Ally bullish on cross-sell opportunities with Fair Square acquisition

Ally Financial Inc. is filling a "key product gap" with its announced acquisition of digital credit card platform Fair Square Financial Holdings LLC, CEO Jeffrey Brown said on the company's third-quarter earnings call.

In conjunction with its third-quarter earnings release, Ally also announced its purchase of Fair Square for $750 million in cash. On the company's Oct. 21 earnings conference call with investors and equity analysts, management discussed the growth opportunities to come from adding a credit card product, which has long been "an important objective" for the company as it expands its banking relationships with consumers, Brown said.

Fair Square has grown from about 99,000 customers and $95 million in loan balances in 2017 to 658,000 customers and $763 million in loan balances as of Sept. 30, according to Ally's investor presentation. Ally is bullish on the future growth trajectory of the card business given Ally's scale and liquidity, CFO Jennifer LaClair said on the call.

"Bringing them into the Ally ecosystem really just gives them more fuel to scale what they've already built. And we have very high confidence that they continue to grow at these levels," she said. "We want to give them access to liquidity and capital to grow as quickly as they can."

Ally expects the transaction be accretive to earnings by late 2022 and into full year 2023 and add 100 to 125 basis points to core ROTCE. Ally intends to continue to focus on Fair Square's target customer base of a "largely underserved" market of consumers with about $70,000 in yearly income with an average FICO credit score of 660, LaClair said.

Ally sees "broad opportunities to scale the business up" by cross-selling the credit card offering to Ally's base of over 9 million customers and also cross-selling Ally's current suite of products to Fair Square's customer base, the executives said.

"Not only do we think that there's cross-sell of card, but as we generate more card growth, there's opportunity to cross-sell some of our other products into the card business," LaClair said. She added that the company was "pretty modest in the projections" they provided.

The $750 million all-cash deal uses about one-fourth of Ally's excess liquidity, LaClair said. Given the impact of the Current Expected Credit Losses, or CECL, model, Ally projects about a five-year earnback period.

"That's simply because we upfront a lot of CECL costs as we're growing the card portfolio," LaClair said.