For a while, private label cards seemed to be the punch line for many jokes; Target wouldn’t be down 41% if they weren’t trying to be a bank. And yet, as seasons change so do the jokes. Today, they report higher-than-expected profitability in the credit card unit. Retailers who never left the private label card business are improving their processes and many new entrants are exploring their options. It is a renaissance for retailers seeking new options.
Merchants are recognizing that waiting for an economic turnaround could leave them with a lost decade of diminished revenues. Instead, they are looking for new opportunities to increase revenues. In a surprising turnaround, private label cards are offering that opportunity. It is clear that private label cards can provide an increase in customer loyalty and same store purchases. Managed carefully, they can also provide a boost to profits.
Many private label card providers have seen an uptick in interest in their products. After several years in the “bad bank” unit, Citi’s private label portfolio has moved back into the main business unit. Discover Financial Services has not only expressed interest in this market, it has the potential to bring some innovative approaches to the space. Their technology would allow a private label card to be shared between multiple retailers. As an example, this would allow an Exxon gas station to accept payments from co-located Subway Restaurant. The best part of this limited shared network is that it’s unlikely to see an increase in risk compared to a true open network card.
There are risks associated with private label cards. The cards often charge a higher interest rate than standard open network cards. More importantly, they often lend to a broader spectrum of consumers, meaning that their portfolio will include consumers that represent a higher credit risk. Finally, private label cards are required to strike a delicate balance between improving sales for lenders and managing their credit risk exposure. The end result is that most private label portfolios have not performed as well as general-purpose cards. That said, for every rule there are exceptions. A number of private label portfolios have proven to be very successful and profitable for both the retailer and the lender, even during the downturn.
On top of all the economic challenges, improved regulations have made it more difficult to maintain a profitable program. The credit card act limited the types of promotions that could be offered by requiring minimum payments each month. This effectively eliminates the “no payments for 12 months” offer. Another challenge is the requirement to verify income before issuing credit, difficult to do at a retail checkout stand. Fortunately, the latter requirement was modified to allow automated income verification or self-reported income to be utilized.
On the up side, improvements in alternative data sources now allow much more accurate credit decisions to be made, improving the ability of lenders to approve the most consumers possible without exposing themselves to undue credit risk. Enhanced point-of-sale systems and software flexibility allow consumers to complete applications privately and quickly at the point-of-sale rather than having to visit the credit department or speak with a call center to open their account. The result is that retailers today can offer a much more pleasant and efficient account opening process than ever before.
It is hard to say how long this trend will continue and there are certainly retailers for whom a private label card is not a great fit, but the improving profitability and growing portfolios of private label credit cards are a clear indication that this industry is not yet dead.