Where There’s Smoke, There’s Fire?

There’s a lot of speculation about the recent move by Target to abandon its Visa co-branded card in favor of its own private label store version. Some say that it is ‘back to the future’ and the start of a trend that will end up bifurcating the card market: general purpose payment and store-branded cards with little in between. Others say that this is a “one-off” by a big player known for making bold moves in the space (e.g. remember the Target Visa smart Card, which Money magazine cited “about as useful as a Ferrari in a traffic jam?”). Here are a few observations on the topic.

Once upon a time, co-branded cards were the cat’s meow. They were highly attractive to issuers because they accrued higher interchange fees and gave issuers and retailers a way to capture affinity (and monetize it). You could find a card for just about any affinity…from your favorite store to your favorite school to your favorite charity. The theory of the case was that affinity = top of wallet.

As these programs proliferated, it suddenly became harder and harder for retailers to associate increased traffic (code for sales) to the use of these (more expensive) cards. And, now in the age of more stringent card regulations and tightening credit, it has also become more difficult for issuers to justify the economics that come with some of these programs, which sometimes includes revenue guarantees back to the co-branded partner.

So, it’s probably not that surprising that we’re seeing some flux in this whole space at both ends: retailers with the scale of a Target exploring their options, in spite of the receiveables’/risk management issues that plague this category of credit card, and issuers reducing the number of affinity cards that they support (e.g. Chase/Starbucks, Citi/Home Depot).

Target says that it’s done a bunch of research and suggests that it gets more incremental sales from customers who use its own store card, and will now have better economics to create additional incentives (coupons, for example) that will drive more sales, even after accounting for the risk (and also probably after discerning that it does not have to comply with some of the same “income verification” issues at POS that they once feared the CARD act would require.)

But, as they say, for every action, there is an equal and opposite reaction. Target’s announcement comes about two weeks after one made by American Express and Macy’s to issue a co-branded card, and a month or so after Chase and Hyatt announced a co-branded card program. So, it seems hard to make the case that store card programs are going the way of the hula hoop any time soon.

I don’t have any inside baseball information on this, but wonder if Target’s decision wasn’t based on an insight as simple as their consumers used their co-branded cards like a store card. By that I mean, that customers with a Target card, were, by and large, using the card at Target exclusively and not as their “top of wallet” outside of that store. If that is the case, then the economics for them could be far better if they managed their own program. And, if that’s the case, it might also imply that there might be more value created by the more “general” affinity card programs: charity, sports, and travel, where the incentives and the rewards accrue to the underlying passion, with better redemption options – and where there is real evidence of top of wallet placement.

I was talking with someone today about how sometimes the mistake the people make in thinking about innovation is trying to make it too big, when incremental improvements sometimes deliver a more compelling use case and better margins. Maybe those who see a much bigger story here are operating under a similar precept.

What will be interesting to watch is how moves like what Target and others in this space are doing affect loyalty programs and rewards/redemption options more generally. The new realities of the economic environment and financial regulation will force a new layer of decisioning about the one thing that really impacts what everyone in the ecosystem cares about – sales. I think we’ve just started to scratch the surface on the new ideas and implementations that will be used to drive affinity to cards, retailers and card products.


Karen Webster is the President of Market Platform Dynamics (MPD), a management consulting firm that helps companies profit from industry disruption. She serves as an advisor and member of the board for a number of companies operating in the payment, technology and digital media industries. More info here.


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