First it was Target (TGT 1.06%). Then came Neiman Marcus. Now Reuters is reporting that three other major retailers had credit card data stolen in 2013. As the bad news keeps coming, it's time to consider whether the traditional credit card can recover.
The already reported incident at Target involved more than 110 million shoppers' data being compromised in the Dec. 19 attack. That event has already raised concerns among the public over the security of their data, but it's likely to be pushback from major retailers -- not the public -- that causes major changes in the credit card industry.
Historically, the public has been pretty willing to forgive any manner of indignity heaped upon it from a product or brand it likes. Tylenol was literally killing people in the 1980s and, though that scandal led to some new packaging and a short-term dip in sales, the painkiller quickly left that public relations disaster behind. Similarly, Taco Bell has thrived despite the public learning that its meat is not, in fact, all from a cow. Wal-Mart's global bribery scandal was barely a blip on the radar with its customers.
Businesses, however, are an entirely different story. No credit card company can afford not to listen to Target. The chain, which represents hundreds of millions, if not billions, in potential profit for Visa (V +0.64%) MasterCard (MA +1.26%), and American Express (AXP 0.05%) should (and likely is behind closed doors) be screaming for changes. Credit cards have essentially remained unchanged since the 1970s and though some companies have added minor security gimmicks like pictures on the backs of cards, none have made major improvements to security or how data is processed. Yes, they added the CV number, the so-called security code on the back, but that number makes online and phone sales safer, not in-store sales.
The credit card market, which IBIS World said in a report was $97 billion in 2013 in the U.S., drives earnings for its four largest players -- American Express, Bank of America, Capital One, and JP Morgan Chase -- which account for 57.6% of the total market in 2013. A move toward more expensive security could affect these companies short-term, but a major shift in how customers pay for things in retail, could devastate the banking industry.
Target and other retailers have a number of choices as to how to respond to the current crisis, and at least three of them are potentially devastating to the traditional credit card issuers.
Go the Starbucks route
Target has a loyal fan base that in many cases identifies with the brand, similar to the relationship Starbucks (SBUX 3.42%) has with its customers. Through its app, Starbucks has created a closed-loop payment system that cuts out the credit card companies. Users of the app can put money into their account through gift cards or by linking it to their PayPal account for auto-replenishing.
Not every brand could get a large percentage of its audience to download an app and go through the bother of funding a payment method in that app. Target, however, likely could as its customers buy into the idea that they are, in a way, superior to Wal-Mart or other department store shoppers. Target already has a relationship with Starbucks as many Targets have Starbucks inside them.
This existing relationship could lead to Target developing its own payment app or even accepting Starbucks' existing payment solution.
Band together
Now that we know Target is not alone in being breached, perhaps a trade group like the National Retail Federation could spearhead a payment system that either snubs the credit card companies or demands more from them. it's implausible, but not impossible that a group like the NRF works to create a shopping app -- perhaps partnered with PayPal -- that completely cuts out MasterCard, American Express, and Visa.
More likely is the idea that retailers use their joint clout to force the credit card industry to do a major overhaul. That's not quite the mufti-billion dollar death blow that developing an alternative payment system would be, but, it's a massive expense for an industry that has been reticent to change. Think back to the aforementioned Tylenol scandal and remember that not just Tylenol, but pretty much every medicine had to move to new, more expensive, tamper-proof packaging.
Encourage the use of cash; fix the store credit card
Gas stations in much of the country offer customers an incentive for using cash as a way to avoid paying credit card fees. Target could do the same and basically say "there's nothing we can do to fix these dangerous credit cards, but for our loyal customers we will offer free ATMs and a 5% cash discount." Pair that with making security repairs to Target's RedCard, store-only credit card, and they will be offering their customers multiple ways to pay without inconveniencing the majority of them.
And if even a small percentage of customers start using pre-paid cards or gift cards that weren't using them previously, it's not just a blow to the credit card companies, it's a boon to Target. One of the dirty retail secrets is that stores love for customers to buy gift cards because a certain percentage are never redeemed (perhaps they get lost or forgotten about) and another percentage have small amounts left unspent on them -- all profit for the retail chain.
