March 2, 2009
Store Credit Cards Exposed
By Tom Ryan
With financial institutions
pulling back exposure everywhere, it’s becoming harder for consumers to
get a store credit card. The credit pullback is expected to put a crimp
on sales at retail, especially of big-ticket items.
"Credit-tightening will
shrink the amount of private label credit outstanding over time, but it
will have an immediate impact on retail sales," John Grund,
a partner at First Annapolis, an advisory firm focused on the payments
industry, told The New York Times. "Consumers need financing to
buy merchandise, especially big-ticket items, and issuers can cut too far
to reduce loss exposure, making the recession even more problematic."
The cards are often used
by those with fewer credit options and frequently finance items like appliances,
furniture and jewelry. Mr. Grund estimated that
30 to 40 percent of department store sales went on private label cards.
The Times article
notes that while some retailers continue to offer the cards at their registers
in exchange for a same-day discount, the lenders have made it more difficult
to qualify, much as they have done with traditional credit cards.
The article in the Times noted
that General Electric, the largest issuer of private label cards that includes
Wal-Mart and Lowe’s, last year attempted to sell the business. The second
largest, Citigroup, which lends on behalf of retailers like Macy’s and
Sears, recently listed its unit as one of its non-core asset. Two of the
larger retailers that still operate part or all of their own card businesses,
Target and Nordstrom, have tightened their lending standards.
Losses on the private
label cards reached a three-year high of 10.51 percent in January, according
to Fitch Ratings, up 44 percent from a year ago. That compares with general
credit card losses of 7.5 percent, up 40 percent. Fitch, which tracks receivables
issued by banks on behalf of retailers, expects private label card losses
to surpass 12 percent by midyear and losses on general cardholders with
solid credit to reach eight percent.
"Credit quality will
continue to deteriorate for general-purpose cards, and at a rapid, more
urgent pace for retail cards," Michael Dean, managing director at Fitch,
told the Times.
Discussion Questions:
How will the efforts to reduce exposure to store credit cards impact
retail sales? What other expected fallout from the tightening credit
standards could be expected? How should retailers be addressing the situation?
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This presumes that consumers want to use those credit cards. Credit or no credit, consumers are not spending. Having access to a store credit card is not going to change this in the short to mid term. I don’t see this having much impact until the economy turns around.
Last year, my “stimulus” rebate went directly to pay down my HELOC. The next week, two letters arrived. Countrywide canceled any further use of my HELOC credit card saying the value of my condo had dropped too far and GE Capital canceled my Abt Appliances card that I had used only once to finance a new refrigerator interest-free over six months. I had planned to remodel my kitchen this spring using a combination of the HELOC, interest-free credit offers, this year’s income tax refund and money I’ve recently inherited. Instead, I maintain the balance on the HELOC (since the interest is low and tax deductible) and keep $20,000 in the bank, afraid to spend it because I know I can no longer rely on credit cards in case of an emergency like a broken furnace or unforeseen vet bills.
I appreciate the fact that banks wish to cut down on their losses, but something is wrong when people like me, who bought an affordable “right size” house, put down 20%, chose a simple mortgage plan and always paid off credit card balances in full, get caught up in the dragnet. I feel I have been penalized for being financially responsible and frankly, that puts me in no mood to buy anything.
Nope, still a dog person only! 🙂
There is still pressure for the sales associates at the department stores to open accounts for customers. I have friends who work for Dillard’s and the push on them is intense to open the Dillard’s American Express store card.
This might be one of the reasons Amex is in so much trouble right now-extending credit left right and center. No wonder they are paying certain card holders $300 to close accounts!
There must be something in the air today as the BTPs are all in agreement on several topics. We all agree Sears is a dinosaur and Mr. Lambert runs the roost his way, and then we all agree that store cards are getting the retailers nowhere. What’s next? We all are cat and dog people?
It isn’t just the credit card issuers who are deleveraging. The users are also deleveraging, both voluntarily and otherwise.
The issue isn’t just the availability of credit to make bigger ticket purchases, it is the mindset (and ability) of the consumer to take action. As a matter of fact, in yesterday’s paper, Best Buy was advertising “No interest for 18 months on all purchases of $499 & up.” If I recall, that is down from $999 a few weeks ago. A blip on the news today indicated the repair shop business is up over 50%.
