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[corp-ethics] FWD: Case Study - Is Legality Enough?

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    Credit Giant Accused of Piling On Charges Employees say Providian urged them to mislead Sam Zuckerman, Chronicle Staff Writer Tuesday, June 1, 1999 ©1999 San
    Message 1 of 1 , Jun 1, 1999
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      Credit Giant Accused of Piling On Charges
      Employees say Providian urged them to mislead
      Sam Zuckerman, Chronicle Staff Writer
      Tuesday, June 1, 1999
      ©1999 San Francisco Chronicle


      Providian Financial Corp., the San Francisco credit card giant that is
      under investigation for possible unfair business practices, instructed its
      telemarketers to engage in high-pressure, misleading sales tactics,
      according to more than a dozen current and former employees who spoke to The

      Many complaints that have been lodged against the company involve the
      sale of add-on products -- such as credit insurance and memberships in auto
      clubs, buying clubs and discount drug plans -- to people who said they did
      not want them. ``When I first started working there, I thought the company
      was doing good things for customers by helping them rebuild their credit,''
      said Kim Williams, who worked for 1 1/2 years as a customer service
      representative in Providian's San Francisco headquarters.

      But Williams quit last year, in part because she felt bad about pushing
      products that she considered useless. ``I never thought they were worth
      anything,'' she said. ``I thought we were just bilking customers out of
      their money.''

      Providian specializes in issuing credit cards to people other lenders
      had dismissed as deadbeats. Its cardholders include people who previously
      had trouble paying their bills, older people who never had credit cards
      before and widowed or divorced people without credit histories in their own

      The San Francisco district attorney's office is investigating
      Providian's sales and collection practices. A series of civil lawsuits
      charge the company with unfair and deceptive business practices.

      The Better Business Bureau has received 850 complaints from Providian
      customers nationwide. Among the gripes is that the company is slow to post
      customer payments, which generates late fees.

      From 1996 to 1998, Providian's revenues from late and over-limit
      charges, add-on products, and other customer fees grew 470 percent to $703.5
      million, while total revenues grew only 120 percent, to $2.4 billion.

      In response to the criticism, Providian stresses that it obeys all
      consumer laws and regulations, and guarantees its customers ``100 percent

      ``We help people to build, protect and responsibly use credit,'' said
      company spokesman Marc Loewenthal. Providian wants ``an active and lasting
      customer relationship,'' he said.


      Last week, after Providian's stock had fallen by one-third on news of
      the district attorney's investigation, Providian announced an ``enhanced
      customer satisfaction program.''

      Among other steps, Providian said, it will reverse late fees and cancel
      sales of add-on products if consumers had not intended to buy them. It also
      hired Ernst & Young to review its payment processing procedures.

      The company said its actions were not an admission that it had deceived
      customers. Its stock rose 15 percent after the announcement.


      The question now is whether Providian can maintain its break- neck
      growth if it reins in its marketing.

      ``Their whole way of selling was to mislead the customers,'' said Linda
      Sherry of the San Francisco advocacy group Consumer Action. ``If they were
      to clean up the act, they might not sell as much.''

      Jack Weiss, a 72-year-old San Francisco printing salesman, said he got
      a credit card from Providian in 1996, although he never bought anything with

      In 1997, Providian sent him an unsolicited membership in its DrivePro
      auto club. ``They sent me this DrivePro card that I didn't ask for and
      charged me $99 for it,'' said Weiss, who was already a member of another
      auto club.

      Weiss said he called and wrote Providian, but was unable to get the
      charge reversed. Meanwhile, he was racking up late fees on the money
      Providian said he owed for DrivePro.

      Weiss tried to cancel his credit card account, he said, but the company
      continued to bill him for his outstanding balance. Finally, it hired a
      collection agency.

      ``My experience with them was dreadful,'' he said.

      Providian said it could not discuss Weiss' case because of privacy rules.


      Current and former Providian employees who spoke with The Chronicle
      said they were under fierce pressure to sell add-on products, especially
      ``credit protection.''

      ``That was our big moneymaker,'' said one former customer service
      specialist who asked not to be identified. ``The amount sold was tremendous,
      and the claims on it were so few.''

