As potential buyers kick the tires of a few big credit card portfolios on the block, the issuers’ private-label card operations for the first time in years could be an advantage, instead of a drag, thanks to changes in the economy and in industry regulations, observers say.
Private-label cards tied to retailers typically are rife with riskier customers having lower credit scores, which was a negative in the years leading up to the economic downturn when many card issuers shed private-label operations.
But the combined effect of the recession plus the Credit Card Accountability, Responsibility and Disclosure Act has dampened profit prospects for the credit card industry as a whole, making private-label cards a relatively better deal for some issuers, Robert Hammer, chairman and CEO of credit card consultancy R.K. Hammer, tells PaymentsSource.
The CARD Act, which went into effect last year, restricts card issuers’ ability to raise interest rates on existing balances and requires them to apply payments first to lower-interest balances, which disrupted many large issuers’ profit streams (
“It’s gotten tougher all over to make money with mainstream bankcards, so people are beginning to migrate back to private label, where there is potentially higher risk but higher profits for those smart enough to manage it right,” Hammer says. “Several years ago, everybody wanted to get away from private-label, and now people are knocking on my door wondering how to get back into it. It proves the adage that if you hold your breath long enough in this business, everything will come back around.”
Three large card portfolios, each with some stake in private-label card operations, are for sale and are generating a significant amount of industry interest, according to a July 12 report from Keefe, Bruyette & Woods.
HSBC Holdings PLC’s $30 billion portfolio–60% general-purpose credit cards and 40% private-label cards; Target Corp.’s $6 billion portfolio in which JPMorgan Chase & Co. is an investor; and Citigroup Inc.’s $41 billion private-label card portfolio are among those for sale. Several other smaller private-label portfolios also are available, Hammer says.
As the down economy continues to dampen consumers’ overall spending, private-label card portfolios hold certain appeal because the merchants branding the cards are “very aggressive and have a vested interest in marketing the product to their customers,” which helps drive card use, Keefe, Bruyette says.
Private-label card portfolios tend to carry higher risks because of their promotional nature, but portfolio acquirers could offset those risks by charging above-average annual percentage interest rates and by setting up revenue- and loss-sharing agreements with merchants, the firm notes.
Potential buyers, which previously might have been only specialty firms, increasingly include general-purpose card issuers, according to Keefe, Bruyette.
Capital One Financial Corp. could have an interest in buying one of the portfolios, particularly HSBC’s, the firm says. HSBC’s portfolio includes cards issued through Best Buy Co. Inc., General Motors Corp., Neiman Marcus Inc. and Saks Inc.’s Saks Fifth Avenue.
Citigroup’s private-label card operations include cards issued through the Home Depot Inc., ConocoPhillips Co., Macy’s Inc. and its Bloomingdale’s division.
McLean, Va.-based Cap One last year signed a deal to issue credit cards for Kohl’s Corp., replacing Chase in that role. The company has since signaled interest in buying more private-label portfolios if a good fit exists (
Wells Fargo & Co., flush with capital and looking to expand its community-banking operations, also could be interested in buying all or part of one of the card portfolios on the block to expand its general-purpose card portfolio, Keefe Bruyette notes.
Discover Financial Services, which has viewed private-label cards as “a natural adjacency” to its business model, also might be interested in picking off certain private-label card portfolios, the firm contends.
Alliance Data Systems, which already owns and co-manages a broad array of specialty merchants’ private-label card portfolios including David’s Bridal Inc., might also grab a piece of HSBC’s private-label card operation. But it is unlikely either Discover or Alliance Data would absorb one of the three portfolios in its entirety, according to the firm.
American Express Co. is another “long shot” potential buyer of a piece of one of the card portfolios on the block, but the prospect of their converting any Visa- or MasterCard-branded cards to the AmEx brand would be daunting, the firm says.
None of the prospective acquirers cited were immediately available to comment on their interest in private-label card portfolios.
Generating profits in the current environment is not easy, but “with good management and sharp eye on marketing opportunities, there is still a lot of opportunity in private-label cards,” Hammer says. “It’s not for everyone, but certain players are going to find the winners here and run with them.”
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