A customer uses a credit card to pay for items at a store in New York City on January 28, 2022.
Robert Nickelsberg | Getty Images
Department stores such as Macy's And Kohl's have long used store brand credit cards to boost purchases and get a cash discount.
However, starting this spring, those cards will become less lucrative. Fees for late 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 is expected to come into effect on May 14.
The new rule will benefit customers with delinquent accounts, but will take a bite out of retailers' highly profitable business of making money off customers' credit cards and the interest or late fees tacked onto their unpaid bills.
Specialty stores with store cards, such as Hole, The pressure will be felt, but it will be greatest at department stores because their sales are already under pressure, said Jane Hali, CEO and retail analyst at equity research firm Jane Hali & Associates.
“We're talking about an area of weakness, so any decline in sales will be more important to them than any other part of the retail business,” she said.
For fiscal 2023, credit card revenues totaled $619 million for Macy's and approximately $475 million for Northstream.
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 most of that revenue category comes from credit cards.
The three companies do not disclose how much of their total credit card revenue comes from late payments.
Added value
Store-branded credit cards are a clear boon for retailers: They encourage purchases and entail virtually no overhead, says 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 shoppers, such as extra discounts or rewards for repeat purchases.
For retailers, the brand cards provide insight into customer behavior because they track purchases and can amount to a perpetual advertisement directly into customers' wallets, Silverman said.
“If I'm constantly using my Macy's card or my Home Depot card or whatever, that brand is even more a part of my everyday life,” he said.
Even before the CFPB ruling, retailers' credit cards were facing problems.
Shoppers, especially young people, are paying in new ways, such as buy now and pay later, which allows a customer to repay a purchase in installments. The use of buy now, pay later in online purchases totaled $19.2 billion between January and March, up 12.3% from the same period last year, 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 purchases of in-demand concert tickets.
Additionally, in a higher interest rate environment, it may be more difficult to get customers to sign up for or use store cards. For retailer-issued credit cards, interest rates — also called APRs or annual percentage rates — averaged about 29.33% in early April, according to Bankrate. That compares to an average of 20.75% for all US credit cards.
All of this leads to declining credit card revenues for retailers, who can now expect them to shrink even further.
Shrink segment
For all the millions private label cards bring in, they make up a small portion of retailers' net sales. Retailer credit cards accounted for nearly 3% of Macy's net sales and just over 3% of Nordstrom's net sales in the most recent fiscal year.
Kohl's, Macy's and Goal all reported year-over-year declines in credit card revenue in the most recent fiscal year – a reflection of reduced discretionary spending and normalizing credit patterns, the companies said.
Target's credit card revenue fell to $667 million last year, compared to $734 million in the previous fiscal year. Chief Operating Officer Michael Fiddelke said at an investor meeting in March that the discounter has seen lower spending on credit cards but has been able to make up for that with the growth of its advertising business, Roundel.
The big-box retailer recently relaunched its loyalty program as a three-tier offering, including a free tier, a paid annual membership and a credit card now called Target Circle Card.
Macy's has also faced declining credit card revenue. The segment's $619 million during the most recent fiscal year was down about 28%. And Macy's said it expects that to drop even further to between $475 million and $490 million for this fiscal year as net sales decline.
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 during the company's earnings call that Macy's is working with Citi, its financial partner, to try to offset the late fee settlement. The company is also looking at strategies to increase customers' use of Macy's and Bloomingdale's credit cards, he said.
For its part, Nordstrom has reported year-over-year increases in credit card revenue over the past three years, though its returns are smaller than those of Kohl's, Macy's and Target. It downplayed the CFPB change, saying the average credit quality of its portfolio is typically higher than that of other retailers, meaning the company is less dependent on late payments.
Gap doesn't disclose credit card revenue, but its Chief Financial Officer, Katrina O'Connell, said on an earnings call that losses from late fees “will be largely offset by other levers within our credit card program in 2024.” The company declined to share details of these compensations.
Some card issuers, such as Synchrony, have said they will make changes in the coming months, such as raising APRs, to try to blunt the effect of the federal rule. Synchrony is a major publisher of retail cards, including Sam's Club and Lowe's cards.
Compensate for losses
At Kohl's it's a bit of a different story.
Kohl's customers tend to have lower household incomes than those of other retailers such as Nordstrom, making them more likely to miss a payment and have late payments, said Lorraine Hutchinson, a research analyst at Bank of America.
And department store chain Kohl's is chasing a turnaround under CEO Tom Kingsbury, former head of the Burlington discount chain, and is leaning in part on co-branded cards to make it happen.
To offset the losses, Kohl's has been working to transition customers from store-brand credit cards, which can only be used in stores and on its website, to co-branded Capital One cards that can be used to pay for other pay for purchases. at.
In an interview with CNBC in mid-March, Kingsbury said the company previously planned to introduce the co-branded cards, but accelerated its plans due to the looming CFPB cap on late fees.
Co-branded cards “will help offset any late rate changes,” he said.
Kingsbury said in March that Kohl's converted nearly 700,000 private label cardholders. The company plans to convert about 5 million more later this year, covering more than a quarter of its 20 million active cardholders.
He also underscored why Kohl's – and other retailers – want to be in the credit card industry.
On average, Kohl's credit customers spend six times more per year than customers who don't participate in the loyalty program, Kingsbury said. Increasing loan revenue from the co-branded card is expected to grow to between $250 million and $300 million annually by 2025, he said.
— CNBC's Gabrielle Fonrouge contributed to this report.