New Zealand shoppers love credit. The latest release on key household financial statistics from the Reserve Bank indicates that Kiwis’ collective household debt has risen to 168 percent of their household disposable income – a new all-time high. Total credit card billings in New Zealand for the year to February 2017 were just under $3.5 billion.
The history of credit cards is intimately tied to in-store finance. According to David Roth’s History of Retail in 100 Objects, the first credit card was directly tied to retail.
“In 1946 a New York banker, John Biggins, introduced his ‘charge-it’ card. When this card was used to buy goods from a shop, the sales slip was sent on to Biggins’ bank. The bank then paid the money to the merchants and got their customers to pay them in return.”
From this point, cards were issued relating back to particular banks and stores, gradually widening in focus until they began to resemble credit cards as we now understand them. Diners Club is recognised as being the first credit card in common use.
However, store cards haven’t disappeared. In-store finance can be a profitable sideline for retailers brave enough to swim with the big fish in banking and finance, and with New Zealanders’ well-established enthusiasm for consumer debt, it should go down well with customers.
So, how popular are store cards? And how much income do store cards typically provide for the retailers which offer them?
Little data on the prevalence and use of store cards exists in the public domain. Credit card use is captured across the retail sector and shared by BNZ’s electronic transaction reports, but the use of in-store finance programmes isn’t separated out from other forms of card use. Part of the problem with data collection is that store cards are a traditional payments method which have strong associations with heritage department stores – many of which are privately-owned, and under no obligation to reveal their financial data.
Southland’s H&J Smith offers the H&J Smith Charge Card. It can be used only at H&J Smith stores, and its account limits can be tailored. H&J Smith also offers finance through ‘College Plans’ aimed at families purchasing back-to-school items, hire-purchase-style ‘Credit Contracts’ and old-fashioned lay-by.
H&J Smith managing director Jason Smith says the entire charge card business is managed in-house – only the production of the cards themselves is outsourced, and computer processing; opening new accounts; carrying out credit card checks; printing of statements and maintaining the card system to meet legal compliance standards are all handled internally. The Invercargill flagship store is the hub of H&J Smith’s charge card business.
“It’s useful to think of the charge card [as] representing a relationship between the customer and the store, as opposed to a credit card, which is a relationship between a customer and a bank,” Smith says. “In other words, the charge card relationship is not just a payment type, but represents a special relationship with the store.”
As such, the H&J Smith team recognise the need to provide a high level of service for cardholders which reflects their value to the business. The company communicates with them at least once a month, and provides them with unique offers and pre-notice of events. Special cardholder events are held seven times per year, and are treated like a social occasion.
“These days are very special for our business as we celebrate the relationships we build with our customers over the rest of the year, and look to engage many of our suppliers in the stores for these days so they can experience first-hand the feedback from our valued customers.”
Smith says the relationships between H&J Smith and its cardholders are so long-term and significant that in most instances, they’re generational. This gives the customer a sense of ownership of their card, and of their account with H&J Smith.
“We look to engage the customer as early as possible to ensure we treat them appropriately in-store, as they frequent our stores often, and we see them as an essential part of our ‘raving fans’ – something every retail business needs to thrive.”
Smith declined to release specific figures illustrating the charge card’s value to H&J Smith, but confirmed that cardholders’ annual spend was generally much higher than that of non-card customers. He noted that the share of business that went on the charge card varied significantly from category to category as the customer may use different payment methods depending on how discretionary their purchase was; what the occasion was; and the value of items being purchased. The ratio of card use is lower in newer markets, Smith says, but H&J Smith has been able to significantly develop this aspect of the business where it has specifically targeted it, as with the recently-acquired Dunedin store.
Asked about any downsides to running the card programme, Smith said H&J Smith managed all of its debt-recovery processes with a personal touch, and could usually find suitable solutions for any difficulties with customers.
He also spoke of the financials, saying funding the charge card ledger is an important part of H&J Smith’s overall funding, so this could add to the complexity of normal bank funding as it is a different type of funding.
Smith & Caughey’s and Ballantynes offer comparable programmes – Smith & Caughey’s offers a competitive 9 percent annual interest rate – but possibly the best-known in-store finance scheme is the Farmers Finance Card, operated by Flexi Cards. Unlike most other store cards, this is a credit-card-style scheme which is widely accepted at more than 12,000 retailers besides Farmers. As Farmers is a privately-owned company, like H&J Smith, it’s not required to release any details about the card and its performance.
A listed company like Smiths City, however, must open its books for the NZX, giving us a limited peek at Smiths City Finance. This wholly-owned subsidiary of Smiths City Group was founded in 1988 and boasts a commitment to “playing fair”. Smiths City owns its own loan book and while it’s changed funding partners once or twice, it’s always retained control of its financial services.
