As Black Friday unfolds, robust spending emerges as a positive sign for retailers; however, a notable shift in payment methods is causing concern. Store credit cards, once a lucrative source of revenue, are losing appeal as consumers shy away from high-interest rates and opt for alternative financing options such as buy now, pay later services.

In recent years, store-branded credit cards have faced challenges due to the rise of e-commerce and temporary store closures during the COVID-19 pandemic. Private-label card originations saw a 37% decline last year, reflecting a shift in consumer preferences. Rising interest rates, averaging 28.93% for retail cards compared to 21.19% for general credit cards, further contribute to the waning popularity of store credit options.

Despite a 2.5% increase in U.S. retail sales on Black Friday, according to Mastercard SpendingPulse, retailers grapple with the dwindling use of store credit cards. The Consumer Financial Protection Bureau (CFPB) suggests that decreasing private-label card originations stem from reduced consumer demand.

Retailers, anticipating further challenges to credit-card revenue, are exploring ways to adapt. The CFPB's proposed rule to cap late fees may impact profits, leading companies like Kohl's to seek alternative solutions. Kohl's recently introduced a co-branded card with Capital One, aiming to offer consumers more flexibility and interest options.

To make store cards more appealing, retailers are tying card usage to loyalty points and offering perks such as free shipping. However, consumer loyalty is diminishing, with more individuals switching retailers to seek better value, according to a McKinsey report.

Buy now, pay later services are gaining traction as consumers like Emma Fortuna, a 25-year-old publicist, prefer their flexibility over store credit cards. Major retailers, including Target and Kohl's, have experienced declines in credit-card business income, signaling a shift in consumer payment preferences.

While buy now, pay later options are still relatively small in the market, they are growing rapidly. Modernizing layaway plans, these services allow customers to make interest-free payments over time. Retailers pay fees to the fintech companies providing these services, including Klarna Bank, Affirm Holdings, and Afterpay.

As retailers navigate this evolving landscape, the decline in store credit card usage poses challenges to their profitability. With consumers seeking more flexible and affordable payment options, the retail industry faces the task of adapting to changing trends in how people pay for their holiday gifts.