Private-label issuers are using CRM, testing kiosks and offering rewards to build consumer purchasing power.
Reports that the retail card business has become a game of portfolio acquisitions for third-party issuers have been greatly exaggerated. Instead, these issuers are reinventing the way they do business with their merchant partners by positioning themselves to compete against general-purpose card issuers on a much broader scale.
That was evident in February when Stamford, Conn.-based GE Consumer Finance teamed with Wal-Mart Stores Inc. and Discover Financial Services to create a cobranded Wal-Mart card. The card, which rewards cardholders with a 3-cent-per-gallon discount at Wal-Mart's 700 gas stations and up to 1% cash back on all purchases, indicates that third-party retail card issuers no longer view their products as one dimensional.
"The days of offering a retail card as a finance tool are over," declares Theodore Iacobuzio, a vice president at Needham, Mass.-based TowerGroup. "The real value for store cards is in creating general-purpose products that provide purchasing power outside the store and in closed-loop loyalty and gift card systems."
Increased utility was the driver behind the decision to issue a Wal-Mart card on the Discover network, according to Mike Abbott, vice president of marketing for GE Consumer Finance's card business. The three also partnered to issue a Sam's Club card on the Discover network.
"From our perspective, dual-branded products not only represent the opportunity for growth but are changing the way the retail game is played," says Abbott.
As a result, the value proposition for retail cards now extends far beyond broader acceptance. Issuers such as Prospect Heights, Ill.-based HSBC Retail Services are providing merchant clients with customer relationship management, or CRM, programs that enable retailers to better track customer behavior.
Armed with more detailed behavioral data, retail issuers can work with their merchant partners to create tiered incentives, ranging from discount coupons printed at the point of sale once the cardholder reaches a cumulative spending level to points that can later be redeemed for merchandise.
"We are seeing more partners expressing a desire to build rewards programs as a way to help drive sales and cardholder loyalty," says Richard Klesse, managing director of client relations for HSBC Retail Services, which has $15.6 billion in managed receivables and 14 million active accounts. "The goal is to create offers that effectively promote the card and drive sales at the most cost-effective price."
Despite speculation that adding sophisticated rewards raises the cost of retail card acceptance to levels near those for bankcards, third-party processors say that is not the case. Private-label cards, along with Discover, cost merchants less to accept than do American Express, MasterCard and Visa cards. If nothing else, upward pressure on bankcard interchange rates is giving retailers more incentive to push private-label acceptance harder.
"There is a cost to rewards programs, but as interchange fees rise it is still less," says GE's Abbott. "The growing feeling is that if moving volume to private-label can save on interchange, why not give some of those savings back to the cardholder in a way that generates more loyalty?"
Beyond the innovation in rewards and financing, third-party retail card issuers also are working to streamline the way consumers apply for cards. Many processors are experimenting with kiosks at which consumers can fill out an application.
The kiosks can be placed near high-traffic areas and are being used in conjunction with a streamlined application process that limits the questions asked of an applicant to as few as five. An instant credit decision is rendered and cardholders are informed of their credit limit, which serves as an incentive for using the card immediately.
HSBC is testing kiosks with Altoona, Penn.-based Wolf Furniture Co., which operates eight stores in Pennsylvania and Maryland.
To help mine new customers, some third-party retail card issuers are looking into offering alternative payment products that go beyond co-branded cards and that cost less for merchants to accept than general-purpose cards. GE has stated it is developing a debit card for retailers that cardholders could fund by opening an account through GE Consumer Finance or an existing bank account.
GE, which no longer breaks out retail card receivables from its other consumer loans, posted assets of $151.2 billion in 2004 and net income of $2.5 billion. HSBC's Klesse also hints at plans to offer other forms of payment products for its retail clients.
The idea of retailers moving into financial services is not such a stretch. Wal-Mart reportedly is gearing up to offer low-interest-rate mortgages and other banking services. Prior to Wal-Mart, Sears, Roebuck and Co. attempted to create a financial services empire that included the Discover Card, the Dean Witter investment house and All State Insurance before spinning those units off in the 1990s.
"The core retail card product is undergoing a big transformation," surmises Abbott. "In the next four to five years, the landscape of this industry will be radically altered."
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