With the holiday shopping season in full swing and most retailers enjoying healthy returns, the Wall Street Journal throws a little cold water on the party by pointing out a significant weakness in the retail playbook: the venerable private-label retail credit card, which is suffering the double-whammy of declining usage and increasing defaults. With consumers increasingly turning to general-purpose credit cards offering rich reward programs, can the retail store credit card be saved?
By Rick Ferguson
Retail private-label credit cards, generally issued by retail credit firms Alliance Data Systems and Synchony Financial, as well as banking firms such as CitiGroup, have long been an essential component of retail loyalty. By extending credit to best customers and capturing their in-store spend, retailers can leverage the resulting data and communications opportunities to build long-term relationships with best customers via rewards and recognition—many store credit card programs are tiered, with big spenders afforded increasingly luxurious soft benefits as well as cash-back or in-store vouchers as rewards.
It also so happens that store credit cards are extraordinarily profitable, and account for an increasing percentage of retailers’ overall profits. The New York Times reported, for example, that store credit card profits accounted for 39 percent of the company's total profit of $1.9 billion last year, up from 26 percent in 2013. Most of that profit comes from customers who revolve their balances monthly, which allows issuers to charge interest rates generally much higher than those of general-purpose credit cards.
The Journal, however, reports that the retail house of credit may need repair, even if it’s not yet in danger of collapsing. According to the Journal, here’s just a sampling of the bad news:
- According to the Nilson Report, proprietary store credit cards accounted for 5.9 percent of total credit card purchase volume in 2016, down from 18 percent in 1990.
- According to Fitch Ratings, missed payments late more than 60 days hit 2.82 percent in October, the highest level since May 2012.
- Lenders write-offs are increasing; Citi’s retail credit card write-offs, for example, increased to 4.7 percent of outstanding balances in the third quarter compared to 3.9 percent last year.
Those are not encouraging trends. Money quote from the Journal:
“Few analysts expect the traditional store-card niche to reverse its long decline any time soon. Some investors are betting that the standalone card issuers will be among the most vulnerable financial firms the next time the economy tips into recession. It’s ‘a vicious cycle of consumers moving spending online, going to stores less and spending less’ on the cards compared with the general cards that can be used in most locations, said Matthew O’Neill, an analyst following retail card issuers at Autonomous Research.”
To compensate for these losses and to protect their profits, retailers have also been ratcheting up interest rates on store cards, a move which may in itself increase write-downs as more less-creditworthy consumers fall behind on payments. Money quote from the Washington Post:
“Interest rates on store cards, which have been inching up for years, now average about 25 percent, according to data from CreditCards.com, part of an online credit card marketplace. And, for the first time, at least one retail card commands a rate above 30 percent. A card offered by BrandSource, a network of locally owned appliance, electronics and home goods stores, comes with an interest rate of 30.49 percent. Three others — Big Lots, Piercing Pagoda and Zales — have rates of 29.99 percent.”
With the foundation of private-label credit seemingly shaky, what can retailers and issuers do to shore it up? Loyalty marketing best practice has long argued in favor of retailers operating loyalty programs on a multi-tender, rather than private-label credit, basis to ensure capturing all best customer spend, rather than limit the program to private-label cardholders who are often less creditworthy and more focused on price and discounts. The lucrative financials driving private-label portfolios have, however, seen many retailers eschew this advice in favor of driving as many customers to the store card as possible.
Retailers do, to be sure, often offer Visa, MasterCard or American Express co-branded rewards cards to their top-tier customers, which allows them to earn in-store rewards anywhere they shop. Still, these co-branded retail cards are generally unable to compete with the rich rewards offered by such general-purpose reward cards as the Chase Sapphire or American Express Platinum card. The resulting portfolio dynamics therefore find best customers—that is, affluent customers who love your store brand and are less focused on discounts—sticking with general-purpose cards, while less affluent, price-focused customers make up the bulk of the retail card portfolio.
One long-standing idea that has yet to take hold in retail credit is to reverse the portfolio dynamics: instead of operating a private-label reward program with a general-purpose card accelerator, operate a multi-tender loyalty program and offer the private-label card as a sweetener to your top-tier customers. Those customers, after all, are less focused on price, and more focused on your brand and the customer experience. Lavish these top tiers with in-store perks, exclusive access, and other soft benefits tied to the private-label card, and make the card an exclusive invitation rather than a lowest-common denominator offer. What better way to encourage best customers to consolidate their spend with you, instead of giving half of it to Amazon?
The main problem with this solution is that best customers tend to revolve their balances less, if at all, which means that retailers might take fewer profits out of the portfolio. Could retailers make up the difference in increased incremental spend from these top segments? Perhaps—or perhaps retailers might need to settle for healthy, if smaller, profits based on true brand loyalty, rather than remain addicted to the sugar-high of profits driven by revolving balances. One thing we do know: a customer relationship based on real loyalty, rather than usurious interest rates, will be a healthier and more sustainable one—and that’s good for both retailers and their best customers.
Rick Ferguson is Editor in Chief of the Wise Marketer Group and a Certified Loyalty Marketing Professional (CLMP).