Parsing Through the Conflicting Views on Retail Card Growth

Navigator Edition: June/July 2016
By: John Grund and Cara Weikel

There are many opinions on the state of the U.S. retail industry and most are quite negative. A weak 2015 holiday season was followed by a disappointing start to 2016 for many retailers. As shown in Figure 1, growth varies widely across the retail landscape. Home improvement and off-price retail stand out on a positive note when compared to most department stores. Furthermore, there is a growing list of retailers that have declared bankruptcy and many more reducing their store footprint. Most headlines point to an accelerating shift by consumers to e-commerce, but it is important to keep in mind that over 90% of U.S. retail sales is still attributable to brick and mortar format. The problem is not one-dimensional.

Figure 1: Q1 2016 Year over Year Change
in Comparable Sales for Select Retailers

Fig-1_-Q1-2016-Year-over-Year-Change-in-Comparable-Sales-for-Select-Retailers1 Global comp sales.
Source: Company press releases and investor materials.

Retail credit card growth is also a nuanced story. It is a bit ironic that retail credit card issuers (including sales finance players) are growing while many retailers are not. In fact, the question of short versus long-term growth is a common line of inquiry among investors as they struggle to reconcile the steady drumbeat of weak retail sales with the growth of retail card issuers. From our perspective, in the short term, as retailers respond to a challenging sales environment, most invariably become more promotional often targeting their most loyal customers, retail cardholders, with credit events and other campaigns. Ironically, retailers also tend to work more closely with their bank partners on credit program enhancements – new value propositions, product launches, digital integration, etc. This dynamic generates a favorable tailwind for retail card issuers even at times when retailers are struggling. During this period, credit sales can and should grow at a faster clip than retail sales driving card penetration up. In the short-term, what’s not to like? It is almost a counter-cyclical buffer of sorts as retailers “double down” on card programs and tenured, loyal cardholders stay engaged.

The tougher questions on retail card growth are longer-term in nature and inherently tied to the very future of the retail industry. After all, a larger share of a declining sales base is hardly a bullish case for retail card issuers over the long-term. The shift to digital shopping, declining customer traffic in many traditional retailers, changing demographics and behaviors certainly cast a lot of uncertainty on growth. However, at the issuer level, growth is also a function of client composition much like the stocks in a mutual fund. A well-diversified client roster is critical especially as the retail industry goes through a period of unprecedented change. While it is important for an issuer to have its fair share of high-flying retail partners, from a practical perspective, long-term growth is likely to be tied more to the portfolio as a whole rather than any one program. In fact, the lack of diversification is a clear risk despite the scale advantages of having a few large, anchor partners. Ironically, legacy segments of the retail credit card such as sales finance are a good source of diversification given their consistent reliance on core financing and resilience over time. By way of example, Synchrony’s Payment Solutions business is $13.4b in receivables with growth in 2015 of 11%.

Parsing through the short term versus long-term growth prospects may be more art than science. However, much like delinquency is an early indicator of credit losses, data and trends can shed more light on long-term growth prospects at the portfolio and program level. We listed a few areas that could help in peeling back the onion on organic growth recognizing that portfolio acquisitions are a different vector:

  1. How diversified is the issuer’s partnership portfolio? Are its major partners growing their sales base?
  2. Are there card growth prospects that are decoupled from core retail sales growth (e.g., the addition of co-brand or PLCC as a complementary offering)?
  3. What are the trends in application volumes and new accounts?
  4. Are new customers (and segments such as Millennials) engaging with the credit card?
  5. How are credit sales (and growth) split among vintages – are sales from new accounts increasing or decreasing? What is the attrition rate across vintages?
  6. Is the mix shift from store to digital channels a favorable one on key metrics (e.g., applications, new accounts, sales, etc.)?

For more information, please contact John Grund, Partner,; or Cara Weikel, Senior Consultant, Both specialize in Credit Card Issuing.

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