Taking Credit

Given the proliferation of credit cards and that so many consumers are already saddled with debt, you may wonder whether it’s worth your while to offer a proprietary, or private-label, credit card. A proprietary card is one that customers can use only with your company. Generally cardholders are given special benefits, such as discounts once they’ve charged a certain amount using the card.

The benefits of proprietary cards are considerable for the company as well. Cardholders tend to spend more and have a greater lifetime value than other customers; the card programs also generate additional marketing opportunities. The main reason customers sign up for a private-label card, says Bill Salamy, vice president of client relations for Alliance Data Systems Corp., a Dallas-based private-label credit service provider, is the additional benefits, such as a point-of-sale discount in exchange for enrolling in the program. Once they become cardholders, the convenience of being able to pay with the card encourages repeat purchases. To enhance customer loyalty, companies can introduce card-related promotions, such as discounts for those who’ve charged a certain amount on the card.

Before investing in a private-label card, though, you need to make sure you will have enough cardholders to garner a favorable deal with the processing bank, and that you have enough repeat buyers who would be interested in using it. You also need to determine if you should manage your credit card inhouse or work with a financial institution.

While it helps to have a strong contingent of repeat buyers, there is no magic number or percentage of customers that a company should have before determining that a proprietary credit is a worthwhile endeavor, Salamy says. Hingham, MA-based apparel cataloger/retailer The Talbots, which rolled out its private-label card nationally in January 2001, knew from market research that a significant portion of its customer base consisted of repeat buyers who tended to favor Talbots over their other shopping options, says spokesperson Margery Myers. “We do benchmark studies, online studies, and focus groups, and what comes out is that once she becomes a Talbots customer, she becomes a Talbots customer for life,” says Myers of the majority of the company’s buyers. “Some of our customers have been shopping with us since the first store opened in 1947.”

Talbots began testing the proprietary card in 1997, making it available to customers in Massachusetts, Connecticut, Rhode Island, Pennsylvania, Ohio, and Delaware. This soft launch consisted of a group of customers “large enough to help us decide if this was something that had legs for us,” says Myers. The company wanted some of the test states located close to its corporate headquarters so that management could better observe the use of and operations behind the card.

Myers won’t disclose a comparison of average order sizes and purchase frequencies between cardholders and nonholders. But the private-label cards were used for 36% of all sales in 2001 and for 45% in the first quarter of 2005, she says.


The greater lifetime value of private-label cardholders is a well established fact in the catalog industry, says Tim Litle, chairman of Lowell, MA-based payment processing firm Litle & Co.: “I would say it’s at least twice as high, and it might be as much as three or four times higher. People don’t carry 100 cards in their wallet, so if they choose to carry yours it means they are a more loyal customer.”

For New York-based Catalogs Holding Corp., customers who have the proprietary credit cards of its Spiegel general merchandise catalog or its Newport News women’s apparel title have a lifetime value that is “four to five times better” than that of noncardholders, says CEO Geralynn Madonna. About 20% of the company’s customer file has been issued a private-label card, she says, and purchases charged to the cards account for about 30% of the company’s sales. Spiegel, which “is still in the growth mode for proprietary credit,” is working to raise that percentage to 40%-50%, says Tony Chivari, senior vice president of marketing and Internet.

Framingham, MA-based office supplies cataloger/retailer Staples, which launched a proprietary card to its business-to-business segment 15 years ago, has benefited from a striking change in the spending habits of customers once they become private-label cardholders, says Rachel Trueblood, vice president of small business and home office marketing.

“We’ve done linear tracking of customers, and there’s a dramatic increase in spending before and after,” she says. “When someone has made a commitment to get a card, it’s sort of like they’re raising their hand to say they’re going to dedicate a lot of spending to you, so they’re better spenders, have a higher retention rate, and place larger orders. They spend at least twice as much as noncardholders.”

One of the primary motives behind launching the card was to make buying more convenient for small businesses, says Trueblood. Companies that give the card to employees don’t have to worry about bills getting racked up for any other purpose than office supplies. The bills customers receive from Staples are also more user-friendly and thorough than those they would receive from major credit providers such as Visa and MasterCard, she says: “They get a detailed invoice down to the SKU level, so they know what SKUs were purchased.” Members can also view and pay their bills online. Customers already enrolled in the company’s loyalty program receive an additional benefit after signing up for the private-label card, says Trueblood; instead of being able to earn 2% off purchases per quarter, they can earn a 5% discount.

For Westlake Village, CA-based music equipment cataloger/retailer Guitar Center, launching a proprietary credit card tied in nicely with its overall branding message. “Our marketing in general is about how you will save more if you buy now,” says Darren Feldman, director of partnership marketing. “It’s all about urgency, and a lot of times, people don’t have disposable income right now.” That’s particularly true for the young adults and struggling musicians who make up a sizable portion of Guitar Center’s target market.

Guitar Center launched its proprietary card in November 1997. The company won’t release specific numbers relating to growth of card membership and the difference in spending habits of cardholders vs. nonholders, but Feldman says he and his colleagues are pleased with the response. “It’s grown exponentially,” he emphasizes. “I can tell you that the average purchase is more, and that the program has grown quite considerably.”


Private-label cardholders, who are generally your best customers, are ripe for targeting with additional promotions. And from a database segmentation aspect, singling them out from the rest of your database is relatively simple.

“When you have that list of loyal customers, you can promote them and have special retail events and special sale events in the catalog,” Litle says. “From a multichannel brand marketing point of view, it makes it a lot easier to track purchase behavior across different channels. The tools for tracking people, whether or not they have cards, are getting better and better, but obviously, if a customer uses a proprietary card all the time, it’s not fuzzy at all. You know exactly who that customer is.”

