New research from TowerGroup has predicted that the in-house issuance of private label credit cards will decline in 2005 as merchants either outsource their card businesses or sell them outright.
The research, from TowerGroup, suggests that while private label credit card portfolios have been the tightly guarded assets of US retailers and oil companies for many years, recent changes in the consumer credit landscape are driving even the largest in-house issuers to rethink. The research points at three main factors that are changing:
- Competition from general-purpose credit cards is increasing,
- The volume of bad loans or charge-offs is increasing, and
- Pressure on margins is increasing.
Outlook not promising
According to the research, the trend toward outsourcing private label cards will continue, with major third-party issuers like Citi Commerce and GE Consumer Finance positioned to acquire the few remaining sizable in-house portfolios.
Regan Wong, director of the Bank Cards research service at TowerGroup and author of the research, explained that "The outlook for in-house private label issuance is not promising. Developments in the credit card business and advances in technology are enabling merchants to implement their payment and loyalty objectives via less expensive means, such as outsourcing and co-branding."
"This opens opportunity for third-party issuers and other competitors, but also presents merchants with new challenges in terms of managing the customer relationship," Wong added.
Highlights of the research
- TowerGroup estimates that private label programmes generated $155 billion in receivables in 2003. Between 1998 and 2003, receivables grew at a compound annual growth rate (CAGR) of 2.6% annually. TowerGroup expects this growth percentage to decline through 2006 to a more modest CAGR of 1.4%.
- Three issuers currently account for over 90% of total third-party issuer receivables in the U.S. (Citi Commerce, GE Consumer Finance and Household). As retailers and oil companies continue to move toward outsourcing private label portfolios, TowerGroup expects much of the business to go to the largest players in the industry - given their ability to offer competitive pricing based on scale.
- Other alternatives to private label cards will continue to compete for transaction share. TowerGroup expects ongoing robust activity in the co-brand and reward programmes. And while other payment media including debit and prepaid products (such as payroll and gift cards) do not address customer loyalty as effectively, they will continue to complete with private label cards for transaction share at the point-of-sale.
Surrender control
But Wong adds: "For a retailer, cardholders are loyal customers. Whereas for a large, third-party outsourcing operation, they are often just another transaction. When a retailer chooses to outsource its entire credit function to a third-party, it surrenders control over the tactical, financial and service aspects of the operation. So while maintaining an in-house credit operation is an expensive proposition, there are still a number of retailers and oil companies that consider the expense worthwhile - for now."
The report, 'Private Label Credit Cards in the US', can be purchased by sending an email to service-info@towergroup.com.
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