Alliance Data bets on installment loans to land more retailers

Private-label credit card issuer Alliance Data Systems was in a precarious spot last year with its high exposure to the apparel industry, which saw the sharpest sales declines of any retail category during the first phase of the pandemic.

But as retail partners Forever 21 and Pier 1 Imports filed for bankruptcy and longtime partner Victoria’s Secret closed stores and began exploring a buyout, Alliance Data diversified its mix of merchants and credit offers.

A key part of its turnaround is the Columbus, Ohio-based company’s acquisition of Australia-based fintech Bread, which Alliance Data purchased last year for $450 million to jump-start its entry into the fast-growing installment lending market after decades of relying solely on traditional revolving credit card lines.

Alliance Data’s existing retail clients may add Bread’s buy now/pay later (BNPL) loans through a white-label approach for online and in-store sales, according to Bread CEO Derek Joyce, who joined Bread in 2020 from BNPL pioneer Klarna. Joyce earlier served for nearly a decade at American Express.

“The in-store shopping experience is coming back, and just as we are seeing the travel industry rebound, we’ll see brick-and-mortar become a big driver for BNPL loans,” said Derek Joyce, CEO of Bread, which Alliance Data bought in 2020.

“Alliance Data is unique among other private-label credit card issuers in the way it’s already got deep point-of-sale integrations at thousands of stores, so adding Bread’s state-of-the-art installment loan technology is relatively turnkey,” Joyce said.

Online sales have been the biggest channel for BNPL purchases — powered by giants Klarna, Affirm and Afterpay working as third-party providers to merchants — and currently about 40% of Alliance Data’s credit card sales are coming from the online side, Alliance Data recently reported.

Joyce predicts the installment loan movement will begin to accelerate faster at the point of sale.

“The in-store shopping experience is coming back, and just as we are seeing the travel industry rebound, we’ll see brick-and-mortar become a big driver for BNPL loans,” Joyce said.

The Bread acquisition opened the door for another deal: In April, Alliance Data forged a new strategic relationship with Fiserv to provide point-of-sale lending options — including BNPL — to Fiserv’s stable of merchant acquirers.

Bread will provide the BNPL technology through Fiserv’s dashboard and Alliance Data will originate and manage the loans, with merchant acquirers earning an acquisition fee for each sale, Alliance Data CEO Ralph Andretta told analysts earlier this year when outlining the first-quarter earnings.

Alliance Data’s deal with Fiserv isn’t exclusive. Other consumer credit lenders have referral relationships with Fiserv’s broad array of merchants, but Bread will be the only BNPL or installment lender built into its platform, Andretta said.

Andretta, a longtime Citi cards executive who joined Alliance Data in early 2020, is also serving as the company’s interim CFO before Perry Beberman takes over the role in July when he leaves Bank of America.

Bread’s lending options will go live with Fiserv merchants beginning this fall, and meanwhile Alliance Data has added several new non-apparel partners including Petco, furniture retailer APT2B and mattress maker Luxi. Altogether Alliance Data has about 65 million consumers in its credit-issuing database, the company said.

Alliance Data also recently inked a deal similar to the Fiserv pact with RBC, whereby RBC’s merchant acquirers will have Bread’s financing options available alongside other options. RBC will originate and manage those loans, Alliance Data said.

“RBC has the biggest merchant base in Canada but they didn’t have technology to offer installment loans directly to customers,” Joyce said.

One analyst notes that while consumer enthusiasm for BNPL loans continues, the outlook for profits is not as clear.

“Lenders should be cautious,” said Brian Riley, head of credit advisory at Mercator Advisory Group, noting that in the last 12 months the largest BNPL lenders lost more than $8 billion in market capitalization as share prices fell.

But having eked out a profit during 2020 despite the rocky retail environment by carefully managing credit lines, Alliance Data could be in a good position for balancing future market risks, Riley suggested.

“With Fiserv’s broad risk and Alliance Data’s ability to service a wide range of second-tier retailers, the firms will likely see traction at the physical point of sale,” Riley said.

The final element of Alliance Data’s turnaround fell into place in May with the announcement of a plan to spin off the sprawling consumer loyalty unit that was proving to be a distraction to Alliance Data’s core credit operations.

For years, Alliance Data’s LoyaltyOne unit has operated Canada’s popular Air Miles coalition program along with BrandLoyalty, a global grocery store marketing program. Both saw a dramatic reduction in rewards earned and redeemed during the pandemic due to travel restrictions and lockdowns, the company reported in April.

Bread’s challenge — now that retail sales are recovering and Victoria’s Secret is preparing for an IPO after sorting out its own troubles — will be capitalizing on post-pandemic shopping trends by creating a seamless checkout experience for borrowers.

“The shopping journey has changed to be more holistic, with consumers using online and mobile, but also using curbside pickup and going into stores, where they’re expecting to find a full range of financing options,” Joyce said.

Though credit card receivables fell during the pandemic, Joyce says that was a short-term reaction to economic uncertainty and the biggest consumer segment — millennials — are poised to spend.

“There was a notion for many years that millennials don’t use credit cards, but the reality is they were late adopters. Most millennials have credit cards and they are positioned to spend, particularly in electronics and home goods, as we come out of the pandemic,” he said.

Bread, which has locations in New York and Tampa, Fla., will maintain its existing offices while working closely with Alliance Data using a technology team that’s spread across the country, Joyce said.

“It’s a great match, because Bread continues to acquire merchants directly, but with Alliance Data we are increasing our reach to merchants exponentially and Alliance now has the industry’s leading-edge installment lending technology,” he said.

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