouldn't say I have studied as in depth, because I'm not in the industry. But I have a peripheral [understanding].

Does it take care of some of these abuses?

I think so. I think this is needed, how much and how far it needs to go. ...

What exactly [are we] trying to solve here? First we should ask that question. Are we trying to solve that customer is not aware of what he's paying? Then it is not going to be solved by all this. But that's not just limited to credit cards; it's limited to so many other industries.

If we wanted to say that certain practices are not acceptable, then we should stop the practices. That will help the customer. If we believe that, as we discussed, that can you charge five over-limit fees on the same over limit? No. Then stop that. Then you don't need a disclosure issue. ...

The military has gotten a law through Congress that has put a price cap on payday lending, 36 percent. The payday lenders are still there. They're regulating their practices, their interest, their fees, everything.

Yeah. Being a free-market student, I don't like the word "price cap." I think we can create a certain pricing discipline where you say that redundant pricing or [pile-on] pricing should not be permitted.

And also I think that there should be some sort of a clarity around this balance transfer, teaser rates. It shouldn't be so deceptive that people don't know what they're getting into. ...

But how do you solve it? I don't know. ... Bankers will figure it out to comply.

And then take whatever the market will bear.

And whatever market will bear. It's market will bear, you know? And there are always some desperate people who will take the product. Lending money to people is never a difficult exercise, OK? People will take money if you're willing to give [it to] them. ...

... What do you think the future is? I know you're invested in prepaid debit cards, right?

I think there is going to be some shift of credit card payments to debit card. And I think there [is] going to be some shift from a subprime credit to prepaid debit. And once people get the taste of it, it will correct the subprime credit pricing in itself.

I am involved in a company which offers -- it's a sort of a prepaid debit card. And I am surprised that the growth in that business happening in the last four or five months is very high, because some of these people have been cut out of the credit to begin with, and they still need access to the payment system.

So they may have lost their credit card or their line of credit, so they're moving into prepaid debit cards?

Correct, because they still need that access to the payment. They still need that Visa card or a MasterCard.

Now, do these cards expire? Does the balance expire on these cards?

Again, this is more or less the people who have small balance, so they make a direct deposit payroll check in bank account, and we give them the access to their own account through a debit card.

So it's like an ATM card?

It's like an ATM card, but it's a Visa card, so it can be not only used at ATM, but you can use it at any merchant where Visa is accepted. So it is, say, just like a credit card. ...

Does it have overdraft fees?

We don't like to extend. But if the relationship is long enough, then we allow them small $20 worth of overdraft for [a] $2, $3 fee. But they have to correct that in their next paycheck. So they cannot carry the balance. But it gives them a little privilege of going $20, or multiple[s] of $20 up to $100, over.

So it's not like what the banks are doing with check overdraft?

It's sort of that, but it's more of a multiple of 20s and up to small amount. And it's not a [prominent] credit for you.

National unemployment is at 9.5 percent. It's over 10 percent in California as we do this interview. But it's projected to keep going up. What kind of danger does that present to the credit card industry?

I think the credit card industry will have to go through some adjustment, because ... the credit card losses have a very strong correlation with unemployment. I'm a student of calculus, so I always look at not just the first study we do, but I look at secondary. So sometimes what is linear could become geometric.

So if you said that if the unemployment is 5 percent or 6 percent, your losses go linearly up. If it goes over 10 percent, it may go at twice the rate. So it could be fairly challenging times, if the unemployment keeps rising, for the credit card. ...

Right now, the combination of high unemployment and high delinquencies -- you know, delinquency did jump up. ... I had a lot less delinquency, and everybody was pounding on me that "You have a bad portfolio." And I said: "Wait a minute. These are the industry delinquencies, so how bad it is going to get?" So my portfolio looked very pristine compared to --

What's going on today.

-- what's going on today. ... And [what is] the [leverage] left for them? They can't cut the credit, because unfortunately if you stop making good loans, then how are you going to pay for the bad loans? Because each bad loan takes up a profit of 10 to 12 good loans. ...

Where do I go? Either I have to raise the credit of the good people -- then I will have adverse selection, because I keep raising the price. Some good customer will say, "You know what? I don't want to. I'm taking someone else's product," which means people who are good [are] quitting me, and people who are bad will take any price, because they don't intend to pay me back anyway.

So I personally think that this unemployment should be a serious concern for some of the credit card issuers.

And may get very serious before the year is out.

... And if each increase is larger than the previous increase, then I would be very nervous. It's not linear anymore. And if it's nonlinear, then you have to do a real stress test. They need to do that: "What if it's at 12 percent unemployment? How big a hit [are we] going to get?" I'm sure they're doing it. Many banks are smart, and there are very sophisticated analytics people working. But I would have definitely done that stress test. ...

Today people are angry at the credit card industry.

Industrywise, I think people are angry just not at credit card. They're angry at cable company; they're angry at wireless company. ... Why get angry at credit card? Why pick out that one industry? ...

I don't think credit card companies are that bad. But obviously, if you hear it in news that credit card companies are bad, and whenever you have a sob story -- because credit card debt is such that it can really hurt people's lives, and therefore emotionally it makes you more angry than a cable company, [where] if worst come to worst, just cancel your service.

