Issuers are showing renewed interest in retail cards, believing that slowly improving economic conditions will overcome the elevated chargeoffs and weak spending that prompted some banks to leave the market.
GE Capital's acquisition of $1.6 billion in store card receivables from Citigroup Inc., announced Wednesday, underscores this trend.
"This clearly is an indication that private-label is still an important piece and will continue to grow in the future," said Steven Jacowitz, a managing director with Auriemma Consulting Group in New York who focuses on retail cards.
Because consumers facing financial trouble often pay off retail cards after other credit cards, retail cards typically carry higher delinquency and chargeoff rates than general-purpose credit cards.
However, the performance of card portfolios in general has improved this year as the economy has stabilized, prompting issuers to focus again on growing accounts.
Banks have also been able to negotiate more favorable contracts with retail partners, analysts said, while the retail spending picture remains fuzzy. Five years ago banks were willing to cut deals with retailers to win their business. Now they are able to exact higher fees.
"Given the fact that we've had very tough economic conditions … some of that risk and some of that balance is going to come back to the retailer," Jacowitz said.
GE Capital, a subsidiary of General Electric Co., acquired Citi's portfolios for sales financing programs, a segment of the retail card market geared toward local and regional merchants.
The portfolios represent about three dozen retail partner relationships and about 18,000 small to midsize merchant locations that sell home furnishings, flooring, consumer electronics and heating, ventilation and air conditioning.
Some analysts saw irony in GE Capital's acquisition when just a few years ago the company was looking to sell its retail consumer finance business. The move signals broader improvements in the card business, they said.
"It's a fascinating turn of events," said Robert Hammer, the president of R.K. Hammer, a credit card consulting firm in Thousand Oaks, Calif. "Here we have … a large-scale issuer in GE that a few years ago was trying to unload its own private-label portfolio with no success apparently. Now they are keeping that portfolio and then becoming acquirers themselves."
A GE Capital spokesman stressed that the business it tried to sell, which includes store card programs for national, mainstream merchants, is separate from the sales finance unit it is bulking up with the Citi acquisition.
"This is very much core to GE Capital," Stephen White, a spokesman for GE Capital in Norwalk, Conn., said.
The retail consumer finance and sales finance units are part of GE Capital's retail finance business.
Mark Begor, the president and chief executive of GE Capital Retail Finance, was traveling Wednesday and not available for an interview. In a press release, Begor said the acquisition "is right in line with GE Capital's goal to invest in core, high performing growth businesses where we have deep experience and broad capabilities to grow."
Neither GE nor Citi would disclose the financial terms of the deal, which already has received regulatory approval.
"GE has sent a message to the market that it hasn't gone anywhere, and it intends to compete aggressively," said John Grund, a partner with the payments consulting firm First Annapolis Consulting in Linthicum, Md. "The sheer size of this acquisition reinforces their commitment to the retail card business."
Sales finance portfolios, in particular, often produce higher profit margins for issuers because there is less competition for retail partners, Grund said. Merchants such as furniture stores and home repair outlets rely on them to finance "big-ticket durable goods."
"That dynamic has probably only been exacerbated through the crisis given credit contraction and market exits and some of the aggressive actions taken by issuers," Grund said.
The sale has allowed Citi to reduce assets that are part of the noncore business division the New York banking company formed in 2009 called Citi Holdings, which includes its retail partner cards business.
The unit issues cobranded and private-label credit cards for retailers including Home Depot Inc., Sears Holdings Corp. and Exxon Mobile Corp. After the sale, Citi has about $46 billion in retail partner cards receivables, said Bill Johnson, the unit's CEO.
That the portfolios were on an operating system separate from its other retail card portfolios was a reason for selling them to GE, Johnson said.
"Making the choice to sell the business had to do with … simplifying the business, so that as we look at divestitures we're not looking at as many conversions," he said. "As we think about growing the business we can focus on growing it on what we consider to be our primary platform."
Citi said it plans to service the portfolios until the first quarter of 2011 while GE converts the portfolios to its own system.