While Smiths City Group has chosen not to release details of Smiths City Finance’s performance, what it has said about its finance arm is that it provides “fuel for growth”. All profit earned from the division is retained within Smiths City Group, chief executive Roy Campbell said the company’s report for the six months to October 31, 2016.
“Retaining [Smiths City Finance] as a division is an aspect of Smiths City Group that is a unique, and I believe, envied advantage we hold over our competitors,” Campbell said. “Our launch of interest-free terms in July of this year has increased the attractiveness of our finance offer in the market and seen strong increases in profitability as a result. Our focus in 2017 will be to continue to enhance and expand the finance products we offer across the market.”
To facilitate this planned growth, Campbell says Smiths City has entered into a committed terms sheet with ASB to refinance the existing debt of Smiths City Group and its finance division. This change of provider from ANZ has resulted in savings for the group via improved interest rates and better transactional processing, Campbell says.
Speaking to NZ Retail, Campbell highlighted how retaining full control of Smiths City Group’s financial services has allowed the company to create a consistent customer experience across every part of the business.
“It’s always been [about] our relationship with our customers and finance is a natural extension of that.”
Like Smith, Campbell spoke of generational loyalty linked to in-store finance options, telling of how he once encountered a customer in the South Island who reported that both her mother and daughter had finance agreements with Smiths City. This represented three generations of a single family which had continuously used Smiths City Finance as part of their purchasing behaviour.
“We have finance customers that have been with us for many years, and families,” Campbell says.
In-store finance isn’t all free-flowing cash and multigenerational customer loyalty, however. Unpaid ‘green card’ accounts played a role in the downfall of Wellington grand dame Kirkcaldie & Stains. As the company moved towards closure in 2015, it found itself lacking $1.4 million owing on the store credit cards from customers who hadn’t paid their accounts.
Acting chief executive Orsola Del Sante-Bland then told Stuff.co.nz that around 10,000 customers had Kirkcaldie & Stains store cards. The company’s credit manager worked with customers on their outstanding accounts.
“They owe us money that we need to recover, so we are stopping spending now on the cards to make sure it has all been retrieved before we close.”
In a situation where every scrap of cash was important, the cards represented lost cashflow and an unhelpful risk. It’s not just failing legacy businesses which can run into trouble through credit schemes either – New Zealand’s largest listed retailer has had an uncharacteristically unprofitable experience with finance in recent years.
In 2015, The Warehouse Group moved its financial services from a joint-venture arrangement with Westpac into a wholly-owned structure called The Warehouse Group Financial Services.
The TWG Financial Services arm of the company now has three different arms – Warehouse Money, which offers two Visa credit cards linked to in-store rewards at The Warehouse; Diners Club New Zealand, which TWG acquired in 2014; and Marble Finance, an in-store finance operated in partnership with Finance Now.
In its half-year report for the six months ending January 29, 2017, TWG reported an operating loss of $5.2 million for the Financial Services division. This was an increase from a $2.7 million loss in HY16, prior to launch. Chief executive Nick Grayston put the losses down to costs of change – the Financial Services Board applied a $22.7 impairment of goodwill – and weaker than expected card spend.
Chief financial officer Mark Yeoman earlier this year told the NZ Herald that switching the old Mastercard-based credit card scheme to the new Visa one required shoppers’ existing cards to be cancelled and new ones issued. Cardholders could not continue to make payments through Westpac branches as they’d become accustomed to doing.
“Some customers thought it was too much hassle,” Yeoman said.
Nevertheless, chief executive Nick Grayston sees the financial services divison as “a very important enabler” for the rest of the business. Speaking with The Register in March, he cited significant credit opportunities from Noel Leeming and Torpedo7, and the potential for such from business customers from the Red Sheds and Warehouse Stationery.
“They’re part of our portfolio of goods and services.”
Don’t get greedy
In-store finance programmes can provide a great source of cashflow for businesses with sufficient scale and organisational ability to handle them correctly. However, when they go wrong, they can go really wrong, exposing retailers to financial strife and kickback from both legal gatekeepers and consumer protection organisations.
An important point to understand is that offering finance brings with it responsibilities that are above and beyond those of straight-up cash and digital transactions. When a retailer provides finance schemes, they are, in a limited sense, becoming a finance company, and must abide by consumer credit law.
The Commerce Commission is the government watchdog responsible for making sure consumer-credit lenders abide by the law. Its powers are significant – in March this year, the owner of mobile trader or “truck shop” Flexi Buy was sentenced to two years’ jail time as a result of a prosecution initiated by the Commerce Commission.
Mobile traders or truck shops usually sell household goods from trucks or via door-to-door operations. They target people living in low socio-economic areas, charge much higher prices than mainstream retailers and use credit or layby as a key feature of their operation.
