The financial performance of retailers owning credit card banks ...

Int. J. Revenue Management, Vol. 1, No. 2, 2007

The financial performance of retailers owning credit card banks Doowoo Nam* College of Business Administration, Inha University, Incheon, Korea 402-751 Fax: (+82)-32-866-6877 E-mail: [email protected] *Corresponding author

Benton E. Gup The University of Alabama, Tuscaloosa, AL 35487, USA E-mail: [email protected]

Jongbae Kim School of Management, Dankook University, Cheonan, Choongnam, Korea 330-714 E-mail: [email protected] Abstract: Some retailers and other firms expecting to improve their operating performance have established Credit Card Banks (CCBs) as a revenue management tool to handle their proprietary credit card receivables, as well as those from Visa and MasterCard. The expected improvement in performance has to come primarily from increasing sales revenue with the retailers’ own private-label credit cards, from interest income and from reducing the amount of credit card receivables and the cost of financing them. We test the differences in corporate performance, primarily measured by the Economic Value Added (EVA),1 and the efficiency of the accounts receivable management, between firms with and without CCBs. We find no significant improvement in their performance. In addition, we document that retailers with CCBs have longer average collection periods and relatively more receivables than those without CCBs, and that there is no difference in the revenue growth rate between the two groups of retailers. Keywords: accounts receivable; corporate performance; credit card bank; EVA; revenue management. Reference to this paper should be made as follows: Nam, D., Gup, B.E. and Kim, J. (2007) ‘The financial performance of retailers owning credit card banks’, Int. J. Revenue Management, Vol. 1, No. 2, pp.129–140.

Copyright © 2007 Inderscience Enterprises Ltd.

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D. Nam, B.E. Gup and J. Kim Biographical notes: Doowoo Nam is an Assistant Professor of Finance at Inha University, Korea. His research interests include banking and corporate finance. He has published in the Journal of Applied Corporate Finance, Journal of Risk Finance, Journal of Emerging Market Finance and Research in International Business and Finance, and contributed to several books. He has been a Faculty Member at the College of Business of the University of Southern Mississippi. He has presented papers at various professional meetings and received the Best Paper Award in the financial institutions area at the 2001 annual meeting of the Southern Finance Association. Benton E. Gup is a Professor of Finance and the Chair of Banking at the University of Alabama. He has also held banking chairs at the University of Tulsa and the University of Virginia. He is the author or editor of 24 books and more than 90 papers, appeared in the Journal of Finance, Journal of Financial and Quantitative Analysis, Journal of Money, Credit and Banking, among others, about banking and finance. He has served as a Consultant to government and industry around the world including Australia, Japan, New Zealand, Peru, South Africa and Taiwan. He is a Member of various professional organisations and a Former President of the Midwest Finance Association. Jongbae Kim is a Professor of Marketing in the School of Management at Dankook University, Korea. His teaching focuses on marketing, new product management, management of technology and business statistics. He has published papers in many scholarly journals such as R&D Management, European Journal of Innovation Management, International Journal of Technology and Marketing and many others. He has served on the Editorial Boards of the Int. J. Technology Marketing and Int. J. Mobile Learning and Organisation, and is a Member of various international academic associations and professional organisations.

1

Introduction2

Major retailers (e.g. Limited, Federated Department Stores and Sears) and other firms (e.g. Mobil, Chevron and Harley-Davidson) own Credit Card Banks (CCBs) to improve their financial performance by reducing their credit card receivables and the funds required to finance them (see Table 1). We use the term retailers to describe all of the firms. The CCBs securitise the credit card receivables and sell them in the capital markets. CCBs can be chartered as national banks or as state banks. In this paper, we examine retail firms that own national CCBs that are chartered by the Office of the Comptroller of the Currency (OCC).3 Few empirical studies have examined CCBs and their contribution to the corporate performance of their parent retailers. Although some studies, for example, Sinkey and Nash (1993), Meyercord (1994) and Nash and Sinkey (1997), address the issues surrounding CCBs, their interests are primarily in the profitability or business performance and the riskiness of CCBs themselves. Our research focus is on the financial impact of retailer-owned national CCBs on their parent retailers. The primary objective of our study is to determine whether the retailers’ operating performance is improved by

