P.O. Box 911
Wilmington, Delaware 19899
Fax: (302) 781-3044
Incorporated: 1929 as Beneficial Finance Corporation
Sales: $1.81 billion
Stock Exchanges: Boston Midwest New York Philadelphia Pacific
SICs: 6141 Personal Credit Institutions; 6162 Mortgage Bankers & Correspondents; 6021 National Commercial Banks; 6719 Holding Companies Nec
Beneficial Corporation is one of the oldest and largest consumer finance companies in the United States. Involved in sales finance, mortgages, banking, and insurance, Beneficial opened its first office, the Beneficial Loan Society, in 1914 in Elizabeth, New Jersey. In its early years, the company loaned money to consumers who could not get loans from banks. The loans, which were often used to buy such durable goods as appliances and furniture, were then paid back in installments. The first office allowed consumers to borrow up to $300. By 1924 Beneficial had 80 offices, making $13 million a year in loans, each averaging less than $100. In 1929 the firm was reorganized as Beneficial Finance Corporation.
Consumer finance was a risky field, dependent on market conditions and the vagaries of state law. Nonetheless, Beneficial managed to slowly expand during the difficult years of the Great Depression and World War II through careful attention to its customer base of middle-class borrowers. Beneficial salespeople offered customers personalized service, getting to know the names and ages of customers’ children and taking other steps that made customers feel more comfortable than if they were applying for a loan at a bank.
The U.S. economy boomed after the war, as did Beneficial, fueled by pent-up consumer demand. In the mid-1950s the firm began diversifying. In 1954 it began a “fly now—pay later” plan with Pan American World Airways. Soon after, it formed a subsidiary that financed leased computers and other office equipment. Consumer finance remained a fickle field, and when Canada reduced the allowable rate on small loans, Beneficial closed 22 offices there and stopped making certain kinds of loans. By the late 1950s Beneficial was expanding rapidly. It moved quickly into Alaska and Hawaii when they became states and opened more than 60 offices in 1959. Beneficial eventually had 1,200 offices in the United States and Canada, making loans averaging $370.
In 1960 Beneficial became the first U.S. consumer finance company to enter the British market. The British government had just relaxed its formerly tight controls over consumer credit, the economy was in a period of growth, and consumer durables were widely available for the first time since World War II. The British market was intensely competitive, however. It already had about 1,250 finance companies, with 12 of them controlling nearly 70 percent of the market. British consumers were also less enamored of installment buying; 25 percent of cars were bought on installment, for example, versus 64 percent in the United States.
In 1961 Beneficial bought Western Auto Supply Co., a 4,500-store retail chain. The customers who bought Western’s hardware were largely the same industrial and clerical workers that took out loans with Beneficial.
By 1964 Beneficial had 1,600 loan offices and made 1.7 million loans worth about $950 million. Interest rates were rising, reaching an effective rate of 18 percent by late 1965, and Beneficial’s profits rose with them. Beneficial decided to expand by buying Spiegel Inc., a Chicago-based mail-order merchandiser. Spiegel, with $300 million in annual sales, sold 90 percent of its goods on credit and made most of its profits from the interest. Beneficial thus viewed Spiegel as a source of new customers for its lending business; Spiegel’s customers were mostly the same people who used Beneficial and Western Auto.
Beneficial viewed its acquisitions as a way to compensate for the increasing competition in the lending business. But by 1966 this diversification strategy began going awry. Interest rates had risen so high that consumers stopped taking on debt, and sales at Spiegel and Western Auto plummeted, multiplying Beneficial’s problems. Western Auto was largely a franchise operation; when its sales slumped, other retailers began offering attractive franchise pacts, and Western lost many dealers. Meanwhile, giant J.C. Penney entered the mail-order market in 1966, further hurting Spiegel. Beneficial itself did better than its two subsidiaries. Its capital came from long-term debt acquired during lower interest rates, and its loans were already at close to the legal maximum rate, so its customers were not scared off by a rise in rates.
