When store credit cards hurt retailers: The differential effect of paying credit card dues on consumers' purchasing behavior

Abstract

In a cautionary note to retailers, this research provides evidence that store (vs. bank) credit card users assign lower reservation prices for future purchases (study 1), show less total expenditure in shopping bags (study 2 and 3), and are less engaged in impulsive purchasing (study 2) at the card-issuing store. The authors provide evidence that even though store and bank credit cards result in a similar level of pain of paying and temporal decoupling, these previously assumed to be similar payment modes lead to different purchasing decisions. Findings suggest that consumers attribute the financial depletion resulting from paying a store credit card invoice to the mental account for the card-issuing store and hence are less generous in their subsequent purchasing decisions at that store (study 4).

Introduction

Store cards have become an everyday consumer tool. Based on a recent Federal Reserve study, the US market of private-label retail cards accounted for approximately $270 billion in sales in 2013 (Pramuk, 2014). A recent survey showed that 36 of the top 100 retailers by sales volume (as tracked by the National Retail Foundation) offer credit card programs (Kossman, 2014). The credit cards offered include 32 store-only cards (can only be used at the card-issuing store) and 27 general-purpose cards (co-branded cards for in-store and out-of-store purchases). Store-branded credit cards provide consumers with a supplementary credit line and other rewards, giving them a reason to own one (Lee & Kwon, 2002). On the other hand, retailers incur various costs such as initial discounts, introductory interest offers, and reward points in the hope that spending with store-branded credit cards will promote brand loyalty (Reczek, Haws, & Summers, 2014) and consumer frequent purchases (Chakravorti, 2000). This current research focuses on the effect of store credit cards on consumers' purchasing behavior from the card-issuing store. More specifically, we investigate the effect of purchases made by store cards on consumers' subsequent purchasing decisions at the card-issuing store.

Mode of payment influences consumers' behavior (Feinberg, 1986). Credit cards have been found to mitigate the pain of paying (Prelec & Loewenstein, 1998) because they temporally separate purchases from actual payments and thus increase consumers' spending behavior. Another reason why credit cards increase the consumers' propensity to spend is because credit cards are an abstract, less vivid, representation of money, and thus consumers experience less pain of paying while spending (Raghubir & Srivastava, 2008; Soman, 2003; Soman & Cheema, 2002). Since both store and general-purpose credit cards are similar on both the temporal separation and the abstractness dimensions, previous research on payment modes, not surprisingly, grouped them under one category (Soman, 2003). Our research suggests that although both general-purpose and store credit cards share many of the same characteristics, they could lead to different purchase decisions. We propose that the differential attribution of financial transactions between store and bank-issued credit cards explains why store credit cards decrease spending at the card-issuing stores – a phenomenon that may seem surprising to retailers.

Retail in-store sales are caught in a downward spiral, despite the current overall economic growth. Competitors such as Amazon.com have created enormous price pressure on bricks-and-mortar retailers as consumers show increasing willingness to shop on-line for products that would have been purchased in stores in the recent past. In response, traditional retailers such as Macy's and Kohl's have closed stores (Thomas, 2018), eliminated thousands of jobs, and, most importantly for our purposes, invested heavily in marketing store credit cards to their customers. Macy's for example derived 39% of its profit in 2016 from store card interest and fees and actively incentivizes employees to persuade consumers to adopt and use the store cards (Corkery & Silver-Greenberg, 2017). Thus, retailers are becoming increasingly reliant on profits from financing consumer shopping at the same time store sales of physical goods are declining. Our research suggests provocatively that this aggressive marketing of store cards may actually be contributing to the decline in product sales these stores are experiencing, thereby offsetting some of the profit being derived from the financial instruments.

However, it is important to note upfront that we are not arguing against the use of store cards for loyalty programs that may produce benefits not examined in the current research. Instead, we argue subsequently for programs that offer such benefits without the use of store cards for payment purposes. Further, we recognize that both store and bank cards can offer other user benefits such as points that can be applied to travel or other rewards. Thus, any unconfounded comparison of payment alternatives must either compare store and bank cards without such service augmentations or include them for both types. In the current research, which is the first to make these comparisons, we adopt the simpler, former approach while acknowledging that future research should examine the possible interaction of various rewards programs with card issuer.

Prior spending impacts consumers' decision making on subsequent spending (Heath & Soll, 1996; Soman, 2001; Soman & Lam, 2002). When consumers use a store card to make purchases at the card-issuing store, their invoice shows only the in-store purchase, potentially making the amount of money spent on these purchases more salient. When paying the store credit card invoice, the depletion in consumers' financial resources is directly attributable to the card-issuing store. As a result, contrary to any retailer objective concerning repeat patronage, consumers may refrain from spending more at the card-issuing store on a subsequent visit. On the other hand, when store purchases are made with a general-purpose credit card, they appear as one among many others and hence less salient (Thaler, 1999). This is likely to be true unless consumers are sufficiently motivated to examine their general-purpose credit card statement in detail and, therefore, attribute spending to specific mental accounts organized by store or service provider (Thaler, 1985).

We contribute to the literature in several ways. First, our conceptualization and results show that different types of credit cards, previously grouped together as a single mode of payment, could lead to different purchasing decisions and spending behaviors at the card-issuing store (as measured by reservation price, impulsive purchasing, and total shopping bag task). Second, we show that payment modes that are similar in transparency, vividness, pain of paying, and temporal decoupling of payment can still be distinguished based on the attribution of financial depletion in store versus general spending mental accounts. Additionally, we show that the inhibitory effect of paying a store invoice on consumers' repurchase decisions prevails even when the store invoice does not show any decomposition of store purchases by individual item purchased, suggesting that the depletion of resources is attributed to the store-issuing card, rather than a function of a single line-item on the bank card invoice versus multiple line items on the store card invoice. Also, we rule out alternative explanations commonly used to explain payment mode effects on consumer behavior, including pain of paying and regret of previous purchases. Finally, consistent with mental accounting theory, our results show that consumers attribute the financial decrease in their resources after paying a store card invoice to the card-issuing store and tend to reduce their expenditures in a subsequent spending opportunity at the card-issuing store.

We present four studies that investigate the hypothesized relationship between paying a store credit card invoice (versus a general-purpose credit card invoice) and future repurchasing behavior from the card-issuing store. Prior to describing these studies, we review pertinent literature that will aid in our conceptualization.