The financial performance of retailers owning credit card banks

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using CCBs allowing them better revenue management. Operating performance is measured by Economic Value Added (EVA) and other financial measures. Table 1

Sample group: credit card bank retailers

Name

SIC code and industry

Credit card bank (year opened)

The Limited, Inc.

5621 Women’s clothing

World Financial Network National Bank (1989)

Ohio

Circuit City Stores

5731 Radio, TV and electronic

First North American National Bank (1990)

Georgia

Spiegel, Inc.

5961 Catalogue and mail-order houses

First Consumers National Bank (1990)

Oregon

Charming Shoppes, Inc.

5621 Women’s clothing

Spirit of America National Ohio Bank (1991)

Dillards, Inc.

5311 Department stores

Dillard National Bank (1991)

Arizona

May Department Stores


May National Banks of AZ, MD, OH (1991)

Arizona, Maryland, Ohio

Nordstrom, Inc.

5651 Family clothing Stores

Nordstrom National Credit Bank (1991)

Colorado

Federated Department Stores


FDS National Bank (1993)

Ohio

JCPenney Company, Inc.


JCPenney Card Bank, National Association (1993)

Delaware

Dayton Hudson Corporation

5331 Variety stores

Retailers National Bank (1994)

South Dakota

Sears, Roebuck & Company


Sears National Bank (1994)

Arizona

Tandy Corporation

5731 Radio, TV and electronic

Tandy National Bank (1994)

Tennessee

Fingerhut Companies, Inc.

5961 Catalogue and mail-order houses

Direct Merchants Credit Card Bank, National Association (1995)

Utah

Mobil Corporation

2911 Petroleum refining

MCFC National Bank (1995)

Kansas

Chevron Corporation


Chevron Credit Bank, National Association (1996)

Utah

Ultramar Diamond Shamrock


DSMR National Bank (1996)

New Mexico

Harley-Davidson, Inc.

3751 Motorcycles, bicycles and parts

Eaglemark Bank, National Nevada Association (1997)

Zale Corporation

5944 Jewellery stores

Jewellers National Bank (1997)

Source:

Office of the Comptroller of the Currency; STORES (magazine).

CCB domicile

Arizona

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D. Nam, B.E. Gup and J. Kim

This study is organised as follows. Section 2 provides an overview of CCBs and their benefits. Section 3 presents our hypotheses and methodology, while Section 4 describes the data employed and presents our empirical results. Section 5 concludes the paper.

2

Credit card banks

2.1 Background In the early 1980s, some non-financial firms took advantage of a loophole in the Bank Holding Company Act of 1956 (BHCA) that allowed them to enter the credit card business (Meyercord, 1994). The loophole had to do with the legal definition of a bank. A bank had to accept demand deposits and make commercial loans. If an institution did not accept demand deposits or make commercial loans, or vice versa, it was not a bank as defined by the BHCA. It was called a non-bank bank. Non-financial firms entered the credit card business by establishing or acquiring non-bank FDIC-insured banks. The Competitive Equality Banking Act of 1987 (CEBA) paved the way for CCBs of non-financial firms by exempting them from the definition of a bank provided that they observed certain limitations. Therefore, retailers and other firms with credit card programmes had a growing interest in opening their own CCBs to handle their credit card receivables subject to the following restrictions (Weil and Manges, 1990; Office of the Comptroller of the Currency, 1998): x

CCBs must engage solely in credit card operation.

x

They cannot accept demand deposits, or the deposits that may be withdrawn by check or similar means for payment to third parties.

x

They may not accept savings or time deposits of less than $100,000, unless they are used as collateral for secured credit card loans.

x

They may maintain only one office that accepts deposits.

x

They cannot make commercial loans.

