Nordstrom Takes DIY Approach to Credit Card Program
Many retailers have sold off their credit card portfolios to partner banks
in recent years as a hedge against the downside of late payments and customer
defaults. One of the exceptions to this trend has been Nordstrom, which has
chosen to keep its program in-house and the chain may reap
a greater upside as card holders get their financial houses in order with a
recovering economy.
"Very few retailers in this challenging economic environment want to
worry about running their main business — which is challenging enough — as
well as managing the credit risk," Patricia Edwards, a retail analyst
with Storehouse Partners, told the Puget Sound Business Journal (PSBJ).
"They (Nordstrom) felt very firmly that they wanted to control their
customers’ experience," she added.
"Most retailers lack control of their private label or in-store card
business. That’s not a good position to be in when you’re scrambling
for sales," David
Robertson, publisher of The Nilson Report, told PSBJ.
Looking
ahead, Mr. Robertson added, "very large retailers with healthy
balance sheets might consider doing it (taking over their credit card programs)
again."
Back in February, Nordstrom CFO Mike Koppel, described the card program as
being "strategically
important to us because of its focus on building customer loyalty."
According to the PSBJ report, Nordstrom saw the delinquency rate on
its cards rise from 3.7 percent in 2008 to 5.3 percent last year. Net write-offs
increased from 5.6 percent to 9.5 percent over the same period. The company
added $20 million to its reserve for bad debt in part because of "continued
weakness" in
California. The chain operates 30 department stores and 23 Rack locations in
the state.
Discussion Questions: Will chains that keep their credit card
businesses in-house have a strategic advantage over the long haul or is managing
debt risk too much for most retailers to deal with? What are your thoughts
on Nordstrom and its credit card program?
Loyalty is always an advantage–it helps insulate buyers from competitive maneuvers. In this case, it is an enormous competitive advantage, because these shoppers are high-income individuals. Getting a bigger share of their purchases means more dollars in Nordstrom’s pocket.
I think there is another edge here too. Because society is breaking into more isolated tribes (See books: “Going to Extremes” or “The Big Sort”), affiliating with this tribe via their wallet will set up potential alternative currencies–such as participation or advocacy points, which can be used to help pay for purchases. Combine this with a digital wallet, and the game gets really interesting. Who wants a third party involved at that point?
I’m a big believer in keeping things like credit and loyalty programs in house. There is definitely the control aspect of it. No third party company (especially a bank) will understand your customer as well as you do. But I’m also not a banker and whenever I see the word defaults and increased together, I know that’s a bad thing.
Those seem like pretty big jumps in delinquencies and defaults. Nordstrom’s business is selling high-margin, high-end, high-fashion products. Not chasing deadbeats. Putting in the 20 million reserve is a great idea but is it enough? I’m wondering, would 20 million even cover California?
Customer retention, share of wallet, and word of mouth are driven by the TOTAL customer experience. If the retailer’s name is on the credit card, then every bill, every bit of related communications, the credit policies, every customer service experience, etc, is part of that customer experience and potentially impacts attitudinal and behavioral loyalty. Whether the credit card is managed internally or externally is a business decision, but basically invisible to the customer.
Credit issues and delinquencies may cause other retailers to off-load their credit card business. Nordstrom is able to take the high road and keep full control at every step of the customer experience. It should pay positive returns for them.
Nordstrom is in the retail business, not the banking business. If they were managing it well, then I would say, it is a good idea. However, their delinquency went from 3.7 percent in 2008 to 5.3 percent last year and write-offs increased from 5.6 percent to 9.5 percent over the same period. This is not good business.
The issue I have is that the retailers are extending credit to people who shouldn’t have it. This is what got America into the current economic problem we are in today.
This is no different than banks making bad loans for homes, then selling the junk loans to banks in Switzerland and all around the world. Then when the houses are foreclosed, those of us who manage our money within our means are stuck paying for it all.
It is all bad business. When will we learn?
The risk Nordstrom is taking may be very different from that of other retailers. Having an upscale customer base bodes well for their strategy. I am not sure a down-scale retailer would have the same experience in tough times.
For me, the question not raised is whether or not the credit granting criteria of any given retailer may create significantly different performance.
If a retailer’s in-house bank is too lenient on granting credit, write offs will be worse ala Spiegel.
Credit is a service granted by a retailer to build loyalty to the business. Targeting customers for credit needs to be consistent with the strategy and position of the business.
Retailers who run credit card programs run as profit centers in good times, with extra fees and higher interest rates, tend to get hammered in the bad times.
Credit is an extension of your core business.
The answer depends upon how carefully the retailer guards their brand versus that of the card management company. I can think of one store I had been loyal to for decades that completely broke the relationship with me: Sending the check across the country (El Paso) from where the stores (or I) are located, and even having the check made out to a bank instead of the store, and not even in a store-logo’d envelope. That isn’t as relevant as it once was, admittedly, as I pay everything electronically now.
