In the face of criticism that private-label credit cards have high chargeoff rates, Alliance Data Systems Corp.'s top executive is defending his company's business model, saying that store cards have done better during the recession than general-purpose cards.
Alliance's private-label cards historically have run at a higher loss rate than network-branded cards because consumers tend to use the card with the most utility and "toss away our card" — "in other words, not pay" the bill, Ed Heffernan, Alliance Data's president and chief executive said during a July 21 conference call with analysts.
But during the financial crisis, the opposite happened, Heffernan said. Consumers who used network-branded credit cards maxed them out buying essentials such as gas and groceries and did not use private-label cards.
The limited utility of private-label cards, combined with creditworthy consumers and $700 average credit lines "meant during the recession, we actually performed quite a bit better than a typical bankcard" and lower usage meant lower losses, Heffernan said.
He also reiterated the company's view that private-label credit cards serve as loyalty products designed to drive purchases at partnering merchants.
Alliance reported revenue of 343.3 million for its private-label services and credit unit for the second quarter. Alliance, which manages private-label credit card programs for 90 retailers, previously had reported the unit as separate segments. The combined unit earned $156.8 million in the year-earlier period.
Increased credit card sales were instrumental for the unit, Alliance said. Credit card sales during the quarter rose 15.8% year over year, to $2.2 billion. Average accounts receivables rose 19.5%, to $4.9 billion.
Alliance said revenue overall rose 46.4%, to $669.8 million. Net income rose 66.5%, to 47.3 million.