CCBs typically have a non-bank holding company parent, such as Circuit City or Chevron, which offers its own private-label credit card for use at its retail outlets. The retailers may also accept third-party credit cards such as Visa and MasterCard.

2.2 Benefits The ability to export interest rates is one of the major benefits of having a CCB. This means that the retailer has one primary regulator and one set of regulations (Ryan, 1991; Robins, 1994). Although national CCBs are chartered by the OCC, the Federal Reserve has some involvement in regulating them. This is still preferable to deal with 50 different state bank supervisors. The ability to export rates helps to explain why CCBs are located principally in states with high interest rate ceilings and favourable terms for the issuer. As shown in Table 1, the CCBs are concentrated in a relatively small number of states: Arizona, Delaware, Ohio and South Dakota, among others. This is consistent with the findings of Sinkey and


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Nash (1993) that more than half of CCBs are located in three states (Delaware, Ohio and South Dakota). Other expected benefits from establishing CCBs are increasing revenues and reducing the credit card receivables and the funds necessary to support them. The use of companyowned credit cards leads those companies to improved revenue management by permitting targeted sales efforts and more generous credit terms to generate sales. These targeted sales efforts can be accomplished by making the most of customer information from credit cards. In other words, retailers can provide more customer-oriented service based on the information on the use of credit cards. Also, they can build up the foundation of customers with store loyalty via a credit-card mileage system. If such sales efforts are successful, they will contribute interest income. The following excerpt from the 1994 annual report of Circuit City Stores illustrates this point (Circuit City Stores, 1994). Circuit City owns First North American National Bank (FNANB), a CCB. “In fiscal 1994, the Company continued to experience improved customer credit availability while FNANB maintained prudent standards for granting credit. The Company believes this increased credit availability contributed to the Company’s comparable stores sales growth. In addition to increased credit availability, this credit program provides the Company with additional marketing opportunities, including direct mail campaigns to credit card customers and special financing programs for promotions. The new credit program also enhances the Company’s customer service philosophy. Interfacing the CCB subsidiary with the Company’s POS system has produced a more rapid customer credit approval process. A customer’s application can be electronically scored and qualified customers receive approval within five minutes of input at a store”.

Retailers with internal credit card operation have to allocate the capital to support the business unit and, in turn, the capital required to operate this business unit would eventually limit the available funds for other investment opportunities. In this regard, retailers would benefit from reducing the balance of the receivables and the necessary funding need by establishing CCBs and moving the credit card balance off their balance sheet to those CCBs, thereby freeing up the capital for new investments or debt repayments. Finally, CCBs can be insured depository institutions within the meaning of the Federal Deposit Insurance Act. The FDIC insurance gives the bank a degree of ‘certification’ as to the financial condition of the issuer. The certification enhances the credit quality of the issuer, which is an important aspect of the securitisation of the receivables (Kendall, 1998). Many CCBs securitise their credit card receivables.

3

Performance of credit card bank retailers

We are primarily interested in the hypothesis that the operating performance of the CCB retailers is improved and different from that of the retailers without CCBs. Secondly, we examine whether the management of receivables by the retailers would get better and more efficient after opening their own CCBs. We assume that all of the accounts receivable are credit card receivables, which may not be entirely correct since the accounts receivable of retailers usually contain the receivables generated from instalment plans, but it is the best that we can do.

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We use EVA as a primary measure of financial performance. It is a widely used measure of corporate performance that reveals the dollar amount of value which a firm creates or destroys in a given period (Ehrbar, 1998; Biddle, Bowen and Wallace, 1999). We also look at the value spread that is defined as a difference between the Return On Invested Capital (ROIC) and the Weighted Average Cost of Capital (WACC). It is used to compare the financial performance across companies, because it is not dependent on the size of the firm or their Invested Capital (IC). The average collection period and the accounts receivable expressed as a percentages of total assets are used as the measures of operating efficiency. Finally, we examine the growth rate of revenue, since one of the retailers’ primary goals establishing CCBs is to boost revenues through by having their customers use proprietary credit cards. The procedures for calculating these measures are discussed in Section 4.

