Byline: Valerie Seckler

NEW YORK — Another record for personal bankruptcies this year? No problem — at least as far as the mass retail crowd is concerned.
In fact, mass and some moderate retailers are introducing their own credit cards, encouraging customers to say “fiddle-dee-dee” and put off paying for today’s purchases until tomorrow.
With steady, solid sales growth continuing to elude most of the nation’s big apparel merchants, a growing number are aiming to fire up shoppers’ purchasing power with new credit cards bearing their stores’ names.
In a few more years, a bigger payoff is expected: Targeted marketing based on mammoth databases is in embryonic stages at most of the chains cranking out the new cards. Since August, a string of mass and moderate merchants have joined the plastic parade, partnering with banks to roll out private label or co-branded credit cards (see box).
The issuers include Sears, Roebuck & Co., now testing a co-branded MasterCard to augment its giant Sears Card business; Wal-Mart Stores, which launched a co-branded MasterCard, together with Chase Manhattan USA last fall; Kmart Corp., which rolled out its private label Kmart Card to its 2,020 stores nationwide in August, and Venture Stores, which is offering a new private label card financed by Beneficial — also Kmart’s partner.
Here’s the rub: The flurry of plastic, and moves to take outside credit operations in-house by firms such as Kohl’s Corp. and Mercantile Stores, comes as personal bankruptcies in the U.S. this year are expected to top the record one million filings by American households in 1996, according to economists’ forecasts.
“The rise in personal bankruptcies has been astounding,” offered Mallory Duncan, the National Retail Federation’s general counsel and credit specialist. “It’s a dramatic jump from the 400,000 or so personal bankruptcies filed 10 years ago — and the economy’s doing well.
“What does this portend if the economy takes a downturn?” he asked. “That’s why many credit granters are having sleepless nights now.”
According to a recent survey by Kiplinger’s Personal Finance magazine, 65 percent of U.S. households are carrying outstanding credit card debt.
“It’s a sign of a peak in the credit card business when the big discounters are all launching store-brand credit cards,” said Richard L. Church, vice president and retail analyst at Smith Barney Inc., of the tactic to pump up sales while debt levels for many consumers have already maxed out.
“Personal bankruptcies are climbing because there’s just too much credit out there,” asserted Michael Freudenstein, vice president and credit analyst at J.P. Morgan Securities. “I think the answer is that the issuers have to raise the bar on the acceptance rate. That’s starting to happen at some issuers.”
However, Arlene Meier, chief financial officer of Kohl’s, the Menomonee Falls, Wis.-based department store chain with sales of about $2 billion annually, said: “We feel the way to drive the business is by building customer loyalty rather than lowering credit standards.”
Kohl’s, which brought its credit card operation in-house 15 months ago, approves 75 to 80 percent of the applicants for its proprietary card — the same as the acceptance rate for its former private label instrument.
“We’re seeing personal bankruptcies rise, but it’s not hitting us as hard as some others,” Meier contended. “Our sales are mostly apparel, so we have smaller average balances than retailers selling big-ticket items. We bill every month, so there aren’t lag times between bills that can hide problems.
“We’ve been comfortable with the delinquency rate — it’s falling within our estimates,” added Meier, but she declined to specify further.
It’s a different story at Sears.
“Clearly we’ve suffered from the nationwide increase in personal bankruptcies,” admitted John Delany, vice president of credit marketing and strategic planning at Sears. “It’s certainly been more than we’d planned for. We’ve been making more phone calls, as more folks fall behind on their payments.
“The biggest issue facing the credit industry today is the change in people’s attitudes toward their debts,” Delany declared. “It’s really frightening how more and more people don’t seem to care about filing for personal bankruptcy protection. Folks are filing bankruptcy in some cases simply because they don’t want to pay off their debt.
“It’s becoming a cost of doing business.”
Some retail observers have questioned whether the profitability of Sears’ credit operation has been hurt by its growing exposure to the rising tide of personal bankruptcies. In the fourth quarter, for instance, the Hoffman Estates, Ill.-based firm saw its provision for uncollectible accounts rocket $133 million, or 68.2 percent, to $428 million.
