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.
Private-label cards tied to retailers typically are rife with riskier customers with 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 combination of the recession and the Credit Card Accountability, Responsibility and Disclosure Act (CARD) has dampened profit prospects for the industry, making private-label cards a relatively better deal for some issuers, says Robert Hammer, chairman and chief executive of the credit card consultancy R.K. Hammer.
The CARD Act, which went into effect in 2010, restricts issuers from raising interest rates on existing balances and requires them to apply payments to lower-interest balances first, disrupting many large issuers' profit streams.
"It's gotten tougher all over to make money with mainstream bank cards, 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 … wondering how to get back into it."
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; 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 smaller private-label portfolios also are available, Hammer says.
As the down economy continues to dampen overall spending, private-label card portfolios are appealing because the merchants branding the cards are "very aggressive and have a vested interest in marketing the product," 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 increasingly include general-purpose card issuers, Keefe, Bruyette says.
Capital One Financial Corp. could have an interest in buying one of the portfolios, particularly HSBC's, the company says. HSBC's portfolio includes cards issued through Best Buy Co. Inc., and General Motors Corp.
Citigroup's private-label card operations include cards issued through Home Depot Inc., ConocoPhillips Co., Macy's Inc. and its Bloomingdale's division.
Capital One last year signed a deal to issue credit cards for Kohl's Corp., replacing Chase. The company has since signaled interest in buying more private-label portfolios.
Wells Fargo & Co. also could be interested in buying all or part of one of the card portfolios to expand its general-purpose card portfolio, Keefe Bruyette notes.
Discover Financial Services also might be interested in picking off certain private-label card portfolios, the company says.
Alliance Data Systems, which owns and co-manages a broad array of specialty merchants' private-label card portfolios including David's Bridal Inc., might 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 company.
American Express Co. (AmEx) is another "long shot" potential buyer of a piece of one of the card portfolios, but converting any Visa- or MasterCard-branded cards to the AmEx brand would be daunting, the company says.
The prospective acquirers cited were not available for comment.
"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."