4

Empirical results

4.1 Data As previously noted, our sample is restricted to retailers that own national CCBs. We do not have data on state-chartered CCBs.4 Table 1 presents the sample group of 18 retailers that have CCBs, their industry affiliations, the name of the banks and when they opened and the states where they are chartered. The matching firms were selected on the basis of their four-digit Standard Industrial Classification (SIC) code and the asset size. We used two-digit SIC codes in cases where the four-digit SIC matching firms could not be found. In either case, each matching firm was selected to be as close as possible to the corresponding sample firm’s asset size in the year the CCB was chartered. The data presented in Table 2 reveal the average and median asset sizes of the sample and matching groups are reasonably close. Table 2

Asset size of sample and matching groups Sample group (CCB retailers) N = 18

Matching group (Non-CCB retailers) N = 18

Average asset size ($ million)

9,775

8,596

Median asset size ($ million)

3,214

3,179

The financial data used in this study came from the 1997 annual Primary-SupplementaryTertiary Industrial and Full Coverage Compustat tapes. In addition, we used 10-K forms and annual reports to obtain supplemental and more up-to-date information. Next, we explain how to calculate EVA, the average collection period and the account receivableto-asset ratio.

4.1.1 EVA EVA is a widely accepted financial performance that has been developed by Stern Stewart & Co., although its origin dates back to Alfred Marshall in the late 1800s. It is defined as a difference between the ROIC and the WACC, multiplied by the IC.


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EVA = (ROIC WACC) u IC. EVA measures the dollar amount of IC that is created or destroyed in a given period.

4.1.2 ROIC ROIC measures the operating efficiency of a firm without regard to its financing and investment activities. A firm creates (destroys) economic value for its shareholders when its ROIC exceeds (is less than) its WACC. ROIC is defined as

ROIC =

NOPAT IC

where the Net Operating Profits After Taxes (NOPAT) are obtained by subtracting the taxes from the Earnings Before Interest and Taxes (EBIT), or simply EBIT u (1 t) where t is the effective tax rate. The denominator is an average of the beginning- and the end-of-period IC. NOPAT has the benefit of being a pre-leverage measure of earnings, which allows for the comparison of companies with different capital structures.

4.1.3 WACC WACC is based on the composition and costs of a firm’s debt and equity capital. Recognising that the book value of equity is likely to significantly deviate from its market value while the book value of debt is much less likely to do so, we use the market value of equity and the book value of debt in calculating the weights for equity and debt. WACC is equal to the cost of equity plus the after-tax cost of debt.

4.1.4 Cost of equity The Capital Asset Pricing Model (CAPM) is the most common approach to estimate the cost of equity (Damodaran, 1994, 1996; Ehrhardt, 1994). There are three components of the CAPM to be estimated: the risk-free rate, the market risk premium and a company’s beta. The risk-free rate used in our study is the annual yield on the 30-year constant maturity US Treasury bonds found in the Federal Reserve Bulletin. The market risk premium is 7.5%, taken from Ibbotson Associates (1999), and the betas are from Bloomberg online.5

4.1.5 Cost of debt We estimated the cost of debt by dividing interest expenses by interest-bearing debts.6 Then it was adjusted for taxes, which results in the after-tax cost of debt. Hence, the cost 7 of debt refers to the after-tax cost of debt.

4.1.6 Invested capital IC refers to the permanent financial resources used in a firm’s operations. We calculate IC as the sum of common equity, long-term debt, minority interest and the carrying value of preferred stock.

