Three financial firms could be lining up for a run at
$7 billon credit card receivables business,
and the credit card divisions of
may have an interest in taking a role in Target's card unit, according to a person following Target's efforts to monetize that business.
The three financial firms rank among the biggest credit card companies in terms of accounts and receivables, according to The Nilson Report, which tracks consumer payment systems. The source says they may seek either a purchase of the card operations or a partnership with the Minneapolis-based discount retailer.
A call to a Target spokesman was not immediately returned. Spokespeople for JPMorgan, HSBC and GE declined to comment.
Target said earlier this month it
hired Goldman Sachs to explore options for its credit card operations. That announcement came the same day that
reported Target was aiming to unlock cash from the card portfolio while still retaining control of customer relationships.
Target's move came just weeks after activist investor William Ackman's Pershing Square Capital disclosed a big stake in Target.
GE's credit card unit, GE Money, reportedly has been keen to increase its relationship with retailers. It already serves a wide array of big-ticket retailers, including
, Brooks Brothers,
Earlier this year, JPMorgan paid some $1.5 billion for
credit card business. Other recent credit card portfolio buyers include
But the world has changed, and banks have been hammered on worries that they are stuck with hundreds of billions of dollars worth of bridge loans.
Target's lucrative receivables portfolio consists of both so-called private label cards, which typically have a smaller limit and can be used only at Target stores, as well as more profitable, so-called co-branded credit cards that carry a Visa or
logo. These can be used at any venue, with rewards tied to usage, notes Ken Paterson, director of credit advisory services at Mercator Advisory Group.
The value of the Target private-label business is that it's a huge relationship-builder. Target's private-label business generates relatively low returns, but it builds brand loyalty, and over time those customers can be converted into co-branded cardholders.
Target has benefited greatly from revenue from its credit card operations, which had earnings before taxes net of interest of $163 million in its most recent quarter -- an increase of $41 million from the same period a year prior, according to public filings.
It's a wonder the retailer would seek to relinquish the business given its merits to its bottom line and the shakiness in the credit markets. But the appetite for the portfolio is said to be very high, in part because it is believed to consist of customers with high-credit scores.
"It is such a rare event to have a portfolio like this come up for sale," Paterson notes. "This would be hugely desirable."
The question is how much of that revenue will Target attempt to retain as it seeks to work out a sale. Target may want to keep the servicing aspect of the card operation, in order to keep its relationships with it clients intact. But few retailers that have opted to unload their credit card operations have done so, Paterson notes.
"They've built a certain standard of servicing; it's a testament to them that they want to maintain that," he adds. "But it's all about building relationships and selling more stuff."
Even if it should decide to shed its servicing business as well, Target will want to continue to reap gains from credit card earnings.
At the end of the day, a sale might be the best way for the company to focus on its retail knitting while allowing a bank -- the most logical owner for receivables -- to extract more profits from the card business.
Target has said that it expects to determine whether it will compete a deal by the end of the year.