Neiman Marcus, HSBC face off over credit card business
One of the retail community's shining examples of customer service – Neiman Marcus – is facing the possibility of having 192,000 customers' credit card accounts cancelled.
Neiman Marcus sold its credit card portfolio to HSBC in 2005 for $640 million. The luxury retailer was one of several multichannel merchants to make such a move over the past few years as they sought to outsource the day-to-day management of these ancillary businesses they had built up. Banks, for their part, saw an opportunity to profit at a time when many retailers were experiencing double-digit sales growth.
However, sometime in the past year, HSBC realized it stood to lose more than $8.5 million over the next three years under the existing terms of its contract with Neiman Marcus. As a result, it put pressure on Neiman Marcus to agree to a new arrangement that would raise charges and interest rates to customers. When an agreement couldn't be reached after several months, HSBC reportedly threatened to cancel the accounts unless Neiman Marcus agreed to its terms. Last month, Neiman Marcus sued HSBC for breach of contract and was granted a temporary restraining order. A hearing is scheduled for April 9.
It is not clear why Neiman Marcus' portfolio has suddenly become unprofitable. Possible explanations are an increase in delinquencies as more consumers feel the pressures of the current economic crisis or declining sales at Neiman Marcus.
On March 5, Neiman Marcus reported that company revenues totaled $1.37 billion for the 13 weeks ended January 26 compared to $1.3 billion in the prior year. Comparable revenues increased 3.7% during the same period.
There is also another possible explanation.
“HSBC could be under pressure to increase the rewards and benefits being offered through the Neiman Marcus credit cards” in order to keep the accounts active, said Christopher Long, CMO, Litle & Co. In recent years, there has been a trend toward offering bigger and better rewards through loyalty cards, especially at the higher end of the market. As a result, luxury consumers now expect such rewards from their cards.
However, when those rewards are designed to increase activity on cards owned by a bank and not the merchant whose brand appears on the card, the question is who should foot the bill?
Whatever is behind the Neiman Marcus/HSBC suit, it's likely more retailers will be reconsidering their decisions to outsource their credit card businesses in the coming months.
“Some of our clients are looking to bring their credit card businesses back in house,” said Sandra Gudat, president/CEO of retail loyalty program consultancy Customer Communications Group Inc. Talbots recently said it will considering buying the J. Jill credit card business from Citibank when an arrangement to manage the portfolio ends in September. Talbots has always managed its own credit card business in-house and says this arrangement has been profitable for the company. The move to bring the J. Jill business in house would require only a small incremental cost, according to the company.
It isn't only about financial pressure from the banks, however. Some retailers have also realized that “a lack of control over their credit card business can be harmful to the business overall,” Gudat said.
With credit card customers among retailers' most loyal and most valuable customers, merchants are discovering that banks aren't providing the same kind of attention to customer service to these customers that they themselves would. These outsourced arrangements also hamper a retailer's ability to leverage its brand via communications to credit card customers.
According to the Neiman Marcus filing, if HSBC carried through on its threats to close approximately 192,000 existing credit card accounts and refuse to open new accounts for eligible customers unless Neiman Marcus accepted it terms, the move would “incalculably harm Neiman Marcus' relationships with its customers” and “irreparably tarnish” the Neiman Marcus and Bergdorf Goodman brands.
According to the filing, HSBC first approached Neiman Marcus in September to propose increasing charges and interest to credit card holders as a way to extract more revenue from the credit card portfolio. Neiman Marcus rejected that proposal and, in December, came back with its own proposal “designed to address HSBC's economic concerns while minimizing the impact on Neiman Marcus' customers.”
In January, HSBC rejected Neiman Marcus' compromise and gave the merchant two options, according to the filing: “either accept new terms or suffer horrific consequences.” By HSBC's own projections, Neiman Marcus stands to millions of dollars in credit over the next two years if HSBC implements its changes, according to the filing.
Both Neiman Marcus and HSBC declined to comment for this story.