The rapidly evolving nature of retail during the COVID-19 pandemic may require a different approach to what have traditionally been highly sought after credit card issuing partnerships.

Competition among credit card issuers to launch and acquire partnerships with leading retailers emerged as a key industry trend during the 2010s. They emerged as mutually beneficial arrangements for issuers and retailers alike, driving increased customer engagement and loyalty with rewards programs and targeted marketing through private-label store cards and co-branded, general-purpose credit cards. But the recent surge in unemployment and shift to online transactions has exacerbated the stresses business models in some retail sectors already faced.

Alliance Data Systems Corp. President and CEO Ralph Andretta said the company is focusing on partnering with clients in what he described during a July 23 conference call as "growing, attractive verticals." A leading issuer of private-label cards, the company is most closely associated with its partnerships with specialty apparel retailers. But Andretta said it is shifting its concentration into segments that "proved stable throughout this pandemic," such as health and beauty, home improvement, and home furnishings, as well as essential categories that include groceries, gas and liquor.

Andretta also said Alliance Data will strive for greater balance within its portfolio between private-label cards, which tend to generate higher losses but also higher yields, and co-branded cards, which typically are associated with higher levels of consumer spending.

Apparel retailers have been particularly hard hit, highlighted recently by the July Chapter 11 bankruptcy petitions filed by Brooks Brothers Group Inc. and Ann Taylor parent Ascena Retail Group Inc. Citigroup Inc. has issued private-label and co-brand cards in partnership with Brooks Brothers since 2015, succeeding Synchrony Financial. Alliance Data's Comenity Bank issues private-label cards in partnership with various Ascena brands, including Lane Bryant, Ann Taylor, Loft and Catherines.

Andretta disclosed that approximately 6% of Alliance Data's accounts receivable is associated with retailers in the bankruptcy process as of June 30. The inclusion of Ascena, which filed for bankruptcy protection July 23, would have added another 2 or 3 percentage points to that figure, Alliance Data CFO Timothy King estimated during the call. Alliance Data's largest retail partnership was with L Brands Inc. at year-end 2019, as the parent of Victoria's Secret and Bath & Body Works accounted for about 10% of its average card and loan receivables.

Partner bankruptcies typically occur "with little change for us," Andretta said. Cards retain functionality for their holders as Chapter 11 reorganizations occur. In what he described as the "worst-case" of a partner liquidation, the card portfolio follows a "predictable and profitable curve," the company said. Loans begin to run off, and the company retains the ability to sell the associated portfolio or offer holders replacement co-branded cards.

"We do not lend to the retailer, so the bankruptcy does not affect our accounts receivable," Andretta said. "Our customer is the cardmember ... and the cardmembers continue to make payments on their balances."

Both Alliance Data and Synchrony highlighted the digital offerings they bring to the table for their retail partners during their respective conference calls, features that have taken on increasing importance as the nature of shopping rapidly evolves.

Alliance Data showed a sharp divergence between the pace of recovery in store-based and direct channel credit sales during the second quarter. Comparisons turned favorable in the direct channel in May after having fallen 17% from March 15 through April 30. Store-based sales remained down 32% in the second half of June, but that rate of decline was much smaller than the 78% retreat the company saw from the second half of March through all of April.

"Data shows that the vast majority of consumers plan to stick with their digital behavior beyond the pandemic, and we are prepared to help our partners' position for the new reality of today and into the future," Synchrony President Brian Doubles said during a July 21 call.

Synchrony CEO Margaret Keane said during a virtual conference in May that she envisions a continued role for physical stores in the future, albeit fewer in number and lesser in square footage.

"I think it will be very different," she predicted.