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4.1.7 Average collection period The average collection period is a measure of the operating efficiency in managing the accounts receivable. It measures the number of days required, on average, to collect the accounts receivable. It is calculated as Accounts receivable Average collection period = , Sales per day

where the sales volume per day is computed by dividing the annual sales by 365. The shorter the average collection period, the more promptly a company converts its sales into cash.

4.1.8 Accounts receivable-to-asset ratio The accounts receivable-to-asset ratio represents the proportion of accounts receivable to total assets. Accounts receivable Accounts receivable-to-asset ratio = Total assets Both the accounts receivable and the total assets are the balance at the end of the corresponding period.

4.1.9 Revenue growth rate The revenue growth rate is the percentage change in annual revenues from the previous year: Revenue Growth Ratet =

Revenuest Revenuest 1 Revenuest 1

Revenues include sales and other sources of income including interest income on credit card receivables.

4.2 Results and implications Because the sample size is small and the data are not normally distributed, we used nonparametric tests. Barber and Lyon (1996) suggest that non-parametric tests should be used in analysing the operating performance, because they are more powerful than the counterpart parametric tests when there are extreme observations in the data. This applies to our data set. The two-sample Wilcoxon rank sum W test (or equivalently, the Mann– Whitney U test) was used for testing the equality of the medians of the variables between the CCB retailers and the non-CCB retailers. Table 3 presents the means and medians of the variables for the sample group (CCB retailers) and the matching group (non-CCB retailers), in the pre-CCB year, the CCB year and the year following the opening of the CCB (the post-CCB year). First, we used the Wilcoxon rank sum W test to examine the equality of the medians of the operating performance measures between the CCB retailers and the non-CCB retailers. Although the test statistics are slightly improved after the CCB opening, there is

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no statistically significant difference in the medians of the EVA or the value spread between the two groups in any period. Nevertheless, there are significant differences in the average collection period and the account receivable-to-asset ratio between the CCB and non-CCB retailers. The average collection period of the CCB retailers is nearly three times longer than that of the non-CCB retailers in any year of the sample period, suggesting that the retailers with the long average collection periods relative to their rival retailers initiated CCBs to improve their efficiency in managing the receivables. However, they were not successful in doing so. Table 3

Comparison of performance

Variables

Pre-CCB year

CCB year

Post-CCB year

CCB retailers

221 (37.4)

121 (27.2)

23 (8.1)

Non-CCB retailers

150 (15.1)

EVA ($ million) 151 (48.7)

113 (34.0)

300

335

363

CCB retailers

1.93 (2.27)

1.42 (2.07)

0.96 (1.06)

Non-CCB retailers

1.20 (0.72)

3.41 (2.47)

1.33 (0.97)

312

353

344

W-statistic for median difference Value spread (%)

W-statistic for median difference Average collection period (days) CCB retailers

64.2 (60.7)

66.8 (60.9)

70.3 (69.9)

Non-CCB retailers

24.8 (22.8)

24.2 (22.3)

25.1 (23.0)

W-statistic for median difference

421*

433*

430*

Accounts receivable-toasset ratio (%) CCB retailers Non-CCB retailers W-statistic for median difference

22.7 (22.6) 9.1 (6.0) 435*

25.2 (24.7)

24.5 (24.0)

9.6 (6.0)

9.5 (7.6)

440*

430*

Revenue growth rate (%) CCB retailers

15.1 (10.7)

22.1 (11.4)

10.4 (10.1)

Non-CCB retailers

24.8 (13.1)

19.9 (12.7)

12.2 (5.4)

W-statistic for median difference

321

Numbers in parentheses are the medians. *Indicates significance at the 1% level (two-tailed test).

