Why should corporate restructuring at General Electric — yawn! — concern credit card users?
The appliance maker is also one of the biggest purveyors of plastic, with about 50 million accounts, and its plan to unload the giant business says something about the state of store cards.
GE Capital backs store cards issued by all sorts of retailers, from Amazon to Wal-Mart. Balances on U.S. credit cards made up about $34 billion of GE Capital’s $50 billion U.S. consumer credit business in 2012. It is a lucrative business — and it should be, with interest rates of 20 percent to 25 percent on most cards.
GE is looking to spin off its U.S. consumer credit business from its dishwashers, jet engines and power turbines, perhaps by early next year, the Wall Street Journal reported last week. Analysts have been expecting the move. “They’ve been wanting to find ways to exit the consumer finance business in the U.S. … because they want to reduce their exposure to financial services,” said Steven Winoker, analyst at Sanford Bernstein.
Analysts think GE would like to sell its card business to another company, but the size of the business makes it more likely that the unit will be spun off to stock investors as a separate company, Winoker said, perhaps in gradual steps instead of all at once.
Why now, when consumers are finally digging out from the recession and charging up their balances again? Most analysts cite regulation as a top reason. After the financial crisis, big banks are getting higher levels of scrutiny, and GE’s consumer finance business is big enough to be considered “systemically important,” giving it a heightened regulatory profile.
At least, that’s the Wall Street answer. There is also regulatory pressure that is coming to bear on GE’s card business from the direction of Main Street.
In June, New York’s attorney general smacked GE Capital and its CareCredit unit with an enforcement action that highlighted a raft of problems in the medical card business. Ninety percent of clients signed up for the card in order to get interest-free financing on expensive medical procedures or on devices such as hearing aids. But one in four of these card owners actually got hit with hefty finance charges that built up on their card over a period of months.
CareCredit makes up only 12 percent of GE’s consumer credit business, according to Winoker’s research. But GE’s store card business is afflicted with some of the same consumer headaches as CareCredit. GE says that 70 percent to 90 percent of card balances in no-interest promotions are able to complete the deals successfully.That means about 10 percent to 30 percent of card customers actually wind up paying interest on their no-interest deals, depending on the merchant and the length of the promotional term.
Consumers Union, for one, has called for an outright ban on no-interest deals in filings with regulators. The Consumer Financial Protection Bureau is mulling credit card issues, and no-interest deals are cited by several consumer advocates as being among the worst “gotcha” traps remaining in the wake of the Credit CARD Act. There’s no indication yet that the bureau will aim its powerful rulemaking authority at the deals, but Best Buy took the possibility seriously enough to outline the consequences of potential new regulation in its annual report. No-interest deals generate about 18 percent of its sales, for a cool $8.5 billion, the company said, and regulation would have a material impact on the company’s results.
GE Capital doesn’t issue Best Buy’s cards, and it isn’t commenting about the spin-off speculation. But the broader point is, a cleanup of the store card business could be in the works, and the impact on people who use store cards would be bigger than any shuffle in GE’s corporate structure.