With lenders keen to restrict credit and
with retailers now keener than ever to retain healthy custom,
private-label card businesses are facing a dilemma. Divya Guha takes a look at three
markets to see what is going on, and whether there is any prospect
of a reversal of fortunes.

Private-label cards seemed such a good
idea not so long ago. When the good times were rolling in the early
part of the decade, retailers were handing them out like sweets to
retain the loyalty of their customers, with banks that handled the
back-end operations taking half the earnings they made from
shopping-mad cardholders.

In 2004 in the US – home to some of the
most enthusiastic shoppers in the world – nine private-label card
programmes reported receivables greater than $1 billion. In 2007,
only 11 private-label card issuers posted receivables greater than
$100 million. Today the picture is very different, and the number
of issuers stands at seven – some of whom are now keen to sell
their retail credit portfolios.

As the health of the private-label card
industry relies on the viability of the retail industry itself –
and with 5,770 store closings predicted by the International
Council of Shopping Centres, the outlook for the private-label
cards business is grim.

Industry sources also say that some joint
venture partners have come close to being dissolved as they clash
over conflicts where, for example, banks want to raise interest
rates, which retailers oppose.

Falling card application approvals from banks
have also angered some retailers who are looking into taking
operations into their own hands – at the cost of loan losses for

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In the UK, the market has shrunk in the wake
of the Financial Services Authority making it imperative for point
of sale personnel selling private-label deals to inform customers
that better credit deals may be available elsewhere.

As a result, private-label card projects are
either being delayed or cancelled and retailers and issuers alike
are placing more focus on prepaid programmes where no credit is
extended. And many existing programmes are being migrated to
co-branded programmes.

In emerging markets, until 2007, players were
capitalising on the growing appetite for credit of the middle and
upper-classes. But they knew that a larger opportunity lay in
reaching the unbanked lower income groups, who were are unable to
afford most goods, even essential items like medicines.

Emerging markets


Arguably the most important target
group for private-label cards in India is the ‘aspiring class’ –
not necessarily highly paid, or the most educated, or even
city-dwelling – but according to the National Council for Applied
Economic Research (NCAER), the consumer group edging out the richer
middle class in the ownership share of TVs, DVD players,
refrigerators and mobile phones.

The availability of cheap finance in India has
drastically changed purchase patterns among consumers who now have
a new appetite for fancy goods, branded grocery items – and

Players who started to make private-label
offerings in India on the back of this burgeoning demand ran on the
belief that they could fuel consumption and create demand for goods
being perceived as modern, but which were never seen as desirable
before. But despite the right demographics, the private-label card
model has failed to gain popularity. However, market scope remains
high and lenders and retailers alike are bullish about Indian
consumer spending, despite the global economic slowdown.

The NCAER reckons that the impact of consumer
finance first began to be felt in 1999-2000 when demand for
financed white goods rose 23.9 percent, while the overall market
grew just 18.9 percent. In the rural markets, cheap finance was an
even bigger factor in growth. While rural demand for white goods
grew 22.4 percent in 1999-2000, the growth of financed white goods
rose a phenomenal 39.6 percent. Retail loans grew at 27 percent
between 2000 and 2003, while purchases with consumer financing in
1999 -2000 saw a rise of 134 percent in urban areas.

Tata-owned retailer Trent launched India’s
first private-label card in 2005 with HSBC at its Star Bazaar store
in Ahmadabad, India’s first budget hypermarket. But although
marketing head Smeeta Neogi says that the company has “plans for
its expansion”, the Star India Bazaar card has so far failed to
attain the sophistication it needs to thrive.

The offering is a loyalty/credit card
available as a stand-alone or an additional card linked to HSBC.
ICICI Bank launched a rival offering, the Shakti card, at
competitor store, Big Bazaar, in Mumbai. The stand-alone versions
of both cards offered a credit limit of INR3,000, which for any
credit card to be viable is too low, according to Puneet Khanna at
retail research firm Technopak. Both cards, which are issued
without credit checks or minimum income requirements and providing
a basis for creating risk profiles for new borrowers, have seen few
takers. Retailers currently hope that loyalty points and special
deals will keep their users returning to shop.

The Shakti card runs a loyalty programme aimed
at low-income housewives, which gets them a 50 percent discount on
their first purchase, a year’s free supply of sugar, four loyalty
points for every INR100 spent, priority check-out at peak shopping
hours and private previews to sales.

“This gave shopping giants an indirect entry
into the credit card space while helping us expand our credit card
customer base,” B Madhivanan, general manager at ICICI’s retail
asset products division, told CI. According to Technopak,
the market has yielded well to the co-branded model run by
higher-end retailers like department store Shoppers’ Stop, which
sees no gains in the private-label offering and whose First Citizen
card, issued with Citibank, has 1 million users, contributing to
more than half of all sales at the stores.

The seeds for increased consumer demand with
an insistence on attractive loyalty programmes have been sown in
India but whether the under-exploited private-label card model will
receive more attention remains to be seen.

Private-label cards

Projected US market for private-label
cards 2008-2012


Receivables ($bn)

% change
















Source: Packaged Facts



The number of private-label cards
issued in Brazil, according to the country’s payment card industry
association ABECS, has grown from 42 million in 2000 with
transactions totalling BRL10.2 billion ($4.2 billion), to 173
million in 2008 with transactions worth BRL53 billion. And they
account for more than half of the credit cards in circulation.

Terry Xie, research analyst at payment
consultancy Mercator Advisory Group, told CI that the
reason is “the fact that Brazilian consumers often lack a financial
profile in the normal financial system.”

