Target has been unable to sell its private-label credit card portfolio, which has been on the market since last January and has now suspended the sale, we learn from Reuters. The retailer had sold half of its credit card loans to JPMorgan Chase for $3.6 billion in 2008 and had been actively looking this past year for a buyer for its current pool of receivables.
Target isn’t actually trying to sell its credit card business, which is a quite profitable part of the struggling retailer’s operations. What it is selling, or attempting to anyway, are the outstanding credit card balances owed by the holders of Target-branded credit cards. Observers are split on the merits of the decision to sell the portfolio, as the long-term benefits of such a move are indeed questionable. But there is another question that deserves reflection: how does such a sale affect the cardholder?
What Is a Store-Branded Credit Card?
Before I weigh in on the issue, let me briefly describe what a store-branded credit card is. Also called “private-label,” this type of bank card is a credit card that is issued by or on behalf of a given retailer or other merchant type and can be used for purchases solely at that merchant’s stores. Other than that, private-label functions just like any other credit card and is subject to the same rules and regulations.
In a way, private-label is similar to a store-issued gift card, as both payment types can only be used at the merchant whose logo they display. The difference, of course, is that, while using a gift card requires that you first load it up with your own money, when using a private-label one you are spending from the credit line you’ve been approved for.
There is one thing both credit and prepaid cards have in common, which helps distinguish all-purpose credit from private-label: cards that display the logo of a credit card company (e.g. Discover, American Express, etc.) or network (i.e. Visa or MasterCard), can be accepted by any merchant that accepts that brand’s cards.
What Does Target Get from a Private-Label Program?
From a merchant’s point of view, a private-label program can be operated in two distinctly different ways. The first is to have a financial institution underwrite and manage the cardholder accounts and the alternative is to operate the whole thing yourself, which is the path chosen by Target. The former option allows you to stick to what you’re good at and let the banks do what they are designed to do. Managing the program yourself is a costly undertaking and you risk taking a huge hit if things go bad. The upside, of course, is that, should you do a good job at it, you would create a whole new, and potentially big, revenue source.
Well, things have worked out quite well for Target. In fact, as Reuters reminds us, the retailer’s private-label arm has positively contributed to the bottom line in every quarter since the last one of 2008, right after the Lehman collapsed and all financial hell broke loose. Few issuers can boast such results. In the third quarter of last year, Target reported profit of $143 million from its credit card unit, a ten percent gain from the same period of 2010.
Additionally, the private-label program benefits retailers through the higher sales spurred by the discounts claimed by customers who agree to open up a card at the checkout. Moreover, Target has managed to boost the subsequent use of its cards by launching a rewards program, increasing its share of sales to 9.5 percent from 5.5 percent, according to a statement issued Nov. 16.
So it is clear that Target’s private-label program is hugely beneficial for the retailer. Yet, Target is trying to sell the credit card receivables for reasons known to its management. How will such a sale impact cardholders? Well, there are a couple of separate issues here.
Firstly, the immediate result of a sale of your Target credit card account to a different company will turn this new company into your creditor. The contract you signed with Target will remain in force, but your new creditor will be solely responsible for making decisions in case of events that are not covered in your agreement. So, if you keep making payments on time, which you should be doing anyway, you will not be affected in any way. If, on the other hand, you are late on a payment, and the consequences of such an omission are not clearly spelled out in the contract, the new creditor will make a decision on what changes will take place, within the parameters of the existing laws.
On the other hand, Target will remain in charge of your rewards program, so there will be no changes there, for as long as your account is active.
The bottom line is that a change in ownership of your Target account, if it happens at all, will not affect you in any way, provided you stick to your part of the agreement. As with all other types of plastic, bad things begin to happen only when you stop doing that. But then, that would be the case even if Target never sold the account.
Image credit: FinancialPost.com.
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