Synchrony looks beyond the store-branded card for growth

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When Toys R Us closed its doors last year, it looked like a clear defeat for Synchrony Financial, which issued credit cards to customers of the defunct retail chain.

But Synchrony has sought to minimize the damage by offering general-purpose credit cards to former Toys R Us cardholders. That pivot could help drive future profits at the Stamford, Conn., credit card lender while also providing a blueprint for other issuers of store-branded cards as more brick-and-mortar retailers succumb to competition from Amazon and other online retailers.

The new card provides 2% cash back on all purchases and can be used anywhere that accepts Mastercard. Synchrony has not revealed how many of the toy seller’s cardholders made the switch, or whether the profitability of the portfolio has taken a hit.

But the company said Friday that those consumers who do have the new Synchrony-branded card are spending an average of about 40% more than the Toys “R” cardholders did. Another positive: Synchrony does not have to share revenues from the new card with a retail partner.

“Overall we’ve been pleased with the trends and the performance that we’re seeing,” Synchrony President Brian Doubles said during the company’s third-quarter earnings call last week. “It’s still early, but we’re seeing good activation, good usage.”

Now Synchrony is trying to take what it has learned from the aftermath of the toy store’s demise to find new ways to grow its business. In recent weeks, some consumers with no apparent connection to Toys R Us have received invitations to apply for Synchrony’s 2% cash-back card.

Synchrony executives said that the company is testing the card with different consumer segments, at different interest rates and with different promotional offers. “While our growth expectations are modest in the short term,” Doubles said, “we are excited about the opportunity and the early results we’ve been able to achieve so far.”

The general-purpose credit card market is somewhat new for Synchrony, which was spun off from General Electric in 2015 and has long specialized in store-branded cards. Store-branded credit cards are a category that includes both plastic that can only be used at a particular retailer — known as private-label cards — and those that carry a retailer’s brand but can be used at a wider range of stores.

The 2% cash-back card is part of a broader push by Synchrony, which also runs an online bank, to build a consumer brand. To that end, Synchrony has been advertising on TV over the last few years, though not nearly to the same extent as some of its big competitors in the credit card business.

Some of those competitors — particularly Citigroup and Capital One Financial — offer both general-purpose and store-branded cards. Doubles alluded to those hybrid business models when he was asked Friday about how Synchrony’s foray into the general-purpose market is likely to be received by the firm’s retail partners. Retailers that issue cards with Synchrony include Amazon, Lowe’s and Sam’s Club.

“If you think about who we’re competing against, they all have general-purpose card portfolios that are much more substantial than what we have here,” Doubles said. “We don’t see it as a competing product.”

Doubles also noted that Synchrony’s executive team already has a lot of experience in the general-purpose card market.

Brian Riley, a credit card industry analyst at Mercator Advisory Group, said that Synchrony has what it needs in terms of technology and personnel to compete in the segment. “I don’t see it as foreign to them,” he said.

Riley also suggested that the 2% cash-back card could come in handy if other retail chains that are Synchrony partners go out of business. Those partners include the embattled mall retailer J.C. Penney, which has closed roughly 150 stores since 2017 and has reportedly hired advisers to explore debt restructuring options.

When retailers close individual stores, their partner banks typically suffer because customers that no longer have a location near their homes have less incentive to pay off their balances. That dynamic may be magnified in the event that a retain chain shuts down entirely.

Moody’s Investors Service stated in a 2017 report that Synchrony was among 10 banks that accounted for 91% of the balances in the private-label card business. Other large participants in the market include Citi, Alliance Data Systems, Capital One, Wells Fargo and TD Bank.

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