Mehta was convicted under the Crimes Act 1961 as a party to Flexi Buy’s conduct for obtaining money from customers by deception and accepting payment from customers without intending to supply the goods they contracted to purchase. Flexi Buy entered into over 300 consumer credit contracts during its less than two years of operation, and only nine of its customers ever received their goods.
The company was also fined $50,000 in 2016 for breaching the Credit Contracts and Consumer Finance Act 2003 by failing to provide its customers with adequate disclosure of key information about their credit contracts.
As of April 13, the Commerce Commission has prosecuted 11 further mobile traders on similar charges. In a statement connected with the prosecution of a trader named Bestdeals 4 You Limited, commissioner Anna Rawlings warned that businesses choosing to operate in the consumer credit market had to be familiar with, and follow, consumer credit laws.
“In the Bestdeals case over 1,000 debtors were affected by the CCCFA offending. Some of the Bestdeals credit contracts failed to include basic information such as the total number of payments required and the amount of those payments,” she said.
“Businesses should also make sure that they are complying with the FTA including laws applying to particular sales methods that they choose to use, such as layby sales.”
The lesson here is clear – there isn’t a lot of wiggle room when it comes to consumer credit law, and those who aren’t rigorously complying with regulations are on borrowed time.
Meeting your legal requirements
Duncan Cotterill associate Katrina Hammon and legal advisor Phoebe Matthews have weighed in on the legal side of in-store finance in a Q&A session.
What are some common pitfalls retailers fall into when they introduce finance into their offering?
Retailers often don’t appreciate the level of regulation involved on lending money, which, by offering goods on deferred payment terms, is effectively what they are doing. The main legislation governing that area is the Credit Contracts and Consumer Finance Act 2003 (CCCFA). The CCCFA sets out stringent conditions that need to be adhered to and can be complex for new and experienced retailers. The principle is responsible lending at each stage, including advertising, entering into an agreement and subsequent dealings.
Is there a single mistake that you see often?
The most common mistake retailers make is not following the letter of the law when providing the disclosures required under the CCCFA. On many occasions we see partial compliance with the strict disclosure requirements. Providing full disclosure when entering into a lending contract often seems to trip companies up.
What’s at stake here? How badly wrong can a finance scheme go?
If a court determines that a lending contract is oppressive they can re-open the contract. Effectively that means that the contract can be varied and amended by the court as required to remedy oppressive terms or other unreasonable provisions. The definition of “oppressive” is broad; it means oppressive, harsh, unjustly burdensome, unconscionable or in breach of reasonable standards of commercial practice.
Where a court finds breaches of the CCCFA the court can impose penalty fines, the level of which vary widely depending on the size and nature of the breach. However, of greater concern is that in the case of certain breaches, during the period of the breach the contract cannot be enforced and the lender loses their right to recover relevant property, costs, or to require the customer to make any payment. During this period the customer is not liable for the cost of borrowing, therefore the company can lose all interest payments for the period they are in default, which if it takes years to notice can be a considerable sum.
How should a responsible retailer structure their ideal finance scheme?
Keep it simple and transparent. Customers should be able to understand their rights and obligations. This is in addition to the disclosures that are required to be made at the time of entering into a contract.
A key point is the basis of the decision to lend to the customer – looking at their financial position and affordability. It is good practice for a retailer to ensure that they retain complete records of the assessment, including copies of any checklists used in assessing whether a customer can afford the finance.
In the best-case scenario, how can in-store finance help support a retail business?
In store finance can be a great asset for a business and a valuable income stream, however setting up the documentation and systems on the cheap can be a costly mistake for clients. Retailers should seek advice from a legal adviser with CCCFA experience.
What kind of criteria is used when assessing whether an in-store finance programme is fair to consumers?
There is the Responsible Lending Code. This is a non-binding code, which sets out the lender responsibility principles and offers guidance on how these principles can be implemented by lenders. Although the code is not legally binding, the courts are likely to take a dim view on those who do not try to adhere to the principles of the code.
What’s the industry standard for interest rates? They seem to vary widely between retailers.
Despite interest rates still being at a historical low, the rates applied to finance of this nature are still often in excess of 15 percent. Lenders need to be careful around the credit fees and default fees they charge, complying with the Responsible Lending Code can ensure that these are not seen to be unreasonable under the CCCFA.
Is there anything else retailers should consider when embarking on an in-store finance programme?
Although the Responsible Lending Code is non-binding and offers guidance to lenders, it is a very useful tool. In certain instances the court can reduce fines imposed under the CCCFA if it is ‘just and equitable’ to do so. Taking a responsible and fair approach to lending in compliance with the code is far more likely to stop you breaching the CCCFA to start with and to get assistance with a reduction in the penalty should there be a breach.