SPS Transaction Services Inc., the nation's third-largest provider of private-label credit card processing, has signed a five-year agreement with the Warren Cos.

Based in Sioux Falls. S.D., the Warren Cos. distribute consumer entertainment products. such as stereo equipment. cable telecommunications products, and videocassette recorders.

Recently, the company obtained the rights to market a high-performance satellite television system from RCA. It hopes the new private-label card - to be issue.d by SPS on behalf of Warren - will help sell this product.

Confident About Growth

Though the card program, known as Entertainment Plus, is only a few weeks old, SPS executives are confident that within a year, the portfolio will be worth around $20 million.

SPS executives said that the Warren deal and five others it has signed this year are evidence that the private-label, third-party processing business is expanding faster than many in the industry believe.

Some Skepticism

"Private label is a continually growing business, though I've heard comments to the contrary," said Robert W. Archer, vice president of sales at Riverwoods, Ill. -based SPS, which is a unit of Dean Witter. Discover & Co.

"More companies are looking at the private label card as a way to create that long-term relationship with the customer that everyone agrees is so valuable," he added. "We see private label continuing to grow."

The "comments to the contrary" come from industry analysts, such as Richard K. Weingarten at Montgomery Securities in San Francisco.

In a report issued in March, Mr. Weingarten wrote that the recent popularity of cobranding - in which a retailer's name is placed on a Visa or MasterCard - will "likely stymie any significant top line growth in private label."

Limited Opportunities

In addition, the report indicates that limited opportunities exist for securing processing business from companies that already operate private-label programs.

It estimates that only 10% of the private label market consists of small retailers that handle their own processing.

These small retailers are the most likely candidates for the third-party processing services provided by SPS. General Electric Capital Corp. and other private-label servicers.

Large retailers typically have enough private-label volume to justify processing their own cards.

Flexibility Seen as Key

During a period of modest processing growth. analysts said that the private-label processors providing the most flexible suite of services are the most likely to record significant gains.

SPS believes that one way it can attract new clients to processing contracts is by issuing the cards on behalf of retailers who do not want to be exposed to the risk of owning receivables.

Card issuance is a major part of SPS' business, accounting for more than one-third of its earnings, according to Montgomery Securities.

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