Data Is Power. Just Ask Fingerhut

It's able to offer credit cards to a lower-income market

For Marilyn Gnat, the Fingerhut catalog is a godsend. It has allowed the retired dime-store salesclerk from Eagle River, Wis., to buy everything from pots and pans to a teddy bear cookie jar with matching salt and pepper shakers--all on the installment plan. "When I started out, Fingerhut was the only place that would give me credit," says Gnat, who raised nine children on her modest income.

Fingerhut sells everything from toy phones for $20 to big-screen TVs for $2,000. But its real business is extending credit, at rates of about 24% a year, to people who would otherwise have to pay cash. Its catalogs list monthly payments in bold type and actual prices in fine print. Even a pair of $40 sneakers can be amortized over 13 months with payments of just $4.79 a month.

To serve its market, the $2 billion retailer has built a cutting-edge database that stores more than 500 pieces of information on each of more than 50 million active and potential customers. That allows Fingerhut Cos. to sort through its records and zero in on the best credit risks among America's low- and moderate-income households, its chosen niche since the Minnetonka (Minn.) company got its start in 1948. Now, it's banking on a new way to leverage its expertise in consumer credit: Fingerhut has quietly become a major issuer of credit cards.

Fingerhut, the second-largest consumer catalog marketer in the country behind J.C. Penney Co., gathers a lot more than names and addresses in its database. It collects demographic details such as age, marital status, and number of children. It tracks hobbies and birthdays and uses that knowledge to hit customers with personalized catalogs when they're most likely to buy. "Fingerhut is one of those pioneering companies that is making intense knowledge of their customer a core competency," says Thomas Blischok, a retail consultant at Coopers & Lybrand.

Early last year, Fingerhut launched its own co-branded Visa and MasterCard. The 750,000 accounts opened by yearend generated more than $500 million in receivables, making Fingerhut the nation's 23rd-largest issuer--and one of the few catering to lower-income consumers, without demanding collateral. The lender's yearend 1996 goal: 1 million accounts and $1 billion in receivables. "They're new to the card business, but they're old-timers in the credit business," says James Daly, editor of Credit Card Management magazine.

FINANCING. Still, mining this end of the market is risky. Credit-card issuers' bad-debt levels rose to 4.4% at the end of 1995, up from 3.7% a year earlier. Fingerhut is reserving for losses of about 6%. To finance its rapid buildup of customer debt, Fingerhut will spin off all or part of its stake in its credit-card unit through an initial public offering later this year. "We have our hands on a very successful business," brags Chairman and CEO Theodore Deikel.

He had better hope so. Deikel, the son-in-law of company co-founder Manny Fingerhut, has headed the company since 1990, when Fingerhut was spun off by Primerica Corp. after four years of stalled growth. By 1993, Deikel had increased sales 50%, to $1.8 billion. But in 1994, startup costs associated with a cable-TV shopping venture and the credit-card business knocked third-quarter earnings down by 50%. The stock fell 22% in a day. Last year, it got hit again by double-digit increases in paper and postage costs.

Deikel, 60, laid off 200 middle managers, tightened credit criteria, and cut back the number of catalogs mailed. That helped push earnings up 11% last year, to $50.9 million on revenue of $2.1 billion, though that's 32% below 1993's earnings. So far this year, sales have picked up, and consumer delinquencies have stabilized. But Wall Street isn't convinced. Fingerhut stock is hovering around 14 a share, down from a 1994 high of more than 33. What does Deikel think about the stock price? "What's below ridiculous?" he sneers. Still, Fingerhut has big plans. "It all goes back to the database," says Deikel, who predicts the company may someday be a major player in car loans, insurance--and even home mortgages. Watch out, Citibank.

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