A Different Kind of Credit-Card Company

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Many schools and alumni associations have defended the agreements, saying the cards are geared to alumni rather than students. But one deal with the University of Michigan that Erskine cemented for MBNA in 2003 suggests otherwise. Under the terms of the contract, MBNA pays the alumni association more for signing up current students than former ones: $6 for each student, vs. $5 for alumni. The association maintains that it helps current students far more than the credit-card program hurts them. "We invested over $800,000 in student programs and scholarships," says Jerry Sigler, the association's chief financial officer. "No logical person would conclude that the best interests of students would be ignored in order to facilitate this program." BofA declined to comment.

Erskine—who signed a confidentiality agreement with his former employer and can't talk much about his tenure at MBNA—recalls that few schools tried to negotiate for better card terms or less intrusive contracts. "Some of the schools got paid up front and turned their heads and held their noses" at the situation, he says. It's not clear whether he ever voiced his concerns to top management. But one former colleague recalls Erskine was uneasy about the industry for years. "He was really uncomfortable with some of the practices that pushed the envelope," says John E. Karzak, a former MBNA executive who worked with Erskine from 1992 to 1998 and is currently chief marketing officer for lender Affinity Financial. "He was essentially an honest guy and thought we could be doing better."

Now Erskine is trying to shake up the status quo. Last year, he pitched the alumni association at Western Kentucky University on his company's new credit card. He asked the 33-member board how many of them carried the school's branded credit card offered by JPMorgan Chase, which featured high late fees and over-the-limit penalties. After an awkward silence, only two raised their hand. Says Erskine: "I didn't blame them because the card was crap." Western Kentucky signed up with PartnersFirst in December. Says a JPMorgan spokeswoman: "Chase is a responsible, careful lender. We constantly evaluate the risks and costs of funding credit-card loans."

Erskine's operation has all the hallmarks of a scrappy upstart. And his team is a rag-tag group of credit-card vets and industry castoffs. "All of us have a little ax to grind," says Erskine. The firm's modest space, a step up from the garage where Erskine first hashed out the idea, seems more dot-com shabby than financial-services chic. The supply closet overflows with yellow balls, a favorite giveaway at pitch meetings. The only art is a framed jersey of hockey player Mario Lemieux.

PartnersFirst's business model is markedly different from that of most card issuers. The firm doesn't impose any fees on its cards. And it doesn't raise interest rates on any of its cards unless borrowers miss two payments. If consumers remain current for six months, the rates drop.

Partners also have a say in the terms of the credit agreements. The Western Kentucky alumni association, like the SEIU, must sign off on any changes in rates or fees. About 500 Western Kentucky alumni have signed up for the card since December. "We felt there had to be a better card out there," says Donald Smith, executive director of the alumni association. "So far, [our alumni] are thrilled with the card."

THE NEW STANDARD

Without fee revenue, PartnersFirst must pay careful attention to lending practices. Unlike many rivals, PartnersFirst doesn't rely solely on computer-generated scores like FICO, those ubiquitous three-digit measures of a consumer's creditworthiness. Rather, analysts review each application by hand, looking at factors such as work stability, job tenure, and payment history. Then every Thursday, Erskine convenes the entire staff to make the final credit decisions over pizza and snacks. "It can certainly get lively," says Harry Tower, PartnersFirst's director of partnership development.

Some of their decisions seem unconventional. Earlier this year the firm wouldn't extend credit to a real estate agent in Florida who made $2 million a year. PartnersFirst figured the borrower's pay would get slashed in the real estate downturn.

Such lending practices could soon become the industry standard. Under the new rules, credit-card companies can't jack up interest rates on a whim. That means they must prudently assess a customer's risk from the outset—or face huge losses when borrowers run into trouble. Most industry experts figure the big companies also will come up with new fees and impose higher rates up front.

As the big players adjust their models, PartnersFirst will be tested. The company, launched during the worst downturn since the Great Depression, is bleeding cash as it continues to invest in the business. But there are signs of improvement. PartnersFirst, which has affinity deals with 60 organizations and nearly 140,000 cardholders, lost $1 million in the first six months of the year. That's compared with a loss of more than $3 million in the same period of 2008. Analysts are cautiously optimistic. Says Sanjay Sakhrani, of research firm Keefe, Bruyette and Woods: "Issuers offering a better product will fare better in this environment."

Silver-Greenberg is a reporter for BusinessWeek.com.

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