A Look at the Evolution of Target’s REDcard Product Suite

Navigator Edition: May 2016
By: John Grund and Jeff Kalski

Target’s REDcard journey is a unique one with many twists and turns over the past decade.  The current customer-facing product suite includes both a private label credit card and a debit card.  There is also a legacy co-brand product now on the MasterCard network.1  All of the products are powered by the highly popular, 5% savings feature.  Together, REDcards accounted for 22.3% of Target’s retail sales in 2015.  The evolution and resilience of the REDcard product suite is noteworthy especially considering historical industry challenges in driving meaningful private label card penetration in the mass/discount retail segment and of course, Target’s data breach in December 2013.

As shown in Figure 1, a key milestone for Target was the national launch of the 5% savings feature in the fall of 2010.  It was a bold decision and fundamentally changed the trajectory of REDcard penetration – bear in mind that REDcard penetration of Target’s sales was less than 6% in 2010, with debit card penetration less than 1%. The 5% savings feature was the defining value proposition and turning point for the legacy Target Debit Card.  Aside from the Starbucks Card, there is probably no greater proof that U.S. consumers will adopt a different, largely unproven payment product if the incentive to do so is rich enough.  Around the time of the launch of the 5% Rewards feature, Target also shifted its new account marketing to favor a private label credit card product, further increasing its focus on a retail-centric credit strategy with a simplified product offering and straightforward value proposition.

Figure 1: Target REDcard Sales Penetration

Fig1_-Target-REDcard-Sales-PenetrationSource: Target Investor Relations Disclosures.

As part of the journey, in March 2013, Target closed the sale of its $5.7 billion credit card portfolio and partnership with TD.  In December 2013, Target experienced a massive data breach with far-reaching consequences.  After the data breach, Target’s penetration rate continued to grow after a one quarter setback, but at a slower pace with the application rate for the Target credit card recovering more quickly than the debit card.

In response to the data breach, Target made the decision to transition its entire REDcard portfolio to MasterCard’s chip-and-PIN technology as it began rolling out chip-card readers to all of its stores in advance of the October 2015 EMV fraud liability shift deadline. Storewide chip card acceptance was completed in the summer of 2015, followed by the beginning of the REDcard reissuance in the fall of 2015 that remains ongoing in 2016.

Six years after the launch of the 5% savings feature, penetration of REDcards remains impressive.  While growth has moderated, the power and resiliency of the clean, straightforward 5% value proposition is apparent.

1 Originally issued on the Visa network; cards reissued as MasterCard as part of EMV implementation (reissue announced in April 2014).
Source: Company press releases.

For more information, please contact John Grund, Partner, john.grund@firstannapolis.com; or Jeff Kalski, Associate, jeff.kalski@firstannapolis.com. Both specialize in Credit Card Issuing.

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