The situation began improving by the end of 1967 as consumers began returning to the credit market. To boost Spiegel’s profits, management tightened credit, brought out special interest catalogues, removed certain items from its catalogue, and started a shopping club. To strengthen Western Auto, Beneficial bought Midland International, an electronic equipment supplier, for 55,000 shares of stock.
Beneficial itself continued to grow; by 1968 the firm had 1,770 offices in every state but Delaware. Revenue for 1968 was $238.6 million. It had 262 offices in California alone and 141 in New York. The firm also had 234 offices in Canada, 24 in Australia, and eight in England. Beneficial was the number two firm in the consumer loan industry. It had more offices than Household Finance, the leader, but Household had an average $950,000 in receivables per office, while Beneficial had only $550,000. To catch up, Beneficial began pushing bigger loans. The maximum size of loans was regulated by law in most states, however. Most of Beneficial’s loans were to families making around $7,500 a year, taking out an average loan of around $690 for a period of 36 months. Approximately 75 percent of loans were secured by liens on autos or chattel mortgages on household goods.
To bring more customers into its offices, the firm began offering on-the-spot tax refunds in 1970 through its Benevest Inc. subsidiary. Customers whose taxes were prepared by Benevest were given their refunds in cash by the company, which was reimbursed when the customer’s state or federal tax refund arrived. The refunds increased Benevest’s tax preparation business but also provided an opening to sell customers other financial services.
In 1970 the firm changed its name to Beneficial Corporation. Interest rates were again rising, meaning that it cost Beneficial more to get the money it loaned. Since the maximum interest Beneficial could charge was often set by law, higher interest rates meant lower earnings as well as less borrowing, as consumers again became wary. By 1973 the short-term interest rate situation had worsened, and large banks like Chase Manhattan Corporation were buying personal loan companies in an attempt to diversify. The economy was in recession, and loan defaults increased. On the positive side, Beneficial was cutting its operating expenses by switching to on-line computer systems, while the size of the average loan was growing.
As interest rates fell in the following years, Beneficial recovered. It had record profits of $100.4 million in 1976 on revenue of $1.743 billion. The volume of consumer loans was increasing, and Beneficial’s insurance operations were growing. Banks were still entering Beneficial’s niche, however, and to counterattack the firm began offering Visa and Master Charge credit cards through its wholly owned People’s Bank & Trust Co. of Wilmington, Delaware. M. W. Caspersen became chairman and chief executive in 1976, at the age of 35.
Profits took a hit in 1977, however, due to losses at Midland International. Consumer loans accounted for less of its profits—56 percent in 1977—while insurance grew to 35 percent. The average size of Beneficial loans continued to grow, reaching $1,348 in 1977, up from $962 in 1973. The average payback period extended to 45 months. Beneficial’s two primary insurers, the Central National Life Insurance Company of Omaha and American Centennial Insurance Co., offered a wide range of coverage from life to property. Beneficial entered reinsurance in 1977, lured by potentially quick profits from high interest rates. The firm also liked reinsurance because risk is divided among many insurers. Further, because reinsurance claims are often delayed by litigation, premiums can be collected and invested without having to pay claims for years.
Beneficial entered the leasing field in 1977, when it bought Parliament Leasing, which leased hospital and medical equipment. Beneficial also bought a small consumer finance firm in West Germany for $40 million in receivables. The firm bought First Texas Financial Corp., a savings and loan, in 1978. The following year, Beneficial purchased Capital Financial Services Ltd. in Columbus, Ohio, and Southwestern Investment Co. in Amarillo, Texas, for a combined total of $184.3 million. To avoid anti-trust laws, Beneficial made an agreement with the U.S. Department of Justice to sell some of its offices. In 1980 Beneficial sold 138 offices in 12 states to a subsidiary of Barclays Bank International Ltd.
