THE retail store-card industry is facing a reckoning.
Long a staple in consumers’ wallets, credit cards offered by giant retailers like Sears Holdings Corp. and Macy’s Inc. are losing out as retailers shutter locations and consumers flock to shopping at online rivals like Amazon.com Inc. The cards, the latest victim of the long decline of the mall retail business, are also being hit by increasingly generous rewards from credit cards—such as cash back and points for vacations—that consumers can use at most places.
Those problems are only part of the challenge facing the large store-card issuers, a group led by Synchrony Financial and Alliance Data Systems Corp., along with some large banks including Citigroup Inc. Soft sales at some retailers and a tepid nine-year U.S. recovery are also rattling this business.
Synchrony and Alliance Data aren’t standing still. Synchrony, the biggest store-card issuer, this month announced a nearly $6 billion lending deal with online payments giant PayPal Holdings Inc. Alliance Data, based in Plano, Texas, and ranked No. 3 after Citigroup. based on store card balances, is adding more online-only merchants to its stable of mall and other brick-and-mortar store cards.
But few analysts expect the traditional store-card niche to reverse its long decline any time soon. Some investors are betting that the standalone card issuers will be among the most vulnerable financial firms the next time the economy tips into recession.
It’s “a vicious cycle of consumers moving spending online, going to stores less and spending less” on the cards compared with the general cards that can be used in most locations, said Matthew O’Neill, an analyst following retail card issuers at Autonomous Research. Store credit cards that can only be used at a specific retail chain accounted for 5.9% of total credit card purchase volume in 2016, down from 18% in 1990, according to trade publication the Nilson Report.
The companies also are coming under pressure as more cardholders fall behind on payments, due in part to a previous loosening in underwriting standards. Missed payments that are 60 days or more late for a broad range of retail cards hit 2.82% in October, the highest level since May 2012, according to Fitch Ratings.
Missed payments tend to rise after stores shut down locations or close altogether.
Brick-and-mortar retailers closed more than 4,000 stores in the first half of 2017 due to declining sales and profitability, according to advisory-services firm BDO USA.
Store credit cards are often issued to consumers who don’t have high credit scores, and for some of them one incentive to make their monthly payments is to be able to continue shopping with their credit card at the store.
When a retailer shuts down its locations near those cardholders’ homes though, the customers are less likely to use the card again and have less incentive to pay the balance they built up on the card.
The debt becomes “a lower priority relative to other obligations,” according to a Moody’s Investors Service report published in June.
Card companies say that the credit cards can often be used on retailers’ websites despite store closures and that many cards can be used outside that retailer as well.
Lenders are writing off more card balances as losses. Charge-offs at Citi’s retail credit cards increased to 4.7% of outstanding balances in the third quarter from 3.9% a year prior, and the bank has increased its guidance for full year 2017 write offs for these cards twice this year. Last month, finance chief John Gerspach said the bank was increasing charge-off expectations beyond 2017 as well.
While some of its partners are in financial trouble, Synchrony also issues cards in booming parts of the retail sector. It issues one of Amazon.com’s credit cards and is the credit-card issuer for Wal-Mart Stores Inc., which in the third quarter posted its strongest quarterly U.S. sales growth in nearly a decade.
A Synchrony spokeswoman said the Stamford, Conn.-based company continues to work with retailers to boost card usage. For example, the card issuer is working with retailers to send offers and other alerts via store apps to cardholders’ mobile phones when they are passing by stores as a way of encouraging them to walk in.
Alliance Data over the past year started allowing shoppers to apply for a store credit card by sending a text message while they are shopping in the store, rather than waiting at the counter. The result is that consumers spend 20% more on their first card purchase, according to Melisa Miller, president of Alliance Data’s credit-card services.
The company is also “adjusting the brand partners” it works with, according to Ms. Miller, adding home-improvement website Build.com this month. This follows partnerships with online retailers Wayfair.com and Overstock.com that it established in recent years.
Store cards aren’t the only ones dealing with increasing charge-off rates, and losses for general-purpose credit cards and store cards both remain low compared to their recession-era highs. But increases have been sharper in store cards. Since net charge-off rates for cards bottomed in the third quarter of 2015, they’ve increased 1.01 percentage points on average for large U.S. store card issuers, about twice the increase for the largest general-card issuers, according to Fitch. - WSJ
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