The credit card issuers can do what they want. The newspapers can write what they want, but the consumer is in a mindset that may not go away for years. In fact, the consumer may never go back to the mindset that led to the growth in consumer spending over the last two decades.
The challenge for retailers is not to get the consumer to spend an extra dollar (that they don’t have). The challenge for the retailer will be to get the consumer to spend the dollar at their store rather than another. The retailers who do the best job focusing on that will be successful. The retailers who rely on just getting consumers to spend will be left behind, if not out of business.
I’m not sure how many people have taken it in but in the UK there has been a great deal of publicity over the past few years about the exorbitant interest rates charged on store cards. It used to be all too easy to get them with great discounts offered for spending on the day of application and nowhere enough checking done into ability to repay. Which, not surprisingly, lead to great debts, defaults and distress.
Is this also true for American store cards? If so, and if people get the idea that it doesn’t make sense (now or ever) to clock up huge debts on them then there certainly will–quite rightly–be fewer people using them. This does not necessarily mean people won’t be shopping (not that they are at the moment anyway) but they do, they may pay differently. And it will be difficult, if not impossible, to find out which shoppers are switching to another payment method as opposed to just not shopping.
For retailers planning ahead, I would advise not banking on store cards.
With the squeeze on store credit cards, retailers risk a triple-hit to their business: the reduction in sales volume from reduced credit, the lost marketing opportunity mentioned by Phil Rubin, and the lost insight that comes from having fewer purchases traceable to individual households. Without good data, not only will retailers be hamstrung in their marketing, but they will be limited in their ability to make the best category management and SKU rationalization decisions.
For retailers who used store credit cards to drive customer insights, I wonder if we’ll see a trend towards embracing loyalty cards. If anything, this presents an opportunity to better understand the purchasing behavior of a broader range of shoppers than use store credit cards today. Properly executed, the transition will provide the data retailers need to make the informed operational decisions the tough times ahead will demand.
The only alternative to store credit might be to offer a “rent to buy option.” The difference here being that the retailer continues to own the asset until it is paid off and the debt on the rental contract is separate from any general obligations the consumer may acquire. The challenge for the retailer is that they still need cash to pay the manufacturer up front.
Maybe we don’t really want to hear this, but one fall out from this whole credit squeeze might be further disintermediation as manufacturers increase efforts to go directly to consumers. By leveraging their fixed assets to carry consumer debt, manufacturers can sell “wholesale direct” and use a portion of the margin to cover consumer defaults. It does not bode well for retailers but it gets product away from the manufacturers.
Any way you look at it, until credit returns to the picture, consumer spending is going to be on the ropes. Considering the lessons everyone seems to be learning about indiscriminate lending and its impact on banks, the level of credit we have experienced lately will probably never return. This means everyone has to get used to less demand from consumers and lower expectations for spending. Focus on providing value and meeting consumer’s immediate requirements and you will probably do better than most.
One would hope that shoppers themselves would be less tempted to sign up for on-the-spot credit cards for in-store discounts if they aren’t really sure of their ability to get the credit, and be able to pay the bill. I think consumers are accepting the “Save More, Spend Less, Live Within your Means” message. For me, it means aggregating purchases onto one card, getting the “benefits” associated with it (airline miles) and making it simpler all the way around at bill-paying time. The discount “come-on” at department stores is pretty meaningless given they just mark the stuff down the next week anyway!
Look for durables, casegoods and electronic equipment to suffer from tightening retail credit. The ads are still flashing around for credit deals but the view from the field is, approvals are way down and sales are going away because of the credit refusal. My suggestion is to stop focusing on credit availability in marketing and focus more on products and services.
Credit providers are de-leveraging the consumer. First, they are requiring higher standards for issuing new cards. Second, they are reducing the credit limit on current card holders. Third, they have raised their interest rate to 29% in some states. The result is some cannot get a card to make the purchase or will not have enough credit to make the purchase. These high finance charges will mean disposable income will be going to the card issuer, not making new purchases. The end result will be another year of declining retail sales. Credit card companies will make their money on interest, not transaction fees, for the next few years.
This, along with other factors will indeed hurt retailers and especially department stores.
In addition to the economics of supporting larger purchases and sharing in financing fees (and receiving other financial income from relationships with firms like Citi and GE), the retailers benefit from customer addressability and the ability to track purchases. This provides customer and business intelligence that is otherwise hard to get or inaccurate.