I have a close friend who closed a long-time Brooks Brothers account when he was hit with a $25 fee for being *one* day late on a payment during our recent blizzard, when the mail was delayed, and has never gone back. I believe if it had been a matter of going into the store and speaking with a manager or local credit employee (remember those?), a credit would be issued and a customer would have been saved. But calling an anonymous bank across the country just wasn’t viewed as being worth the effort, when the store accepts every major credit card.
To the point that stores are “not in the banking business,” no they are not, but they are also not in the cleaning business, and that doesn’t mean they shouldn’t keep their stores clean.
I believe the rationale for retailers exiting the financing field has been one of two things: either they were doing poorly, and needed the cash from selling their cc operations, or, it was argued, financial organizations were pros at that kind of thing and would do a better job of it; the first argument can be appraised, I suppose, in the same way that you view someone who sells their blood because they need the money, and the second…well, I’m not sure that turned out so true.
Nevertheless, as someone pointed out, a retailer’s forte is selling things; they should (also be in the business of) help(ing) people buy those things only to the extent that the latter ultimately helps the former.
The business decision being weighed by Nordstrom and other retailers is a tough one.
Retailers will be at greater ease to use their PLCC card to reach business objectives by operating the portfolio in-house. There are undeniable competitive interests between issuers and cobrand partners that are difficult to negotiate away.
The credit card business however, thrives on scale and some of the best tools for fraud and risk monitoring come at a price that is difficult to absorb across a smaller portfolio. In addition, by managing the card in-house, the retailer does not have the opportunity to share rewards funding with a card issuing partner.
If Nordstrom has been able to rationalize the economics, they have given themselves the freedom to use the card to support sales without restrictions from a third party partner.
For the majority of retailers, I would suggest to exhaust all negotiating angles with card issuers to reach a suitable arrangement for cobrand issuance before taking the portfolio inside.
How Nordstrom chooses to manage their credit is solely up to them. Retailers can make that decision based on size and financial position. For many retailers, it just doesn’t make good sense or is even impossible for them to manage a credit program. Banks (many of them) offer very flexible and personalized programs to manage credit for the retailer. Sure it’s a third party, but the flexibility and discretion that can be built into the program is much more than you may think. In addition, it increases immediate cash flow.
When a ‘bank’ takes over your in-house charge, they reimburse immediately much the same as if it were a normal Visa or MasterCard transaction. That alone, can be a huge advantage. In conjunction with close oversight and regular contact and follow up with those customers utilizing your card managed by a third party can give you the nearly the same if not a better opportunity than managing the entire program yourself. Retailers still own the lists and still maintain their position of contact; they simply can focus on that rather than the financial side. In that way, they have not lost control over the experience, they may have gained more control.
Too often, retailers fail to recognize appropriate relationships with credit customers. Conversely, consumers often fail to recognize their obligations as well. Initial efforts in maintaining a relationship with a poor payment performing customer may be of value. Extending that relationship too far has no benefit whatsoever. The financial benefits of third party processing and redirecting those savings towards customer management and relationship building with your best credit customers might be the best solution. The cash flow improvement alone makes it hard not to consider it.
This is not Nordie’s first rodeo. I have the deepest respect for their bidness acumen (and their Faconnable stuff, to which I’m addicted). It’s reasonable to assume that some retailers have the skill to manage their own credit cards, and if not Nordstrom’s, then who? Bill Hanifin’s comments were the most illuminating and instructional for me on this topic, and I can’t help but believe that Nordstrom’s took into account the ideas he referenced prior to making their decision. Additionally, as others mentioned, for Nordstrom’s more than almost any other retailer there exists a deep, abiding customer loyalty reinforced by a top-of-the-line reputation for quality and service – the sum of which cast the deciding vote for keeping credit card services in-house vs. outsourcing them. How many other retailers can claim the same?
I have a Nordstrom account and it is fabulous. You can earn Nordstrom Notes and use them in-store or online. While other retailers with bank provided credit services offer loyalty programs, they are not quite the same. While I agree it is risky for Nordstrom to remain in the banking business, I do think, post-recession, they will be okay. Customers are very loyal to them because they know how to treat us! A great store and always a great experience.
On the other hand, Saks Fifth Avenue will send you a gift card based on your use of their bank card; however, the amount you receive based on the amount of your annual spend is slim and their methodology is impersonal.
A loyalty program can exist without earning interest off customers buying on credit. If this were a unique “service” there might be an argument but if I can use my Gas Station Mastercard instead, I would because the rewards are great, transparent and flexible. The Costco Card is different because they won’t accept most credit cards so you’re pretty much stuck. But why should Nordstrom risk alienating customers by sending bills to their homes? Do I want to see an ad included with my bill so I can feel even more guilty? Nordstrom needs to set up a strong customer loyalty program and exploit the rich tools we all have available both on and offline.