Sears, Roebuck and Co., one of the biggest holdouts from credit card cobranding, has begun testing a product with MasterCard International.

The nation's second largest retailer has been promoting the card in several markets in the Midwest and Texas, with an eye to rolling it out nationwide. The card is issued by Sears National Bank, a small institution based in Phoenix.

Experts said the move could inspire other retailers to launch cobranded cards. Any new programs, however, will have to be carefully thought out, because the cobranding market is increasingly crowded and profit margins for retailers are shrinking.

"It's clear that if any retailer wanted to enter the market, they would have to be very unique" in the offering, said Corey Stone, vice president and managing director at Easton Consultants, Stamford, Conn.

Though card industry observers had been expecting a cobranding effort from Sears, the decision to team up with MasterCard came as a surprise. Sears had been rumored to be planning a program with Visa U.S.A.

"It was strictly a business decision to choose MasterCard," said Jan Drummond, a spokeswoman for the Hoffman Estates, Ill.-based retailer.

The no-fee Sears MasterCard carries a 7.9% introductory rate. After next March, the rate jumps to prime plus 9.9%. By comparison, the Sears Card - an in-store charge card - has an interest rate of 21% with no annual fee. Sears has more than 57 million proprietary cards.

Cardholders will receive a 1% rebate on all purchases made anywhere with the Sears MasterCard.

And, in an unusual twist, Sears has tied the cobranded card to its proprietary store card. Sears Card holders who also carry the Sears MasterCard earn a 2% rebate when they make a purchase at Sears over $300. Otherwise, Sears Card holders earn 1% for in-store purchases over $300.

"Sears is the largest issuer of private-label credit card accounts," said James L. Accomando, president of Accomando Consulting Inc. in Fairfield, Conn. "It is only natural that it should test alternative products against its private-label credit card."

Meanwhile, the program is "a big win for MasterCard," said Michael Auriemma, president of Auriemma Consulting, Westbury, N.Y.

"It's a move that makes sense," he said. "Like Sears, MasterCard caters to a mass market. Visa tends to be more upscale, and targets a travel- oriented market."

Many of the significant retail alliances formed in the past two years have been with Visa U.S.A.

On Tuesday, People's Bank in Connecticut announced that it is issuing a cobranded Visa card for T.J. Maxx and Marshalls stores. In May, the retail catalogue giant L.L. Bean, signed with MBNA Bank of Delaware to issue cobranded Visa cards.

MasterCard declined to comment on its relationship with Sears, but Nancy Hemenway, the association's vice president for brand development, said she sees many opportunities for retailers that approach cobranding in a careful manner.

"Those retailers that jumped into the market quickly are now gone," she said. "Retailers that realize the value equation will be able to drive significant profits with incremental sales and reach a broader market."

MasterCard, which kicked off the cobranding trend in cards in 1990, says that some 42% of its cards are now cobranded. By contrast, Visa U.S.A. said that 27% of all its cards were cobranded.

According to The Nilson Report, an Oxnard, Calif., newsletter, Visa has a 65.87% share of the total credit card market with a volume of $97.32 billion, in the first quarter. That compared to $50.69 billion for MasterCard.

Going forward, experts said, cards and issuers will have to work hard to stand out in the cobranding arena.

"A couple of years ago, issuers could put a plain vanilla Visa or MasterCard up against a plain vanilla store card and use that to sell the virtues of a cobranded card complete with store incentives," said Stephen Drees, a principal with Strategic Marketing Services.

Over the past several years, Sears has made many executive and administrative changes in its approach to credit cards.

The biggest was in 1993 when it divested the Discover card issued through its former subsidiaries, Dean Witter and the Hurley State Bank in South Dakota.

Also that year, it announced that it would also accept Visa, MasterCard, and American Express cards for purchases.

In March 1995, the SearsCharge card became known as the Sears Card. With the name change, Sears made an effort alter the features of the card to compete with bank cards.

Since then Sears has recruited top industry talent to do this, hiring former American Express chief executive Steven D. Goldstein and MasterCard's cobranding chief, Kristine Crow.

Sears Bank, the issuer for the cobranding program, was acquired by the retailer in 1993 and now has $11 million in assets. It was formerly known as American Bank of Arizona.

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