If you're looking for a project that will spin a quick return, private label cards are probably not for you. Like any good investment, real rewards are reaped as the program matures.
I don't even look at my quarterly 401K statements - not even a glance. At my age, there's really no sense in charting output, but I know the investment will pay off in the long run if I'm consistent with the input. Unfortunately, as the person in charge of technology purchasing decisions at your retail enterprise, you'll probably be required to show a return on your technology investments well in advance of your retirement. You don't have the luxury of time to watch technology investments mature - not for too long anyway. But wise retail technology investors realize that while quick ROI hits are achievable, the sweeter, long-term rewards will take a bit more time to come to fruition. Such is the case with private label credit cards. On the following pages Patricia Hewitt, VP of business development at private label card company Fiserv (Lake Mary, FL), and Gary Smith, director of marketing at Internet/catalog retailer Crossing Pointe (Warren, PA), discuss the benefits of private label credit card integration.
1. What advantages do private label cards offer retailers?
Hewitt: There will always be a demand for private label cards since these programs have consistently proven to benefit retailers for three fundamental reasons: First, these cards are a direct and persistent connection between the buyer and seller. This relationship allows the retailer to reach out to a customer via the personal relationship that's been established through their acceptance and use of a branded card. Second, industry studies have consistently proven that consumers spend more money, more frequently with private label credit cards than they do with general purpose cards. Third, a private label card program is an excellent means of building and promoting brand awareness. There are many more reasons that can be cited for the benefits of a private label card program, but essentially they all boil down to the effective use of consumer-driven data to drive up sales and build brand equity.
2. What factors go into determining a good retail fit for a private label card?
Hewitt: The retailer who is most likely to have a successful private label credit card program should have a business that generates at least $1,000,000 in annual sales. In addition, their customer demographics should indicate a base that is generally credit-driven and most importantly, credit-worthy (turning down your customers for credit is not a positive retail experience). These benchmarks make sense for a few different reasons, but primarily due to the economic challenge of justifying such a program unless one can issue a reasonable number of cards. Most retailers will look to an underwriter to actually fund (and service) their program's receivables. Also, the business should be in a position to absorb the start-up costs, as well as marketing and managing it on an ongoing basis.
Now, if the retailer decides to take advantage of a private label program that is offered through an association affiliation, then these benchmarks may change in that essentially, they have a bundled service they're buying into. This lowers their economic barrier to entry, but they'll trade off personalization and perhaps some customer-centric information or marketing opportunities since they'll be part of a larger group.
Smith: Crossing Pointe is a division of 92-year-old catalog retailer Blair. We target the female baby boomer with fashionable apparel at value pricing. In order to serve that market, you need to offer credit, and you need to focus on branding. There's no generation more apt to use credit than this one. But we use CW Direct from CommercialWare, which has no private label credit capability. All of our major competitors offer it, and we couldn't go to market without it. Blair handles private label cards in-house, but when we developed the Crossing Pointe brand, we decided we would need to outsource. We could not have gone to market quickly enough had we attempted to mimic the Blair model in-house.
3. What results statements could a typical retail customer make after introducing a private label card?
Hewitt: Once a private label credit card program begins to mature, the typical retailer should see a correlation develop between their private card receivables (increase) and their merchant discount fees (decrease). This result indicates that they are leveraging their private label program effectively against general purpose card usage. Next, they should experience around 10% growth in the number of private label accounts they're opening compared to the previous year. This indicates they are effectively marketing their program. Finally, they should compare their preprogram margins to their post-program margins to make sure that the overall expense of the program is not eating into bottom-line dollars.
Smith: Our goals are to bring in new buyers and capture a market segment we haven't been in before. A private label card helps us do that. But you have to look at it from a longer term than one year. When you start up, you'll spend more than you make as you build your volume. You need to look at it from a long-term value approach.
