The Big Business Behind Store-Brand Credit Cards

These days, most shoppers can't make it through the checkout lane without being offered a store credit card. Companies generate billions from these offerings, but do consumers who sign up for them also benefit?

In this clip, Sean O'Reilly, Vincent Shen, and Gaby Lapera explain how the cards work on the retailer end, which entities are profiting the most from them, and what you need to know before applying for one.

A full transcript follows the video.

This podcast was recorded on Feb. 9, 2016. 

Sean O'Reilly: Fortunately for our listeners today, most consumers happen to also have bank accounts. And for our first segments, use credit cards to pay for their Starbucks lattes and trips to the grocery store. You've got some useful insights, as I understand, regarding credit cards. So first, what do consumers need to know about this? What's going on in the credit card industry? And all that good stuff.

Gaby Lapera: So, generally, what's going on in the credit card industry, I'm actually going to refer you back to a show that we did earlier in January, I think it was the first show of the year, when we talked about electronic transactions. But, more specifically, for consumers, there are some tricks to credit cards that you should know about.

O'Reilly: I just got preapproved.

Lapera: (laughs) Oh my God.

O'Reilly: And I feel really good about myself (laughs).

Lapera: Oh my gosh (laughs). Those things are... yeah, you get those mailers in the mail, and they're like, "Congratulations! You've been preapproved for like $25,000!"

O'Reilly: "Me?!"

Lapera: And you're like, "You know, I only make $40,000, but that seems reasonable, I should totally have a $20,000 credit limit!" Of course, that's obviously based on your credit score from before. But credit card debt is nothing to mess around with. I think a lot of people don't realize that the average interest rate on credit cards is 15.18%...

O'Reilly: That low?

Lapera: ... for the last quarter. That's the average, so that means there's some people with a lot higher (laughs).

O'Reilly: Got it.

Shen: Yeah, and we'll see, too, talking about some of these retailer-focused store brand cards, the interest rates are--

O'Reilly: Don't tell them that, Vince!

Shen: ... even higher than that, right?

Lapera: Yeah. A lot of the times, those are in the 20%-30% range. And that's actually something consumer should watch out for. When you're offered something like a store credit card, a lot of times, they're like, "You get 30% off on your first big shopping thing! And sometimes, we'll send you points!" But a lot of people carry credit card debt, and with the interest rates being as high as they are on those cards, it's not the best idea.

O'Reilly: Even every time I check out on Amazon.com (AMZN -1.64%), which is surprisingly frequent nowadays, because ... anyways, they pitch me that Amazon card, like, "You get $30 off this purchase!" It's like, am I going to take out another credit card just for $30 off? Anyways. Backing up a little bit, Gaby, what are the average number of credit cards that the average American has outstanding?

Lapera: So, the average number of active credit cards a consumer has for bank cards, which is the ones that are branded, Visa, MasterCard, those guys, that's 2.24 per person. For store cards, which are like the Target (TGT -0.70%) REDcard, or the Amazon card, it's 1.55 per person.

O'Reilly: Unbelievable. OK. So, Vince, you were doing some research before we came in, on the massive amounts of money that stores make off these credit cards. I get pitched a card every stinking time I leave the house, it seems. Why are they doing this?

Shen: I look at it like this: In the past, you had other ways of between loyalty programs, points and things like that. Now, with Amazon, for example, you have Prime, and they've already espoused the benefits they've seen from that in terms of Prime members spending more money, things along those lines. Well, I think, the ultimate idea behind some of these cards is to build that loyalty, where you get perks, points, or discount per purchase, people who have these store-brand cards will go to whatever retail they have it with and shop more often.

And the thing is, a lot of these big retailers, the ones I want to talk about like Target and Macy's, make quite a bit of money from this. So, even though both of these companies have agreements with actual banks like Citibank, TD Bank, to manage, and they actually own these accounts, the retailers themselves actually have to help with things like promoting and other more administrative stuff. But they get tons of money. So Macy's, in 2014, for example, generated over $750 million in reduction to their SG&A, which is how they record it in their financial statements, from these affiliate fees...

O'Reilly: Oh my gosh.

Shen: ... that they receive. And same thing with Target, where they've been able to enjoy really good penetration with their REDcard, so, I think it's like some 20% of their purchases.

O'Reilly: They were almost violent, at one point, promoting that thing, by the way.

Shen: Yeah, every single time you go through the checkout line, if you don't have one...

O'Reilly: It was bad.

Shen: ... they will mention it to you. And again, same situation for them. They're making hundreds of millions of dollars in these agreements, and they're not even managing the main accounts under these cards, so it's very profitable for them. It has the side effect of building that brand loyalty, having shoppers coming back because they get those discounts or whatever, and it's very powerful.

O'Reilly: Yep. So, Gaby, I actually knew a guy who was irrationally loyal to General Motors. He was like, "Oh yeah, I got this GM credit card, and they're giving me points toward buying a new truck!" I went to college with him and he... Anyways. It's literally endless. Macy's only gives you coupons if you use the credit cards, it's just nuts. So, what's going on in the private-label credit card industry today? Who issues them, who is actually putting up the money, is this a good business for the financial institutions still? Because obviously, it's great for the retailers.

Lapera: Right. Let's back up a little bit. For our listeners, private-label credit cards are credit cards are branded as whatever store they're from, so like the Macy's card or Amazon card, so, it's not associated with a Visa or MasterCard. And typically, with these cards, there's a couple different types, but the one that I think you're talking about is the retail card, which is, they can really only use it with that merchant.

O'Reilly: Right.

Lapera: They can't use it anywhere else. They do have some that are called dual cards, which you can use at a merchant, the specific merchant it's been issued for, and then other places, and it works as a regular credit card there. But the main provider of these private-label credit cards is a company called Synchrony Financial (SYF 5.04%), which, funny you mentioned GM, because Synchrony Financial got spun off of GE (laughs). 

O'Reilly: Oh, wow, lots of Generals. So, do they have a monopoly? Do I want to go buy this stock?

Lapera: Um, I'm not going to tell you to go buy it, because I can't give you the direct financial advice (laughs).

O'Reilly: (laughs) Do you want to go to the watercooler later and tell me?

Lapera: They were very clear about that when I got on-boarded. Erik Stadnik, our lawyer, was like, "Don't. Don't. Just don't." I think that was the whole talk, was just him going, "Don't. Please. Don't." (laughs) But, so, they got spun off of GE. They're doing OK. The retail cards, the dual cards, that's a big part of their business, and they have deals with people like Chevron, Amazon, really big names. I don't know, really, how long it's going to...

O'Reilly: Be good.

Lapera: Be good.

Shen: I think it's interesting, too, because you have some people changing the model a little bit, like Starbucks, for example. I believe -- I'm not a part of their payment app -- but that's all prepaid, right?

Lapera: Yeah.

Shen: So, I understand it's kind of different, smaller-sized purchases. You're not buying an appliance, for example, through this kind of system. But for some of these retailers, maybe the kind of convert to the system where too much more interactive and mobile-based.

Lapera: Yeah. And then, one of the benefits of that, of each retailer having their own method, is they get a lot more data on people.

Shen: Yes.

Lapera: I'm sure the bank partners with them and provide some data, but having their own set of data on these people, that's huge. And they've also done studies showing that those loyalty programs that are easy to access on your phone are also a major benefit for those retailers.

Shen: Mm-hmm, probably just in terms of the adoption rate as well.

Lapera: Exactly. That's actually what Walmart and they're little consortium of friends with their mobile app that's supposed to compete with Apple Pay are trying to do. But that's not quite rolled out yet. So, we'll see how that ends up for them.