The Resiliency of Retail Credit Cards

Navigator Edition: November 2015
By: Ryan Douglas

In recent months, there has been a wave of retail credit card news. These announcements have spurred the curiosity of investors, customers, and retailers alike while drawing attention to the importance of retail card programs. While there is a long-standing debate on the value and benefit of retail card programs, particularly on the subject of utility and incremental sales, our experience and history shows that retail credit card programs can drive meaningful and sustained sales for retailers, generate receivables growth for issuers, and  positively influence customer shopping behavior.

Driving Meaningful / Sustained Retail Sales

For certain retailers, their branded credit card programs, private label or co-brand,  account for 30%, 40% or even 50%+ of total sales in any given year. Moreover, the level of sales penetration has withstood the test of time through credit cycles and periods of intense competitive pressure where payment alternatives have been widely available to consumers.  For those retailers with high sales penetration, the branded credit card program is an integral part of their strategy and DNA. As shown in Figure 1, Kohl’s discloses that its private label credit card program accounts for nearly 60% of total retail sales bolstered in part of a steady stream of credit events. As another example, not only does the Macy’s credit card program account for close to 50% of sales, but it has done so for close to a decade through the financial crisis. Retailers such as Target and Stein Mart are experiencing a material increase in credit penetration due in part to an increased commitment to the program, the launch of new products and a revamped loyalty program.

Figure 1: Retail Card Sales Penetration of Total Sales
(includes private label, co-brand and debit)

Fig_1_Retail-Card-Sales-Penetration-of-Total-Sales*First Annapolis Consulting Estimate
Source: Company press releases and quarterly earnings reports.

Generating Receivables / Loan Growth

Retail credit card programs also drive receivables growth for banks. Since the dislocation triggered by the Great Recession, generating receivables growth has been a challenge for most banks.  In the face of industry headwinds, specialized issuers with a strong focus on retail credit programs such as Synchrony and Alliance Data have been able to generate receivables growth at double-digit rates in some years (see Figure 2). Synchrony and Alliance Data each attribute only ~25% of this growth to portfolio acquisitions or new program launches, and state that 75% to 80% of their growth is organic. Retail credit programs are quite resilient – higher APRs are able to absorb economic shocks and mature programs tend to have a solid base of seasoned cardholders that are quite loyal to the brand and use the product to compartmentalize their spend.

Figure 2: YoY Receivables Growth

Fig_2_YoY-Receivables-Growth_¹ Primarily from Best Buy acquisition. ² Weighted avg. of top 12 issuers.
³ Announced, acquisition not complete.
Source: Company press releases and quarterly earnings reports.

As retailers and issuers look for growth opportunities and respond to changing consumer behaviors, they are investing in areas such as mobile wallets / payment solutions.  Earlier this year, Synchrony announced that it will be among the first issuers to offer its PLCC cardholders the ability to add their cards to Apple Pay and recently, Samsung Pay.  Alliance Data launched its Mobile Loyalty Suite, which is an app that is available to all of its partners and allows customers to apply via a mobile phone, creates a virtual card that is stored for use in the customer’s device, and enables rewards tracking and redemption at the POS. In recent news, the Chase Pay digital wallet (set to launch mid-2016) is the first bank-branded wallet that will be enabled in MCX / CurrentC, the merchant-led mobile wallet platform.

Influencing Customer Shopping Behavior

On average, retailers that have credit card programs see their cardholders spend more and shop more frequently than the average customer. Target has stated that its REDcard customers tend to visit twice as often and spend approximately 50% more than the average customer. Other retailers have shared favorable views on their card programs:

  • Kohl’s“Loyalty [card] members shop more often and are spending more with each trip.”
  • Neiman Marcus“Customers holding a proprietary credit card have tended to shop more frequently and have a higher level of spending.”
  • Bon-Ton“Our revenue growth was [partially] driven by improvement in the performance of our credit card portfolio.”
  • HSN“Best customers purchasing in the quarter increased 10%, due in part to our HSN credit card.”
  • hhgregg“There is a long-term lifetime value to getting an hhgregg credit card in that customer’s hand, that consumer is three times more likely to purchase at hhgregg over the next 12 months, than a consumer that doesn’t have our credit card.”
  • Nordstrom“We’ve always tried to build a long-term relationship with our customer through our credit card, and the customers that have joined us and that have opened accounts have been very loyal.”
  • Best Buy“Company income benefits from the continued expansion of loyalty / card program operations…”

One could argue that customers who sign up for a retail credit card tend to be more loyal to the brand and will naturally spend more under the premise of positive, self-selection.  However, much of our data shows an incremental lift of cardholder spend over other customer segments including members of tender-neutral loyalty programs. That said, there are other benefits of retail card programs that are specific to individual retailers including merchandise financing, enhancing CRM efforts, lowering the cost of acceptance, allowing for compartmentalizing of spend, etc.  Retail card products may lack some of the flash of other payment products, but their resilience over time is impressive by any measure.

For more information, please contact Ryan Douglas, Senior Consultant,, specializing in Credit Card Issuing.

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