Private-label credit cards are making a comeback with retailers.

New regulations and shifting consumer spending habits are prompting merchants and issuers to rethink their views on private-label cards, a product that many companies abandoned in recent years in favor of general-purpose, co-branded cards that could be used more widely.

But co-branded cards rarely made it to the coveted top-of-wallet position, executives say, and the low transaction volumes sometimes did not justify issuers' expenses for managing the programs, especially smaller ones.

"The performance of co-branded cards has not been as fruitful as one would have hoped, and as a result retailers are refocusing on their private-label program[s], primarily because that's what the consumers are reacting to and using at a higher level," Bill Johnson, the chief executive of Citigroup Inc.'s retail partner cards unit, said in an interview this week.

The unit, part of the Citi Holdings division the New York bank formed in 2009 for its noncore assets, is one of the biggest players in the private-label and co-branded retail card market. Its partners include Home Depot Inc., Sears Holdings Corp. and Exxon Mobil Corp.

Citi last year announced it was shuttering a co-branded card program with Home Depot but would continue to issue the Atlanta retailer's private-label card, which customers can use only in its stores.

Target Corp. made a similar decision this year, announcing it would stop issuing its co-branded Visa Inc. credit card and focus on its private-label program.

As issuers tighten their underwriting standards, it is more difficult for lower-credit-quality consumers to qualify for accounts, making store cards even more attractive to merchants.

"There is … less credit available today, and it's likely that retailers would like that credit focused on their own customer rather than providing customers with credit to be used elsewhere," said Mallory Duncan, a senior vice president and general counsel at the National Retail Federation in Washington.

Duncan said he has heard from the trade group's members of increasing interest in "pure private-label" programs over co-branded cards. Citi's Johnson and other industry experts are not predicting the demise of co-branded cards; such partnerships remain attractive to issuers and retailers alike. Rather, they say, the shift in focus is more nuanced.

"There are a few retailers who have had good success with the co-branded product, and those that have had good success continue to market and promote the product," Johnson said. But among merchants that had both co-branded and private-label programs "and have had less success with bank card products, they're showing more interest in focusing exclusively on the private-label card. There are more retailers in that latter group."

Citi recently renewed its contract for Zale Corp.'s private-label card program after almost ending its relationship with the Irving, Texas, jewelry retailer. Under the new, five-year contract, Citi reduced the minimum level of annual net credit sales Zale must make, to $315 million, from $600 million. Citi may also end the arrangement if Zale's net card sales fall 20% or more during any 12 months.

Citi had planned to terminate the previous contract, which was to expire in March 2011, because Zale had failed to meet the credit sales volume minimum. Zale made several payments this summer to make up the difference.

Like other retailers who offer a private-label card, Zale depends on the program for a significant portion of its sales; 40% of its U.S. purchases are made on the card.

"Many consumers obviously want to use credit," said Roxane Barry, the director of investor relations for Zale, adding that the program is "extremely important to us."

As part of its new agreement, Citi agreed to establish a marketing fund of its own money to promote the program. Barry would not say how big the fund is.

Payments consultant Phil Philliou said that deal criteria among the top co-brand issuers have "become much more demanding" in the last two years.

"Issuers have figured out that it takes nearly the same amount of organizational focus and resources to manage a very large program as it does a small program, and, consequently, many issuers have opted to not renew their smaller programs," said Philliou, a partner in New York's Philliou Selwanes Partners LLC, in an e-mail.

Analysts also noted that the Credit Card Accountability Responsibility and Disclosure Act makes it more difficult to raise certain fees, such as for cash advances, without giving 45-day notice.

Private-label cards typically do not enable cash advances, averting that headache for issuers.

Private-label cards carry lower credit limits and higher annual percentage rates than co-branded retail and general-purpose credit cards because they are deemed riskier. They ordinarily incur higher delinquencies and chargeoffs, as in the recent recession. But conditions in the private-label and co-branded retail card markets have consistently improved during the last year as the broader credit card market has done. Chargeoffs for private-label receivables were 10.4% in July, down from 11.6% in June, according to Standard & Poor's Ratings Services' most recent U.S. Credit Card Quality Index. By comparison, the chargeoffs for general bank-issued card receivables was 8.7% in July, down from 9.7% in June.

Cynthia Ullrich, a senior director in Fitch Ratings' asset-backed securities group, said that, though retail credit cards typically incur higher losses, they also typically generate higher revenue than traditional bank cards.

The gross yield on retail credit card asset-backed securities was 25.26% in July, compared with 22.48% for general credit card securities, according to Fitch.

As some issuers move away from co-branded cards, others see an opportunity. Capital One Financial Corp. is looking to establish co-branded and private-label partnerships to expand its card offerings and distribution channels, Pam Girardo, a spokeswoman for the McLean, Va., banking company, said in an e-mail.

Capital One recently won the private-label card portfolio for clothing retailer Kohl's Corp. The Menomonee Falls, Wis., department store operator said in August that it would move the portfolio from JPMorgan Chase & Co. Inc. to Capital One.

"For the right partnerships, private-label cards have attractive economics, including strong credit performance and long-lasting customer relationships," Girardo said. She added that the company is finding more opportunities in the retail card market in general "as competitors retrench or reposition in response to the recession and … increased regulation."

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