Credit card issuers show renewed interest in private-label cards

In recent months, some leading credit card issuers have shown a growing interest in creating or growing private-label credit card portfolios:

  • Capital One announced the acquisition of HSBC’s $30 million card portfolio in August 2011.  This follows its April 2011 purchase of Kohl’s private-label portfolio.  In reporting 3Q11 financials, Capital One indicated that it would be interested in acquiring more private-label portfolios.
  • This week, the Wall Street Journal reported that Wells Fargo is actively exploring whether to issue private label cards
  • In reporting 3Q11 financials, Citigroup announced that it would be moving its private-label card portfolio from Citi Holdings (it asset-disposal unit) to Citicorp.  And it recent renewed its private-label card issuing deals with Shell, Sunoco and Sears.
  • TD Bank has recently entered into a number of deals to issue cards for: Cartier; Furniture First; and Bailey, Banks and Biddle.

There are a number of reasons for issuers’ renewed interest in this market:

  • Credit quality metrics have improved significantly in recent quarters, for both own-branded and private-label cards, with very strong declines in charge-off and delinquency rates.  For example, the net credit loss rate for Citi’s Retail Partner Cards portfolio fell from 12.24% in 3Q10 to 7.51% in 3Q11.  During the same period, the portfolio’s delinquency rate fell from 7.94% to 5.70%.
  • With loan-to-deposit ratios now well below 100% for many leading banks, and with continued pressure on net interest margins, banks are looking to grow loans in new categories
  • Given the recent growth in commercial and corporate lending, banks are also seeking to cement relationships with large corporate clients
  • The CARD Act has impacted revenues and profitability from issuers’ own-branded card operations.  As a result, some issuers are looking to build scale to their card operations by investing in various card categories

In building their private-label card portfolios, issuers need to understand how the marketing of credit card has changed in recent years.  Today, credit card marketing is more focused on encouraging cardholders to allocate a greater share of their everyday spending to cards, rather than cash or checks.   And even though outstandings are showing some tentative signs of growth, issuers are not aggressively chasing loan growth with aggressive interest rates and low underwriting standards.  In building their private-label portfolios, issuers need to apply these learnings and take the longer-term view, in order to avoid the mistakes of the past.