Trends Analysis: Should Stores Still Invest in Branded Credit Cards?
Store cards are one of the earliest forms of credit cards.
SuperMoney’s Andrew Latham writes that oil companies and department stores in the US began to offer early credit card prototypes back in the 1920s. These cards — metal plates, actually — allowed customers to pay for their purchases after the fact.
Fast forward almost a century, and store cards are still in use today. Big brands, including Apple and Uber, have launched branded credit cards in the last two years. But are these cards still a lucrative offering for retailers? Do consumers even care about them anymore?
We’ll look at the current opinion on one of retail’s oldest methods of extending lines of credit to customers.
For Companies, Branded Cards Bring Big Benefits — and Risks
One of the big benefits branded credit cards offer retailers is the additional level of customer engagement they generate, writes IBM’s Chris Shaw. “Merchants recognize that the more you are tied to their brand, the more likely you are to be a brand advocate. And that loyalty can pay off in a big way for merchants.”
Shaw points to research by GE Capital Retail Finance that shows store credit cards increase store visits from 1.4 to 1.7 per month. This is across brick-and-mortar stores, big-box retailers and eCommerce shops. Those monthly bumps translate to about four additional store visits per year per cardholder.
Branded credit cards also save companies money when processing transactions, Flexiti CEO Peter Kalen notes. Often, credit card providers don’t levy the same charges on store cards that they do on other non-branded cards. These gives companies added flexibility when it comes to pricing strategies. “Retailers can offer promotional financing on purchases, attracting customers with affordable monthly payments or fully deferred payment plans,” Kalen writes.
There’s a clear line to bigger profits for retailers. Flexible buying options and passed-on price savings allow customers to spend more.
Those big benefits do come with a downside, however. Relying on profits from store cards is risky business, warn New York Times reporters Michael Corkery and Jessica Silver-Greenberg. “If more consumers fall behind on their payments, the profits could dry up, intensifying retailers’ troubles.”
Brands and credit card providers can take some comfort in the historical behavior of consumers. Marketing consultant Eric Lindeen notes that consumers tend to pay back branded credit cards first.
Customers Can Live to Regret Rewards
Financial journalist Gregory Karp says consumers have more and better reward options than ever before. Where cards were once only useful at a single store, consumers can now earn rewards everywhere. With more competition, the rewards are also increasing, too.
“Now, co-branded card issuers might offer double or triple points — or more — every time you swipe at the pump or hand your card to a waiter or store clerk. Ikea even offers bonus points for spending on utilities. Traditionally, co-branded credit cards offered a mundane 1% back on purchases made outside the brand. Now, Uber’s card, for example, offers a whopping 4% back on restaurant purchases.”
While the opportunity to earn so many rewards may be appealing enough for consumers to take out a branded credit card, many end up regretting it. MarketWatch’s Jacob Passy reports that almost half of US consumers who have held a store card regret their choice. That’s according to data from a survey conducted by LendingTree.
One of the biggest reasons for regret is the high interest rates that come with store cards, adds Passy. “Many retailers charge higher interest rates for their store cards because they do very minimal or no underwriting to determine whether a consumer is creditworthy. That means more people can get the cards, but those who carry a balance can easily be burned.”
Millennials Are Most Wary of Branded Credit Cards
Unfortunately for retailers relying on branded credit cards, it’s the youngest generations that are the least trusting when it comes to credit.
Gaby Dunn, host of the Bad with Money podcast, notes that her generation tends to reject credit cards as a result of the recession. “I think we don’t understand them or we’re skeptical of them because we’ve seen our parents dealing with credit card debt and the economic recession in 2008 when we were impressionable and perhaps just getting our independent financial lives together.”
A Money Pulse report found that only a third of adults aged 18–29 had a credit card, business writer Mike Cetera reports. “Even as the economy and job prospects have improved, this generation hasn’t warmed to the idea of using credit as a financial tool.”
Napala Pratini at Credible notes that millennials rank credit card debt above dying and war as the scariest issue they face in day-to-day life. Among that group, nearly one-third ranked accruing interest as the scariest aspect of credit card debt, while another third ranked monthly payments as the scariest part. The vast majority reported that they would be changing spending habits to sort out their debt.
What Are the Alternatives for Retailers?
Bread CEO and Co-Founder Josh Abramowitz believes branded cards are ripe for disruption. Store cards don’t translate to the eCommerce environment, which is why solutions like Bread are offering retailers a digital-first alternative.
“I think you really question every assumption about what customers are looking for – and I think that online, transparency and predictability are incredibly important,” Abramowitz says. If retailers want to transition credit offerings online, they can’t continue to hide fees and repayments in small print. Honesty and openness are key.
From there, imagine payment not as the end of a transaction, but a step in a longer journey. “Popular brands like Starbucks and Cumberland Farms have learned how to make payment part of a personally gratifying shopping experience,” writes the team at ZipLine. “In fact, payment is the gateway to their program. It’s necessary for participation, but is so seamless that consumers don’t hesitate to opt in, regardless of the commitment level and trust required.”
Some companies, like Target, have found that branded credit cards are offering diminishing returns, and they’re turning elsewhere to shore up customer loyalty, reporter Kavita Kumar notes. In 2018, the company rolled out a new membership card, Redcard, that isn’t linked to a payment card, is available for free and effectively offers customers 1% cashback. Members also get to waive the $5 fee for next-day delivery and get to vote on which organizations Target should donate to.
Store cards are still profitable for retailers for now, but change is on the horizon. For eCommerce companies, it’s worth considering digital options for building customer loyalty before turning to a credit offering.