During a conference call with analysts July 21, Alliance Data Systems Corp.’s top executive reiterated the company’s view that its private-label credit cards serve as loyalty products designed to drive purchases at partnering merchants.
Ed Heffernan, Alliance president and CEO, noted the goal in response to criticism from the Wall Street and investor community that views private-label programs as a lower-quality products than network-branded credit cards.
Alliance’s private-label cards historically have run at a higher loss rate than network-branded cards because consumers tend to use the card with the most utility and “toss away our card,” Heffernan said. “In other words, not pay [the bill],” he added.
During the recession, however, the opposite happened, according to Heffernan. Consumers who used network-branded credit cards maxed them out buying essentials such as gas and groceries and did not use private-label cards, he said.
The limited utility of private-label cards, combined with creditworthy consumers and $700 average credit lines “meant during the recession, we actually performed quite a bit better than a typical bankcard [and had less loss from infrequent use],” Heffernan said.
Alliance reported revenue of 343.3 million for its private-label services and credit unit for the second quarter ended June 30. Alliance, which manages private-label credit card programs for 90 retailers, previously had reported the unit as separate segments. For comparison, the combined unit earned $156.8 million for the same time period in 2009.
Increased credit card sales were a key driver for the unit, Alliance said in a statement. Credit card sales during the quarter totaled $2.2 million, up 15.8% from $1.9 million during the same time period last year. Average accounts receivables were up 19.5%, to $4.9 million from $4.1 million.
The Credit CARD Act rules did not affect Alliance as much as it had anticipated, the company said in a statement. Alliance had expected the maximum credit card late fee to drop to $20, but the Federal Reserve Board instead capped it at $25.
Alliance previously had modified cardholder terms to include a $1 processing fee to offset the impact of any decline in average late fees charged. The fee was scheduled to take affect this summer but was eliminated because “the average late fees can be offset by changing the current fee structure,” the company said.
Alliance said it plans to “marginally increase minimum payments and modify existing late-fee structures to maintain the current average late fee of approximately $25.” Cardholders will receive notice of these changes next month and will be effective for billing cycles beginning in November.
“By pulling the fee, we have very happy merchants,” Heffernan said during the call. “It also means there will be no new fees for our cardholders, and that can only be viewed as a positive.”
Alliance plans to move its bank subsidiary, World Financial Network National Bank, to Wilmington, Del., where other national banks operate. “This move provides us additional flexibility to manage the company’s credit card programs going forward,” Heffernan said.
Overall, Alliance reported revenue of $669.8 million, up 46.4% from $457.5 million during the same time period in 2009. Net income increased 66.5%, to 47.3 million from 28.4 million.
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