On January 28, 2022, a customer uses a credit card to pay for an item at a retail store in New York City.
Robert Nickelsburg Getty Images
While the new rules will benefit customers with past-due balances, they will hurt retailers’ lucrative business of making money from customers’ credit card usage and the interest and late fees added to unpaid balances. become.
Specialty retailers with store cards such as Gap will feel the pinch, as profits are already under pressure, said Jane Hari, CEO and retail analyst at equity research firm Jane Hari & Co. , department stores are said to be the most severely affected. Associate.
“We’re talking about weaker areas, so the revenue reduction is going to be more important to them than other areas of retail,” she said.
Credit card revenue for fiscal 2023 was $619 million for Macy’s and approximately $475 million for Nordstrom.
Kohl’s reported “other” revenue of $924 million in 2023, a broader category that includes unused gift cards and third-party advertising on its website, but Fitch Ratings Estimates suggest that the majority of that revenue category comes from credit cards.
The three companies did not disclose how much of their total credit card revenue comes from late fees.
Fitch Ratings retail analyst David Silverman said store-brand credit cards are a clear boon for retailers, encouraging purchases and having virtually no overhead.
Typically issued through financial services companies and banks, such as Synchrony Financial, TD Bank, and Capital One. Additionally, they often come with additional perks for shoppers, such as additional discounts and rewards for repeat purchases.
Silverman said branded cards could provide retailers with insight into customer behavior to track purchases and become ever-present advertisements in customers’ wallets.
“When I use a Macy’s card or a Home Depot card all the time, those brands become even more part of my daily life,” he said.
Even before the CFPB ruling, retailer credit cards were facing challenges.
Shoppers, especially younger generations, are paying for their purchases in new installments, such as “buy now, pay later.” According to Adobe Analytics, which analyzes online transactions across retail sites, “buy now, pay later” spending on online purchases totaled $19.2 billion from January to March, an increase of 12.3% year over year. Increased.
Some customers are opting for credit cards that offer experience-based benefits, such as access to airport lounges or early purchase of high-demand concert tickets.
Additionally, in an environment of higher interest rates, it can be more difficult to get customers to sign up for or use a store card. Interest rates (also known as APR or annual percentage rates) on retail credit cards averaged about 29.33% as of early April, according to Bankrate. By comparison, the average for all credit cards in the US is 20.75%.
All of this will lead to a decline in credit card revenue for retailers, who are expected to see further revenue contraction.
All the millions of dollars brought in by private label cards represent a small portion of retailers’ net sales. The retailer’s credit cards accounted for nearly 3% of Macy’s net sales and just over 3% of Nordstrom’s net sales in its most recent fiscal year.
Kohl’s, Macy’s and Target all reported year-over-year declines in credit card revenue in their most recent fiscal years, reflecting lower discretionary spending and normalizing credit patterns.
Target’s credit card revenue last year fell to $667 million from $734 million a year earlier. Chief Operating Officer Michael Fidelke said at an investor meeting in March that the company’s credit card spending is down, but growth in its advertising business, Roundel, is making up for it.
The retail giant recently relaunched its loyalty program as a three-tier offering that includes a free tier, a paid annual membership, and a credit card now called the Target Circle Card.
Macy’s is also dealing with declining credit card revenue. The division’s revenue for the most recent fiscal year was $619 million, a decrease of approximately 28%. And Macy’s said it expects sales to fall further this fiscal year to between $475 million and $490 million due to lower net sales.
This outlook does not take into account rulings regarding credit card late fees.
Adrian Mitchell, chief operating officer and chief financial officer, told investors on the earnings call that Macy’s is working with financial partner Citi to offset late fee awards. He said the company is also exploring strategies to increase customer usage of Macy’s and Bloomingdale’s credit cards.
Nordstrom has reported year-over-year increases in credit card revenue over the past three years, although its sales are smaller than Kohl’s, Macy’s and Target. The company downplayed the CFPB’s changes, saying the average credit quality of its portfolio tends to be higher than other retailers, meaning it is less reliant on late fees.
Gap doesn’t disclose credit card revenue, but Chief Financial Officer Katrina O’Connell said on an earnings call that losses from late fees “will be largely offset by other instruments within the credit card program in 2024.” ” he said. The company did not provide details regarding these offsets.
Some card issuers, including Synchrony, have said they will make changes such as increased annual interest rates in the coming months to soften the impact of the federal rule. Synchrony is a leading issuer of store cards, including cards from Sam’s Club and Lowe’s.
At Kohl’s, the story is a little different.
Lorraine Hutchinson, a research analyst at Bank of America, said Kohl’s customers typically have lower household incomes than those at other retailers such as Nordstrom, making them more likely to miss payments and be hit with late fees. It is said to be expensive.
And off-mall department store retailer Kohl’s is looking to rebuild under CEO Tom Kingsbury, the former head of off-price chain Burlington, and is looking to achieve that with partnered brands. Partially relies on cards.
To make up for the losses, Kohl’s is working to get customers to switch from store-branded credit cards, which can only be used in stores and on its website, to co-branded Capital One cards, which can be used to pay for other purchases. Too.
In an interview with CNBC in mid-March, Kingsbury said the company had been planning to introduce co-branded cards for some time, but brought those plans forward due to the looming CFPB late fee cap.
Co-branded cards “will help offset changes in late fees,” he said.
As of March, Kohl’s had converted nearly 700,000 private label cardholders, Kingsbury said. The company plans to convert about 5 million more people later this year, covering more than a quarter of its 20 million active cardholders.
He also emphasized why Kohl’s and other retailers want to get into the credit card business.
Kohl’s Credit customers spend, on average, six times more annually than shoppers who don’t participate in the loyalty program, Kingsbury said. He said incremental credit revenue from co-branded cards is expected to grow from $250 million to $300 million annually by 2025.
—CNBC’s Gabriel Fonrouge contributed to this report.
