Private Label Credit Cards—The Segment Many Hate To Love

by Ken Paterson 0

It continues to amaze me how much interest the private labelcard business generates in the industry and the media, consideringthe lack of love these programs seem to enjoy among issuers.Tostart, there are just a handful of major issuers who hold themajority of these assets.And even among these, there is sometimesambivalence about staying in the business, especially in a creditenvironment like the one we have experienced over the last twoyears.

Part of the intrigue must originate from the periodic portfoliosales and portfolio flips that occur as issuers adjust theirholdings and as retailers re-bid expiring contracts.In just thelast six months, there has been a spate of portfolio changes amongthe leading issuers, including GE, Citi, Chase, and now CapitalOne.The press is now propagating rumors about potential interest inthe strong Alliance Data portfolio of private label programs.Theseevents make for exciting press.

The flip side is that even before the Great Recession, privatelabel program growth was undramatic, remaining at about 10-12% thesize of network branded cards in terms of outstandings, and downdramatically from around 25% in the 1990s.During and after theRecession, the segment has lost ground along with it networkbranded cousins.This situation fosters an element of a zero-sumgame, where the quickest path to growth is through portfolioacquisition rather than rolling out new programs and signing newcardholders.Again, that makes for good headlines.

There are some interesting changes in the wind, as Home Depotand now Target have turned away from network branded card issuingto focus on private label.For mega retailers and their issuingpartners, the added control, lower transaction costs, and rewardprogram integration can make a more attractive financial case forprivate label.And with growing merchant power to steer toward lesscostly payment types, we are potentially on the verge of a new erain private label cards.

As we have discussed in recent reports (Retailer Credit: NewVisions For A Trouble Segment, and Co-Branded Consumer Cards 2010:Mature Products Ripe For Change), one of the biggest challenges torenewed private label growth is issuers’ lack of appetite for thehigher risk typically found with these programs, and the attendantchallenge of program funding.Mid-sized retailers continue to havetrouble finding issuing partners.Retailers need to provide creditto the broadest reasonable consumer footprint in order to drivesales, and issuers understandably have an abundance of cautiontoday.There is certainly opportunity for brave issuers to growthese programs (if they have good risk models).

We will know we are in better economic times when headlinesfocus less on the seeming zero-sum mathematics of portfolio shifts,and more on the real growth at leading private label issuers.Untilthen, we can watch the headlines-and watch for new private labelprogram strategies among the leaders.

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