Retailers and credit card lenders at odds in crunch

SAN FRANCISCO (Reuters) - The need by U.S. retailers' to sell in hard times has put them at odds with the lenders backing their credit cards. While stores aggressively promote use of their cards, lenders are increasingly wary of consumer defaults.

That conflict of interest, a direct result of the global credit crunch, could fuel escalated risk in 2009 following a holiday season in which more consumers are offered store credit cards that they may be less likely to repay.

"From the retailers' point of view, the more people who open up cards, the better it is for sales," said Laura Nishikawa, an analyst with Innovest Strategic Value Advisors.

But in the midst of the economic downturn, banks are working hard to protect themselves against defaults from existing cardholders, not to mention weeding out consumers with bad credit and maxed out accounts who seek new cards.

"As a bank right now, you're afraid you're picking up the bad apples," Nishikawa added. "That's one of the reasons a lot of the banks are tightening their standards."

The tug-of-war between retailers and lenders is accelerating, particularly as store chains pull out all the stops to ring up holiday sales in what is expected to be the worst shopping season in nearly two decades.

Stores from Home Depot Inc (HD.N) to online jeweler Blue Nile Inc (NILE.O) have seen potential sales evaporate due to their customers' inability to access credit to pay for big-ticket items, whether a diamond ring or a kitchen remodel.

"Large consumer durables are extremely credit sensitive," said Citigroup analyst Steven Wieting, citing autos, furniture and electronics as vulnerable sectors. "People simply do not buy a new car without credit."

Blue Nile Chief Executive Diane Irvine said recently the credit freeze had hurt "purchases of high-ticket items, as traditional avenues of financing have now closed."

NO CREDIT? USE THIS CARD!

One solution for retailers is to offer shoppers yet another credit card. These private label cards, backed by lenders such as GE Money (GE.N), Citi (C.N) or HSBC (HSBA.L), carry varying interest rates and limits set by the lenders themselves based on credit worthiness.

"The retailer has no interest in the card being repaid. They just want the loan to be made in the first place so they can get the sale," said Nishikawa.

At stores from Cost Plus CPWM.O to Ann Taylor (ANN.N), salespeople ask shoppers if they want to apply for a card, offering discounts if they do.

Retailers, desperate for revenue in a dismal selling environment, "are trying to sell anything at any price," said David Bassuk, managing director in the retail practice of Alix Partners, a business advisory firm.

"They are pushing the credit card down your throat because they find when you go into a store and they offer you 10 percent off if you open a credit card today, it creates a motivation to buy more stuff," Bassuk said.

Red Gillen, senior analyst with Celent, a financial research and consulting firm, said retailers are "stuck between a rock and hard place."

"On the one hand they want the shoppers to buy more, and on the other hand they don't want their shoppers' applications to be denied," he said. "That leaves a very bad taste in their mouths."

But ultimately, it's the underwriters who hold the (proverbial) cards, experts say. To protect themselves, applications can be rejected, credit limits or higher interest rates can be imposed, and all lenders have the right to tinker with terms after they've signed up someone new.

"The underlying issue is the credit underwriters bear the risk so their position holds sway," Gillen said.

HOME DEPOT, BEST BUY CREDIT

Home Depot has been scaling back its programs to offer no payments and no interest for 12 months. This week, an offer on the company's website advertised a six-month, no payment, no interest credit card on purchases over $299.

Some 30 percent of new account applications for Home Depot credit cards are rejected, executives said. Its average approval limit has decreased 5 percent from last year.

"As we look out, continuing pressure on credit availability could potentially impact sales," said Chief Financial Officer Carol Tome in a quarterly conference call with analysts.

Best Buy Co Inc (BBY.N), aware that people can't charge new televisions, computers or stereo systems without financing, advertises an HSBC credit card with no interest for 18 months for purchases over $499.

A holiday marketing program by Kohl's Corp (KSS.N) to get shoppers into stores includes charge card promotions like a two-day shopping pass with additional discounts.

A spokesman for Macy's Inc (M.N) said its card was not being promoted any more than usual in the new environment. Still, even as write-offs increase, use of the Macy's credit card is rising.

But after consumers sign up for cards to get a discount on purchases, they often let their new cards lapse. Lenders are keeping an eye on these inactive store credit cards, worried that a sudden flurry of activity means that the cardholder is "in a tight spot," said Nishikawa.

And with the approach of the holidays, a time when a large chunk of sales are purchased on credit cards, banks are increasingly wary, experts say.

Alix Partner's Bassuk said he sees "more risk and more downside" as retailers promote cards and lenders raise rates.

"The holiday season is going to be (about) retailers pushing these bargains, people taking out high-rate credit cards, more and more defaults, and we'll see an escalation of the economic problems we're facing."

(Reporting by Alexandria Sage, editing by Richard Chang)