What does it mean for a retailer to get out of the credit card business?
Target Corp. told us - twice - last week that it is "interested in selling the balance of our credit card business, given the right macroeconomic environment and the right economic proposition for us and our partner."
That seemed to parallel the thinking of activist shareholder William Ackman, who told us that Target should "exit" the card business - but that it would still be "very much involved with the business on an ongoing basis." American Banker duly noted that, no matter what happens at its sure-to-be-contentious shareholder meeting this month, Target´s
"days in the credit card business appear to be numbered."
So we were a little perplexed when Target CFO Doug Scovanner wrote a letter to the editor stating that "Target will not quit the card business. While we continue to aspire to reduce our current minority investment in this pool of assets, Target´s talented team will continue to play its key role in managing this portfolio." (The letter was also filed with the SEC, presumably as another volley in the "he said, he said" filing skirmish that Target and Ackman are waging as part of the proxy fight.)
True, the store card industry can be confusing: few retailers still own the receivables for their private-label or cobranded portfolios, but their financial partners stay behind the scenes - or at least on the back of the card - and out of view of consumers. And Target´s current arrangement with JPMorgan Chase & Co., which bought a minority stake in the retailer´s portfolio a year ago, is especially unconventional.
So we called some store card experts who hadn´t been quoted in the original story to parse the difference between "selling the balance of," "quitting" and "exiting" the credit card business.
"When I say `get out of the business,´ that means the risk," said Robert K. Hammer, who brokers portfolio transactions. "The company that held the receivables is out of the risk end of the business, while the cardholders that they serve are still getting the products. It´s just through another provider. "
Irving Levin, who founded the subprime lender Renaissance Holdings Inc. before selling it to Household International (now a part of HSBC) agreed that, "If an issuer owns their receivables and is selling them, you can say they´re exiting the credit card business," although "when they say `selling the balance of the credit card business,´ you might speculate whether that´s selling the entire vertically integrated business or just the receivables."
Hammer cautioned that consumers might have a different understanding of "quitting" the card business. Retailers looking to sell their store card portfolios to financial institutions "want to minimize differences to the customers. The last thing they want is customers thinking, `Oh, my card isn´t good anymore.´ Their chargeoff rate would go through the roof," Hammer said.
But in the industry, he said, "When you say `get out of the card business,´ that tells me they´re exiting the business by selling it to somebody else. Very seldom does that mean simply liquidating it and telling their customers it´s no longer a viable product."
(Of course, at $995 a year and with a mandate to inform the financial services industry, we think it´s safe to assume that American Banker counts more industry members than ordinary consumers among its subscribers.)
In a Monday meeting to discuss his agenda, Ackman said that Target's letter left him unsure of the company's intentions toward its credit card business.
"I´m not sure exactly what the company´s posture is on what they´re going to do with the credit card operation. But I think a partnering transaction along the lines of what other retailers have done - we hope that´s in the future of the company," he said. "There´s a difference between being in a business, and how the business is financed and who takes the risk. I want none of the financing to be coming out of Target´s pocket. I want it to be coming out of a bank, a large financial institution that has more resources than Target, and has lower cost of capital. I want the credit risk as much as possible to be shifted to a financial institution. But I want everything else - the marketing, the customer acquisition, the data analysis and all those benefits to remain with Target."
(Ackman also told us in an email today: "We are not recommending that they get of the card business, but rather continue to control the relationship with the customer, the marketing, customer acquisition, while shifting the funding and credit risk to a partnering bank.")
In the interest of saving Target the trouble of writing another letter - and additional SEC filing fees - we asked a Target spokesman for his thoughts on Pershing´s definition. He said in an email Thursday night: "We remain interested in selling the balance of our credit card receivables, given the right macroeconomic environment and the right economic proposition, and we remain committed to allowing our guests the continued benefit of the creativity and expertise of the world-class team at Target Financial Services."
The more things change...