Private-Label Cards Giving Retailers A Boost

Several recent reports on private-label credit cards show a market that, like most loan-based products, fell considerably during the recent recession. But signs are pointing up these days, as merchants and the owners of their card portfolios are back to positive growth.

Private-label credit cards, the oldest of all loan-based card products, continue to serve as valuable resources for both the merchants branding them and the companies owning their portfolios. In 2012, they accounted for 28 percent of total private-label card payments and 69 percent of total private-label card spend, according to the Federal Reserve.

Other private-label cards include store prepaid and government electronic funds transfer products. In terms of retail comparison, store private-label prepaid cards had a 42 percent share of the overall private-label card market, but just 12 percent of spend, the Fed noted in its “2013 Federal Reserve Payments Study.”

The success of Starbuck’s mobile-payment app, which is used to facilitate transactions from the coffee retailer’s prepaid card accounts, may help drive more stores to promote private-label prepaid programs. But private-label credit card programs tend to generate significantly higher revenue.

Market ups and downs

The private-label credit card market, however, has had its share of ups and downs over the past few years, with the down periods fueled by the Great Recession. After plummeting in 2008, 2009 and 2010, accounts began growing again. In July 2012, the number of retail credit card accounts exceeded the 175 million mark for the first time since December 2009, according to the Packaged Facts report “Private Label Credit Cards in the U.S.”

Today, the retail credit card market is on an upswing, as improved payment rates have chargeoffs on store cards have hit at all-time lows, according to Fitch Ratings.

Packaged Facts estimated total private-label credit card loans at $108.6 billion for 2013. Among the major issuers of the cards are Citi Retail Services, GE Capital Retail Bank, Capital One Financial Corp., Alliance Data Systems, TD Bank, Wells Fargo & Co. and JPMorgan Chase.

Heavy competition

The competition among such companies can be fierce. Dillards, for example, earlier this year switched its private-label credit card servicing to Wells from GE Capital. But the companies also tend to rely on one another to take unwanted capital. Cap One, for example, sold its Best Buy portfolio to Citi last year, but it also acquired the HSBC portfolio. Capital One entered the store-branded credit card market in January 2011 by acquiring the Hudson’s Bay Co. credit card portfolio from GE Capital. On May 15, Cap One extended its multiyear Kohl’s private-label credit card contract.

The Best Buy deal helped Citi boost its Retail Services revenue by 8 percent during this year’s first quarter, John Gerspach, Citi chief financial officer, commented during the quarter’s earnings call with analysts.

Some 200 retailers in all support private-label card loans, according to Packaged Facts. Click here for a complete list of stores offering credit cards to customers.

In-house processing making a comeback?

Some companies continue to process and manage their own card portfolios, including Nordstrom and Signet Jewelers. Whether they continue to do so for much longer is a matter of debate, given that recent legislation in California could jeopardize the market by making retailers personally responsible for any card-security breaches they experience and limiting how much personal data they can collect and store. Banks, however, would be exempt.

Indeed, many retailers sold their credit card portfolios after the 2008 market crash to raise cash. Now that they have returned to profitability, the same retailers are looking to restart their in-house card programs to offer customers more attractive financing options to boost sales, according to Dan Stavros, executive vice president at CoreCard, a private-label credit card solutions provider.

“However, regulatory changes since 2008 have made it more difficult for smaller businesses to offer private-label card programs,” he tells “Large processors continue to shy away from smaller portfolios, and only a few smaller processors and software vendors provide products that can meet the new regulatory requirements and be cost effective for the smaller businesses.”

Growth projections

Packaged Facts predicts private-label card purchase volume to grow at a compound annual rate (CAGR) of 4% through 2015. Continued loosening of credit standards, modest increases in new-account and new-program development, and overall increases in total retail sales will help drive that growth.

In terms of receivables, the report predicts private-label card programs will grow at a CAGR of 6 percent through 2015 to top the $129 billion level, as consumers gain the confidence to carry moderately higher balances. “However, we expect that portfolios will continue to have a higher percentage of accountholders that pay off the balances each month rather than revolve balances,” Packaged Facts said.

Stores tend to offer private label cards to boost customer loyalty, often offering buyers discounts when using their store cards to initiate the purchase. Target’s REDcard, for examples, offers automatic 5 percent discounts. Moreover, customers using store cards might otherwise have used a network-branded payment card, which would have resulted in the merchant having to incur card-acceptance expenses via the discount fees they pay their merchant bank, which can range from 2 percent to 4 percent of the sale.

Revenue potential

Some retailers also earn significant revenue from their card programs.According to Packaged Facts,Macy’s has made “a small fortune” on its card program, receiving $865 million from partner Citi Retail Services in 2012, $772 million for 2011 and $528 million for 2010. “Its credit operations generated net income of $663 million for 2012, $582 million for 2011, and $332 million for 2010,” according to the research company’s report.

For the fiscal year end ended Feb. 1, 2014, Nordstrom says it earned $374 million in credit card revenue, up slightly from the previous year.

Third-party issuers also are benefiting. Alliance Data, for example, during the first quarter this year had its ninth consecutive quarter of double-digit growth in private-label revenue, increasing 13 percent to $562 million, driven by 15 percent growth in average card receivables.

“Importantly, we continued to pick up share during the quarter, as our credit sales of core clients – meaning pre-2012 (vintages) – increased 7%, while overall client sales were about flat compared to the first quarter of 2013,” Chris Horn, Alliance Data chief financial officer, said during a call with analysts to discuss first-quarter earnings.

Loyalty benefits

According to GE Capital Retail Finance’s Retailer-branded Credit Program Study, released in February 2013, retailer-branded credit programs create more frequent store visits, increasing from 1.4 per month to 1.7 per month for nearly four extra trips per year. “The higher traffic continues through normal retail and seasonal cycles, and translates into a 29% overall boost in store visits,” the issuer said.

Moreover, retail credit customers increase incremental retail sales between 39 percent and 86 percent than customers who pay with other methods, GE Capital said.

GE Capital did not respond to’s request for an interview. Other key players, including Alliance Data, BluePay, Global Payments and Chase, also were unable to provide an interview for this story.