      Many credit card companies sell credit insurance, which provides
      benefits to cardholders who become disabled or unemployed.

      Most programs pay the customer's minimum payment and let them continue
      to use the card. But Providian's program merely freezes the balance --
      making no payments -- and disallows further use of the card.

      Meanwhile, Providian's monthly charge for the product, commonly 79
      cents for every $100 of balance, is among the highest on the market,
      according to Consumer Action.

      ``Credit insurance is one of the most overpriced rip-off products in
      the marketplace,'' said Ed Mierzwinski of U.S. Public Interest Research
      Group in Washington, D.C. '`Providian has invented a product that's even

      Providian's Loewenthal said that the company's credit protection
      ensures that customers do not get a negative report on their credit record
      and that some
      customers would not be eligible for credit at all if they did not buy

      The company's telemarketers sold the product by reading from a script,
      which was worded in a way that made many customers think that they were
      merely requesting information when actually they were signing up for the

      ``If they say, `Yes, send me the information,' you hit `Yes' and it's
      automatically (charged to) the account,'' said Samara Alharby, 21, who
      recently lost her job working on overdue accounts at Providian's Sacramento

      ``I was required to sell credit protection even to people who were over
      their credit limit,'' Alharby said. Although telemarketers earned wages, not
      commissions, they received bonuses for meeting quotas and could be
      disciplined or fired if they fell short. To make quotas, some salespeople
      gave short shrift to disclosure, Providian employees said.

      ``The telemarketers were reading through the scripts really fast,''
      said one former employee who monitored marketing calls. ``The customers
      didn't know what they were talking about.''


      Five current or former customer service representatives said they were
      inundated with complaints from cardholders who ended up with credit
      protection that they never wanted.

      A collection specialist in the company's Fairfield offices estimated
      that 25 percent of the calls she handled involved complaints that credit
      protection was sold deceptively.

      ``I'd ask, `Did you approve the addition of credit protection?' and
      they would say, `No, I just asked for information.' ''

      Loewenthal said the company makes sure all telemarketing scripts obey
      the law. Salespeople are regularly monitored to make sure they stick to
      scripts, he said.

      Current and former Providian employees said they were not directly aware of
      telemarketers who did not read disclosures or sold products to people who
      specifically had declined them, which would violate the law. But several
      said they suspected such activities did take place because of the large
      number of customers who insisted that they had never agreed to buy products.

      Several former employees said they suspected certain telemarketers in
      Providian's Kentucky call center made such improper sales because of a high
      volume of customer complaints. ``We would tell (managers), `This is what's
      going on in Kentucky,' '' said Williams.

      Providian spokeswoman Laurie Cole said any telemarketer who was found
      not to have read disclosures would be disciplined and retrained, and fired
      if they repeated the offense. Any employee who sold products without
      customer authorization would be fired immediately, Cole said, although she
      declined to say how often such sanctions were imposed.


      Providian's Wall Street fans describe the company as a hard-charging but
      sophisticated organization that is scrupulous about not crossing the line
      into illegal activity.

      They say the company is bound to generate a larger-than-average number of
      complaints because it is dealing with many customers who have had credit

      ``The company has always been aggressive in the marketplace. But have
      they done anything illegal? I doubt it,'' said Merrill Lynch analyst Michael

      Providian, of course, is far from the only credit card company
      criticized for unfair business practices.

      Many card issuers have recently raised fees for late payments and
      exceeding credit limits, generating howls of protest.


      Congress is considering legislation that would toughen credit card
      disclosure requirements, a measure the industry bitterly opposes.

      Still, Providian is ``on the cutting edge of the industry's bad
      habits,'' said PIRG's Mierzwinski.

      The company changed its name from First Deposit in 1994. Three years
      later, it was spun off its parent, a Kentucky insurance company, and became
      an independent, publicly traded company.

      Providian's most aggressive growth, and most of the consumer
      complaints, have come since the spin-off.

      Although some of its customers have good credit records, much of the
      company's success came from its proprietary formula for pinpointing
      customers who had past credit problems but were still likely to pay back debts.

      Today, Providian is the nation's ninth-largest credit card company with
      a stock market value of $13.7 billion.

      ©1999 San Francisco Chronicle Page A1


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