Insights: Why Retailers Should Act Now to Re-evaluate their Private Label Cards

By Hemal Nagarsheth and Ramesh Siromani



Consumers view the “right” payment method, (accessing points, discounts, and special offers,) as a critical part of the purchase process – good news for branded private label cards which allow retailers to cultivate loyalty, improve operating results, and gain sustainable competitive advantage.



A. T. Kearney’s client experience reveals that customers enrolled in these programs shop up to twice as often as those who don’t participate, and spend two to five times more on initial purchases. Even with these results, too many retailers continue to view private label cards as just another payment mechanism and have failed to re-evaluate or strengthen their programs.



Market changes

Consumer credit card spending is rising and charge-off losses are moderating. Private label credit card spending per transaction is growing in excess of general-purpose cards. Established issuers are aggressively pursuing revenue growth as the buyer pool expands and upstart issuers enter the market. The saturation of existing target sectors is leading issuers to pursue retail sectors previously deemed “non-strategic.”



Retailers encouraging customer participation in private label card programs reap substantial benefits. Nordstrom’s loyalty program requires participating shoppers to join the company’s private label card program. The company’s 2014 10K reported that the 3.8 million active members of the Nordstrom’s loyalty program drive 38 percent of the company’s total annual revenue.



Four steps toward retail action

So, how can retailers begin to reorient their private label credit card programs?



First, they need to fully understand the top-line growth opportunity we noted above: private label isn’t just a tool to reduce interchange and associated costs, nor is it just another customer financing vehicle.



Next, retailers must develop a clear card value proposition, determining why private label matters and provides value to their customers; which products (private label credit card, co-branded card, decoupled debit, etc.) best deliver that value; and, finally, what specific targets are required to fulfill the first two criteria.



Start by extending the data sphere beyond point of sale, incorporating and generating insights from the broader environment, including social media listening and customer life event monitoring to predict needs. Then determine loyalty drives such as discounts (Target) versus service (Nordstrom). Finally, institute specific, measurable targets that the retailer and issuer are obligated to meet.



Third, retailers must challenge issuers to do more and to fully understand the value driven by the card issuer and the gain-sharing mechanism. Retailers must begin negotiating better deals – ensuring that their issuer partner also has ‘skin in the game’ and is willing to support a better customer experience at the point of payment, help fund marketing programs, and play an active role in customer lifecycle management.



Such programs capitalize on the “seller’s market” to move beyond discount fee/transaction fee reduction to defined revenue metrics such as card share and net revenue targets. They secure startup investments to fund innovation and ongoing marketing and analytics funding to drive program relevance and customer adoption. Issuer technology and process know-how must be leveraged to implement point of sale innovations such as sub-minute account opening or e-enablement on mobile. Starbucks, for example, e-enabled its gift cards through a mobile app with Apple Passbook integration and Apple Pay (mobile NFC).



Finally, retailers must get their own house in order, removing organizational shackles and knocking down functional silos. Too many retailers place their private label product in a “finance silo” with, at best, limited tie-ins to the rest of the organization, rather than making it part of the larger marketing, sales, and operations conversation about integrating payments and loyalty. Moving past silos requires creating overarching governance to manage the end-to-end card value chain, from product setup to marketing, origination and servicing.

In today’s retail world where customers can buy whatever they want, whenever they want, however and from whomever they want, nothing is more important than establishing differentiation and building profitable customer loyalty.



Private label card programs are not a panacea for all the ills of today’s high-tech driven, information dependent commercial world, but they do provide a strong foundation for redefining – and improving – both your relationship with your customer and, in turn, their lifetime value to you.



Ramesh Siromani is a partner with A.T. Kearney. He is based in Toronto and can be reached at [email protected].



Hemal Nagarsheth is a consultant with A.T. Kearney. He is based in Chicago.