A customer uses a credit card to pay for items on January 28, 2022 at a retail store in New York.
Robert Nickelsberg | Getty Images
Department stores like Macy’s and of Kol have long used store-brand credit cards to increase purchases and earn money.
However, starting this spring, these cards will become less profitable. Late fees for customers will be capped at $8, down from an industry average of about $32, under a new rule from the Consumer Financial Protection Bureau. The change faces legal challenges, but it is it is scheduled to take effect on May 14.
The new rule will benefit customers with overdue balances, but it will take some away from retailers’ highly profitable business of making money from customers’ credit card swipes and the interest or late charges that accrue on their unpaid balances.
Specialist retailers with store cards, such as Gap, will feel the pinch, but it will be most important to department stores, whose revenues are already under pressure, according to Jane Hali, managing director and retail analyst at equity research firm Jane Hali & Associates.
“We’re talking about an area of weakness, so any cut in revenue will be more significant to them than another area of retail,” he said.
For fiscal 2023, credit card revenue totaled $619 million for Macy’s and about $475 million for Nordstrom.
Kohl’s reported $924 million in “other” revenue in 2023, a broader category that includes unused gift cards and third-party ads on its website, though Fitch Ratings estimates that most of that revenue category comes from credit cards.
The three companies do not break down how much of their total credit card revenue comes from late fees.
Added value
Brand-name credit cards are a clear boon for retailers: They encourage purchases and come with virtually no overhead, said David Silverman, retail analyst at Fitch Ratings.
They are usually issued through financial services companies and banks, such as Synchrony Financial, TD Bank or Capital One. And they often come with additional perks for shoppers, such as additional discounts or rewards for repeat purchases.
For retailers, branded cards provide insights into customer behavior as they track purchases and can amount to a permanent advertisement, right in customers’ wallets, Silverman said.
“If I use my Macy’s card all the time or my Home Depot card or whatever, that brand is even more of a part of my everyday life,” he said.
Even before the CFPB decision, retailer credit cards were facing challenges.
Shoppers, especially younger ones, are paying in new ways such as buy now, pay later, which allows the customer to pay off a purchase in installments. Buy now, pay later online shopping usage between January and March totaled $19.2 billion, up 12.3 percent from the year-ago period, according to Adobe Analytics, which analyzes online transactions on retail sites.
Some customers choose credit cards that offer experience-based perks, such as access to airport lounges or early bird tickets to high-demand concerts.
Additionally, in a higher interest rate environment, getting customers to sign up for or use store cards can be a more difficult proposition. For credit cards issued by retailers, interest rates — also called APRs or annual percentage rates — averaged about 29.33 percent in early April, according to Bankrate. That compares to an average of 20.75% for all US credit cards.
All of this is contributing to reduced credit card revenue for retailers, who can now expect to see it shrink even further.
Shrink section
For all the millions brought in by private label cards, they drive a tiny fraction of retailers’ net sales. Retailer credit cards accounted for nearly 3% of Macy’s net sales and slightly more than 3% of Nordstrom’s net sales in the most recent fiscal year.
Kohl’s, Macy’s and Target all reported year-over-year declines in credit card revenue for the most recent fiscal year – a reflection of reduced discretionary spending and normalizing credit standards, according to the companies.
Target’s credit card revenue fell to $667 million last year, from $734 million in the previous fiscal year. Chief Operating Officer Michael Fiddelke told an investor meeting in March that the discounter had lower credit card spending but was able to make up for it with growth in its advertising business, Roundel.
The big-box retailer recently rolled out the rewards program as a three-tiered offering that includes a free tier, a paid annual subscription and a credit card now called the Target Circle Card.
Macy’s, too, has faced declining credit card revenue. The division’s $619 million during the most recent fiscal year was a decrease of 28 percent. And the company said it expects that to fall further to $475 million and $490 million for this fiscal year as net sales fall.
This perspective does not take into account the late credit card charge decision.
Adrian Mitchell, chief executive and chief financial officer, told investors on the company’s earnings call that Macy’s is working with Citi, its financial partner, to try to offset the late pay decision. It also is looking at strategies to increase customer use of Macy’s and Bloomingdale’s credit cards, he said.
Nordstrom, for its part, has reported year-over-year gains in credit card revenue for each of the past three years, though its range is smaller than that of Kohl’s, Macy’s and Target. He downplayed the CFPB’s change, saying the average credit quality of its portfolio tends to be higher than other retailers, meaning it relies less on late fees.
Gap doesn’t disclose credit card revenue, but its Chief Financial Officer, Katrina O’Connell, said on an earnings call that late charge losses will be largely offset in 2024 by other drivers in our credit card program. The company declined to share details about those compensations.
Some card issuers, such as Synchrony, have said they will make changes in the coming months, such as raising APRs, to try to soften the impact of the federal rule. Synchrony is a major issuer of store cards, including cards for Sam’s Club and Lowe’s.
Compensation for losses
At Kohl’s, the story is a little different.
Kohl’s customers typically have lower household incomes than those of other retailers such as Nordstrom, making them more likely to miss a payment and be subject to a late fee, said Lorraine Hutchinson, a researcher at Bank of America.
And off-price retailer Kohl’s is chasing a turnaround under CEO Tom Kingsbury, the former head of the Burlington off-price chain, and is relying in part on co-branded cards to do it.
To offset the losses, Kohl’s is working to get customers to switch from store-brand credit cards, which can only be used in its stores and on its website, to Capital One co-branded cards that can be used to pay for other markets. very.
In an interview with CNBC in mid-March, Kingsbury said the company had previously planned to introduce the co-branded cards, but accelerated its plans due to the CFPB’s looming cap on delays.
The co-branded cards “will help offset any late fee changes we have,” he said.
Kingsbury said since March, Kohl’s has converted nearly 700,000 private label cardholders. It plans to convert about 5 million more later this year, covering more than a quarter of its 20 million active cardholders.
It also underscored why Kohl’s — and other retailers — want to be in the credit card business.
On average, Kohl’s credit customers spend six times more annually than non-Loyalty shoppers, Kingsbury said. Additional credit revenue from the co-branded card is expected to grow between $250 million and $300 million annually through 2025, he said.
— CNBC’s Gabrielle Fonrouge contributed to this report.