By AnnaMaria Andriotis
Barclaycard is shedding a chunk of its subprime card balances, in a deal that reflects diverging views in the card industry about the future of the U.S. economy and the wisdom of wagering on risky borrowers.
The credit-card issuer, a unit of British bank Barclays PLC, sold $1.6 billion of credit-card balances owed by mostly near-prime and subprime borrowers to privately held personal-loan firm Credit Shop Inc., according to people familiar with the matter.
The deal marks the first time that Austin, Texas-based Credit Shop, which is mostly focused on extending personal loans to near-prime and subprime borrowers, purchased credit-card accounts and balances. The firm, which launched in 2013 and counts Chinese firm Renren Inc. as an investor, is planning on launching its own credit card later this year, according to people familiar with the matter. Several executives at Credit Shop were previously with Barclaycard.
Subprime card issuance has been on the rise in recent years, partly as some banks have grown more comfortable taking on more risk and some nonbank lenders enter the card market for risky borrowers.
At the same time, there is growing anxiety among investors and some lenders that a turn in the credit cycle could be near and that losses could soon rise. Card defaults, while still near record lows, have been on the rise recently. Several large lenders also recently reported jumps in charge-offs, which are unpaid balances that lenders write off as losses when they don't expect borrowers to pay them.
Missed payments are up at Barclaycard. Thirty-day delinquencies hit 2.6% in the fourth quarter, up from 2.2% a year prior, while 90-day delinquencies reached 1.3%, up from 1.1%, according to Barclays' latest earnings report. Most of the credit-card balances sold in this deal weren't delinquent, said people familiar with the matter.
While they represent more risk, subprime borrowers pay higher interest charges that can result in bigger returns for lenders in a strong economy.
Nonbanks are becoming more active in the subprime card market as many banks remain hesitant to expand in this space. Subprime lender LendUp launched a credit card in 2015 that it has since expanded in availability.
The balances Credit Shop bought from Barclaycard come from a range of Barclaycard cards, but they aren't associated with the issuer's co-branded cards that it has with airlines, hotels and other merchants and that account for the majority of its overall card portfolio.
Overall, the balances sold account for about 6% of Barclaycard's total card balances as of the end of 2016 but comprise nearly 30% of its non-cobranded card balances, said people familiar with Barclaycard.
Once a relatively small player in the U.S. card market, Barclaycard has been acquiring large accounts over the past year as it has focused on expanding its presence in the U.S. credit-card market.
Much of this growth has occurred on the co-branded side, where the issuer lends to consumers who are mostly prime but also include subprime, a lending mix that likely will continue going forward, according to a person familiar with the matter.
It won the JetBlue credit cards last year -- an account that was previously with American Express. Barclaycard also was involved in brokering a rare deal last year when it got the American Airlines co-branded card for in-flight and in-airport sign ups. Citigroup Inc., which previously had the entire portfolio, kept the card for sign-ups elsewhere.
Total U.S. purchase volume on Barclaycard credit cards increased 8% in 2016 to $70.5 billion, according to the Nilson Report, a trade publication. It is the ninth largest U.S. card issuer by both volume and outstanding balances.
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