Private label card programs remain one of the most exciting and least understood opportunities for both retailers and issuers. In spite of bad press during the last few years and data that appears to indicate unacceptable risks, these profitable programs provide unique opportunities for retailers to grow their profitability and loyalty. The key to a successful program is understanding the true risk and reward in the context of each retailer’s unique market.
The most unique attribute of private label card programs is the interrelationship between sales volume and credit risk. While Target was condemned for the credit losses they incurred on their portfolio, in reality the losses were far less than reported. The cost of their loss was limited to cost of goods and some incremental sales expense. While retail took credit for record sales, the credit group took the full blame for the losses. While it is true that lending is not core to a retailer’s business, it can be a powerful tool if used well.
Issuers with open network cards face far greater exposure, since they are underwriting sales at other stores. This is why the interest rates are often higher on these cards. Nonetheless, private label cards are not only the least expensive method of payment to process, but also can be the most profitable in spite of potential credit losses. The loyalty associated with branded cards is significant. This is most evident when looking at card payments of distressed consumers. Retail branded cards are consistently paid earlier than bank issued cards. As a result, credit losses from distressed consumers are significantly lower for retail cards. While Target stores experienced significant losses on their portfolio, they were issuing credit to riskier consumers than most private label programs would have considered. In this light, their losses were likely in line with other lender experiences.
Different payment options, like private label credit card or decoupled debit, can have very different appropriateness for different types of retailers. Retailers focused on major life purchases are likely to benefit from a program that offers credit terms. Tiffany & Company or John Deere need to facilitate purchases outside of a consumer’s monthly budget. By contrast, Whole Foods Market offers products normally funded through weekly or monthly budgets. In this case a decoupled debit card could be a very effective tool that provides the loyalty benefits of a private label card while recognizing the consumer’s aversion to placing weekly purchases on credit.
Most retailers lie between these extremes. Sears Department Stores offer durable goods and smaller consumable items. They must provide varied options to meet their consumers’ varying needs. Target Stores have seen significant success with their REDcard program, which utilizes decoupled debit, with purchases reaching 20% of total store sales in some communities. The REDcard is an elegant branded loyalty program that allows consumers to fund weekly purchases with their cash balance. Their private label card is also fairly successful, with about 7% of store sales, and supports consumers purchasing major items such as electronics.
There is a consumer trend away from using credit, but a significant majority of prior credit card users continue to use their credit cards and maintain credit balances. Certainly, many consumers are shifting to cash or debit cards in order to better manage their spending and a few of them have completely abandoned credit products (although more than a few shifted because of reduced credit lines, limited credit availability, or bankruptcy). We’ve seen these changes in consumer behavior impact both credit issuers and retailers, but the actual changes in consumer preferences are not that significant. Like in the presidential election, where the 6% undecided voters in the middle carried significant sway in national politics, the few consumers in the middle create the impression of dramatic change in the industry.
To be successful retailers need to maintain in the appropriate range of payment options for their customer base and their unique product offerings. For some retailers this means doubling down on private label credit cards as the best option. For others, decoupled debit or integration with PayPal will yield stronger returns. For most retailers, the right solution is to offer a range of payment products that is as broad as the retail products they offer. Only by matching the purchasing strategies of their customers will they be able to ensure that they never turn a customer away at the register.
Eric Lindeen is a champion for improving the lending process and helping financial institutions compete more effectively. During his time at Zoot Enterprises, he has helped lenders develop and deploy complex solutions for credit origination. His 20-plus years of experience in marketing and technology enable him to bridge the gap between business strategy and IT practice. Lindeen is now responsible for Zoot’s marketing efforts and sharing Zoot’s industry expertise.