So in addition to losing sales through less credit availability, there will be fewer customers to directly market to. Though of course, some department stores don’t do this very well, or at all.
Private label credit cards have commonly been at 24% to 29% for years. The math is easy: borrow at the prime rate (today it’s 3.25% and if you borrow based on Libor, it can be cheaper), suffer 12% losses, pay 2% to 6% administrative fees, and lend at 24% to 29%. Even with 12% losses and 6% administrative fees, at 24% you still make a profit, and you reinforce customer loyalty. Private label credit card holders are always your most loyal customers, buying the most per visit and making more visits than anyone else.
To stimulate sales, it’s often cheaper to extend credit than suffer markdowns. That’s why you see “no money down, no interest, take 12 months to pay” offers. The best for any retailer: give the borrowers an incentive to pay in person, which brings them into the store again to buy more every month.
It’s certainly more profitable to extend credit than pay credit card processing fees for Amex, Visa, Mastercard and Discover.
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This presumes that consumers want to use those credit cards. Credit or no credit, consumers are not spending. Having access to a store credit card is not going to change this in the short to mid term. I don’t see this having much impact until the economy turns around.
Last year, my “stimulus” rebate went directly to pay down my HELOC. The next week, two letters arrived. Countrywide canceled any further use of my HELOC credit card saying the value of my condo had dropped too far and GE Capital canceled my Abt Appliances card that I had used only once to finance a new refrigerator interest-free over six months. I had planned to remodel my kitchen this spring using a combination of the HELOC, interest-free credit offers, this year’s income tax refund and money I’ve recently inherited. Instead, I maintain the balance on the HELOC (since the interest is low and tax deductible) and keep $20,000 in the bank, afraid to spend it because I know I can no longer rely on credit cards in case of an emergency like a broken furnace or unforeseen vet bills.
I appreciate the fact that banks wish to cut down on their losses, but something is wrong when people like me, who bought an affordable “right size” house, put down 20%, chose a simple mortgage plan and always paid off credit card balances in full, get caught up in the dragnet. I feel I have been penalized for being financially responsible and frankly, that puts me in no mood to buy anything.
Nope, still a dog person only! 🙂
There is still pressure for the sales associates at the department stores to open accounts for customers. I have friends who work for Dillard’s and the push on them is intense to open the Dillard’s American Express store card.
This might be one of the reasons Amex is in so much trouble right now-extending credit left right and center. No wonder they are paying certain card holders $300 to close accounts!
There must be something in the air today as the BTPs are all in agreement on several topics. We all agree Sears is a dinosaur and Mr. Lambert runs the roost his way, and then we all agree that store cards are getting the retailers nowhere. What’s next? We all are cat and dog people?
It isn’t just the credit card issuers who are deleveraging. The users are also deleveraging, both voluntarily and otherwise.
The issue isn’t just the availability of credit to make bigger ticket purchases, it is the mindset (and ability) of the consumer to take action. As a matter of fact, in yesterday’s paper, Best Buy was advertising “No interest for 18 months on all purchases of $499 & up.” If I recall, that is down from $999 a few weeks ago. A blip on the news today indicated the repair shop business is up over 50%.
The credit card issuers can do what they want. The newspapers can write what they want, but the consumer is in a mindset that may not go away for years. In fact, the consumer may never go back to the mindset that led to the growth in consumer spending over the last two decades.
The challenge for retailers is not to get the consumer to spend an extra dollar (that they don’t have). The challenge for the retailer will be to get the consumer to spend the dollar at their store rather than another. The retailers who do the best job focusing on that will be successful. The retailers who rely on just getting consumers to spend will be left behind, if not out of business.
I’m not sure how many people have taken it in but in the UK there has been a great deal of publicity over the past few years about the exorbitant interest rates charged on store cards. It used to be all too easy to get them with great discounts offered for spending on the day of application and nowhere enough checking done into ability to repay. Which, not surprisingly, lead to great debts, defaults and distress.
Is this also true for American store cards? If so, and if people get the idea that it doesn’t make sense (now or ever) to clock up huge debts on them then there certainly will–quite rightly–be fewer people using them. This does not necessarily mean people won’t be shopping (not that they are at the moment anyway) but they do, they may pay differently. And it will be difficult, if not impossible, to find out which shoppers are switching to another payment method as opposed to just not shopping.
