Citigroup Inc., Capital One Financial Corp. and a host of other issuers appear bullish on retail credit card programs following recent announcements of their plans to recommit and expand in private-label cards. But a caution flag suddenly has emerged.
Fitch Ratings Inc.’s latest data show the average charge-off rate on retail credit cards, which declined sharply over the past two years and has helped improve profitability, rose in October as more customers failed to meet their payment obligations.
The charge-off rate on outstanding retail credit card receivables rose 58 basis points for the period ended Oct. 31, to 8.36% from 7.78% in September, Fitch said Dec. 13.
That compares with an average retail charge-off rate of 12.78% in October last year, underscoring the dramatic improvement in losses private-label cards experienced over the previous 12 months as the recession began to recede, analysts say.
And while the recent uptick in private-label charge-off rates is worth noting, it is not yet a sign of serious trouble, as delinquency rates that often foreshadow losses remain in healthy territory, analysts say.
The delinquency rate on retail credit card accounts at least 60 days past due at the end of the October was 3.46%, up 10 basis points from 3.36% a month earlier, Fitch said. Retail card delinquency rates hovered around 5% a year earlier, Fitch data show.
Because private-label card programs tend to have higher interest rates than do bankcards and generate higher profits when performing well, the post-recession industry turnaround has caused an outpouring of interest in private-label credit card programs “from all directions,” Ken Paterson, director of credit advisory services at Mercator Advisory Group, tells PaymentsSource.
“It’s an area issuers have become extremely interested in lately, although few are willing to stomach the risk it involves,” he says.
Citigroup has recommitted to its substantial retail credit card program and in January will move its Partner Cards program back into its core operations after sidelining it with other troubled assets beginning in 2009 (
Cap One CEO Richard Fairbank in October told analysts the lender is open to absorbing another retail card operation after acquiring the Kohl’s Corp. portfolio earlier this year (
As long as issuers are careful to maintain relatively strict discipline in their underwriting standards, private-label card issuers with strong retail partners and strategically priced, well-marketed products should not experience any shocks from a slight uptick in retail charge-off rates, Paterson suggests.
“I’m not surprised that charge-off and delinquency rates are up a bit for retail cards because issuers began to get more aggressive with issuing a year or so ago. And as a normal part of that cycle, 12 to 18 months after opening a lot of new accounts you’re going to see some of them go bad,” he says.
Issuers as a whole remain “very strict” in their underwriting standards, and new account rates are still “relatively low” compared with the go-go days before the recession when issuers relaxed their standards and consumers were using credit cards much more heavily, he says.
“Consumer appetite for credit has come back a bit since the depths of the recession in 2009, but it’s not anywhere near where it was before the recession, and issuers are not taking big chances,” Paterson says.
Along with renewed interest in private-label cards, New York-based payments consultant Philip Philliou believes cobranded card programs also may get more interest next year.
“We will continue to see savvy card issuers enter into strategic partnerships and outright acquisition of private-label programs from national retailers,” Philliou says, predicting “an upswing” of cobranded card deals.
Private-label credit cards benefit from association with retail brands that often convey “greater trust and value” compared with bank-branded cards, he says. As a result, more issuers are shopping around for promising new relationships.
“Certain issuers really dropped the ball” in managing retail card partnerships during the recession, and now retailers “recognize that they have choices,” Philliou says.
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