Amid strong growth in online shopping, the pain that many traditional retailers are feeling may soon be shared by their partners in the credit card industry.
A new report from Moody’s Investors Service predicts that the woes now being felt at many retailers with large physical footprints will soon spread to the companies that issue plastic to their customers.
The near-term concern is that when particular store locations close, customers who live nearby will become less likely to pay off their existing debts, since they will no longer have a physical connection to the retail chain. In cases where a merchant liquidates its assets in bankruptcy, the losses for the card issuer will likely be larger, according to the report.
“Although consumers would damage their credit records, many will be more willing to default on a card from a retailer without local stores because they will not expect to make future purchases at its other locations or online,” the Moody’s report states.
Two large card issuers were flagged by Moody’s as being particularly vulnerable: Synchrony Financial in Stamford, Conn., and Alliance Data Systems in Plano, Texas. Those two firms are far more focused on the store-branded card market than the other big credit card issuers are.
The store-branded card segment includes both cobranded credit cards, which can be used at a wide variety of merchants, and private-label cards, which are only accepted at one particular retail chain. The latter category is seen as likely to experience bigger losses as a result of rising store closures.
In the last two years, the percentage of private-label card loans that are at least 60 days past due has risen from around 3% to roughly 4%, according to Moody’s.
Jody Shenn, a senior analyst at the New York-based ratings firm, said in an interview that it is difficult to determine how much of that rise in late payments is connected to the continuing retail shakeout and how much to other factors.
But with store closings now accelerating, he said, “We would expect the impact to be more meaningful and noticeable going forward.”
Stores in shopping malls are seen by Moody’s as most vulnerable to the growing consumer preference for e-commerce, though the firm also pointed out that some of the sales lost as a result of store closures will be offset by online purchases.
Synchrony’s retail partners include JCPenney, which is expected to close more than 100 stores this year, according to Moody’s. Alliance Data’s partners include mall staples such as Lane Bryant, Ann Taylor and Victoria’s Secret. Moody's estimates that footwear and apparel chains, office supply retailers and department stores will all shrink their footprints by at least 4% this year.
Other segments of the traditional retail landscape are considered less vulnerable in the face of shifting consumer preferences. For example, U.S. home-improvement stores are expected to add locations in 2017 — good news for Synchrony, which issues credit cards for the hardware chain Lowe’s.
In recent calls and meetings with investors, executives at both Synchrony and Alliance Data have sought to send the message that they are taking the steps necessary to adapt to the changing retail landscape.
Synchrony executives frequently speak in glowing terms about the company’s partnership with the online shopping giant Amazon. And in March, Synchrony announced its purchase of GPShopper, a developer of mobile apps for retailers.
Still, during Synchrony’s first-quarter conference call, CEO Margaret Keane was asked to address the scenario where one of the company’s retail partners goes into liquidation.
Keane responded that Synchrony would inform affected customers that they are still responsible for their debt, before she added, “Most consumers understand that, and they end up paying their bills.”
Speaking earlier this month at an industry conference, Alliance Data CEO Ed Heffernan argued that the ongoing changes in the U.S. retail landscape come with a substantial upside. His firm’s partners include shopping sites like Wayfair and Overstock.com.
“So the rise of the pure online retailers is a huge new opportunity for us,” Heffernan said.
Synchrony and Alliance Data may face the greatest exposure to the changing retail landscape, but Moody’s concluded that Citigroup and Capital One Financial will also be affected, though less severely.
Citi’s retail partners include Best Buy, Macy’s, Sears, Office Depot and Staples. Capital One issues credit cards for the department store chains Lord & Taylor, Neiman Marcus and Saks Fifth Avenue.