Author Topic: ADS - Alliance Data Systems  (Read 94449 times)

cmlber

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Re: ADS - Alliance Data Systems
« Reply #30 on: May 29, 2018, 10:18:43 AM »
Switching costs vary by size of retailer. They are high for smaller retailers which is the market ADS focuses on. Still their two largest customers make up 30% of the card segment revenue. These customers probably have a lot more leverage and likely less profitable.

If it is purely private label card, then switching costs are not all that much. Citi (with exception of Costco) and Capital One can onboard a new retailer pretty efficiently. Where ADS has increased switching costs is by integrating marketing with cards. Epsilon and LoyaltyOne makes it a pain for smaller retailers to move their private label cards.

I don't think this is true.  Look at SYF.  Lowe's has been with them for ~40 years.  Most of their large retailer relationships are 10-20 years, and their ROE's are very high.  It's not a simple switch for the retailer.


racemize

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Re: ADS - Alliance Data Systems
« Reply #31 on: May 29, 2018, 10:41:42 AM »
Switching costs vary by size of retailer. They are high for smaller retailers which is the market ADS focuses on. Still their two largest customers make up 30% of the card segment revenue. These customers probably have a lot more leverage and likely less profitable.

If it is purely private label card, then switching costs are not all that much. Citi (with exception of Costco) and Capital One can onboard a new retailer pretty efficiently. Where ADS has increased switching costs is by integrating marketing with cards. Epsilon and LoyaltyOne makes it a pain for smaller retailers to move their private label cards.

I don't think this is true.  Look at SYF.  Lowe's has been with them for ~40 years.  Most of their large retailer relationships are 10-20 years, and their ROE's are very high.  It's not a simple switch for the retailer.

Citi did take the card from AmEx for Costco though, so it is definitely doable.

cmlber

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Re: ADS - Alliance Data Systems
« Reply #32 on: May 29, 2018, 11:40:11 AM »
Switching costs vary by size of retailer. They are high for smaller retailers which is the market ADS focuses on. Still their two largest customers make up 30% of the card segment revenue. These customers probably have a lot more leverage and likely less profitable.

If it is purely private label card, then switching costs are not all that much. Citi (with exception of Costco) and Capital One can onboard a new retailer pretty efficiently. Where ADS has increased switching costs is by integrating marketing with cards. Epsilon and LoyaltyOne makes it a pain for smaller retailers to move their private label cards.

I don't think this is true.  Look at SYF.  Lowe's has been with them for ~40 years.  Most of their large retailer relationships are 10-20 years, and their ROE's are very high.  It's not a simple switch for the retailer.

Citi did take the card from AmEx for Costco though, so it is definitely doable.

Agreed. But doable and low-switching costs are two very different things. For SYF to have the ROE's they have with the length of relationships they have tells you there are meaningful switching costs. 

racemize

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Re: ADS - Alliance Data Systems
« Reply #33 on: May 29, 2018, 11:44:51 AM »
Yeah, the Citi transition certainly wasn't as smooth as desired...

HJ

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Re: ADS - Alliance Data Systems
« Reply #34 on: May 29, 2018, 12:15:02 PM »
Citi paid up for the Costco relationship.  While undisclosed on detail, by Amex's account, Citi paid up a lot.  It is certainly fair to say that Costco relationship is likely worth a lot more than the typical retailer relationship in ADS portfolio.  Pre crisis, when credit card portfolio transactions are more common, they routinely trade 10+% premium to underlying balance, to be amortized over a 4-5 year period, even if it's a subprime portfolio.  The latest exercise in the headlines had Capital One paying roughly $200MM premium to buy the Cabela's portfolio of $5.7 billion, which is not a subprime portfolio.  But prior to that, they sold the Best Buy credit card portfolio (to Citi), reportedly at book.  Not saying all of these trades are at the right value, but these are some of the yard sticks out there.   

vinod1

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Re: ADS - Alliance Data Systems
« Reply #35 on: May 29, 2018, 12:48:16 PM »
What I am trying to say is compared to larger companies, smaller companies have higher switching costs.

Credit cards (general purpose or private label single store) have wonderful economics. They are like legalized mafia. High teen NIM gives you a lot of MOS. As long as a company has scale and sticks to basics, they can make pretty good money.

ADS and SYF, basically share these profits with their customers. If you look at SYF, they disclose how much they pay their customers (retailers,etc). It is pretty close to 50/50 profit sharing on a pre-tax basis.

I think ADS has a slightly stronger moat than SYF as they focus on smaller companies.

Length of relationship and having ROE is a good data point but does not tell us conclusively either about switching costs (they could be sharing more of the profitability to retain the relationship or ROE could be coming from some other set of companies within their customer base).

Vinod
The fundamental algorithm of life: repeat what works. –Charlie Munger

Saluki

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Re: ADS - Alliance Data Systems
« Reply #36 on: July 02, 2018, 12:13:16 PM »
Does anyone know how the Air Miles and other rewards work with ADS and the merchant and customers? Do the rewards come out of ADS' split of the profits, or the retailer's? 

In learning about Berkshire's experience with the float at Blue Chip Stamps, it occurs to me that miles that a customer earns, but won't be redeemed for years would have the same characteristics as the float at BCS.
If it's important, do it every day. If it's not important, don't do it at all.  -Dan Gable

glorysk87

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Re: ADS - Alliance Data Systems
« Reply #37 on: July 02, 2018, 01:49:03 PM »
Does anyone know how the Air Miles and other rewards work with ADS and the merchant and customers? Do the rewards come out of ADS' split of the profits, or the retailer's? 

In learning about Berkshire's experience with the float at Blue Chip Stamps, it occurs to me that miles that a customer earns, but won't be redeemed for years would have the same characteristics as the float at BCS.

ADS is paid a fee per mile earned.  On the rewards side, they are responsible for purchasing/paying for any rewards that are redeemed by the consumers.

To your point, the business operates with a float seeing as ADS is paid upfront per mile but some time elapses before that mile is redeemed for a reward.

Cigarbutt

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Re: ADS - Alliance Data Systems
« Reply #38 on: July 02, 2018, 01:50:18 PM »
Does anyone know how the Air Miles and other rewards work with ADS and the merchant and customers? Do the rewards come out of ADS' split of the profits, or the retailer's? 

In learning about Berkshire's experience with the float at Blue Chip Stamps, it occurs to me that miles that a customer earns, but won't be redeemed for years would have the same characteristics as the float at BCS.
Th

Just to add some details:

Loyalty programs tend to report results with some variations but there are some underlying principles. I am relatively familiar with the Loyalty One sub but don't know much about other ADS subs.

Basically, sponsors pay "fees" to ADS when collectors use their loyalty cards during a purchase. This gives rise to a promise for rewards to collectors which results in deferred revenue (ADS recognizes immediately some revenue as a "service" component). Accounting profit will be generated if the cost from suppliers is less than revenue recognized. Estimates are influenced by breakage (points that will never be redeemed, about 20%) and average "life" of the reward (about 40 months).

You are correct in saying that funds can be held for some time between the accumulation phase and the redemption phase but, contrary to insurance float which is regulated and supervised, loyalty programs have more flexibility so due diligence is important.

How the float is invested can make a difference too as I understand that, with Blue Chip Stamps, return from invested float was the main ingredient for success and not the underlying business which was essentially in a run-off mode.

Saluki

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Re: ADS - Alliance Data Systems
« Reply #39 on: July 03, 2018, 02:30:17 PM »
Thanks for the help!
If it's important, do it every day. If it's not important, don't do it at all.  -Dan Gable