On January 28, 2022, a customer used a credit card to pay for items at a retail store in New York City.
Robert Nickelsberg | Getty Images
Department stores such as macy’s department store and Kohl’s People have long used store-branded credit cards to drive purchases and get a cut of their cash.
Starting this spring, though, the cards will become less profitable. Under a new rule from the Consumer Financial Protection Bureau, late fees for customers will be capped at $8, below the industry average of about $32.The change faces legal challenges, but It is expected to be implemented from May 14th.
The new rules will benefit customers with past-due balances but will undermine the highly profitable business of retailers making money from customers’ credit card swipes and interest or late fees tacked on unpaid balances.
Specialty retailers with store cards, e.g. gap, Jane Hali, chief executive and retail analyst at equity research firm Jane Hali & Associates, said department stores will feel the pressure, but that will be the most important because their revenue is already under pressure.
“We’re talking about a weak area, so any revenue cut is more important to them than another area of retail,” she said.
In fiscal 2023, Macy’s credit card revenue totaled $619 million, and Macy’s credit card revenue was approximately $475 million. 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, though Fitch Ratings estimates the majority of that revenue category came from credit card.
The three companies did not disclose how much of their total credit card revenue comes from late fees.
bonus
David Silverman, a retail analyst at Fitch Ratings, said store-brand credit cards are a clear boon for retailers: They encourage purchases with virtually no overhead.
They are typically issued through financial services companies and banks such as Synchrony Financial, TD Bank or Capital One. And they often offer additional perks to shoppers, such as additional discounts or incentives for repeat purchases.
For retailers, branded cards can provide insight into customer behavior because they can track purchases and can amount to permanent advertising in customers’ wallets, Silverman said.
“If I use a Macy’s card or a Home Depot card or whatever, the brand becomes more of a part of my daily life,” he said.
Even before the CFPB’s ruling, retailers were facing challenges with their credit cards.
Shoppers, especially young people, are paying in new ways, such as “buy now, pay later,” which allows customers to pay in installments. According to data from Adobe Analytics, which analyzes online transactions on retail websites, between January and March, the total amount of online shopping using “buy now, pay later” reached US$19.2 billion, an increase of 12.3% over the same period last year.
Some customers choose credit cards that offer experience-based benefits, such as airport lounge access or early purchase of high-demand concert tickets.
Plus, in a higher-rate environment, getting customers to sign up or use a store card can be a trickier proposition. As of early April, the average interest rate (also known as APR, or annual percentage rate) on credit cards issued by retailers was about 29.33%, according to Bankrate. By comparison, the average interest rate for all U.S. credit cards is 20.75%.
All of this will lead to a reduction in credit card revenue for retailers, who now expect further reductions in credit card revenue.
Market segment shrinks
Although private label cards bring in millions of dollars in revenue, they represent only a small portion of retailers’ net sales. In the retailer’s most recent fiscal year, the retailer’s credit card sales accounted for nearly 3% of Macy’s net sales and just over 3% of Nordstrom’s net sales.
Kohl’s, Macy’s and Target All reported an annual decline in credit card revenue in the latest fiscal year, reflecting lower discretionary spending and normalizing credit patterns, the companies said.
Target’s credit card revenue fell to $667 million last year, down from $734 million in the previous fiscal year. Chief Operating Officer Michael Fiddelke said at an investor conference in March that the discounter’s credit card spending was down, but it had been able to make up for it through growth in its advertising business, Roundel.
The major retailer recently relaunched its three-tier loyalty program, which includes a free tier, a paid annual membership and a credit card (now called the Target Circle Card).
Macy’s is also facing declining credit card revenue. The segment’s revenue in the most recent fiscal year was $619 million, down about 28%. Macy’s said it expects sales to fall further this fiscal year to between $475 million and $490 million as net sales decline.
This outlook does not take into account credit card late fee rulings.
Macy’s is working with its financial partner Citi to try to offset the late fee ruling, Chief Operating Officer and Treasurer Adrian Mitchell told investors on the company’s earnings call. The company is also looking at strategies to increase customer use of Macy’s and Bloomingdale’s credit cards, he said.
Nordstrom, for its part, has seen year-over-year growth in credit card revenue in each of the past three years, although its revenue is lower than that of Kohl’s, Macy’s and Target. It downplayed the CFPB’s changes, saying the average credit quality of its portfolio tends to be higher than that of other retailers, meaning it is less reliant on late fees.
Gap does not disclose credit card revenue, but chief financial officer Katrina O’Connell said on an earnings call that the loss from late fees will be “largely offset by other leverage in our credit card program in 2024.” The company declined to disclose specific details about these offsets.
Some card issuers, such as Synchrony, have said they will make changes in the coming months, such as increasing annual interest rates, to try to blunt the impact of the federal rule. Synchrony is a major issuer of store cards, including cards from Sam’s Club and Lowe’s.
offset losses
At Kohl’s, it’s a different story.
Bank of America research analyst Lorraine Hutchinson said Kohl’s customers typically have lower household incomes than other retailers such as Nordstrom, making them more likely to miss a payment and be charged late fees.
Separately, off-mall department store retailer Kohl’s is seeking to turn a profit under CEO Tom Kingsbury, the former chief executive of discount chain Burlington, and is relying in part on co-branded cards to do so. One goal.
To offset the losses, Kohl’s has been working to switch customers from store-branded credit cards that can only be used in its stores and website to co-branded Capital One cards that can be used to pay for other purchases, as well.
Kingsbury told CNBC in mid-March that the company had previously planned to launch a co-branded card, but accelerated its plans due to the impending implementation of the CFPB’s late fee cap.
The co-branded card “will help offset changes in our late fees,” he said.
As of March, Kohl’s has converted nearly 700,000 private-label cardholders, Kingsbury said. The company plans to convert about 5 million more credit cards 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 annually than shoppers who are not part of its loyalty program, Kingsbury said. Incremental credit revenue from co-branded cards is expected to increase to $250 million to $300 million annually by 2025, he said.
—CNBC’s Gabrielle Fonrouge contributed to this report.
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