Neither the store nor its new partner would disclose the value of the credit card business. During Capital One’s earnings call in January, however, Chief Financial Officer Gary Perlin said it was “a $3 billion to $4 billion portfolio.” And according to a release from Kohl’s, the card business accounted for half of its revenue last year.
The private-label, or store-brand, credit card market is witnessing a resurgence, after a precipitous decline during the downturn when losses rose at a faster pace than general-purpose cards. Delinquencies and charge-offs have slowed in the past year, while stricter standards on traditional cards have made store cards more appealing to consumers.
Private-label cards carry higher interest rates and lower credit lines than general-purpose plastic. Consumers with limited credit options tend to flock to these cards, and because they are unsecured there is always the looming risk of delinquencies and defaults.
Issuers are nevertheless drawn to the high fee income. Retailers that offer private-label cards tend to have a vast distribution network of stores, allowing issuers to hedge their bets against regional distress, said Robert Hammer, head of the credit card consulting firm R.K. Hammer.
“Store cards earn anywhere from 2 to 4 percent pre-tax return on assets — that’s probably two to four times what the average bank will do,” he said.
During the January conference call, Capital One chairman and chief executive Richard Fairbanks said he anticipated “strong risk-adjusted returns” from the Kohl’s deal. The portfolio, he noted, had “lower revenue margin and lower charge-offs” than Capital One’s core credit card accounts.
Hammer said Capital One has to find ways to accelerate its loan portfolio in a period of rapid decline. “One of the ways to do that, in addition to organic growth through branches, is to buy portfolios in bulk,” he said.
And that’s exactly what Capital One has been doing. Back in January, the company entered the private label market with the acquisition of the credit card portfolio of Canadian retail conglomerate Hudson’s Bay Co. That portfolio had roughly $1.3 billion in outstanding receivables.
“For the right partnerships, private label cards have attractive economics, including solid credit performance and strong spending levels, and long-lasting customer relationships,” said Capital One spokeswoman Sukhi Sahni. “And, private label cards play to Capital One’s strengths of information-based credit underwriting, and customer management.”