It’s no surprise to anyone that big brick and mortar retailers are in trouble, considering the stiff competition they face against eCommerce retailers who can offer convenient shopping and easy, direct-to-customer shipping that modern shoppers really love.
Despite all of this, many retailers have been reluctant to make major changes that would attract more visitors. Instead, they’re relying on a stop-gap measure to stay afloat: branded credit cards.
The Ticking Time Bomb of Branded Credit Cards
The pressure is on for brick and mortar retailers to find more ways to make money, but one of the more surprising ways they’ve decided to do that is by financing customer purchases at exorbitant rates.
For example, struggling department store Macy’s reported $1.9 billion in profits last year, but 39 percent of that came from branded credit cards. That’s up significantly from the 26 percent reported in 2013, according to reporting by the New York Times.
At Kohl’s, credit cards made up 35 percent of 2016’s total profits, up from 23 percent in 2013. Even Target is becoming more aggressive with credit card offers. Last year 13 percent of its profits were from its branded card, up from 11 percent in 2013. In stark contrast to brick and mortar stores, Amazon’s credit card income was only three percent during 2016.
What’s the Point of Branded Cards?
Branded cards are often offered with customer incentives that make little financial sense.
For example, J. Crew offers card holders 15 percent off their first purchase, but may charge 25 to 29.99 percent interest if that balance is carried. It’s a house of cards that’s bound to collapse as customers default or realize the savings they’re being offered only make sense if they’re not subjected to interest charges, thus paying every transaction in full immediately.
“These stores are propping up their failing businesses on the backs of lower-middle-class people,” bankruptcy attorney Charles Juntikka explained in an interview with the New York Times. Analysts fear that these practices are a way of masking real problems from investors until it’s too late.
Either brick-and-mortar retailers will need to find a better way to generate steady revenue or they risk facing sudden losses should the economy take a moderate downturn or customers default en masse.