Equifax’s disclosure that hackers had absconded with the personal data of 143 million Americans after exploiting a vulnerability in the company’s cyber defenses that was largely the result of negligence has sent its shares spiraling 37% lower. And now, Bloomberg is warning that the shares of certain troubled lenders – which have already largely underperformed this year – may also be vulnerable as the fallout from the hack works its way through the US economy.
Consumers who’ve learned that their data were potentially compromised are rushing to freeze their credit, creating a major problem for lenders like Synchrony Financial and Alliance Data who specialize in retailer partnerships that offer store-branded credit cards – a once-lucrative business that has struggled as same-store sales and a flurry of bankruptcies have beset the retail sector.
“Equifax Inc.’s massive data breach could make an already tough market outlook even more daunting for the firms behind Gap Inc.’s and Ann Taylor’s store-branded credit cards.
Those retailers’ banking partners, including Synchrony Financial and Alliance Data Systems Corp., could see account originations fall off a cliff if consumers freeze their credit to protect themselves from fraud. Consumers have to take extra steps – including calling the credit bureau, going online or paying fees – to lift a block and get a new card.
“If people are defaulting to credit freezes, then if you’re a Macy’s retailer trying to sell credit cards, you can’t get that done at the point of sale,” said Vincent Caintic, an analyst at Stephens Inc.
“It could become a regular thing, these freezes. It does slow down the origination process and it’s probably going to increase acquisition costs.”
While the lenders declined to discuss any potential repercussions from the Equifax hack, the Bloomberg reporter noted that Synchrony has said it receives just 40% of its applications on the web – meaning its credit-card business is inextricably exposed to the many problems of America’s troubled retailers.
“Private-label credit-card issuers are already struggling to generate spending on their products as the retail slump forces more store closures and write-offs. Synchrony, the largest issuer of private-label credit cards in the U.S., has fallen 20 percent this year, compared with a 6.1 percent increase for the 67-company S&P 500 Financials Index. Alliance Data has dropped 6.3 percent this year.”
According an analyst at KBW, because of the difficult associated with unfreezing one’s credit, the hack will likely damage sales at Synchrony, Alliance and their peers.
“Opting for credit freezes in response to the hack “would create friction and be an impediment for growth” at the issuer banks, said Sanjay Sakhrani, an analyst at Keefe, Bruyette and Woods.
Still, he said, “if the customer wants it enough, there are channels and avenues that they can go through to unfreeze their credit histories.”
Meanwhile, Equifax is suffering from one humiliation after another as – in the words of USA Today’s editorial board – the company has bungled the hack worse than anything the board has ever seen. On Friday, the revelation that Equifax sought to cover up the fact that its chief security officer was a music major only compounded its problems.
We’re curious to hear how CEO Rick Smith justifies the breach, and the coverup and the company’s decision to delay disclosing the hack, during Congressional testimony next month.