The consumer loan industry again fell on hard times in 1979 as a recession caused personal bankruptcies to increase 60 percent, while interest rates soared. Beneficial’s recently purchased savings and loans were also hurting, losing $800,000 in 1980. Beneficial’s purchases had cost more than $300 million. To raise cash it sold Spiegel to a German company for $52 million, a sale that freed Beneficial from most of Spiegel’s formidable $441 million debt. Spiegel’s retailing division had not been doing well, posting profits of only $10.8 million in 1980. Beneficial also moved into the profitable second-mortgage loan business, along with many other finance companies.
By its own admission, Beneficial had known very little about reinsurance when it entered the field in 1977, so it hired ten managing general agents to handle it through American Centennial Insurance. But one of the agents defrauded the company, diverting millions of dollars in premiums while distributing the risk to fraudulent or insolvent reinsurers. Two other agents, Beneficial later claimed, grossly under-reported losses likely to be claimed from programs they wrote. As a result, Beneficial was forced to put $200 million into the reinsurance operation in the early 1980s. Even so, the firm made $101.2 million in 1985 on revenues of $2.1 billion. But in 1986 its reinsurance losses forced the writeoff of another $260 million, creating a loss of nearly $50 million for the year.
The reinsurance debacle damaged Beneficial’s credit rating and forced down the price of its stock. Alleghany Corporation, a New York-based financial services and industrial company, bought three percent of Beneficial and announced plans to buy more. The firm’s management responded by announcing that Beneficial was looking for a buyer. Beneficial stock rose 50 percent amid various takeover rumors.
Its reinsurance woes obscured Beneficial’s underlying strengths. It had $7 billion in receivables and an 11 percent spread between the cost of its money and the rate it could charge consumers. In addition, its second mortgage and credit card loan programs were also doing well. Given these strengths, management soon decided to sell off Beneficial’s troubled operations rather than the entire corporation.
The sale of American Centennial Insurance was complicated by regulatory hurdles stemming from the insurer’s poor financial condition. The deal nevertheless went through, leaving Beneficial free to pursue its core businesses. By 1990 the firm was the third-largest issuer of second mortgages in the United States and had $8.4 billion in assets. It charged 14 percent interest for second mortgages and 23 percent for unsecured personal loans. Beneficial also was expanding into Europe, opening offices in Dresden and Leipzig, both in the former East Germany.
To find potential clients, Beneficial bought customer bills from retailers and used automated telemarketing. With many banks and thrifts weakened by bad loans, Beneficial was able to buy consumer loans worth $863 million in 1991, adding to its rapidly growing receivables portfolio. Income for 1992 would have been $148.4 million but was lowered by a charge of $98.6 million, much of it for foreclosed real estate, particularly in southern California. But due to its return to conservative lending practices in the mid-1980s, Beneficial largely avoided the huge real estate losses that hurt many lenders, including rival Household Finance.
With the approach of the mid-1990s, Beneficial was in a more solid position than it had been in many years. It continued its focus on middle-income consumers, starting new ventures aimed at them, including the Personal Mortgage Corporation and FlashTax, Inc.
“Benefits for Beneficial,” Forbes, October 15, 1965.
Gordon, Mitchell, “Beneficial Corp. to Ring up Record High Net This Year,” Barren’s, October 30, 1978.
“Harder Than It Looks,” Forbes, January 15, 1967.
Kantrow, Yvette D., “Beneficial Gains by Lending to the People Banks Shun,” American Banker, February 19, 1992.
“Luring Clients With On-the-Spot Tax Refunds,” Business Week, December 20, 1969.
Nathan, Leah J., “Beneficial Could Give Lending a Good Name Again,” Business Week, October 22, 1990.
Pacey, Margaret D., “Beneficial Finance: Number Two in the Personal Loan Field Is Also Trying Harder,” Barron’s, April 8, 1968.
“Personal Loan Companies Could Use Some Help,” Financial World, November 28, 1973.
“Selling Spiegel to Prepare for a Future in Banking,” Business Week, July 6, 1981.
Spragins, Ellyn E., “Beneficial: On the Block and Loving It,” Business Week, September 8, 1986.
“U.S. Lender Seeks to Cash In,” Business Week, October 31, 1959.
—Scott M. Lewis