Target Corp.'s decision to drop its cobranded Visa card is the strongest sign yet that merchants are re-evaluating the benefits of offering general-purpose credit cards.
The Minneapolis retailer said Tuesday that it would stop issuing its Target Visa cards to new applicants, starting April 29, and instead will only offer its venerable private-label card.
Target said in February that it was testing consumer response to such a move; Tuesday it said the program had made a clear case for its private-label cards over general-purpose cards.
"With this decision, we expect to see increased Target store sales while we will have fewer credit card receivables overall to fund," a company spokesman said in an interview.
Though the company would not release specific numbers, thespokesman said that people with the private-label cards visit the store more often and buy more merchandise than customers with the Target Visa card.
However, people tend to spend less overall with the private-label cards, which reduces the amount of card receivables Target must fund.
The Target Visa card, which was introduced in 2001, is popular. About 70% of Target's account holders have one, and they account for roughly 95% of the receivables in Target's overall card portfolio, the spokesman said.
"What was most interesting to us was that giving customers only a private-label card was a frequency-driver. They weren't spending more on each trip, but visiting the store more often, which ultimately resulted in more spending," the Target spokesman said.
Current cardholders are not affected by this move and will be able to renew their Target Visa cards when they expire. The private-label cards were introduced in 1995.
Dropping the cobranded card is a major shift for the retailer, said Steven Jacowitz, the director of alliance development at Auriemma Consulting Group. "Target is saying it wants to focus only on transactions that are most profitable for it, which means those that occur inside its store and on its own card."
He said Target's move also indicates that "private-label card programs are not dead, as some have suggested."
It also shows that cobranded cards are facing an identity crisis, said Scott Strumello, a managing associate at Auriemma. Issuers are under increasing pressure to develop cobranded card programs that "resonate" with consumers and generate revenue, he said.
"Cobranded card programs that don't have a rich value proposition for transactions that take place outside of the cobrand partner's roof may not be as effective overall anymore," Strumello said. "Cobranded travel card programs continue to be successful because customers clearly understand the value proposition."
Nor is there much room for new cobrand products, Jacowitz said. "There are not that many new cobranded card programs out there; it is a pretty well-saturated market."
Another high-profile cobranded card bit the dust last month when JPMorgan Chase & Co. parted ways with Starbucks Inc., and said that people with the Starbucks Duetto cobranded Visa card would be converted to other JPMorgan Chase card products.
Target's decision is another blow to Visa Inc.'s cobrand operations. Macy's Inc. said in late March that it was replacing Visa with American Express Co. as its network partner for its cobranded cards, which are issued by Citigroup Inc.
"We respect Target's business decision to move ahead promoting their proprietary cards and we look forward to working with Target to provide existing Visa Target cardholders with the value they have come to enjoy with a product that can be used both in Target stores and at millions of merchant locations worldwide," Visa said in a statement.
Target last October began a test in which it offered its private-label card to new customers who would have qualified for a Visa card and compared the results with those receiving a Visa card. The rewards program for both the private-label and the Visa card are similar.
Target has struggled with its card portfolio, which has generated chargeoff rates of 14% to 15% in the past year, according to Moody's Investors Service. The average chargeoff rate for general-purpose credit cards issued by major banks in 2009 was 10%.
"Target's credit card portfolio has not performed well over the last couple of years," said William Black, a senior vice president at Moody's. He noted that the ratings agency downgraded Target's securitized card portfolio last year.
In May 2008 Target signed a $3.6 billion deal with JPMorgan Chase in which the New York banking company agreed to fund 47% of its portfolio. Target has said it is open to selling all or part of its remaining card portfolio as long as it can retain management and control over it, the spokesman said. JPMorgan Chase referred inquiries about Target's card program to the retailer.