For retailers planning ahead, I would advise not banking on store cards.
With the squeeze on store credit cards, retailers risk a triple-hit to their business: the reduction in sales volume from reduced credit, the lost marketing opportunity mentioned by Phil Rubin, and the lost insight that comes from having fewer purchases traceable to individual households. Without good data, not only will retailers be hamstrung in their marketing, but they will be limited in their ability to make the best category management and SKU rationalization decisions.
For retailers who used store credit cards to drive customer insights, I wonder if we’ll see a trend towards embracing loyalty cards. If anything, this presents an opportunity to better understand the purchasing behavior of a broader range of shoppers than use store credit cards today. Properly executed, the transition will provide the data retailers need to make the informed operational decisions the tough times ahead will demand.
The only alternative to store credit might be to offer a “rent to buy option.” The difference here being that the retailer continues to own the asset until it is paid off and the debt on the rental contract is separate from any general obligations the consumer may acquire. The challenge for the retailer is that they still need cash to pay the manufacturer up front.
Maybe we don’t really want to hear this, but one fall out from this whole credit squeeze might be further disintermediation as manufacturers increase efforts to go directly to consumers. By leveraging their fixed assets to carry consumer debt, manufacturers can sell “wholesale direct” and use a portion of the margin to cover consumer defaults. It does not bode well for retailers but it gets product away from the manufacturers.
Any way you look at it, until credit returns to the picture, consumer spending is going to be on the ropes. Considering the lessons everyone seems to be learning about indiscriminate lending and its impact on banks, the level of credit we have experienced lately will probably never return. This means everyone has to get used to less demand from consumers and lower expectations for spending. Focus on providing value and meeting consumer’s immediate requirements and you will probably do better than most.
One would hope that shoppers themselves would be less tempted to sign up for on-the-spot credit cards for in-store discounts if they aren’t really sure of their ability to get the credit, and be able to pay the bill. I think consumers are accepting the “Save More, Spend Less, Live Within your Means” message. For me, it means aggregating purchases onto one card, getting the “benefits” associated with it (airline miles) and making it simpler all the way around at bill-paying time. The discount “come-on” at department stores is pretty meaningless given they just mark the stuff down the next week anyway!
Look for durables, casegoods and electronic equipment to suffer from tightening retail credit. The ads are still flashing around for credit deals but the view from the field is, approvals are way down and sales are going away because of the credit refusal. My suggestion is to stop focusing on credit availability in marketing and focus more on products and services.
Credit providers are de-leveraging the consumer. First, they are requiring higher standards for issuing new cards. Second, they are reducing the credit limit on current card holders. Third, they have raised their interest rate to 29% in some states. The result is some cannot get a card to make the purchase or will not have enough credit to make the purchase. These high finance charges will mean disposable income will be going to the card issuer, not making new purchases. The end result will be another year of declining retail sales. Credit card companies will make their money on interest, not transaction fees, for the next few years.
This, along with other factors will indeed hurt retailers and especially department stores.
In addition to the economics of supporting larger purchases and sharing in financing fees (and receiving other financial income from relationships with firms like Citi and GE), the retailers benefit from customer addressability and the ability to track purchases. This provides customer and business intelligence that is otherwise hard to get or inaccurate.
So in addition to losing sales through less credit availability, there will be fewer customers to directly market to. Though of course, some department stores don’t do this very well, or at all.
Private label credit cards have commonly been at 24% to 29% for years. The math is easy: borrow at the prime rate (today it’s 3.25% and if you borrow based on Libor, it can be cheaper), suffer 12% losses, pay 2% to 6% administrative fees, and lend at 24% to 29%. Even with 12% losses and 6% administrative fees, at 24% you still make a profit, and you reinforce customer loyalty. Private label credit card holders are always your most loyal customers, buying the most per visit and making more visits than anyone else.
To stimulate sales, it’s often cheaper to extend credit than suffer markdowns. That’s why you see “no money down, no interest, take 12 months to pay” offers. The best for any retailer: give the borrowers an incentive to pay in person, which brings them into the store again to buy more every month.
It’s certainly more profitable to extend credit than pay credit card processing fees for Amex, Visa, Mastercard and Discover.