Ally Financial, one of the top players in the automotive finance business, said it will buy credit card company Fair Square Financial for $750 million.
The all-cash deal is expected to close at the end of the first quarter of 2022, Ally said Thursday in a statement.
"Our announcement to acquire Fair Square Financial — a digital-first credit card company — aligns with our long-term strategy to be the leading full-service digital-bank," Ally CEO Jeffrey Brown said in the statement. "The addition of credit card complements our existing offerings, adding a growing, customer-focused product with attractive risk-adjusted returns."
Ally said the purchase gives it a "scalable, digital-first credit card platform."
"This transaction enhances our runway for ongoing momentum as the leading and largest digital bank in the U.S.,” Chief Financial Officer Jenn LaClair told analysts Thursday. All of Fair Square’s customers apply digitally for credit cards, and 90 percent of them interact with the company online, she said.
Brown told analysts Thursday that adding a credit card offering been an important objective for Ally. He said it represented another opportunity to get before consumers, likening it to other business lines like mortgages Ally had added since 2016.
Ally said the acquisition delivers 658,000 cardholders and $763 million in loan balances. The average customer has a 657 FICO score and a $2,300 line of credit. LaClair said Fair Square had largely focused on middle-class consumers of around the $70,000 income and mid-600s credit, a “largely underserved market.” It did have the capability to cover the full range of borrowers, though, she said.
Ally expects the deal to begin building profits in late 2022 and be profitable on a full-year basis in 2023.
LaClair said bringing Fair Square under Ally gave the company “more fuel to scale.” She said the credit card provider had demonstrated more than 60 percent growth in active accounts and more than 70 percent growth in loans, and Ally expected them to continue expanding at those paces.
"The platform is absolutely poised for growth,” she said. "… We want to give them access to liquidity and capital to grow as quickly as they can."
LaClair said Fair Square created a chance for cross-selling credit cards to Ally’s bank customers – but also "opportunities within the auto segment as well." But she said Ally could also seek to sell its other products to a growing Fair Square credit card customer base.
“Lot of opportunities here,” she said.
As for Ally’s auto business, the company reported making decisions on 3.3 million applications during the third quarter, up 0.6 percent from the third quarter of 2020, and originating $12.3 billion in auto loans during the third quarter, up 26 percent from the prior year.
Brown said the auto business delivered "our highest third-quarter in 15 years, at a really impressive 7.1 percent yield.” LaClair said Ally was on track for 2021 to end as the company’s fourth straight year of auto yields above 7 percent.
Ally reported $825 million in pretax income from automotive finance during the quarter, up 45.6 percent.
Brown said Ally also continued a 12-year streak of expanding the number of dealers working with the company.
LaClair said the company broke the 20,000 mark in dealers who engaged with Ally across consumer, commercial, SmartAuction or commercial services lending. The 20,353 dealers represented a 7.3 percent increase over the nearly 19,000 working with Ally during the third quarter of 2020.
"Auto continues to perform exceptionally well. ... We don't see any sign of that stopping,” she said, citing market trends and Ally’s strengthening position in the market.
But LaClair said the Fair Square acquisition would help Ally when auto trends return to more normal levels. Auto loans and dealer financial services represent the bulk of Ally’s income.
"This whole notion of diversification is what we've been focused on,” LaClair said.
Ally shares fell 5 percent to close Thursday at $52.97.