One need not go further than their local mall to see that retail is in trouble. Macy’s, one of the largest retailers in America, announced that it was closing 100 stores and would be repurposing some of its most valuable real estate assets into mixed use developments. Retailers reducing their physical footprint is common in today’s market as more and more consumers are shifting their purchasing habits from in-store to online. In fact, a recent Pew study found that nearly 80% of Americans said they did at least some shopping on the internet, with 43% shopping online weekly or at least a few times a month. Compare that to when Pew first started asking this question in 2000 when only 22% of Americans had ever bought an item online. Despite the clear shift in consumer preferences, traditional retailers have struggled to adapt their business models accordingly.
Short-Term Fixes Create Long-Term Headaches
E-commerce retailers, and Amazon in particular, have established themselves as the online low-price retailer of choice for many Americans. Retailers who have maintained a traditional brick and mortar footprint are struggling to slash prices enough to compete online while still covering the overhead of their physical stores. With retailers suffering extensive margin compression in an increasingly competitive online marketplace — often, singularly, from Amazon — they are seeking out other short-term fixes to stop the bleeding. One such tactic has been the proliferation of store branded credit cards. While store branded cards are nothing new to the retail industry, the incremental revenue they can drive from sky-high interest rates is increasingly attractive to struggling retailers. The New York Times cited one of the largest U.S. retail stores, stating that “the money from branded credit cards accounted for 39 percent of the company’s total profit of $1.9 billion last year, up from 26 percent in 2013.” At another well-known department store, 35% of profits were derived from store-branded credit cards, up from 23% over the same three-year period. However, below the promise of a short-term bump in profits from these cards lies a potentially hazardous relationship between customers and merchants.
Consumers Are Holding Brands Accountable
One of the profit drivers for store-branded cards is the practice of charging deferred interest. With a deferred interest product, if a customer does not pay off their entire purchase within the allotted 0% promotional period of 6-12 months then they will retroactively be charged interest on the original purchase price of the item. In many cases people would find that the retroactive deferred interest added to their bill was more than the remaining balance on the item they purchased in the first place! A shock like this, especially to someone loyal enough to have taken out a store-branded credit card, could have a detrimental impact on the customer’s willingness to use that credit card or even continue shop at said merchant. Ultimately, it is the brand on the front of the card, not the lender on the back, that shoulders the brunt of the negative consumer backlash sparked by deceptive practices such as deferred interest.
Consumers are increasingly holding brands accountable for their associations and actions, especially when it’s viewed as irresponsible, insensitive, or simply just taking advantage of consumers. In the age of social media, one customer’s bad experience with a brand can become headline news — just ask United. However, retailers can get ahead of these potential crises by eliminating policies that they know are not in the best interest of their customers. Just last week the largest retailer in America, Walmart, announced a big decision to remove deferred interest on both of its Walmart-branded credit cards. According to Walmart, “Whenever we can save our customers money and help remove unnecessary hassle or burden, we do just that.” Walmart ultimately decided that the potential or actual costs to its customers was far greater.
Enabling Credit-Worthy Customers Through Honest Financing
At Affirm, it is our mission to build financial products that improve lives. We partner with more than 900 retailers and equip them with tools that help them acquire and retain loyal customers without sacrificing their brand or bottom line. In fact, we have found that customers that Buy with Affirm through our retail partners buy again more than 25% of the time. Affirm was also developed as an online and mobile-first credit solution with the needs of the modern consumer in mind. Over 60% of Affirm purchases are made on mobile – more than 2x the industry average. Finally, and most importantly, Affirm enables more creditworthy consumers to access credit by outperforming the FICO score across all consumer credit profiles. Affirm’s full-credit-spectrum solution unlocks tremendous value from customers whom most traditional providers cannot service.
Consumers are making their voices heard loud and clear, they want products from companies that have their best interests in mind. Ultimately, we believe a retailer’s survival and success will depend on whether they listen and take action like Walmart.