Nonetheless, Sears reported a 17.2 percent increase in revenue from its domestic credit card portfolio — primarily Sears Card receivables — and a $160 million gain in the portfolio’s net interest margin for the quarter.
In a Jan. 24 report reiterating his “buy” rating on Sears, Todd D. Slater, retail analyst at Lazard Freres, stated: “Sears’ credit business is very powerful and growing, despite the increasing write-offs as a percent of receivables that have risen to an annualized rate of 4.77 percent — the highest level in the company’s history.
“We expect the provision for uncollectibles to continue to expand, but at a moderating rate, growing 38 percent in 1997, versus a 57 percent increase last year,” Slater projected.
Sears — which already claims 55 million accounts in one-third of all American households with its Sears Card — in August began testing a co-branded Sears MasterCard in six Midwestern markets.
“Roughly 36 million of the 55 million Sears Card accounts are active each year, so the co-branded card gives us a chance to meet the needs of more customers,” Delany allowed. He declined to identify the pilot markets.
The test of the MasterCard will be evaluated in May or June to determine whether the plastic will be rolled out nationally. Across the country, Sears has more than 800 full-line mall-based department stores. According to Slater, the co-branded card has been exceeding expectations.
Driving the proliferation of plastic, Delany acknowledged, is simply “efforts by merchants to figure out how to sell more merchandise.”
At least one retailing consultant remains unconvinced the ploy will work.
“It’s never been proven that consumers buy more at a store just because they hold the retailer’s credit card,” observed Pamela Thomas Graham, a principal at McKinsey & Co., who heads the consultant’s New York-based retail practice. “Credit cards aren’t just a convenience for customers — they’re a way to tinker with the marketing mix.
“Retail executives are just starting to realize how powerful the data they capture with their credit cards is,” Graham emphasized. “The marketing potential should be perceived as the true value of the cards; that’s what jump-starts sales gains.”
A general merchandiser who is evaluating credit card purchases by maternity customers, for example, might send those shoppers marketing teasers on baby goods nine months later.
“A lot of retailers are laying the foundation for these kinds of moves, but it hasn’t taken off yet,” Graham said. “Sears is taking an aggressive look at how they use life events to trigger purchases.”
Noting that the rising emphasis on collection activity “hasn’t affected us on the marketing side of Sears’ credit operation,” Delany acknowledged: “The primary value of credit cards is that they allow us to build a database that helps us better serve our customers.”
Successful database marketing demands good statistical models and the expertise to identify the most profitable customers, Delany explained. For example, he said, “We use our data to tell us where certain customers are buying a type of product in the store, and we try to match their profile with customers who aren’t shopping that area and target them with promotions.
“We’ve started to do this within the last three years,” he added. “It usually takes at least five years to really get a database marketing program going.”
Asked if the flurry of new plastic sparked Sears to test the co-branded MasterCard, Delany said, “There are probably only a couple of retailers that would have enough loyalty to challenge our credit card. Wal-Mart is one.”
About 60 percent of Sears’ retail sales is pulled in by its Sears Card, whose revenue and profit each expanded by about 16 percent in 1996, according to Slater’s report.
The increased utility of a co-branded bank card, compared with a private label card to be used only at an individual retail chain, could lure more customers to Sears, despite the strong share of business pulled in by its Sears Card, analysts noted.
“Shoppers can use them everywhere and build up their reward-point totals in a channel not normally available,” said J.P. Morgan’s Freudenstein. “It’s also possible that some applicants would be OK’d for a co-branded program who might not make it on a straight bank card.”
On Oct. 14, the country’s largest retailer rolled out a co-branded Wal-Mart credit card with MasterCard and Chase Manhattan USA, responding to shoppers’ requests for an alternative way to pay for purchases at a time when the 2,265-door chain could strike a cushy deal with its financing partners.
Instead of offering its customers future discounts based on the size of purchase put on the Wal-Mart MasterCard, Wal-Mart negotiated with its partners for a card featuring everday low interest rates and no annual fee.
The card’s fixed annual percentage rate of 14.48 percent is about 3 percentage points lower than the average APR for standard credit cards — 17.55 percent, according to RAM Research, a marketing firm based in Frederick, Md.
“We did consider a private label credit card, but in talking with Chase and MasterCard, we learned they were in line with our vision of offering a card whose key property is everyday low interest rates, instead of a lot of the other gimmicks out there,” a Wal-Mart spokesman said.
