Sluggish loan growth has bedeviled the U.S. credit card business ever since the Great Recession.
Many households have taken a once-bitten, twice-shy view of plastic. Regulations have gotten tighter. And card issuers have adopted more cautious underwriting practices.
But in one corner of the industry, consumer borrowing is enjoying a strong revival: the store-branded card business, which was in bad shape during the downturn.
Between the second quarter of 2014 and the same period this year, Synchrony Financial, which specializes in store-branded cards, enjoyed 11.8% loan growth. Another industry leader, Alliance Data Systems, saw 33% growth in loan receivables in its card services business over the same one-year period. Meanwhile, total revolving credit in the U.S. rose by just 3.9%, according to Federal Reserve data.
Several factors appear to be driving the outsized growth.
Some of it is likely connected to the credit cycle. Store-branded cards, a catchall term that includes private-label cards that can only be used at one retailer and co-branded cards that can also be swiped at other merchants, tend to have higher-than-average losses when consumers become distressed.
So the store-branded credit card segment contracted more during the recession than the industry as a whole. And since then it has grown at a faster rate.
"It's a very cyclical market," said Odysseas Papadimitriou, chief executive officer of the company that owns CardHub.com, a comparison-shopping website.
Postcrisis regulations may also be playing a role in the rapid growth. Some consumers with marred credit, who relied on subprime credit cards before a 2009 credit card reform law that contributed to a sharp contraction in that market, may now be turning to private-label credit cards.
"People with bad credit, in the absence of secured cards, they don't have many options," Papadimitriou said.
But there is another key factor in the growth of store-branded cards: retailers are seeing benefits from driving consumer spending onto these cards.
"From a retailer's standpoint, there's definitely been a push toward incenting consumers to use private-label cards," said Mike Taiano, a card industry analyst at Burke & Quick Partners.
Retailers Steering Customers
The offers for store-branded credit cards used to be aimed largely at impulse shoppers. Consumers might get 25% off their first purchase, but then no further incentive to use the credit card. Consequently, lots of accounts would sit dormant for long stretches of time, with the cards buried at the bottom of people's wallets.
Today, it is far more typical for retailers to offer rewards that are designed to build long-term customer loyalty.
Cardholders at the clothing chain Gap get perks such as 10% off on Tuesdays, plus birthday savings and access to special events. Amazon's store card offers 5% back on all purchases to members of Amazon Prime.
"Increasingly you're seeing a more sophisticated approach to crafting the value proposition," said Mike Schmidt, vice president of retail marketing insights in Alliance Data's card services business.
The analytical tools that merchants and card issuers use "are better than they've ever been, and continue to get better," added Mark Horwedel, CEO of the Merchants Advisory Group, a trade group representing many of the nation's largest retailers on payment issues.
A consumer who opens a store-branded card account tends to spend substantially more at that specific retailer over the next year, according to Schmidt, though he acknowledged that the sales boost tails off in later years.
Alliance Data, Synchrony and other issuers of store-branded cards — a list that includes Citigroup, TD Bank, Wells Fargo and Capital One Financial — often play a key role in crunching consumer spending data in an effort to craft targeted offers.
"We work closely with our partners to design the value propositions such that consumers don't just receive that initial discount," said Sanjay Sidhwani, senior vice president of marketing analytics at Synchrony.
The promise of higher sales volumes is not the only reason that retailers are trying to push their customers to use store-branded cards. Retailers also tend to get much better deals on interchange fees when those cards are swiped.
Sidhwani, of Stamford, Conn.-based Synchrony Financial, noted that retailers' savings on store-branded cards vary by merchant. But he said that stores typically save between 1.5% and 2% of the purchase price, compared with customers who use a general-purpose credit card.
In aggregate, those savings can be substantial — particularly on private-label cards, which consumers often use to finance larger purchases.
With credit card issuers hungry for loan growth, retailers appear to have more of an upper hand now in contract negotiations. Exhibit A: Costco Wholesale, which earlier this year ditched its longtime partner American Express to issue a co-branded card with Citi and Visa, will reportedly pay almost nothing to its new partners.
"I think there's no question that retailers have increasing leverage, particularly as they get bigger, and they have more sales," said Mark DeVries, an analyst at Barclays Capital.
"And there's aggressive competition," he added. "I don't think that goes away."
A Big Rebound
If history is an accurate guide, the store-branded card business will continue to see strong loan growth until the next recession hits, and then contract sharply again.
Between 2006 and 2009, the number of private-label credit card payments in the U.S. plunged from 2.7 billion to 1.5 billion, according to data from the Federal Reserve Board. The chargeoff rate on securitized private-label card receivables swelled as high as 12.6% in early 2010, Standard & Poor's found.
During the downturn, Citi and General Electric both explored selling their private-label card businesses, but later decided not to do so.
As it turned out, both companies were wise not to hold a fire sale. GE eventually spun off its card business into Synchrony Financial, and shares in that company have risen by 36% since their debut in July 2014.
Today, it is anyone's guess how long the benign credit cycle, which has fueled the resurgence of the store-branded credit card business, will last.
One potential hurdle for the industry involves the ongoing regulatory crackdown on retroactive interest charges that hit borrowers at the end of a promotional period. Those deferred-interest features, once a mainstay of the store-branded card business, became less common after the Consumer Financial Protection Bureau raised objections.
On the other hand, some analysts believe the store-branded card business will get a boost from the eventual widespread adoption of mobile wallets, which could make the cards more attractive to consumers who want to avoid cluttering up their wallets with plastic.
There is also promise for the industry in beacon technology that allows retailers to send targeted offers to shoppers' cellphones. At some point in the future, when a consumer walks into a particular store, that retailer's credit card may rise to the top spot in the shopper's mobile wallet, predicted Zilvinas Bareisis, an analyst at Celent.
"That's something that could potentially happen, and certainly solves the clutter problem," he said.