Eighty-three years ago, Sears, Roebuck and Co. began extending credit to its customers with the equivalent of a revolving credit plan. The goal was straightforward -- to build sales and customer loyalty.

Today, there are hundreds of private-label credit card programs in existence, accounting for more than 160 million active accounts. These programs range in size from a few thousand accounts for small local retailers to 29 million Sears active accounts nationwide.

While the general-purpose credit card leads the industry in terms of outstanding receivables, retail private-label cards still have more accounts outstanding. In addition, privatelabel cards continue to have a strong following -- 27% of households use private label cards most often in retail stores versus 26% of households that prefer to use bank cards. And the support for private-label cards continues to grow.

Yet many industry observers are now predicting that private-label credit card programs will soon go the way of the dinosaur. They believe that private-label cards will not survive the current industry revolution caused by the spectacular growth of a relatively new concept - the cobranded credit card. These cards, which didn't even exist five years ago, now total 76 million, or 26% of all MasterCard and Visa credit cards outstanding.

While it is true that the cobranded card has experienced considerable growth, it is unlikely that cobranding will replace private-label credit. In fact, the evidence supporting the use of private-label cards -- and the advantages they provide -- is more compelling than even

First, private-label programs provide retailers with access to customer information that is generally unavailable through cobranding programs. For example, retailers can use private-label cardholders' histories to identify their best customers and target promotions accordingly.

In addition, new private-label technology such as SPS Payment Systems' Database Analysis and Reporting software enables retailers to analyze their customer base in detail, tracking information such as buying trends, usage patterns and demographic data. The value of this information is obvious. It allows retailers to market with a rifle instead of a shotgun, by developing direct mail and other marketing campaigns targeted specifically to selected customers.

Second, the private label card is a branded marketing tool that both distinguishes the retailer from the competition and generates customer loyalty and goodwill. It .makes shopping at the individual retailer easier and more convenient. This is particularly important for those retailers seeking to compete on service, rather than price. The retailer maintains a direct relationship with the cardholder. At the retailer's discretion, the card can be used to provide special benefits to active patrons. In addition, private-label card programs can be tailored to reflect the personality and style of a particular retailer rather than that of a bank card issuer.

Third, private-label programs can be less costly than cobranding. In order to establish a competitive cobranding effort, retailers must offer strong financial incentives to customers. Such incentives frequently include deep discounts and free merchandise. It is difficult to demonstrate that these incentives will result in incremental sales increases for the retailers.

In addition, cobranding has certain hidden costs which are not under the control of retailers. One such cost is the loss of potential customers. Unlike private label programs in which the credit-granting decision is made, or at least heavily influenced, by the retailer, cobranding turns the credit granting process over to a third party - the bank card issuer.

In many instances, the credit requirements of the issuer are more stringent and the credit processing time longer than those the retailer would offer with a private-label card. Also, special costly programs which a bank card issuer might initiate to encourage increased cobranded card usage may not necessarily be directed toward a particular retailer's customer base.

Fourth, private-label programs represent dedicated lines of credit with a particular retailer. Retailers can be sure that their private-label cards will not be used to buy merchandise at their competitors' locations. Cobranded cards, on the other hand, may be used to purchase merchandise anywhere that accepts MasterCard or Visa. Retailers lose control over their customers' purchase decisions. Through cobranding, retailers end up rewarding customers who shop at their competitors' locations.

Finally, private-label programs allow retailers to provide customers with a variety of payment options at the point of sale. For example, retailers can offer their private-label cardholders attractive credit terms, such as 90 days same-as-cash on the purchase of certain merchandise. These terms are particularly useful for retailers involved in the sale of big ticket merchandise such as furniture and appliances. Cobranded programs typically lack the flexibility necessary to incorporate these types of payment options.

With all of these advantages, why do some industry experts see the existence of private-label credit threatened by cobranding? Perhaps they shouldn't, particularly since cobranding is more likely to impact the market for bank cards. This is because cobranded Cards compete directly with the average 2.8 bank cards already owned by the cardholder.

To take advantage of cobranding incentives, cardholders are likely to consolidate their purchases or give up one of their existing bank cards. For example, cardholders are less likely to use actively both a GM MasterCard and an AT&T Visa than they are two private-label cards from different retailers.

The real issue, then, is not whether cobranded cards will replace private-label cards. The real issue is whether cardholders will prefer to use cobranded cards in order to "gain points" toward a particular retail incentive. Since private-label usage remains strong in spite of cobranding, it seems likely that private-label cards will continue to be a very significant marketing tool and customer payment option for the future.

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