The private label credit card (PLCC) business faces unique challenges in the U.S. market. PLCC companies are highly sensitive to retail sales. These programs tend to offer substantial rewards, paid for with interest rates above the market, when compared to general purpose branded network cards. Credit quality tends to be closer to sub-prime than you will find in your typical Mastercard or Visa offers.
The market divides into sectors served by top bank card companies, such as Capital One and Citi, plus non-banks Synchrony and Alliance Data, two specialized retail financial service companies. Capital One, Citi, and Synchrony target iconic brands such as Amazon (Synchrony), Home Depot (Citi), Walmart (Capital One).
Alliance Data plays a notch down, targeting retailers found in malls. The good news is that many of these retailers also have robust e-commerce platforms; the bad news is that they also carry the burden of supporting the retail brick-and-mortar space.
Today’s article, from the American Banker, discusses operational performance and the new CEO, Ralph Andretta. He will be the third CEO at Alliance Data in less than a year. Ed Heffernan spent ten years at the helm until June 2019, followed by a short stint when Melissa Miller had her five month run. Now comes Andretta, who joins the firm as Alliance Data stock is at a ten-year low, trading today at $76.77, down from a peak of $303.30 on May 8, 2015.
The Banker says:
- So, the company’s chief financial officer, Tim King, was in a tough spot Wednesday during remarks at an investor conference held by Keefe, Bruyette & Woods in New York. King urged patience regarding the path forward while speaking in blunt terms about the firm’s problems.
- “Obviously, for the last nine months, we have been in a state of flux,” he said. “The stock is trading down because, you know, folks don’t believe us. We’ve had about three, four quarters in a row where folks have felt like we faded, and we’ve missed on our numbers. We need to produce long-term, steady growth. And Ralph and I certainly understand that.”
And oh, those charge offs.
- In late January, Alliance Data, which makes loans through its Comenity Bank subsidiary, announced that it expected its charge-off rate to rise this year by 20-30 basis points from its 6.1% rate in 2019.
But the wisest comment comes from the new CEO, who says he wants some time to digest current business. Alliance Data is a unique firm, and it is not as easy as shifting from a role at American Express to Citi or Chase.
- New CEO Ralph Andretta announced on Feb. 20 that he would spend the next 100 days on a listening tour and that he would work to develop a strategic plan for the firm by late spring.
Here are three areas where I would point him.
- Get back to using FICO Scores to standardize the business! Mercator reviews every credit card Asset Backed Securitization in the United States. Something unique to Alliance Data is that the firm relies on a proprietary credit score, rather than the industry standard usage of the FICO Score. Alliance Data is the only major credit card firm that takes this approach, and with 18 Asset-Backed Securitizations valued at $7.8 billion, issued between 2014 and 2019, their internal score is more of a curse than a blessing. Fixing the score should not be the objective. Use the FICO score like every significant creditor.
- Be innovative! We see little innovation when compared to the likes of Synchrony, Alliance Data’s fiercest competitor. Last year, Synchrony brought an industry first to the market, with a private label secured card for Amazon. Synchrony also created a super private label card to address industry verticals with a multi-store card that uses a Restricted Authorization Network (RAN). Rather than just a single store, the card addresses a wide range of vertical markets, such as home repairs and medical. This new card aims at Alliance Data’s sweet spot, and the notch below. And in tandem with strong operational results, Synchrony closed deals with Venmo and Verizon in the past 90 days.
- Build a conversion plan for PLCC to an in-house credit offering. PLCC accounts notably take in weaker credit accounts. We say build a program that steps these customers up to branded network cards, as a revenue builder. Bring in weak accounts, cure them, train them, and consider a Mastercard or Visa. Add a secured card product if necessary.
The genteel days of banking are behind Mr. Andretta, but an excellent opportunity is in front of him to steady the ship at Alliance Data.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group