In a reversal of a deal that was supposed to happen four years ago, CardWorks is now buying Ally Financial’s credit card business.
The news follows reports from last December that Ally was seeking a buyer for the credit card division it had acquired in 2021. Ally, which began as GMAC, the lending arm of General Motors, held $2.3 billion in credit card receivables with 1.3 million active cardholders as the end of 2024. While the sale itself wasn’t unexpected, the identity of the purchaser is somewhat ironic.
That’s because, in 2020, Ally announced a deal to acquire CardWorks, best known as a subprime credit card lender and the parent company of Merrick Bank, for $2.65 billion. However, the agreement was mutually terminated with the onset of the pandemic. The uncertain economic landscape made the business too risky. As Brian Riley, Co-Head of Payments at Javelin Strategy & Research, noted at the time, if the pandemic had caused Ally’s chargeoffs to slip from 4% to 10%, it wouldn’t have had enough savings to cover the risk.
A Home in Subprime
Merrick is the 18th largest credit card issuer in the U.S., with 3.64 million cards in circulation. According to Forbes, the average credit score at Merrick at the time of the first Ally deal was just 630, which is well below the standard definition of subprime. To mitigate the risks associated with these higher-risk cardholders, nearly all of Merrick’s card products require a security deposit.
This aligns with the niche Ally has long targeted. In December 2021, Ally spent $750 million to acquire Fair Square Financial, a digital-first credit card company. Fair Square’s primary offering was the Ollo Card, which catered to borrowers with mid-to-low credit scores.
However, that business began to show signs of strain under Ally’s ownership. During last year’s Dodd-Frank stress tests, Ally projected loss rates exceeding 40% under severely challenging economic conditions, while the industry as a whole saw loss rates between 16% to 20%, according to Riley. During its Q3 2024 conference call, Ally acknowledged that the shifting operating environment had created increased uncertainty in its short-term forecasts, especially regarding credit costs and profit margins.
Meanwhile, CardWorks had been beefing up its back-office operations. In 2023, it acquired Dataline Systems, a provider of business process outsourcing and financial services operations support. Additionally, CardWorks was part of a consortium that purchased GreenSky, the largest lending platform for home improvement loan originations by U.S. banks, in 2024.
At the same time, Ally was searching for a solution to its longtime credit card woes. “We’ve been trying to figure this out for years and years,” Ally’s then-CFO, Jennifer LeClair, said in 2021. The hunted had become the hunter.
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