What it means
A store card is the classic example. The retailer puts its name on the card and promotes it at the till, and a bank handles the credit approval, billing and collections behind the scenes.
Because the card works only with one retailer, or a small group of them, it is called a closed-loop product. This is different from a general-purpose credit card that is accepted everywhere on a payment network.
Retailers use these cards because cardholders usually spend more per visit and return more often, and the retailer gains data about customer behaviour that helps it plan stock, offers and store locations. Promotional offers such as deferred interest or equal monthly instalments can lift sales on large purchases like furniture or electronics.
The financial arrangement is normally a revenue share. The bank earns interest and fees from cardholders, pays the retailer a portion of the income, and takes the losses when customers fail to pay.
The risks are credit losses, which tend to rise in an economic downturn, and the effect on the retailer's reputation if collections are handled badly. Customers also pay higher interest rates on private label cards than on many other credit products, and regulators pay close attention to how these cards are sold.
Accounting for the arrangement depends on the contract. A retailer that only receives a share of income records it as other income, whereas one that keeps the receivables itself carries the credit risk and must record allowances for expected losses.
In practice
Real-world examples.
Example
A furniture chain offers a store card with 12 months of interest-free payments on purchases over $1,000. Average spending per customer rises noticeably, and the bank partner funds the balances. The retailer receives a share of the income and pays the bank a fee for each promotional offer it runs.
Example
A department store uses its card to run members-only sales and points. Cardholders visit more often and the store gets rich data on what they buy. Management measures the extra sales from cardholders against non-cardholders, and reports the gap to the board every quarter.
Example
An electronics retailer discovers that late payments on its card have risen sharply during a downturn. Its bank partner increases its provisions for credit losses. Because of the revenue share, the retailer's income from the card falls. Management responds by tightening the approval criteria for new applicants.
Formula
Calculation
Net yield = (interest and fees earned - credit losses - funding cost - servicing cost) / average receivables
Suppose a lender holds $10,000,000 of private label card balances. Interest and fees earned are 22% x 10,000,000 = $2,200,000. Credit losses are 6% = $600,000, funding cost is 3% = $300,000 and servicing cost is 2% = $200,000.
Net income = 2,200,000 - 600,000 - 300,000 - 200,000 = $1,100,000.
Net yield = 1,100,000 / 10,000,000 = 11%.
If the retailer's agreement gives it 30% of this net income, its share is 0.30 x 1,100,000 = $330,000.Case study
Seen in the real world.
Birchwood Home Stores is an illustrative, fictional furniture retailer that launched a private label card with a bank partner. In the first year, 80,000 customers opened a card, and balances reached $40,000,000.
Cardholders spent on average 25% more per visit than other customers, which raised the retailer's sales. However, the finance director noticed that the revenue share dropped when losses rose, because the retailer's share was calculated after credit losses.
She asked the bank for monthly reports showing balances, losses and the retailer's share. In this illustrative story the reports revealed that deep promotional offers attracted weaker borrowers, so the retailer tightened its offers and kept most of the sales benefit with lower losses.
Watch out
Common mistakes.
- Judging the card only on extra sales, when the retailer's income also depends on credit losses and how the revenue share is calculated.
- Assuming the retailer carries no credit risk, when many agreements pass part of the losses back through the revenue share.
- Offering long promotional terms without considering how many customers will pay late or default, since longer interest-free periods tend to attract customers who need the credit most.
Questions
People also ask.
Is a private label card the same as a store credit card?
Yes, the terms are used interchangeably for cards branded by a retailer and usable mainly at that retailer, though some store cards are linked to a payment network.
Who owns the customer relationship?
The retailer owns the brand and marketing relationship, while the bank partner usually owns the account and handles credit decisions, though contracts differ and some retailers keep control of the customer data through the agreement.
How is it different from a co-branded card?
A co-branded card carries both a retailer and a payment network logo and works everywhere, while a private label card is usually limited to the retailer.
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