Last year, Citigroup Inc (NYSE:C) bought up Capital One Financial Corp. (NYSE:COF)’s $7 billion Best Buy card portfolio for an undisclosed price; though the parties to the transaction said it was struck at book value. The deal was particularly notable for the sea change in Citigroup’s view on private-label credit cards as a business.

credit cards

In fact, Citigroup Inc (NYSE:C) was in the market to offload its Citi Retail Services, a store branded card business that was a part of its “bad bank” portfolio, as late as 2011. But in a October 2011 volte face, it announced it would not be selling the division in view of improving demand and lesser competition. General Electric Company(NYSE:GE) was also keen to divest its GE Capital Retail Bank, which ran its private-label credit cards business, but gave up in September 2008.

Synchrony Financial (SYF) spin-off

GE later spun off GE Capital Retail Bank as Synchrony Financial (NYSE:SYF) which listed last month after an IPO that was moderately successful in terms of price. Nevertheless, Synchrony Financial (NYSE:SYF) trades today at a market cap of $19.08 billion, and according to GE, it is the largest provider of private-label credit cards in the United States based on purchase volume and receivables.

In fact, Synchrony Financial (NYSE:SYF) received $17.2 billion worth of applications for its debut bond sale of $3.6 billion. Investors have viewed the company’s long-standing credit relationships with retailers such as Lowe’s (35 years) and Sam’s Club (20 years) positively – “Given the length of their customer relationships, we feel pretty good about their credit quality and ultimately, I think the market has validated that,” says Morningstar analyst Manish Patel.

What changed the perception of private-label credit cards?

BTIG Research analyst Mark Palmer says private-label credit cards, once given up for dead, have made a comeback because of a U-turn in consumer credit trends. He notes that after 2010 there has been a steady decline in the annual charge-off rate for securitized retail and receivables. Since private-label credit cards bore the brunt of delinquencies during and after the financial crisis, the improvement in credit quality was a shot in the arm.

What’s more, banks cracked down on issue of the more pervasive general-purpose credit cards and instead pushed debit cards to their customers. Private-label credit cards then moved back in to fill this vacuum, boosted also by retailers’ attempts to boost store sales via these cards.

Palmer also observes that these cards provided a powerful cost advantage. “PLCCs are the least expensive method of payment that stores can accept given low or zero swipe fees, and reducing cost of payments is a huge benefit to retailers,” he says. These cards also have the added advantage of ensuring customers’ loyalty to the retailer’s brand.

To the banks themselves, private-label credit cards offer a win-win scenario of high interest rates and low delinquencies. Where it can raise funding at lower costs, as in the case of Synchrony Financial (NYSE:SYF), the business can boast of a solid return on equity.