When Citigroup Inc. bought Associates First Capital Corp. in 2000, the country's third-largest private-label credit card business was part of the deal.
The division, renamed Citi Commerce Solutions from Associates Commerce Solutions, is Citi's first serious effort in the private-label market.
The company is now actively promoting Citi Commerce to retail companies in an effort to challenge its main private-label competitors, General Electric Capital Corp. and Household International Inc., as well as Alliance Data Systems, an aggressive processor that began as the in-house credit operation of The Limited and J.C. Penney Co. Inc.
In June, The Nilson Report said that in 2000 - the most recent year for which figures are available - GE Capital had by far the most receivables ($24.6 billion), the most accounts (100 million, of which 37.4 million were active), and the most charge volume ($39.5 billion) in the private-label market.
Household, Citi, and Alliance followed, in that order, in each of those categories, except Alliance had the second-highest number of accounts.
Citigroup says it is edging closer to Household through deals made in the past 12 months with such companies as Amazon.com, Autozone Inc., Zale Corp., and the Fred Meyer Jewelers subsidiary of Kroger Co.
"We feel on par today with Household," Bill Johnson, the general manager of Citi Commerce Solutions, said in an interview this week. "We're competing very well with them." 
Mr. Johnson, who was recruited by Associates First Capital from GE in 1999 to head the private-label operation, said Citi's resources and management support will increase the unit's business. It had already achieved considerable scale, and "that got enhanced with the purchase of the business by Citi," he said.
Before the purchase, "Citi had not been in the private-label business in a meaningful way, but they were very impressed with [Associates' line] and decided it would be a key part of the strategy with Citi Cards," he said.
With the parent company's backing, "there's no limitation on capital investment, and our cost of funds are on par with anyone else or better," Mr. Johnson said.
Last month First Data Corp. announced a long-term transaction-processing agreement with Citi Commerce Solutions. Over the next two years First Data will take over "running the system" for the private-label receivables, while Citi will continue to handle the front-end servicing, collections, and services for commercial accounts, Mr. Johnson said.
Linda Kristiansen, an analyst at UBS Warburg in New York, said the large department store companies she covers (including Saks Inc., Nordstrom Inc., and Wal-Mart Stores Inc.) are not interested in selling their credit card receivables to outside financial institutions. "Most retailers have had credit card programs for a long time. They want to keep their own receivables."
Moreover, "most retailers choose just to break even" on their card programs "and focus on driving sales," she said.
Sears, Roebuck and Co., which has a portfolio of more than $27 billion, is unique among retailers, in that it turns a profit on its cards, Ms. Kristiansen said. However, its entry two years ago into the cobranded general-purpose card market is becoming a trend, she said. Average balances on such cards run higher than those for store cards, and retailers are beginning to view their portfolios as potential profit centers, she said.
Cobranded portfolios (primarily with MasterCard and Visa) would be a source of earnings as well as information for the retailers, since they could examine cardholders' purchasing behavior elsewhere, she said.
"There's money to be made on the receivables," said Matthew Fassnacht, an analyst at J.P. Morgan Securities Inc. Private-label accounts generate revenue by charging relatively high interest rates to the cardholder and interchange fees to merchants, he said.
Mr. Fassnacht, who covers transaction-processing companies, including Alliance, said that many retailers do not have the financial skill to make their card programs profitable. Except for the very large corporations, most retail companies, "don't have the balance sheet clout to make it worthwhile," he said.
Outside financial institutions - or processors, such as Alliance, that securitize the portfolio - have technology, risk analysis, marketing, and collections systems in place that most retailers could not afford, he said.
The risk for merchants is entrusting their customers to an outside company, Mr. Fassnacht said. "There's definitely a conflict of interest. The retailer wants everyone to be happy" and stay loyal, while the owner of the receivables wants to make strategic credit decisions "or else their losses will outpace their income."
Mr. Johnson of Citi Commerce Solutions said it takes the most retailer-friendly approach. "The retailer knows their business better than we do. We happen to know credit; they know their customer. It's a joint offer."
Citi's appealing brand is useful in acquiring merchant accounts, but "the nature of private-label would say that the merchant's visibility is primary, and the Citi relationship and branding is secondary or muted," he said. "Part of private-label is answering the phone with the name of the partner."
Most observers would agree that GE Capital taught the industry that lesson. Now Alliance may be teaching the industry another.
Alliance "sells their service on the idea that, first of all, they understand the retail market and, secondly, how they handle the customers," Mr. Fassnacht said. "Household, Citi, and GE certainly have better scale and can get the funds cheaper, but [Alliance] can differentiate itself on service. It's well regarded as a company that knows specialty retail and can really enhance sales."
Last month Alliance, which says it currently manages $2.5 billion of receivables and 15.5 million active accounts (about the same number as Household and Citi combined, according to The Nilson Report's 2000 figures), bought the private-label accounts of two more specialty retailers: Williams-Sonoma Inc. and Ann Taylor Inc.
"What sets us apart is that we've been doing this for retailers for years," said Ivan Szeftel, the president of Alliance's retail credit services division, which originated when The Limited's credit services unit was formed in 1985.
The private equity firm Welsh, Carson, Anderson & Stowe bought J.C. Penney Business Services Inc. in 1996 and used it to create Alliance as a joint venture with World Financial Network National Bank. Until it was spun off by The Limited, the bank was used to underwrite the retailer's card portfolio.
Alliance's business lines also include transaction processing, loyalty programs, and merchant acquiring.
"Clearly, Citi and Household have brand names and extensive capabilities, but when we engage in an interactive way with clients, we're talking about how to promote their products," Mr. Szeftel said. "Our competitors have tremendous resources, but in terms of our ability to develop programs and drive incremental sales, we can compete very effectively."
Meanwhile, Household says it does not intend to surrender any of its market share.
The private-label portfolio "is one of the most profitable businesses in our company," said Craig Streem, a vice president at the Prospect Heights, Ill., company. "We've had very strong returns, and we continue to add merchants and experience growth even in a negative-growth environment."
