A reliable non-sales revenue stream for retailers could be under threat as a combination of regulatory changes and macroeconomic headwinds hit home.
This week, the Biden administration and the Consumer Financial Protection Bureau finalized a rule reducing the typical credit card late fee from $32 to $8, and while this change is potentially a bigger deal for banks and card issuers, retailers could also see an impact to their bottom lines.
Many major retailers have profit-sharing agreements with banks that issue and fund their in-store credit cards. But the potential financial impact of the rule change on them is still unclear, as retailers have different arrangements with issuers—which could explain why over the past two weeks, several analysts pressed retailers about the topic during earnings calls.
Victoria’s Secret CEO Martin Waters told shareholders this week that “it’s important to understand that we do not necessarily recognize any revenue on some of the fees that are being discussed or debated, but certainly our provider does, and that impacts their model.”
TJX Companies CEO Ernie Herrman said the rule change or an uptick in credit card delinquencies could have an effect on the discounter, “but not as much as some of the other retailers that rely much more heavily on the credit card.”
Nordstrom CFO Cathy Smith, meanwhile, boasted that the department store’s clientele were generally less impacted by late fees: “The average credit quality of our portfolio tends to be higher than some of our peers, so therefore, late fees are a smaller piece of the overall credit revenue to our P&L.”
Credit crunch: The more pressing issue for some retailers is the possibility of credit losses in the year ahead, as consumers struggle to pay off mounting debts.
Best Buy CFO Matt Bilunas said the electronics seller is expecting a 20 basis-point hit to profit due to a “lower profit share on a credit card arrangement…primarily due to expected increases in net credit losses,” excluding any impact from the new late fee rule.
Macy’s CFO Adrian Mitchell similarly said that “excluding any impact for the proposed late fee ruling,” credit card revenues would drop from 80% of “other revenue” in 2023 to 74% this year. The company’s credit card revenues declined 26% YoY in 2023.
He added that Macy’s was “working on mitigation factors” in case the late fee ruling passed.