Before COVID-19 forced nonessential retailers to close, consumers faced a familiar interaction at the checkout counter: the store credit card pitch.
But with temporary store closures during the spring and ongoing worries about keeping nonessential storefronts open, store employees can't pitch as many consumers these store cards in person. So what does the ongoing pandemic mean for store credit cards? Research suggests that consumers may be more interested in them, but financial institutions aren't extending credit to as many borrowers.
According to a recent report from CompareCards by LendingTree, 44% of Americans say they're somewhat likely to apply for a store card during the holiday shopping season, an increase from 32% in 2019 and 24% in 2018. Per the report, Gen X consumers were most likely to apply for retail cards (78%), but other notable groups seeking these cards were parents of children under 18 (72%), workers who've been laid off or furloughed during the pandemic (64%) and men (63%).
Though consumers might be interested in getting more cards, financial institutions are originating fewer private label cards, according to an Equifax report published Oct. 20 shared with Retail Dive. As of the week ending on Oct. 11, 177,800 private label accounts were originated, down from 643,500 during the same week in 2019, according to the report. Financial firms have also cut credit limits from private label cards from more than $1.4 billion to $385.8 million.
Despite the pandemic-induced recession and uncertainty surrounding a second federal stimulus bill, store cards remain another channel for customer engagement, experts told Retail Dive. In response to the crisis, retailers have made online credit applications more accessible, improved their incentives and lowered interest rates to attract applicants and ultimately drive sales. But banks shouldering the risks for these cards are less inclined to approve as many applicants as they had in the past.
Connecting with consumers through credit
Shoppers are usually drawn to store credit cards because they have lower credit standards, which is especially attractive for consumers with no credit or damaged credit, said Ted Rossman, industry analyst at CreditCards.com.
Now that consumers aren't shopping in-store at pre-COVID-19 levels, Matt Schulz, chief credit analyst at LendingTree, said retailers have made it easier for consumers to apply for store credit cards online. A few years ago, many retailers required consumers to apply for store cards in-store, and the application process was more complex, but now retailers have made these applications accessible via their main navigation on their website or part of the home page, Schulz said.
Rossman said store card applications typically spike around the holiday season. But with less in-store traffic, retailers could receive fewer referral fees from customer store card signups, which ultimately means less spending on the cards, Rossman said. Contradicting the CompareCards report, Rossman expects that store credit cards, which already make up a smaller share of the credit card market, will shrink more.
In response to the Federal Reserve reducing rates early on in the coronavirus pandemic, some retailers lowered their interest rates on store credit cards, Schulz said. According to CompareCards' research, the average annual percentage rate has dipped from 25.4% to 24.2%
Store credit card costs
Tim Zawacki, a lead research analyst at S&P Global, describes the relationship between financial firms issuing store cards and retailers offering them as a symbiotic one. Both Zawacki and Rossman said retailers earn incentives from banks for consumers approved for a card. Banks decide which consumers are approved for store cards based on their underwriting criteria, not retailers, Zawacki said.
Store branded credit cards also offer retailers savings on interchange fees that they'd have to pay for general credit cards, Rossman said.
With banks generally accepting the majority of the risk associated with approving store cards, retailers see the arrangement as a chance to increase sales and build relationships with their frequent customers, Zawacki said, adding that data collected on these cards gives retailers insight into spending patterns. The discounts can be seen as marketing expenses for attracting new consumers and driving consumer spending. For the more successful store credit card programs, shoppers can spend a disproportionately high amount of sales transacted on their branded cards relative to overall sales, meaning that a retailer could have close to or more than half of its sales made via their branded credit cards, Zawacki said.
"Retailers can view [these incentives] as a marketing expense, as a cost of acquiring a customer. And the benefit is that is that it's tied to a purchase, so you're only paying that out if somebody buys something," Rossman said.
The CompareCards report notes that retailers have been introducing tiered rewards programs and offering other perks for consumers who spend more at their stores. Retailers have also been introducing tiered rewards to suit their customers' needs and incentivize more spending despite high interest rates, Schulz said, adding that the private label card rewards haven't been as competitive as general cards, but they have improved over time.
"The formula for figuring out how to do rewards the most profitably has been something that the entire credit card industry has been wrestling with for years," Schulz said. "You have to make sure that you're not spending so much creating a rewards system that you make that rewards system unprofitable. Otherwise, you've defeated the purpose of the whole thing."
Reigning in credit limits
According to CompareCards' report, almost half (49%) of store credit cardholders currently have debt on that card, and more than half (56%) of consumers with store cards said they regret opening one, up from 46% last year.
Pointing to research from Equifax, Rossman said the average FICO credit score approved for store credit cards has increased over time. Though they aren't as selective as bank-issued credit cards, financial firms have raised their standards on which borrowers can access these cards, he said.
Unlike before the Great Recession, consumers haven't borrowed excessively and financial institutions' underwriting for consumer financial products overall has been more disciplined, Zawacki said. Tim Howes, associate professor at Johnson & Wales University, said that some consumers are taking advantage of forbearance programs and have used their stimulus money to pay down credit — maneuvers which preserve their credit scores and make it difficult to determine who's truly in good standing. Congress has failed to pass another stimulus package, and more funding may not come until next year, CNN reports.
Zawacki noted that so far consumers that have come off financial institutions' forbearance programs have resumed paying their balances, but it's not clear whether consumers will continue to pay back those balances or if financial firms will extend such programs. If defaults in store cards begin to rise, at some point banks may pull back further on who they'll allow to open those accounts, Howes said.
For consumers with store credit cards, their spending might have shifted from entertainment and travel purchases to other categories, Zawacki said. Home improvement retailers, for example, might see more activity in their store cards as consumers spend more on remodeling or other home improvement projects, he said.
"The retail card market was declining well before the pandemic and that could well persist afterwards."
Ted Rossman
Industry Analyst at CreditCards.com
Schulz noted that the CompareCards research indicated a divide between affluent and lower-income consumers. For well-off consumers who like to shop, the high interest rates aren't as bothersome because of the rewards. Store cards can be attractive to less financially stable consumers or those who need to build or repair their credit, Schulz said. For the latter of the two, retail credit cards can be a stepping stone to improving their credit and perhaps avoiding less desirable financing options, he said.
While Gen X consumers are presumably further along in their careers and perhaps have to manage a home and family, millennials and Gen Z consumers might be drawn to these cards out of necessity, especially if they've been affected by the pandemic, Schulz said.
Citing research from Equifax, Rossman said store credit card originations and balances have been on the decline prior to the pandemic, but these declines can be harmful to retailers leading up to the holiday season. The holidays are not only crucial for retail sales, but they also bring in more store credit card applications. The amount of private label accounts has declined, a trend which has been going on before the pandemic, Rossman noted.
"There are still a lot of retail cards in the market, so we probably won't see usage fall off a cliff, but we're likely to see continued contraction in this space," Rossman said. "That can be attributed mostly to debt-averse consumers and tighter lending standards. It's likely to hit hardest during COVID, but as these numbers show, the retail card market was declining well before the pandemic and that could well persist afterwards."
