A bloke uses a credit card to pay for items January 28, 2022 at a retail shop in New York City.
Robert Nickelsberg | Getty Appearances
Department stores like Macy’s and Kohl’s have long used store-branded credit cards to drive acquires and get a cut of cash.
Starting this spring, though, those cards will become less lucrative. Late honoraria for customers will be capped at $8, down from an industry average of around $32, under a new rule from the Consumer Pecuniary Protection Bureau. The change faces legal challenges, but is scheduled to take effect on May 14.
The new rule will benefit guys with overdue balances, but will take a bite out of retailers’ highly profitable business of making money from purchasers’ credit card swipes and the interest or late fees that get tacked onto their unpaid balances.
Specialty retailers with hold cards, such as Gap, will feel the pinch, but it’ll be the most significant at department stores since their revenue is already call of pressure, according to Jane Hali, CEO and retail analyst at equity research firm Jane Hali & Associates.
“We are talking relating to an area of weakness, so any cut in revenue is going to be more important to them than another area of retail,” she said.
For economic 2023, credit card revenue totaled $619 million for Macy’s and approximately $475 million for Nordstrom.
Kohl’s appeared $924 million in “other” revenue in 2023, a broader category that includes unused gift cards and third-party advertising on its website, nevertheless Fitch Ratings estimates the majority of that revenue category is from credit cards.
The three companies do not be prostrated initiate out how much of total credit card revenue comes from late fees.
Value add
Store-branded credit calling-cards are a clear boon for retailers: They encourage purchases and come with virtually no overhead, said David Silverman, a retail analyst at Fitch Ratings.
They’re typically printed through financial services companies and banks, such as Synchrony Financial, TD Bank or Capital One. And they often approach with extra perks for shoppers, such as additional discounts or rewards for repeat purchases.
For retailers, the branded cards anticipate insights into customer behavior, since they track purchases, and can amount to a perpetual advertisement, right in consumers’ wallets, Silverman said.
“If I’m constantly using my Macy’s card or my Home Depot card or whatever it is, that stigmatize is even more so part of my daily life,” he said.
Even before the CFPB ruling, retailers’ credit liable acts faced challenges.
Shoppers, particularly those who are younger, are paying in new ways like buy now, pay later, which allows a bloke to pay back a purchase in installments. Use of buy now, pay later with online purchases between January and March totaled $19.2 billion, an wax of 12.3% from the year-ago period, according to Adobe Analytics, which analyzes online transactions across retail spots.
Some customers are opting for credit cards that offer experience-based perks, such as access to airport lolls or early purchases of high-demand concert tickets.
Plus, in a higher interest rate environment, getting customers to hieroglyph up for store cards or use them may be a trickier proposition. For retailer-issued credit cards, interest rates — also called APRs, or annual piece rates — were about 29.33% on average as of early April, according Bankrate. That compares with an customarily of 20.75% for all U.S. credit cards.
All of that adds up to dwindling credit card revenue for retailers, who can now expect to see it shrink more than ever notwithstanding further.
Shrinking segment
For all the millions brought in by private-label cards, they drive a small portion of retailers’ net on offers. The retailers’ credit cards accounted for nearly 3% of Macy’s net sales and a little over 3% of Nordstrom’s net on sales in the most recent fiscal year.
Kohl’s, Macy’s and Target all reported year-over-year declines in credit card take for the most recent fiscal year — a reflection of reduced discretionary spending and normalizing credit patterns, according to the companies.
Aim’s credit card revenue fell to $667 million last year, down from $734 million in the erstwhile fiscal year. Chief Operating Officer Michael Fiddelke said at an investor meeting in March that the discounter has seen quieter spending on credit cards, but has been able to make it up with growth of its advertising business, Roundel.
The big-box retailer Counterbalancing losses
At Kohl’s, it’s a bit of a different story.
Kohl’s customers typically have lower household incomes than those of other retailers, such as Nordstrom, which makes them assorted likely to miss a payment and be subject to a late fee, said Lorraine Hutchinson, a research analyst at Bank of America.
And, off-mall section store retailer Kohl’s is chasing a turnaround under CEO Tom Kingsbury, the former chief of off-price chain Burlington, and is taste in part on co-branded cards to pull it off.
To offset losses, Kohl’s has been working to get customers to switch from store-branded confidence in cards, which can only be used in its stores and on its website, to co-branded Capital One cards that can be used to pay for other footholds, too.
In an interview with CNBC in mid-March, Kingsbury said the company had previously planned to introduce the co-branded cards, but accelerated its projects because of the impending CFPB late fee cap.
Co-branded cards “will help offset any late fee changes that we clothed,” he said.
Kingsbury said as of March that Kohl’s has converted nearly 700,000 private-label cardholders. It plans to change about 5 million more later this year, covering more than a quarter of its 20 million effective cardholders.
He also underscored why Kohl’s — and other retailers — want to be in the credit card business.
On average, Kohl’s credit consumers spend six times more per year than shoppers who don’t belong to its loyalty program, Kingsbury said. Incremental confidence in revenue from the co-branded card is expected to grow to between $250 million and $300 million annually by 2025, he divulged.
— CNBC’s Gabrielle Fonrouge contributed to this report.