There has been a great deal of commentary of late about the fate of retail creditors and industrial loan companies in the legislative battle over control of our financial system.
Legislators seem to be looking at this issue from a bank-centric point of view and perhaps are not considering that there are very compelling reasons retailers engage in consumer financing.
Retailers have always had a strong motivation to extend credit, but for different value propositions than traditional banks. The objectives, profit motives and goals are quite different between the two industries. In fact, the ideal retail customer is not the same as the ideal bank customer.
For instance, high-end retailers' typical customer is affluent, makes significant purchases every month, and often pays their bills in full and on time. And their ultimate customer may be someone who spends $100,000 on one shopping visit but might not pay the bill for a couple of months because someone else handles the accounting for the consumer.
Neither of those personas fits the optimal customer profile for banks — someone who makes the minimum monthly payment, accrues interest daily or pays just late enough to incur fees but does not pose a huge payment risk.
The most profitable customer for retailers may very well be the least profitable one for a bank.
Retail companies want to make money selling merchandise, not on interest and fees. They are issuing credit to drive more business. Their goal typically is to reduce customer friction as much as possible. If a consumer wants to buy a big-screen TV, the retail store will offer better terms because their primary objective is to sell TVs. The ability to offer interest-free and zero-down financing and place a retail card in their customers' hands has a significant value.
Passing legislation that has the effect of unfairly punishing consumers by further restricting credit and retailers who are trying to survive in a tanked economy isn't the right answer. There's room at the table for everyone, as long as smart lending and appropriate checks and balances are in place.