The Wall Street Journal broke the story late Wednesday night, not in time for today’s print edition citing “Walmart was harmed by its former exclusive credit-card issuer by ‘no less than $800 million’”. The American Banker reports that Walmart’s claim alleges:
- Synchrony broke an “implied promise” that it wouldn’t harm Walmart’s ability “to receive fruits of the contract,” the retailer said in the complaint. In a statement, Synchrony called the suit “baseless” and said it plans to file substantial claims against Walmart.
Says the American Banker, Synchrony’s response is:
- “This lawsuit is nothing more than an attempt by Walmart to exert leverage and avoid the contractually defined process for valuing the loan portfolio that Synchrony has serviced,” Synchrony said. It pledged to bring a claim that will “demonstrate Walmart failed in the most basic elements of our agreement, including its promotion of the card program both in stores and online.”
As Walmart’s card issuance shifts to Capital One, there is a question about what will happen to the existing book of business, underwritten by Synchrony, amounting to about $10 billion. It may be retained, sold to Capital One, or sold to Walmart. With credit losses approaching double digits, a sale might make sense.
There are several issues to watch as this lawsuit progresses. The long term question is how this will affect the private label credit card business going forward (see this industry scan by Mercator Advisory Group).
However, the real-time issues are: 1.) To what extent is the co-brand partner accountable to the retail partner for underwriting decisions. The retailer will want easy credit, the lender will deliver tight credit; 2.) How should current Private Label Issuers prepare their exit strategies should the relationship go south? ; and, 3.) Should an arbitration clause, such as those placed in many credit card contracts, be required on these deals?
The Walmart relationship is a win for Capital One. Capital One surely has experience in the PLCC market, with retailers like Kohl’s, but Walmart, with more than $360 billion in US sales, is the big enchilada in credit.
In what has often been called the stepchild of payments, the private label credit card business has seen action in 2018, with the Walmart shift, the Bon Ton retailer failure, and Sears’ recent demise. However, one thing for sure, with a projected $300 billion in sales and an average of 4 cards per household, the PLCC market is poised for growth without regard to the outcome of this litigation.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group