Credit Card Expert: How Retailers Can Capitalize On Co-Branded Credit Cards

Odysseas Papadimitriou, founder of WalletHub, discusses the value of a well-crafted retail credit card program

If you don’t have a store credit card, you’re leaving money on the table. That applies to both retailers and consumers these days, as store-specific plastic has become a driver of loyalty and targeted discounts in an increasingly competitive retail environment.

For consumers, the benefit is obvious. The best store credit cards offer 10%+ off your first purchase and/or 5% “cash” back on all purchases moving forward. Who wouldn’t want to accrue such savings at one of their favorite stores?

The perks might not be as clear-cut from the retailer’s perspective, with tight margins perhaps clouding the vision of many chains. But you need only consider the following to understand the value of a well-crafted retail credit card program:

• Customers visit a store nearly twice as often and spend almost twice as much when they have a good co-branded credit card, according to MasterCard.
• 21 of the 25 largest U.S. retailers (excluding fast food, grocery store and drug store chains) currently offer store credit cards.
• Store credit cards enhance the purchasing power of potential customers who cannot afford to buy a retailer’s goods in cash. High-margin retailers are uniquely positioned to take advantage of this. For example, if a credit card company doesn’t receive payment for a $500 charge, it’s out the full amount. But a department store might book a loss of just $250 given the discrepancy between what it paid for the underlying merchandise and how much the goods sold for.
• Store credit card balances are growing almost 1.5 times as fast as retail sales, according to data from Equifax and the U.S. Census Bureau.

Perhaps even more importantly, store credit cards provide a treasure-trove of data for the retailers that offer them. This allows analytically savvy organizations to better understand their customers, foster increased engagement and more precisely target discounts and other deals.

With all of this being said, simply offering a co-branded credit card is not a panacea for a retailer, automatically transforming customer engagement and bolstering the bottom line.

The card must have competitive terms in order to pique and hold the interest of consumers as well as ultimately reinforce the retailer’s brand identity. Here are a few guidelines to keep in mind in that regard:

Fair-Credit Requirement & No Annual Fee Are Must-Haves: All of the store credit cards in WalletHub’s database are available to people with fair credit, and only a handful of offers have annual-, monthly- or one-time fees. Adopting such norms is important not only in the interest of keeping up, but also because it will help maximize your addressable market.

Roughly 70% of consumers have fair credit or better, according to WalletHub data, and people are far more inclined to open a new credit card solely for purchases from a single retailer if there is no fixed cost associated with doing so.

Rewards Should Be Above Replacement Level: Consumers have more payment methods available to them than ever, so they need a reason to use your co-branded plastic over the alternatives. And since cash, debit cards and prepaid cards offer no competition in terms of rewards, that means you must keep pace with the general-purpose credit card market. More specifically, you need to offer far higher ongoing earning rates than even the market’s best general-purpose rewards cards in order to compensate for relatively limited usability and appeal to applicants across the credit spectrum.

Just consider how things currently stand. The average cash rewards card offers 1.02% back on all purchases, according to WalletHub’s latest Credit Card Landscape Report. The best rewards cards offer double that, along with hefty initial bonuses. And the best store cards give you 3% to 5% back.

Financing Trickery Is the Norm But Not Recommended: According to a 2016 WalletHub report, all of the major retailers with a 0% financing promotion use a tricky feature called deferred interest, which might be profitable in the short term but isn’t likely to foster much long-term loyalty. Deferred interest means the card’s regular APR will retroactively apply to the entire original purchase amount if the cardholder pays one month’s bill a day late or leaves a penny balance at the end of the 0% period.

This type of “gotcha” pricing isn’t always disclosed as clearly as it could be, creating a recipe for ill sentiment toward retailers, especially after the busy holiday shopping season. The complete lack of consumer-friendly store financing offers also represents an opportunity for a forward-thinking brand to create a meaningful contrast.

Finally, it’s worth noting the role that retail plastic plays in helping consumers improve their financial standing. Given their lack of annual fees and lenient approval requirements, store cards are often the best credit-building vehicles available to consumers. And a more financially secure customer base is good news for any retail business.

Odysseas Papadimitriou is a credit card industry veteran, having led Capital One’s online credit card marketing prior to foundingWalletHub. WalletHub helps consumers find the best financial products for their needs and is the only site offering free credit scores and reports that are updated on a daily basis.

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