Tuesday, February 10, 2009

Retail Credit--Going Extinct?

Is retail credit about to go extinct? It's hard to believe, but once upon a time (until about 30 years ago) nearly every department store issued its own credit cards so it could fuel sales and promote to its best customers. The credit manager -- not a bank -- tightened and loosened credit standards, according to the store's strategic and financial goals.

Before 1976, only a handful of department stores even accepted bank cards, Amex, or Diners Club. Then, one by one, the department stores began accepting third-party cards. Still, the average sale charged on a department store card was usually higher than the average third-party credit sale. Retail credit was a vital tool, a "billboard in the wallet" for the stores.

As third-party cards became ubiquitous, department stores chose to accept them rather than risk losing any sales. Competition was a factor, too. During the 1980s, Citicorp (as it was known then) and GE courted retailers, looking to take over their credit-card portfolios. And one by one, the stores agreed, moving receivables and credit acquisition costs off their balance sheets by handing over their credit operations.

Today's New York Times reports that losses are mounting on private-label credit cards, a problem for GE and Citi, the two largest issuers. GE issues for Wal-Mart, for instance, and Citi issues for Macy's. Some analysts say things will get worse as the economy goes downhill and consumers put off repaying private-label debt so they can pay down more urgent debt first.

Is retail credit going to go away forever? It's the credit card of last resort for many people with spotty credit records, but it's also the first for many younger consumers who want to build a good credit record. At one time, store cards were actually a profit center (as Sears knows, from its 1970s/1980s period). But not these days.

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