Alliance Data Systems’ Salamy says companies can create personalized messages on billing statements to cardholders. “You can take point-of-sale demographic and psychographic information to overlay messages and incentives in the statements,” he says. If a cardholder is being billed for a shirt he just purchased, for instance, you could include a message advertising a pair of pants or a tie that goes with it. Indeed, statement stuffers to cardholders can be a useful way of spotlighting a star product, says Westerly, RI-based direct marketing consultant Steve Rowley.

Every month Spiegel mails a mini 16-page catalog out with its private-label statements, says Madonna. The book, which has the same height and width as the statement, offers exclusives to cardholders, such as 20% off select items, as well as nondiscounted products. In addition, the statements always feature a personalized statement, notes Chivari. For example, if the customer is close to achieving the six-month $500 spending goal that will allow her to receive a merchandise certificate, the card will remind her of how close she is getting. Or if a customer hasn’t made a purchase in a while (statements go out every month regardless of purchase activity), the message will refer to not having heard from her in a while.

Staples uses statement inserts to publicize offers for different products and services, such as the company’s delivery service. “We can also do some segmenting based on customer information,” Trueblood says. “We know what zip code they’re in, so we can direct them to a certain store.”


One key difference between a private-label card and a cobranded card (see “Proprietary vs. cobranded,” page 26) involves the management of the card operations and the assumption of the financial risk. If you’re offering a cobranded card with Visa, Visa assumes the risk for delinquent accounts. With a private-label card, you can choose to manage all aspects of the program — and subsequently take the hit if customers fall through on their payments — or contract with a financial institution. New York-based Citigroup, Prospect Heights, IL-based HSBC Finance Corp., and Stamford, CT-based GE Consumer Finance are among the service providers that will take care of private-label card transactions and operations.

The financial institution handling the processing deducts a percentage off the merchant’s profit from each card transaction, says Litle; this is known as the discount rate. The greater the sales a proprietary card is expected to reap, the lower that discount rate will be, and the more profit the merchant will be able to make per sale. Discount rates can vary greatly, Litle says, but a mutually beneficial rate between institution and merchant would usually be at least 2% but no more than 9%.

Of course, administering card operations inhouse also has its costs. In 2000, prior to the national rollout of its card, Talbots established its own bank and finance subsidiaries to consolidate and manage the administrative activities associated with it, says Myers. Based in Lincoln, RI, this arm of the company employs about 20 workers and operates in concert with staffers in the direct marketing, creative, and finance departments at the company’s corporate headquarters, who dedicate part of their time to the marketing of the card.

And financial institutions won’t be interested in managing the private-label credit cards of smaller companies, which cannot generate enough to volume to make the business worth the bank’s while. Salamy says that generally the companies that use Alliance Data for their proprietary card management have sales of at least $100 million annually.

At Guitar Center, Feldman and an assistant handle the marketing of the card, but the operations are outsourced to HSBC. Even so, Feldman says, the representatives he works with at HSBC provide guidance on how to best market the card. “They bring best practices to the table, things other merchants have done successfully to test,” he says. Such suggestions might include incentive programs to encourage employees to enroll cardholders, processes to expedite the application process, and programs to enable customers who were declined a card the ability to qualify for some other, less risky form of credit.

Staples also outsources operations of its card. Citigroup oversees all the administrative and transactional functions, says Trueblood. And like Guitar Center, Staples handles the marketing inhouse. Staples also educates its employees on the card and oversees the legal work associated with the card, such as making sure all the terms and conditions of membership are well publicized and that the customer credit information is kept private and protected.

“I would say the hardest part of managing it is making sure we have the staff ready and educated to answer any question about it on the frontlines,” says Trueblood. All new employees must complete online training on the card, including the ins and outs of enrollment and benefits. In addition, Staples provides call center reps and store workers with 3″ × 5″ cards with the most frequently asked questions about the program.

There are also some hidden expenses associated with proprietary card programs. “The costs include [customer service rep] talk time on the phone, the space taken up in the catalog with the card’s terms and conditions, and the incentives to get people to sign up,” Madonna notes.

Proprietary vs. cobranded

If you’re not sure you’re able to staff up enough to manage a proprietary card properly, or if you don’t wish to assume the financial risk involved, a cobranded card may be an alternative.

A proprietary card “probably offers the greatest opportunity for response rate lift in our industry, but on the other hand, it’s one of the greatest risks a catalog company can take,” says Westerly, RI-based direct marketing consultant Steve Rowley. “The risk lies in assuming too much credit, allowing the customer to have too high a credit limit, and getting overextended. If you’re slow in collecting, it becomes a drain on cash flow in the business.”

A cobranded card is issued in partnership with a major credit provider, such as Visa or MasterCard. Your company’s name is printed on the card, but the credit provider assumes all the risk for delinquent payments, fraud, and such.

Proprietary cards have benefits that cobranding can’t match, however. One reason Westlake, CA-based music equipment cataloger/retailer Guitar Center favors proprietary over cobranded is the exclusive line of credit it can provide its customers, says director of partnership marketing Darren Feldman. “With a dedicated line of credit, you have nothing else competing for those dollars,” he explains. “That’s really key. We all have bills to pay, but with private-label, those things can’t be paid with the card, so those dollars are there to use.”

Proprietary credit also enables companies to save on third-party bank fees in the processing stage. “It’s our lowest-cost credit product, compared to Visa, MasterCard, American Express, and Discover,” says Rachel Trueblood, vice president of small business and home office marketing for Framingham, MA-based office supplies cataloger/retailer Staples.

Moreover, she says, Staples’ business-to-business private-label card allows it to grant credit to small and start-up companies that might not qualify for a card from a major credit provider. “Visa and MasterCard aren’t keen on giving new businesses credit,” Trueblood says, “because they haven’t built up a credit history yet.”

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