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February 26, 2009

Private-label cards – the twilight years?

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 Private-label cards seemed such a good idea not so long ago

By Verdict Staff

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 banks.

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 debt.

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 credit.

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 balance.”

“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 situation.”

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.

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