In fact, Target has just broken into the top-10 list of credit-card issuers, joining the ranks of brands such as Chase, MBNA and American Express -- and it's the only retailer to have done so. (The nearest is Nordstrom, ranked No. 27). What's more, Target, which offers both a Target Visa card (shoppers can use it anywhere) and a Target Store-branded card, is running counter to the trend followed by retailers such as Sears department stores and Federated Department Stores, who have moved to sell off their credit-card operations.
So why isn't Target following the outsourcing trend? "It's a way for Target to maintain complete control over the message and communication platform," said Rick Ferguson, an expert in credit-card and loyalty marketing at Colloquy, a loyalty-marketing firm based in Cincinnati. "It's a kind of closed-looped system, and they have more control over the data." And there are innumerable ways, beyond just tracking purchases, to manipulate the ample data produced by a credit-card program to a retailer's advantage in a marketing platform.
Target declined to say how it uses the cards in marketing, but Mr. Ferguson said the possible applications are many, from tracking recency (how recently a consumer shopped the store) to frequency (how often). Target could also determine the monetary values of shoppers based on average transaction amount and attrition risk, or the likelihood they will shop a competitor.
The advantage to keeping this data in-house is Target's ability to drill down to the customer level. Outsourcing means "a retailer may only see it in the aggregate," Mr. Ferguson said.
Not only is Target benefiting on the marketing side, it's making a nice profit along the way. Through its Target National Bank division, Target is quite literally minting money, charging up to 23.74% interest on balances from 16 million customers totaling $5.6 billion.
Beyond the obligatory 10% off purchases when a shopper first signs up for a card, the retailer offers a 10%-off day after every 10th drug prescription. And through a rewards program, every dollar spent on a Target card and every two dollars spent on a Target Visa card earns a point. After 1,000 points, cardholders earn another 10%-off day.
In addition, Target offers a philanthropic twist to drive usage, offering a 1% cash reward through its Take Charge of Education program for a school of the cardholder's choice. Despite the advantages of running in-house credit-card operations, retailers have sold off in recent years because "they ended up being in a situation where they needed cash and needed it quickly, and selling these businesses was basically like going to the pawn shop," said Gwenn Bezard, research director at the financial services company Aite Group.
There are other advantages to outsourcing, including avoiding the risk of managing debt, especially for lower-income consumers, according to David Robertson, publisher of The Nilson Report, a newsletter that covers the credit-card industry. The average household incomes of Target, Nordstrom and Wal-Mart customers are $59,000, $92,572 and $46,679, respectively, according to Big Research. It's notable that "the two retailers that continue to operate their own programs service a higher demographic," Mr. Robertson said.
Wal-Mart and Home Depot
No doubt noting Target's success, the nation's top two retailers, Wal-Mart Stores and Home Depot, want to form their own banks. Wal-Mart so far has failed to garner regulatory approval for its application for a Utah bank charter. Home Depot recently purchased EnerBank, based in Utah, a move that will allow it to offer home-improvement loans and its own credit card, which could help it save the much-derided "interchange fees" charged retailers by credit-card companies.
"Once retailers own the bank, they can get a much better deal on processing their credit card than going to a third party," said J. Craig Shearman, VP-government affairs at the National Retail Federation.