331

365

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Table 3 also shows that the accounts receivable-to-asset ratio of the CCB retailers is significantly higher than the ratio of the non-CCB retailers. It did not go much lower even after the retailers opened their subsidiary CCBs. Thus, the retailers with CCBs had a competitive disadvantage relative to their rivals in managing the accounts receivable. Finally, the revenue growth rate of the CCB retailers is not different from that of the non-CCB retailers. It is worthwhile to note, however, that the test statistic for the median difference test becomes more significant in the post-CCB year, although it is not statistically significant. Also, note that the median of the CCB retailers’ revenue growth rates is smaller than that of the non-CCB retailers prior to the post-CCB year, but the situation eventually turns the other way around in the post-CCB year. This evidence suggests that the revenues of the CCB retailers remained strong in the year following the opening of the CCBs, while their counterparts suffered from continuing sluggish revenues. In addition to the problem of the small sample size, which can be alleviated, though not perfectly, by the use of the non-parametric statistical technique, another limitation of our study is dealing with the short sample period (the 3-year time frame). This is because CCBs are a relatively recent phenomenon. If we expand our study by covering the longer-term performance of the CCB retailers, the sample will be more restricted and we would not be able to obtain meaningful results.

5

Conclusion

Retailers and other firms established CCBs hoping to improve their operating performance with a better revenue management tool. CCBs are used to securitise the receivables. The expected improvement in performance has to come from increased sales based upon targeted sales efforts, from reduced expenses associated with receivables and from credit card operations. Retailers and other firms did not necessarily establish CCBs just hoping to improve their operating performance, since it is not the only impact of CCBs on the firms. Besides this financial impact, retailers can benefit from owning CCBs in other areas such as the improvement of firms’ credibility by having their own credit cards and the enhancement of customer satisfaction by providing better service through a more convenient settlement system. In addition, CCBs would be important to the customer relationship management. In other words, they would enable parent retailers to collect and analyse the information on customers’ buying pattern, and the retailers can provide more tailor-made marketing programmes based on this information. In this paper, however, we focused on the operating performance of firms with and without CCBs in the years before establishing the CCBs, the year they were established and the following year. We used EVA to evaluate the operating performance and examined the efficiency of the account receivable management, measured by the average collection period and the receivables as a percentage of total assets. We find no significant improvement in the performance of firms that established CCBs. In addition, we have shown that the retailers with CCBs have longer average collection periods and relatively more receivables than the retailers without CCBs, and that there is no difference in the revenue growth rate between the two groups of retailers. If improving the operating performance was one of the goals of establishing CCBs, it did not pay off. Apparently, JCPenny Company too came to this conclusion. They sold their accounts receivable (credit card) portfolio to GE Capital in October 1999


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(GE Capital, 1999). James Oesterreicher, Chairman and Chief Executive Officer of JCPenny (1999) said, “By selling the receivables portfolio, we will free up substantial cash to reduce debt, strengthen our balance sheet and outsourcing the credit card operation will permit management’s attention to be focused exclusively on our core business activities”.8 These were some of the same reasons that the retailers used to establish CCBs. As noted earlier, however, the cost and the benefit from owning CCBs would not be limited to the financial aspect. Therefore, the decision of whether CCBs should be retained requires circumspection by evaluating their intangible contributions to the firms as well. This study examines the financial impact of CCBs on the firms owning them, and it sheds light on the value of CCBs. The decision-making on CCBs should be, however, based on more comprehensive evaluation by taking their non-financial aspects into account. Further research would include the non-financial impact of CCBs on the parent retailers, for example, an approach from a marketing point of view mentioned earlier, which can be hard to quantify and needs a longer time frame to evaluate. It is examined, through the revenue growth rate in this paper, whether CCBs are allowed of the implementation of better marketing strategies, but more research on this aspect of CCBs should be made to determine their overall value to the parent retailers. On the other hand, other financial ratios in addition to the performance measures examined in this study can be used to evaluate the additional financial impact of CCBs. For example, since one of the expected benefits from owning CCBs would be extra funds by reducing the capital need of parent retailers to support credit card receivables, the retailers’ capital structure or leverage ratios would be expected to improve if these extra funds are used to retire the debts.

