Store Cards Rejected for Good Credit
By Tom Ryan
Gander Mountain claims an Ohio bank has threatened to stop issuing
co-branded credit cards to its customers who have good credit. The reason:
such transactions are not profitable enough for the bank.
According to a lawsuit Gander Mountain filed against the bank,
World Financial is threatening to automatically deny new credit-card applications
to customers with the best credit scores — those with FICO scores of 800 or
higher — because they bring in less revenue from financing than other accounts.
The maximum FICO score is 850.
About a quarter of Gander Mountains customers
fit that credit range, according to the Minneapolis/St. Paul Business Journal.
Under
its contract with World Financial, Gander Mountain gets a $37 “bounty” for
each new credit card account opened. According to the lawsuit, World Financial
in May asked Gander Mountain to rewrite its contract to waive the $37 bounty
for customers with FICO scores over 800 or it would deny cards on its own. Instead,
World Financial said it would offer those customers with good credit a private
label card with lower credit limits, fewer rewards and no online servicing options.
Gander
Mountain claims that customers with FICO scores over 800 are its “most
valuable customers” and if World Financial turns them away, it will create
a “negative customer experience” and hurt its business.
World Financial,
which has not responded to the lawsuit, also issues credit cards for retailers
including Victoria’s Secret, J. Crew, Express, Pottery Barn, Ann Taylor, Trek,
New York & Co. and Abercrombie & Fitch, among others.
Bill Ryan, managing
director of New York research boutique Portales Partners, said that while World
Financial’s parent company, Alliance Data Systems, generates a lot of its revenue
from that late fees, creditworthy cardholders use their cards more often, generating
transaction fees for banks. They also pay annual card fees and have negligible
charge-offs.
“I have to admit, this is one of the first times I’ve seen a company
refuse to write high-end credits,” Mr. Ryan told the Minneapolis
Star Tribune.
The lawsuit comes as
members of the House and Senate last week announced an agreement to include
debit-card fee cuts in the final version of its financial-overhaul legislation.
Discussion Questions: What do you make of World Financial’s alleged threat
to deny credit to Gander Mountain’s most creditworthy customers? Do you generally
side with the bank or Gander Mountain? Do you think store card costs for
retailers will rise or fall over the next few years?
I could write a diatribe about banks and how they give the public one good reason after another for not trusting them, but in a free market economy you should not be able to force one company to do business with another via lawsuit. Gander Mountain should find another bank that wants its business or should offer credit on its own. In the not too distant past, this was one way retailers serviced their customers.
I would side with the bank. It’s hard to turn a profit on customers who pay off their balances every month. Even worse when they offer cash rebates. Gander needs to find another way to manage their store cards. As people become more frugal and smarter, banks are going to have a more difficult time making a profit.
How can any objective person believe that rejecting timely, fully-paying credit card users is not an honorable way to do business?
When any credit card company puts honor and integrity second and mainly wants fees from partial payers, then they should change their card’s name to “The Gotcha Card.”
It is certainly true that banks make less money on the “fees” with cardholders who pay their bills on time and in full. And it is also true that these cardholders tend to buy more, concentrate their purchases on a single card or two to earn the highest rewards (points, cash back, miles or whatever they value most)and to avoid cards with annual fees whenever possible. In short, they are smart consumers.
So the only place banks earn money on them is from transaction fees, and the new financial regulations limit that revenue source. The resulting “inverse crisis” has spurred exactly the same behavior the financial meltdown spurred on banks part — stop the behavior that loses money. It is simply perverse that in this case that means “cutting off” the most credit worthy instead of the highest risk consumers.
The banks are acting rationally — within the rules of the game. Whether retailers can force them to accept low/no profit accounts through the courts based on some form of “reverse discrimination” argument is dubious I would think. Gander Mountain will either need to compensate the bank differently for issuing these cards or switch to a lending institution that is willing to accept the lower overall profitability of the Gander Mountain affinity card portfolio.
As long as we’re this far out on the limb of speculation, I’d bet on the latter. Banks that do a good job of integrated customer relations management and related services selling (Wells Fargo comes to mind as a standout in this area) should welcome new relationships with consumers who still have an 800 FICO score.
As Max points out, Gander Mountain should just find another bank to do business with. It does provide some interesting insight into how banks do business these days, apparently seeking out those with bad credit histories to give cards to. Of course, these are the same geniuses who thought it was a good idea to provide mortgages to people who couldn’t afford them. That worked out pretty well.
And so we have it in a nutshell–the reason why the economy is not getting better as fast as we would like. Restricted credit by greedy banks.
When a person with excellent credit gets turned down for a credit card, something is terribly wrong. In fact, being rejected for a credit card will bring that person’s credit score down.
Gander Mountain and all other retailers need to find other banks that are more customer friendly and willing to do business. World Bank sounds like a predatory lender if all they want is bad credit customers.
I agree with Max on this one. A similar situation occurred with REI (Recreational Equipment, Inc.) several years ago; they switched banks and have enjoyed great success with US Bank. No disruption in customer service, and REI has maintained the loyal support (and use of the card) by its members.