“We’ve considered launching a credit card for several years and decided to do it now because we got a deal that was attractive,” the spokesman added. “As our customers have gotten better acquainted with the variety of cards available, we thought the time was right for them to embrace our card.”
But with some industry analysts, including Slater, expecting a high level of personal bankruptcies to become a permanent part of American society, retailers issuing new cards need to focus sharply on the potential costs of the business — as well as the possibility of boosting sales.
The dynamics driving up the personal default rate are especially worrisome for retailers kicking off cards to kick-start sagging sales and boost profits. These merchants increasingly are facing customers who fail to pay off their credit card bills in time because of traumatic events such as a major illness or divorce — with little hope they will be paid. And the level of the uninsured is continuing to rise, Duncan related.
In the past, more customers fell behind with their payments only temporarily, because of lower-impact bumps like job losses.
What’s more, said Duncan, regardless of how dire the financial straits facing some shoppers, “these days, in a large percentage of personal bankruptcies, you also have people filing who are no more than a month behind in payments.”
In response, retailers such as Sears are beginning to build models based on characteristics of consumers who so quickly seek bankruptcy protection, in an effort to predict who’s most likely to bail out on their payments next.
“The stigma of an individual going bankrupt is evaporating, so the ultimate solution is to cramp down on credit,” Duncan reasoned. “There are too many guests on talk shows who are saying that they filed and kept the BMW.”
Pointing out that one of the “most assured ways of growing sales is providing customers with extra credit,” Montgomery Securities analyst Thomas Tashjian cautioned, “The risk is that as one moves into the lower income strata, the probability of personal bankrupties shoots higher.”
The challenge also makes it trickier for mass merchants to strike the necessary balance between a private label card’s issuer and lender.
“This is the next big issue these players have to face,” said McKinsey’s Graham. “Retailers want to approve as many accounts as possible, and the banks have to worry about issuing cards to consumers with good credit ratings.”
In the future, retailers with private label cards may have to share more of the credit risk with the bank, the consultant forecast. At the same time, retailers will probably place greater importance on partnering with banks that have the most sophisticated credit scoring systems, she said. The models would enable merchants to more accurately target the best credit risks.
“There’s an inherent tension between wanting to issue as many cards as possible and reducing exposure to uncollectible credit card debt,” said Delany. “We’re working harder to segment cutomers by risk factors. We declined more customers in 1996 than we have turned down in the past.”
Sears has developed a host of credit scoring models that forecast the probability of 90-day deliquencies for various customer groups and help the retailer determine what size credit line an applicant should obtain.
In an effort to extend the reach of its Sears Card, the company recently began testing a “Starter Card,” aimed at shoppers with limited credit histories, Delany said. The card is more closely monitored and offers smaller credit lines than its full-blown Sears Card. Credit limits can expand as customers build credit histories.
Consumers can expect multitier credit card programs like Sears’ to be initiated by a growing number of merchants in coming years, predicted Graham, who noted it gives retailers a way to target specific shoppers — say, loyal, premium customers who would respond to special promotions, or moderate-price customers who would be lured by low interest rates and sales coupons.
At some point, though, “the proliferation of private label cards will be too much,” Graham forecast. “Co-branded cards are a hedge against that overkill, as some consumers try to trim their card portfolios.”
“For any business adapting a private label card, improving profitability is gravy,” advised J.P. Morgan’s Freudenstein. ” Typically, charge-offs and deliquency rates on private label cards are higher than on bank cards. The best bet on a private label card is not to get burned.”

Credit Card Flavors

NEW YORK — Following are three categories of credit cards widely used by retailers.
Private Label: Strictly an in-store credit instrument. Bank carries credit card receivables. Offers retailer the ability to build a more elaborate marketing database, based on information captured at point of sale, than do purchases made on bank cards bearing brands such as MasterCard or Visa. Bank card transactions do not provide as much customer data.
Proprietary: In-store card for which the retailer carries the receivables.
Co-Branded: A credit card created through a partnership between a bank, a credit card like Visa or MasterCard, and another company such as a retailer that’s seeking to win more customers by boosting a card’s utility.