Photo: rondauphin via Flickr
Unlike most retailers who outsource their credit card business, Target has been running an in-house operation since 1995 via their very own bank (Target National Bank).A nice little money maker for them, until the economy crashed and their net write-offs surged, hitting 11.2% during Q4 of ’08 and eventually climaxing at 15.0% during Q1 of 2010.
A dismal failure? Definitely. But not anymore…
How They Pulled a 180
Obviously the system was broken and it needed to be fixed. Scratch that… fixing would still be a failure. What needed to happen was a rebuild from the ground up. Fortunately, they moved swiftly to do just that.
During Q2 of 2010, they announced their plans for a completely new version of the Target credit card offering a 5% discount. An ingenious move for the following reasons:
Reason #1: Store use only = better risk control
No offence to the folks out there who use store credit cards, but let’s be honest here… they’re more likely to have subpar credit versus someone who carries, say, the American Express Mercedes Benz card or some other high-end credit card. Traditionally, the people who apply for department store and gas station cards are more likely to be those who can’t qualify for anything better.
So essentially what Target did over the years was create a crappy cardholder base, bloated with customers who have subprime credit. Then when you slap the Visa logo on the front and tell these customers they can use their card not just at Target stores, but anywhere Visa is accepted… it was just asking for trouble.
The new version is for store usage only. Is it still risky to extend credit to some of these cardholders? Of course. However the difference is that Target is undertaking that risk to sell more of their own merchandise (which they make money on) versus those customers spending elsewhere. That makes the risk all the more worthwhile. Furthermore, by doing so they control what the money is not being spent on. It’s not being used for cash advances to pay a mortgage, trips to Vegas, etc.
Reason #2: Rewards for 5% is the magic number
As someone who markets credit cards for a living, I can tell you there’s something magical about 5%. Tell someone they’re earning 3% or 4% and it might go in one ear and out the other. But tell them it’s 5% and you have their attention. But don’t take my word for it. Just look at some of the most popular reward cards on the market such as the Chase Freedom, Discover More, and even that new AmEx Mercedes Benz card mentioned above. What do they have in common? They all give 5% (or 5x points) in some form or fashion.
Why is this so significant? Because with the 5% cash back, suddenly the Target credit card is appealing enough to catch the higher-ups, the folks with great credit. You can bet this move will only strengthen the quality of their cardholder base. Ideally, that should mean when the next economic tsunami hits, they won’t be left picking up the pieces for so many deadbeats.
Last but not least… 5% is a significant spending incentive. Rather than swinging by the CVS around the corner, a cardholder would probably be more inclined to venture on over to Target to buy what they need (and more). It’s also great for PR. Instead of talking trash about the card, I’m seeing bloggers out there touting it as a good tool for financial planning because it saves you money (in theory at least). In short, this program bolsters store loyalty and incentivizes greater spending… a win-win for the revenue.
Reason #3: In-house quality control
These days very few retailers have anything to do with the credit card operations which use their name. Most outsource (or outright sell) the operations to GE Money, World Financial Network National Bank, and other similar outfits. For regional and smaller chains, this model is probably the most efficient when compared to the costs of running the operations in-house.
However for the big boys, they may be better off doing it alone. The number of complaints I see for many store cards is absolutely staggering. By keeping things in-house, a competent company should be able to keep tighter reins on delivering quality. Keeping customers happy, keeping them coming back for more.
As mentioned, Target runs an in-house operation. It’s definitely not perfect and has harnessed its fair share of customer service complaints, too. However since the launch of the new card, the number of negative comments seemed to have plummeted, at least for now. This aspect of maintaining quality will be a must if they want to draw in (and keep around) the more creditworthy.
When their bad debt peaked, they were the laughingstock of store cards. But over the last couple quarters, it’s a different story and the credit card division is significantly boosting the company’s earnings.
If the trend continues, I would not be the least bit surprised if we see other major retailers copy this winning formula. Especially now that our economy is flat (at best) and retailers will need to pull every trick in the book to keep Wall Street happy.
For example, review the Best Buy credit card for yourself and you will probably draw my same conclusion I did – it’s definitely time for a re-vamp. If Best Buy were to mimic the Target model, the card would attract a whole new breed of quality cardholders, not to mention give them an incentive to shop Best Buy instead of Amazon.
On the other hand, I think there would be little incentive for the granddaddy of them all, Walmart, to adapt such a generous rewards program. Why? Because even though the Walmart credit card is a total joke, it’s probably sufficient for whom they’re going after. Target is said to draw wealthier customers, and in turn, they need a card that caters to them.
Disclosure: Credit Card Forum has an affiliate advertising relationship with most major credit card issuers, including Chase, Discover, and American Express who were mentioned above. However, there is no advertising relationship with AmEx for the Mercedes-Benz credit card as of the time of writing.
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