4. What are the most important features any retailer should look for in a private label credit card offering?
Hewitt: Generally speaking, a retailer should make sure that their service provider is well-funded and financially stable themselves, and is able to demonstrate the stability and processing speed of their core processing system. Imagine you customer's frustration when you can't process their credit application or sales transaction because of "system unavailability." A good card offering should be able to demonstrate its effectiveness in helping retailers incubate their new card programs. The service provider should prove that they are able to provide innovative credit and loyalty programs that can be tailored to the specific retailer's needs quickly and cost-effectively. Finally, the service reputation of the program provider should indicate that they understand how to provide a positive servicing experience to the retailer and, if applicable, their customer.
Smith: Your partner needs to have stable software that has been tested. They need to understand the private label credit environment and be financially solid with comparable references to prove it. The company must be willing to adjust its offering to fit your business environment. You want a partner that will provide consulting as well as project management. If you outsource it, you want to find a partner that will ensure you don't need to worry much about it. Our partner provides the software, the data center, and they print our statements for us. They handle past due notices and account balances, but give us inquiry ability.
Retailers should determine if they want real-time or batch processing. More and more, retailers want things instantly, especially when Internet customers are involved. We have fairly dynamic credit marketing initiatives with different interest rates and different plans, which we're constantly testing. Our partner had to be flexible enough to handle those plans without a whole lot of additional programming.
You need to evaluate the risks you take on in the accounts receivable department, and whether you have the people on hand capable of making it work. Your partner will (hopefully) have good people, but you need some internal support capability as well.
5. Where's the justification for a retailer to adopt a private label card program?
Hewitt: Adopting a private label card program can be justified for visible reasons, such as promoting and leveraging customer loyalty. A retailer can also offer innovative credit programs that compete very nicely against general-purpose cards. These types of programs include teaser rates (low introductory rates), same-as-cash programs, and installment programs for large purchases, thereby making a purchase at their store more compelling and less painful to the consumer. They can use their customer-centric touch points, such as customer statements, and SKU (stock keeping unit)-level buying information to move inventory more effectively.
Additional benefits include new sources of fee income by renting out "statement space," which take the form of inserts or envelope advertising for noncompetitive products and services. When consumers call with questions on their accounts, this is another opportunity to reach out and promote products and services. Successful programs will generate a decrease in general purpose card expense, in the form of merchant discount fees. Under certain conditions, program providers may offer participation incentives to retailers when they reach specific transaction levels.
A private label program is most effective if it is married to a well-conceived and well-executed loyalty program. This is where private label card programs really shine, in that they allow the consumer to receive financial rewards (such as bonus points) or soft rewards (such as premier client programs) that can be very specifically tailored to their buying habits. These types of loyalty programs are mature retailing concepts, which are greatly enhanced through a private label card delivery channel.
Finally, many of the not-so-obvious benefits of a private label card program are really predicated on how well the retailer uses the very valuable information it gains on its customer's buying habits to build market share. That's why the truly successful card programs should always be launched with a strong reporting and analysis component. Without the intelligent use of this data, the program will certainly be less effective than it could be with one. Successful private label card programs are always integrally tied to a company's marketing strategy and appropriately anchored to its risk management strategy.
Smith: The investment was a strategic imperative for the business. The project was initiated by analyzing our customers and our competition. We would have left behind a significant chunk of business without it. But it takes two or three years to build the business and see the benefits. It takes time to build your portfolio and really get it to the point where your revenue is coming in at the level you want. It's a long-term commitment. If you're looking for a quick bang for next year, this isn't the thing to do. It's at least a two- to four-year commitment. But what we know from our long history with Blair is that the lifetime value proposition is much higher with credit customers. They stay with you longer and spend more.
6. What kind of integration is involved?
Hewitt: If a retailer is using an underwriter to book and fund these accounts, they will need to integrate their POS system with their service provider or somehow provide a link between their stores and the credit grantor. To process sales and returns, a private label program certainly has to integrate with the retailer's POS system or offer some means of processing these transactions. Without the ability to process sales as efficiently as general-purpose cards, the program's effectiveness will most certainly be degraded. The reporting and analysis of private label card activity is also vital to a program's success, and therefore, the retailer should be able to capture the cardholder and their SKU-level transactions into their existing data warehouse or their data analysis solution provider. If the retailer provides its own customer service, the private label program has to integrate into its contact management application. It is also important that the card program provide clear and concise financial reporting, including GL (general ledger)-specific entries.