Question: I have noticed recently that more and more large department stores are accepting major credit cards (such as American Express and Visa) in lieu of their own cards. Why is this occuring--aren't they losing out on the finance charges?
I personally think that it is a great idea for the consumer--I would much rather carry one or two credit cards, rather than the dozen I presently tote around in my purse.--D.U.
Answer: Not even the fine old science of retailing is immune to change, and the emphasis shift in financing that you've spotted is, sure enough, a current trend. A few years ago most retailers were fussy to the point of being moss-backed about what they would accept as payment: money, a check or their own credit card. Period.
While most major department stores are still zealously retaining their own cards, according to William Dunkelberg, a professor of economics and management at Purdue University and a former senior researcher for that institution's Credit Research Center, "hundreds of smaller ones--even though large in their regional markets--have simply walked away from their own cards and have gone entirely to 'third party' cards--American Express, Diners Club, Visa and MasterCard."
And, like most things in life, there's rarely a single rationale--but a combination of several--to explain it.
"But, probably the largest single reason in this case," Dunkelberg adds, "is simply that third-party cards have become so widely accepted as a means of making payment. It's what customers have gotten used to, and so the stores have had to go along with it. Not to accept them has become like not accepting checks."
Another important reason for the trend, Dunkelberg continues, is the incremental sales involved.
"They make sales to people who are in the store, but who don't have--and may not want to have--one of that store's credit cards. This way, the third-party card serves as a cash substitute for a sale that otherwise would have been lost."
Also involved in this current switch in strategy is the matter of (wouldn't you know?) money--specifically, those finance charges to which you referred.
"The average retail account, nationally," Dunkelberg adds, "is only about $200 and, at 18%, the retailer is losing his shirt. So, in a year's time, he picks up about $8.50 in finance charges. But, against that, the cost of the money to him is about $5; postage for the monthly bills is going to be $2.64. And then you add to that the average bad-debt loss of 1%, or $2, and you've got expenses of $9.64, which have more than exhausted your revenues, and you still haven't paid your rent, your light bill or your people."
On top of all this, of course, are the not-inconsiderable costs of simply opening a new account for a customer and the collection efforts if the account goes sour--expenses, sure enough, that the third-party-card issuer passes along to everyone in higher finance charges, but which don't come directly out of the retailer's pocket.
"In retailing, unlike a lot of other businesses," Dunkelberg continues, "a full half of the costs of operation aren't related to the cost of money itself."
In spite of the trend toward third-party credit cards, he adds, "only about 2% to perhaps as high as 10% of the store's volume is being generated by third-party cards, while anywhere from 40% to 60% is still coming from its own cards. This is a good argument for a big store to hang onto its own card."
Another disadvantage to the store of going completely to third-party credit cards: The retailer loses personal contact with his customer. No chance to stuff the monthly envelopes with enticing ads and solicitations for high-ticket geegaws for which the average customer hasn't the slightest use, but which he buys in impressive quantities anyway.
"No matter whose card the store is accepting," Dunkelberg notes, "it means that merchandise still has to be marked up to pay for it, and the unfortunate aspect of this is that the people who can't get credit are paying for it right along with everyone else."
Q: Your recent column on American Express really hit home. Three years ago while vacationing in Italy, all of my American Express traveler's checks were stolen from a shoulder bag my first day in Rome. Imagine my surprise upon reporting the theft to the local American Express office that, because the amount of the loss was more than $750, they could not replace any of the checks for three days. I insisted that it would be obvious that a traveler with $1,500 worth of checks was a major purchaser, and this was all the more reason for an instant refund. No, they were adamant--no replacement of a single dollar for three full days.
This was particularly distressing because, three days from then, I would be in Belgium on business, not in Italy. Fortunately, a traveling companion was able to stake me for half a week until an office in another country could replace my loss.