Why Retail Stores Offer Branded Credit Cards?

The retail industry has become closely intertwined with the finance industry over the years. This is the reason that the availability of better financing options often causes the sales of one store to increase in comparison to other stores.

Over the years, retail stores have come up with many financial innovations which has helped them compete with their peers. The introduction as well as the widespread use of store branded credit cards is one such innovation.

It is common for retail stores such as Wal-Mart, Tesco, CVS etc to offer their own branded credit cards to their customers. In fact, these retail chains try to maximize the number of people that hold such credit cards.

In developed markets such as the United States, it is being estimated that close to one third of all sales being made by big box retail stores are being transacted on store branded credit cards.

Since branded credit cards are rapidly increasing in popularity, it is important to understand the benefits offered by such cards to the retailers.

1. Incentivizing Credit Card Usage: The first and foremost point to understand is that different retail stores and research groups have conducted studies which show that consumers tend to spend more money when they are paying via a credit card.

   It has been estimated that customers tend to spend 18% to 20% more when they spend via a credit card. Hence, stores which offer customers with the convenience of using credit cards tend to record higher sales as compared to other stores. It is for this reason that many retail stores offer a discount if they customer pays using a credit card. These retail stores are confident that the profit that they earn from higher sales will offset the discount that they offer.

2. Customer Loyalty: Branded store credit cards tend to provide attractive offers when the user signs up. The initial fee is generally waived off and a large discount is provided.

   Also, the loyalty points offered to the customers on their purchases are much higher if they have a store branded credit card. This means that the customers tend to perceive the store offering the credit card as providing more value for money deals. The end result is that customers end up showing more loyalty towards the store. As a result, the retail stores are able to consistently record higher sales. This makes offering store branded credit cards more appealing for retail stores.

3. Impulse Purchases: Over the years, retailers have realized that impulse purchases tend to make up a big percentage of their overall sales. It is for this reason that they try to incentivize impulse purchases wherever possible.

   Customers are generally unable to make impulse purchases if they do not have the required purchasing power. Store branded credit cards are able to extend that purchasing power to a wider audience. Hence, stores that offer store branded credit cards are able to generate more in sales which are impulse purchase decisions made by the buyer.

   Many stores carefully study the kind of products that form part of the impulse purchase decisions. Retailers then use store branded credit cards to offer special discounts on such products and incentivize sales using store branded credit cards.

4. Buy Now Pay Later: Retailers have started offering a new type of credit called buy now pay later financing. Generally, there are specialist financiers who offer this type of financing. However, because of increased competition, there are many credit card companies which have started offering this type of financing as well.

   Retail stores collaborate with such service providers in order to provide store branded credit cards to their customers who can later use it to obtain buy now pay later financing. Many new age service providers such as Klarna and Afterpay who specialize in offering buy now pay later financing have started collaborating with retail stores.

5. Access to Data: Retail store branded credit cards help stores obtain a lot of data about their clients. Firstly, customers have to offer data such as address, date of birth etc, when they apply for the card. Also, when customer use this credit card at different locations outside the store, that data is also available to the retailer. As a result, the retailer is able to create a demographic profile of the user by mining this data.

   Retailers can make educated guess about the level of income, the level of expenses, the likes, the dislikes and the spending pattern of the user. This data can then be used by retailers to create specialized offers which can help them achieve higher sales. In many cases, stores may also be able to share this data with third parties such as their partner brands to create specific promotional offers.

6. Lower Transaction Costs: Last but not the least, transaction costs charged by payment processors can be significant. Since retail is a low margin, price competitive business, retailers are always looking for places where they can cut their costs.

   Store branded credit cards provide retailers with the opportunity to reduce their transaction costs and thereby improve their profit margin. This is another reason why many retailers prefer offering store branded credit cards.

Hence, it can be said that store branded credit cards provide significant benefits to retailers which is the reason why most top retailers provide such cards to their customers.