References Barber, B.M. and Lyon, J.D. (1996) ‘Detecting abnormal operating performance: the empirical power and specification of test statistics’, Journal of Financial Economics, Vol. 41, pp.359–399. Biddle, G.C., Bowen, R.M. and Wallace, J.S. (1999) ‘Evidence on EVA’, Journal of Applied Corporate Finance, Vol. 12, pp.69–79. Circuit Cities Stores (1994) Annual Report. Damodaran, A. (1994) Damodaran on Valuation. New York: John Wiley & Sons. Damodaran, A. (1996) Investment Valuation. New York: John Wiley & Sons Ehrbar, A. (1998) EVA: The Real Key to Creating Value. New York: John Wiley & Sons. Ehrhardt, M.C. (1994) The Search for Value: Measuring the Company’s Cost of Capital. Boston, MA: Harvard Business School Press. GE Capital (1999) ‘GE Capital to acquire JCPenny’s credit card receivables portfolio and card service facilities’, GE Capital Release, Stamford, CT, 18 October 1999. Ibbotson Associates (1999) Stocks, Bonds, Bills, and Inflation 1999 Yearbook. Chicago, IL: Ibbotson Associates. JCPenny (1999) ‘JCPenny aligns with GE Capital’, JCPenny New Release, Plano, TX, 18 October 1999. Kendall, L.T. (1998) ‘Securitization: a new era in American finance’, In L.T. Kendall and M.J. Fishman (Eds), A Primer on Securitization (pp.1–16). Cambridge, MA: MIT Press. Meyercord, A. (1994) ‘Recent trends in the profitability of credit card banks’, Quarterly Review (Federal Reserve Bank of New York), Vol. 19, pp.107–111.

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Nash, R.C. and Sinkey, J.F. Jr (1997) ‘On competition, risk, and hidden assets in the market for bank credit cards’, Journal of Banking and Finance, Vol. 21, pp.89–112. Office of the Comptroller of the Currency (1998) Comptroller’s Corporate Manual: ChartersEntry. Washington, DC, April. Robins, G. (1994) ‘Credit card banks’, STORES, pp.78–80. Ryan, J.G. (1991) ‘Credit card banks: what terms other than interest rates may be exported?’, Retail Control, pp.25–30. Sinkey, J.F. Jr and Nash, R.C. (1993) ‘Assessing the riskiness and profitability of credit-card banks’, Journal of Financial Services Research, Vol. 7, pp.127–150. Weil, G. and Manges, L.L.P. (1990) ‘Credit card banks: a new force in the retailing industry’, Retail Control, pp.30–32.

Notes 1

EVA is a trade name that is registered by Stern Stewart & Co. The authors are indebted to John E. Fesperman, President and Chief Operating Officer of JCPenney Insurance, Credit and Facilities Services, for his helpful comments. 3 National CCBs can be owned by non-bank holding companies. The Bank Holding Company Act amendments can be found in 12 USC 1841, c, 2, F. Also see credit card bank exemptions created under the Competitive Equality Banking Act of 1987 (CEBA) amendment to the Bank Holding Company Act (OCC Comptroller’s Corporate Manual, 1998). The OCC refers to these banks as CEBA Credit Card Banks. For convenience we use CCBs. 4 Faulkner & Gray’s Credit Card Directory, a widely used source of information about CCBs, provides information about the retail programmes serviced by CCBs, but not about who owns the banks. Many state-chartered CCBs service multiple retailers. For example, Hudson United Bank (Shoppers Charge Accounts Co.) services customised programmes for 700 retail locations nationwide, including apparel, jewellery, giftware and other specialty retailers. 5 To estimate betas, we used weekly data for 3 years and the S&P 500 Index as a market portfolio. 6 We used the average balances for debts payable in current liabilities and long-term debt at the beginning and the end of a period. The data were obtained from the companies’ financial statements. 7 The effective tax rate for a company is calculated as a proportion of income taxes in pre-tax income. 8 JCPenny (1999) and GE Capital (1999). 2