Household International Inc., the second-largest issuer of private-label credit cards, is trying to use product innovations to fend off a challenge from third-place Citigroup Inc.
The current focus is consumer electronics retailer Best Buy Inc., the largest of Household's 70 private-label clients, whose customers have become a laboratory of sorts for Household's marketing experiments.
The latest effort takes a page from Sears, Roebuck & Co. and other retailers that have converted some of their private-label customers to bank card customers. Some customers who apply for Best Buy cards are offered a MasterCard as well, and Household pays the retailer a fee for each MasterCard customer it gains.
Household's national director of retail card services, Richard C. Klesse, said that Household has not combined purchase data for the two cards, but it has discussed how it might do so to help develop enhancements for Best Buy customers.
It has been Household's first foray into offering general-purpose cards through stores. "We were concerned that sourcing a Household International bank card would impact the private label, but we have seen no impact," Mr. Klesse said in a recent interview in his Prospect Heights, Ill., office.
"Best Buy customers use the Best Buy card at the store, but use the bank card for other shopping," he said. "It might have had more of an impact if we put the Best Buy name on it," but for now - unlike the Sears MasterCard - the bank card has no cobrand affiliation.
As more and more retailers sell their private-label credit card portfolios to third-party card issuers, Household is trying to take advantage of the trend. So is Citi, which has been outspoken about its desire to surpass Household in private-label market share and receivables, and General Electric Co.'s GE Capital Corp., the market leader in private label.
Household has issued cards for Best Buy in some fashion for nine years, but last year it completed the purchase of Best Buy's six million accounts, which bear $2 billion in receivables. The deal included a seven-year contract to service the accounts.
Another recent win for Household was the July agreement to buy Saks Inc.'s $1.1 billion store card portfolio. Household had $13.3 billion in average managed store card receivables at the end of second quarter, against $16.7 billion for its Visa and MasterCard loans.
Though several of Household's private-label customers have introduced cobranded bank cards with Household's competitors, Mr. Klesse said it does not endanger the store card's existence. For instance, he said, Costco Wholesale Corp. is one of Household's top five private-label accounts, even though the warehouse club chain does a lot of marketing for its cobranded card issued by American Express Co.
Mr. Klesse explained the appeal of the store card: "We don't have interchange; financially it is much stronger. They have a third party in there, and our modeling doesn't include that."
Household has been the subject of lawsuits over its subprime mortgage lending practices, which have been called predatory. Home lending makes up 70% of its business, versus 30% for cards.
At least one analyst, Reilly E. Tierney of Fox-Pitt, Kelton Inc., said that those problems are unlikely to affect Household's ability to sign private-label card deals. "It is a totally different issue," he said. "First of all, they haven't been charged with anything. People get sued in the mortgage business all the time."
He pointed out that Citigroup has also faced a good deal of criticism about its subprime home lending business, and that its ability to market credit cards has not been hampered. Both Citi and Household have "a high credit rating" and "a long track record of good service levels in the retail services business, where they don't target subprime borrowers," Mr. Tierney said. Potential private-label partners were no more apt to downgrade Household's sales pitch on that point than they would Citigroup, he said.
Mr. Klesse of Household described a different challenge in trying to persuade retailers to outsource their card businesses.
"They have had resistance in letting go of it," he said. "A number believe it is doing better financially than it is. The cost accounting as to what is credit and what is retail is not always clear."
He said that certain categories of retailers have been easier to convince than others. "Discounters and electronics chains have been more willing to change," he said, citing turmoil in those market segments as the reason.
Despite the stiff competition, Household has been gaining market share. Mr. Klesse attributes the success to Household's well-developed risk management technology and marketing techniques. Mr. Tierney attributed it to Household's ability to deliver things its retailer customers care about, like fast credit approvals and programs for gaining new customers.
While Household has followed Sears' lead in offering MasterCards to private-label customers, Mr. Klesse was less enthusiastic about another recent Sears innovation: making deals with other merchants to accept the Sears store card. "Most merchants want the line of credit dedicated to their stores," he said. But "if one of our retailers wants to do some tests, we would be doing that."
Mr. Klesse said that Household sponsors an annual merchant meeting, and that some alliances have been struck at it. Two merchants made a deal once in which one, a motorcycle manufacturer, started displaying motorcycles at a store chain that sold complementary merchandise.
Household mainly sells its ability to manage risk and marketing technology to its retailer clients, offering sophisticated products and services that it said most retailers cannot offer on their own. "In our negotiations, we model a targeted loss rate," Mr. Klesse said. "We can provide increased approvals while maintaining the same loss rate. We try to minimize any change or impact to their business."
Once Household begins managing an account, it has lots of time-tested ideas for boosting customer store visits, he said. For example, customers who have not made a purchase in six months get a store coupon with their statements.
Like Sears, Household has experimented with sending bank cards to store card holders whose accounts have been inactive for several months. When a Best Buy customer visits a store and wants to pay with a bank card, a store clerk can offer a store card and can even automate the credit application by swiping the customers bank card through the payment terminal. Household's program picks up name-and-address data from the card and uses the information for store credit applications.
Household has also developed some tools for encouraging store card use on the Internet. At Best Buy's Web site, a pop-up page appears to offer a Best Buy credit card to customers who are researching a big-ticket purchase.
Mr. Klesse said that his management team impresses clients as well. It includes a mix of GE Capital and Citigroup veterans, plus the people who arrived through Household's 1998 purchase of Beneficial Corp.
To Mr. Tierney, Household's customer service is what keeps it ahead of bigger companies like Citigroup and recent store-card entrants MBNA Corp. and Capital One Financial Corp. "If they compete with Citi on price, they will lose," he said. "Household is answering the competition pretty handily with the right bells and whistles on the cards and a service level to the retailer on things like turnaround time that make a difference to them."
Household has managed to hold its own in what George Rosenbaum, the chairman of the Chicago retail consulting firm Leo J. Shapiro & Associates, calls a "very intense competition."
"What I would bet on is, they are doing something more for the customer that would have a positive effect on increasing trips to Saks or whoever the retailer is."
Eventually, Mr. Rosenbaum predicted, Household and companies like it will begin looking for new retail categories that have not historically issued store cards, such as supermarkets. "Most major supermarkets have customer cards, so you already have card-carrying customers with no charge privileges," he said. "I think a smart marketer would be working on it."