But given that, I think the credit card community has to do also some positive image building. I think they should move away from some of these stealth pricing, penalty pricing. ...

But I think some of this anger is valid. Some of the anger is generated because they're in the news. And people lately are very angry at banks in general because of this disaster we have. ...

Why aren't credit cards like the credit cards we see at credit unions, where there's 9 percent or 11 percent fixed interest rate, there's a fee, there's a reasonable limit on how much you can spend, and there's no tricks?

I think that's a great product. ... At credit unions -- I'm a credit union member -- they know me, they came in, they picked up the application, they filled it out, and, you know, what is the acquisition cost? So I think if anybody can get a product like that, they should. ...

But at the same time, it will be very difficult for a national bank to price the product the same way, because they don't know their customer. They go through this curve, loss curves, statistics, segmentations, FICO scores and all that. And the cost of running the business is totally different economics. ... Some banks measure the profitability based on the number of relationships they have with the bank.

But isn't that the way things were when you started out in banking? Banks couldn't be national, only could operate in a state or in your local community? Were there lessons learned in the Depression?

Well, we always fight this struggle among growth versus safe and sound. Safe-and-sound banking is banking where you do business the old-fashioned way, because you knew your community. You were collecting the deposit for the community; you were reinvesting in community.

But then, if you're a bank in a community where there is no growth -- either there's no population growth or no wealth growth -- what happens? Where do you go? So then you start looking for communities where you're not. And either you enter it de novo by opening a bank or a branch, or you acquire a bank.

So [where the] problem begins is when you start entering the territory that's new to you. That's a learning curve. And I believe [billionaire investor] Warren Buffett said very nicely -- he says that: "What was wrong with the banking, the old way which was a guaranteed way to make money? Why [did they have] to invent all this crazy stuff that puts us in the messes we are in today?" And I agree with him.

But at the same time, we are an over-banked country, saturated in terms of capacity versus availability of growth. And that's why we create this leverage; that's why we create these complex products; that's why we try to create stealth pricing.

Where do you strike the balance? I don't know. ...

Providian was bought by Washington Mutual after you left?

Yes.

And now it's part of JPMorgan Chase?

Mm-hmm.

And we hear it may disappear.

I'm not surprised. I will not be surprised, because first and foremost, I respect [JPMorgan Chase CEO] Jamie Dimon, and he's a very smart man. Unfortunately, that stigma -- he doesn't want that [stigma that] comes with this so-called Providian portfolio.

If I were in his shoes, I would say: "Why leave with the stigma? Plus, I'm sure we have a significant overlap between Chase cardholders and Providian cardholders." So I might as well take care of that by consolidating with the Chase card and eliminate the brand. ...

If I were in his shoes, I would do the same thing, because it's a name that's maligned, no matter how much you scream and shout. Why carry that legacy? Unfortunately maligned and wrongly maligned. (Laughs.)

You feel you got singled out.

Absolutely, absolutely. ...

It is an ethical, moral question really? Because [there are] some in the industry who basically say: "Our business is to make money. Our shareholders want us to have the best profits, and we'll take what the market will bear."

I think there is some truth, but there is not a complete truth. I agree on that part, that let the market decide what's right and what's wrong, rather than us decide. But to say that trying to make a lot of money in a short period of time, is it good for the shareholder? It's not good.

If you look at that model and look at AIG [American International Group] shareholders, look at Citi, what they've done there for shareholders -- if they were so conscious about their shareholders all along, then how come their shares are selling at two bucks and one buck? ...

But you say now that you, in a sense, were pushed into some practices that you now regret at Providian from that free-market competition.

Yes, certainly. I think that the one area that I [would] redo it is that I should not have overemphasized the growth which was pushed into doing things that we normally will do it.

But when you are rightly or wrongly subscribed to the theory that you're to grow 10, 15 percent a year, ... to do that, I have to recreate a Providian every two years. And ... it took me 20 years to build one, or 14 years. I cannot replicate the same size in less than two years again.

So that's where I was wrong. And that's where I should have told my board, and I should have told my analysts, "Yeah, it will have given my share a temporary hit, because my multiple [would] have shrunk."

And my board may not have liked it, but at least I should have said it, that, "Look, trying to grow 15 percent on a $30 billion asset on a single product, I can't do it, because it will create practices in the company that may not be the best long term."

How do you react to someone who says if you can't afford to pay back a debt, you shouldn't get that debt?

I think that's an underwriting criteria, per se. But if you do completely like that, [that will] create a significant undermining of economic activity. And I don't think we need that, because what we want to create, people who have the ability to pay the debt, even if today they don't have the ability to pay back the debt, OK?

Because if you completely shut out [these people], then you will create a different kind of problem. If somebody is going to college and cannot afford the college fee, and we say, "We'll not give you the debt because you don't have the ability to pay back the debt," that's wrong, because we know that if he does get that education, he will be able to pay back the debt. So would you stop giving him the debt? That's where I'm not agreeing 100 percent on that. That's a very simplistic approach. ... I'm a little bit concerned about unintended consequences of that good thought.