Banks are in business to make money too. If Gander does not like the terms of their agreement with the bank, they should just find another partner. No one “has” to get a Gander credit card, and the issue here is really the $37 “bounty” (read payout) that Gander enjoys which the bank loses. Great credit customers don’t run-up balances, so the bank is simply recognizing the obvious; their model cannot afford to support this bounty on customers who will not generate enough outstanding interest charges to offset the fee.
I think the big learning here is that the bank, being a bank, fails to realize that they have a contract with Gander that says they will pay the $37 bounty. It’s a contract. The bank needs to honor it.
Gander should find a bank that wants their business and then tell all of there customers to switch to the new bank.
Like all businesses both World Financial and Gander Mountain need to make a profit. There was mention of a $37 bounty in the article, but no follow through on the impact. Is that fee the real cause of disagreement–as well as the potential solution? World Financial seems to be indicating that they make an acceptable profit only on those cardholders with lower FICO scores (who typically pay high interest and late fees). Gander Mountain seems to be saying that many of their best customers (and their real payback) are those with high FICO scores.
Though neither party would get everything they want, it would seem that the break point for each company’s profits might be that $37 bounty. If those high credit scoring customers are really worth more in sales to Gander Mountain, wouldn’t they still be profitable over a few years even if they didn’t get that upfront $37 for each of those accounts that the bank is paying them? And isn’t the stream of revenue that will come to World Financial over several years from interest and late fees enough for the bank to continue to pay that initial $37 bounty for each of those customers?
Is this a matter of both parties failing to consider the end customer, and thinking of returns for the current quarter only rather than returns to their respective companies over the next year or two?
This is where the immovable object (naive and spoiled public) meets the irresistible force (naive and meddlesome Congress): let’s see, our APRs and miscellaneous fees have been capped, the processing fees we charge vendors have been capped, how much in “rewards” can we offer customers? Answer: try “none.”
Years ago, when charge transactions were manually aggregated, there was some logic in the idea of a “credit card.” In this age of instantaneous processing, there isn’t. If people want to use a charge rather than a debit card–i.e. they want to borrow money–they should be willing to pay for it…the idea of being “rewarded” for this is absurd.
My reading of this is that Gander Mountain has a contract with World Financial. Unless there are terms or clauses to that contract that are not clear here, World Financial has to honor that contract, regardless of how profitable it is. Once that contract expires, the parties can negotiate agreeable terms, or agree to part company.
Why should this surprise anyone? Banks have totally lost sight of how to properly generate profits, build customer loyalty, and create long-term value. If they make mistakes, they have taxpayers who will bail them out. So hearing that banks are making absurd decisions based upon totally ridiculous analysis is no surprise.
It is an example of a bank showing the rest of the world how much they don’t know about running a business.
I think we all understand how banks who issue credit cards make money – they rely on people who do not pay off their bill each month. Very recently, I had my business credit card declined at a gas station after fueling a rental car before a flight home. I called my wife from the airport and alerted her because I was concerned that someone had stolen my card number, etc.
Once I arrived in Chicago, I called again and found out that they had declined the card because she had forgotten to make the payment. She queried the person she spoke with about why they had not contacted her about the missing payment. I explained that they would prefer we carried a balance forward each month so they could earn interest, etc.
Now they have never indicated that they didn’t want to continue to issue us a card (perhaps they are waiting for us to miss more payments), but I can understand Gander Mountain bank’s position – they are firing unprofitable customers. I would hope that they would find an alternative other than turning down credit worthy customers. Based on the article, that doesn’t seem likely. Given the circumstances, I agree with Mr. Goldberg that the way to handle this is to find a new bank.
As a Retail Private Label banking insider I would like to offer a perspective from this side of the ropes. With the new UDAP laws in place it’s ever more difficult to even break even on these card programs. Please look at any of the credit card banks’ latest earnings releases. Most credit card divisions are losing money at this point. Retail card contracts that were written pre-UDAP make it very difficult to turn a profit in the post-UDAP world.
I believe many of these products will go away in the near future. I know my bank plans to let the contracts expire on most relationships. The card programs that will survive are the ones where retailers offer true value to the consumers for carrying the product or the product is needed to finance large ticket items. Most consumer electronics retailers and big box home improvement stores fit the latter category. Gone will be the days of offering a card just to offer it, because the economics will not be there for the retailers.
In the past, retailers were incented to offer card programs by the banks via bounty payments. In today’s market, bounty payments are not financially feasible thus eliminating the financial benefit for retailers to offer the product. In a way, I think this is a good thing. The only products that will remain are those that offer true value and are financially necessary, as I mentioned above. I’m not sure the public was being properly served when being offered a private label card to finance a $20 purchase.
In the end, I think all will work out for the best. In the meantime we’re going to be hearing stories like the Gander MTN one until equilibrium is reached. In the meantime, prepare for a bumpy ride.