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Satisfying the customer whose credit has been denied

The retail credit scene is tough, but retailers don't have to bear the brunt of rejection.

May 3, 2009

It's retail's million dollar question: How do you convince shoppers to spend more money in the store?

For years, one solid answer has been to dangle a discount for applying to the store's branded credit card program. Everyone knows the drill: "Would you like to sign up for a Kohl's credit card today and get 15 percent off your total purchase?" More often than not, shoppers say yes, according to TrueCredit.com by TransUnion — a recent study revealed 58 percent of consumers have between one and five retailer credit cards.

But now, tightening credit limits mean more for retailers than merely the lost sales that follow. For many consumers, the clerk's news that they've been denied is the first sign their creditworthiness may have hit the skids, and that unpleasant association may lead them to shop elsewhere in the future.

Just ask the credit card consultant who still recalls when Sears turned him down when he was fresh out of college. "It left a lasting impression with me — 'to hell with those guys'," he said. "Here it is 30 years later and I've still got a bit of an edge about it."

The consumer credit landscape

Banks have begun to lower credit limits on cardholders, a move the American Banking Institute estimates will suck as much as $391 billion out of play by mid-2010; other analysts believe consumer liquidity could contract as much as $2 trillion.

Even so, those numbers alone aren't necessarily causing panic. The FDIC claims Americans currently borrow only 20 percent against their available credit, so of the $5 trillion that was in play, only $976 billion of that is withstanding. Take the aforementioned $2 trillion out, and there's still twice as much money in the stream than consumers currently tap.

The problem arises when the credit-limit ceilings come crashing down. Balances suddenly make up a higher percentage of the borrowed amounts, and banks are saying no more often, even to folks who pay faithfully and on time. According to a Reuters report in November 2008, approximately 30 percent of new account applications at Home Depot were denied, up from 5 percent in 2007.

"Even if you weren't using your limit, it impacts your confidence as a consumer," Tim O'Connor, vice president of RetailNet Group, said. "You say, 'Hmm, something's going on — I should limit my spending.'"

Still, branded cards are too lucrative for retailers to throw in the towel. Dallas-based Neiman Marcus sued its HSBC Bank Nevada and affiliate HSBC Private Label Corp. in September 2007 over the bank's plan to raise the fee and interest rate on the retailer's cardholders. Court papers revealed that blocking credit for the 192,000 involved customers would add up to millions of dollars a day in lost sales.

Additionally, private-label credit cards typically charge interest rates in the 20-percent range, making for a decent profit margin for those retailers, such as Target, that finance their own credit lines.

In fact, Target and Nordstrom have skipped the bank step altogether and funded their credit card lines internally, taking on the liability. Historically, this move has provided the retail giants with a wealth of data about their customers, pointed out Aaron Choi, a senior analyst at RetailNet Group. It also allows them to avoid paying fees to a merchant every time someone swipes its proprietary card.

Yet, even though Target maintained a decent profile in its credit card receivables, the balance profit-to-loss ratio grew ever shakier, Choi notes. "Because so many people have gotten hurt in this recession, [Target's] defaults have gone up — although they're still below average — and the company has to eat that," he said. Consequently, officials sold off roughly half of their credit portfolio in early 2008. Now, like its bank counterparts, Target is readjusting terms and credit limits on the remaining accounts, CFO Douglas Scovanner told investors on a fourth-quarter conference call.

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Taking the sting out of credit rejection

So what's a retailer to do? During the 2008 holiday season, O'Connor tracked more promotional activity built around pricing as stores concentrated on discounts to create excitement. "Instead of trying to give a little bit of credit to consumers, they said, 'Come on into the store and we'll figure out a way that you can afford a lot of this stuff,'" he said.

Home Depot snipped its "no payment, no interest for 12 months" deal to a six-month moratorium if you spent more than $299. But the jury is out on whether this strategy even works today, said Choi, as a balance that doesn't diminish over time creates a negative indicator on consumers' credit reports they'd just as soon avoid.

To minimize the negative effects of the crunch, Target quietly took down its credit card application signage and scaled back on the verbal offers.

But it's Macy's that may have found the most positive solution. The Cincinnati, Ohio-based retailer is experimenting with a prepaid card kiosk so that no customer will have the special-offer rug yanked out from underneath her.

"A credit rejection is a slap in the face that says, 'You don't qualify, we have nothing for you,'" Walsh noted. "So large retailers who issue millions of cards a year are also declining millions of customers a year. That's a completely lost opportunity and disruptive to the relationship you are trying to create with your clients."

Instead, the answer should be yes — not to credit, necessarily, but to getting the discount or offer and belonging to the family of cardholders. Macy's prepaid card kiosk, a pilot created by Ready Credit, allows each clerk to be such a hero.

Surprisingly, the demographics that typically qualify for a prepaid card include more than folks with thin or poor credit histories. Many of the users are people who don't want to incur debt but are still loyal Macy's shoppers eager for the card discount, Walsh said. "Most of these customers have been shopping here for years, but there hasn't been a product for them."

Consumers spend an average of 15 to 20 percent more with a prepaid card than if they relied on cash for the purchase, according to Ready Credit's research. And, like the credit counterpart, prepaid plastic allows retailers to track aggregate shopping habits and analyze trends. Macy's isn't the only corporation knocking on Walsh's door.