Store credit cards deal department stores another revenue squeeze

Department stores like Macy’s And Kohl’s have long used store-brand credit cards to make purchases and get a cut of the money.

However, starting this spring, these cards will become less lucrative. Late fees for customers will be capped at $8, down from the industry average of about $32, under a new rule from the Consumer Financial Protection Bureau. The change faces legal challenges, but is expected to take effect on May 14.

The new rule will benefit customers with past-due balances, but will reduce retailers’ highly profitable business of making money from customers’ credit cards and interest or late fees that are added to their outstanding balances.

Specialty retailers with store cards, such as Gap, The pressure will be felt, but it will be greatest at department stores since their revenues are already under pressure, according to Jane Hali, CEO and retail analyst at equity research firm Jane Hali & Associates.

“We are talking about an area of ​​weakness, so any reduction in revenue will be more significant for them than any other sector of retail,” she said.

For fiscal 2023, credit card revenue totaled $619 million for Macy’s and approximately $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 advertising on its website, although Fitch Ratings estimates that the majority of this revenue category comes from credit cards.

The three companies don’t say how much of total credit card revenue comes from late fees.

Store-branded credit cards are a real boon for retailers: They encourage purchases and carry virtually no additional fees, said David Silverman, a retail analyst at Fitch Ratings.

They are typically issued through financial services companies and banks, such as Synchrony Financial, TD Bank, or Capital One. And they often offer additional benefits to buyers, such as additional discounts or rewards for repeat purchases.

For retailers, branded cards provide insights into customer behavior, since they track their purchases and can serve as perpetual advertising, right into customers’ wallets, Silverman said.

“If I’m constantly using my Macy’s card or my Home Depot card or whatever, that brand becomes even more a part of my daily life,” he said.

Even before the CFPB’s decision, retailer credit cards were facing challenges.

Shoppers, especially younger ones, are paying in new ways, like buy now, pay later, which allows a customer to pay off a purchase in installments. Use of “buy now, pay later” for online purchases between January and March totaled $19.2 billion, an increase of 12.3% from the year-ago period, according to Adobe Analytics, which analyzes online transactions on retail sites.

Some customers opt for credit cards that offer experience-based benefits, such as access to airport lounges or early purchase of in-demand concert tickets.

Additionally, in a higher interest rate environment, getting customers to sign up for or use store cards can be a trickier proposition. For retailer-issued credit cards, interest rates — also called APR, or annual percentage rates — were about 29.33% on average in early April, according to Bankrate. This compares to an average of 20.75% for all U.S. credit cards.

All of this adds up to a decrease in credit card revenue for retailers, who can now expect to see it decline even further.

For all the millions brought in by private label cards, they generate only a small portion of retailers’ net sales. Retail credit cards accounted for nearly 3% of Macy’s net sales and just over 3% of Nordstrom’s net sales in the last fiscal year.

Kohl’s, Macy’s and Target all reported a year-over-year decline in credit card revenue for the most recent fiscal year – reflecting a reduction in discretionary spending and a normalization of credit models, companies say .

Target’s credit card revenue fell to $667 million last year from $734 million the previous fiscal year. Chief Operating Officer Michael Fiddelke said at an investor meeting in March that the discounter had seen a decline in credit card spending, but was able to make up for it thanks to the growth of its advertising business, Roundel.

The big-box retailer recently relaunched its loyalty 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 has also had to deal with declining credit card revenue. The sector’s $619 million in the last fiscal year represents a decline of about 28%. And Macy’s said it expects that amount to fall even further, to between $475 million and $490 million this fiscal year, as net sales fall.

This outlook does not take into account the ruling on credit card late fees.

Adrian Mitchell, chief operating officer and chief financial officer, told investors on the company’s earnings conference call that Macy’s was working with Citi, its financial partner, to try to make up for the late decision on the fees. It also is looking for strategies to increase customer use of Macy’s and Bloomingdale’s credit cards, he said.

Nordstrom, for its part, has seen year-over-year increases in credit card revenue in each of the past three years, although its revenue is lower than Kohl’s, Macy’s and Target . It downplayed the CFPB’s change, saying its portfolio’s average credit quality tends to be higher than other retailers, meaning it’s less reliant on late fees.

Gap doesn’t disclose credit card revenue, but its chief financial officer, Katrina O’Connell, said on an earnings conference call that losses from late fees will be “largely offset in 2024 by other levers within our credit card program. The company declined to share details of these compensations.

Some card issuers, like Synchrony, have announced they will make changes in the coming months, such as increasing APRs, to try to mitigate the effect of the federal rule. Synchrony is a major issuer of store cards, including Sam’s Club and Lowe’s cards.

At Kohl’s, it’s a bit of a different story.

Kohl’s customers generally have lower household incomes than other retailers, such as Nordstrom, making them more likely to miss a payment and be subject to late fees, said Lorraine Hutchinson, a research analyst. at Bank of America.

And off-mall department store retailer Kohl’s is looking to turn things around under CEO Tom Kingsbury, 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 its customers to switch from store-branded 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 purchases. Also.

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 late fees.

The co-branded cards “will help offset the late fee changes we have,” he said.

Kingsbury said that as of March, Kohl’s 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.

He also highlighted why Kohl’s — and other retailers — want to get into the credit card business.

On average, Kohl’s credit customers spend six times more per year than shoppers who are not in its loyalty program, Kingsbury said. Additional credit revenue from the co-branded card is expected to reach between $250 million and $300 million annually by 2025, he said.

— CNBC’s Gabrielle Fonrouge contributed to this report.