He added: “But retailers are able to provide
credit to the unbanked and underbanked because they are closer to
these consumers and know them better thanks to their record of past
purchases. Private-label credit cards are a natural extension of
their store credit businesses. Loyalty programmes are common
features on these cards. And since they are private-label cards
issued by merchants, they are often funded them.”

The private-label cards market in Brazil has
grown substantially in the last few years and is expected to grow
by around 10 percent in 2009. Mercator estimates that there were
about 168 million private-label credit cards in circulation in by
the end of 2008. However, players are increasingly switching to
prepaid private-label card schemes and there is a clear trend of
the model being migrated to co-branded cards by many retailers.

Examples of large retailers that recently
launched co-branded cards are Carrefour, Ponto Frio, Pernambucanas
and Casa Bahia, among others. Typically, private-label cards are
less attractive as they are restricted to the retailer, but less
expensive for the customer (with no annual fees) and bear lower
risk. Given these characteristics, companies believe it attracts a
lower income profile of consumer that shows a higher demand for

Consumer finance portfolios, in spite of low
current account penetration (30 percent), have grown steadily in
the Latin America region and Brazil is the region’s most developed
market for consumer finance. While private-label cards are popular,
the most successful consumer credit offerings are unsecured
personal and payday loans from low-cost stores run by the likes of
Fininvest Losango which offer very high interest rates, aggressive
sales, very fast credit assessment and approvals. The model was
very profitable until 2005, but most of these companies are not
making money now.

Issuers like Unibanco have developed
partnerships with retailers gaining access to millions, “while
cutting the cost of acquiring them,” says Alexandre Sawaya, a
partner in Sao Paolo of the research firm McKinsey. “The cards can
be used to pay for in-store purchases or for loans provided at the
point of sale. Banks may also leverage their partnership to sell
other financial products or services.”

Conflicts of interest between banks and
retailers at this difficult economic time do crop up, Sawaya says,
but “the prize is sizeable for banks that can strike a

“Partnerships which are structured in
profit-sharing agreements (retailer and financial institution share
the bottom line, not revenues) contribute to better alignment
between the players,” says Sawaya. “However, good partnership
management is a key skill for these joint ventures to succeed.”

Most Brazilian banks partner with both
retailers and financial shops to issue private-label cards, and
have their own generic credit card offerings and a combination of
these, ensures a strong portfolio. But competition to win over
low-income consumers in Brazil is high with low individual net
gains, players need to excel to ply profitably.

United States

Over the past few years, the trend
has been for US retailers to sell their private-label card
portfolios to financial institutions. Today in the US, one of the
most successful markets for private-label cards globally, only has
four major retailers still holding on to their portfolios.

One of them, Target, recently sold a portion
of its card assets to Chase. Charming Shoppes, another major
retailer, has defied Wall Street pressure to outsource its
programme to focus on its struggling core businesses. The other two
players are Sterling Jewelers (a subsidiary of UK-based Signet) and
fashion retailer Nordstrom.

Experts say that even if they were to want to
sell their portfolios, it is unlikely they would find buyers. The
market has also seen retailers, though reluctantly and at the cost
of losing customers to competitors, moving towards co-branded card
models with mainly Visa and MasterCard. Target told Packaged Facts,
a US-based retail research consultancy, that 40 percent of spending
on its co-branded Visa card took shoppers to competitors.

“Market saturation of general-purpose cards
and the cost of acquiring new accounts through other channels make
third-party issuers eager to co-brand which remains a
cost-effective way to increase revenue from an existing customer
base, so issuers naturally target their private-label retailers for
cross-selling co-branded cards,” a Target spokesperson told
Packaged Facts.

At the end of 2007 when the market had started
to cool, along with their outstandings, the major financial
institutions in the US were GE Money ($37 billion), Citigroup ($30
billion), HSBC ($17 billion), JPMorgan Chase ($4 billion) and
Alliance Data ($4 billion).

GE Money had overtaken Citi’s number one
position in large part due to its ‘portfolios of portfolios’. GE’s
portfolios are smaller, more agile, and more diversified, with
discount, department, speciality, home improvement, and sporting
goods stores among them. In comparison, Citi’s great acquisition
coups Macy’s and Sears are mature, sprawling entities strangled by
convention, bureaucracy, and, increasingly, irrelevance, says
Packaged Facts.

While loan defaults are increasing all around,
private-label card losses in the US have been higher. As of January
this year, the loss ratio for private-label cards was 10.5 percent,
compared to 7.5 percent for general-purpose cards.

Luckily, US private-label cardholders (mostly
from lower income groups) are “very enthusiastic shoppers,” says
Packaged Facts. But lamentably, “total receivables for
private-label cards are expected to fall 3.5 percent, or $4
billion, for a total of $109.7 billion in 2008, with growth in 2009
likely to grow only by half a percent in 2009.”

Red Gillen, of research consultancy Celent,
told CI: “A lot of financial institutions have been burned
by extending credit too deeply into the risk pool, and going
forward lending will likely be tighter than it has been in the
past. Private-label cards will continue to lead to higher losses
than general-purpose credit cards and it is only when the economy
improves we will see an improvement in this private-label

Although more than one in 10 consumers will
have more than one private-label card, just one in four US
consumers uses it, and that figure is likely to drop in 2009.
Taking into account economic, consumer and retail factors, the
market, says Packaged Facts is “likely to rally in 2012 and
approach $123 billion in 2012.” But as for now, delinquencies and
charge-offs are decimating profits, and issuers are looking to
international markets for growth.