If you Google the “pros and cons of selling to Walmart” you will get a raft of advice but there are some common themes. You need to be prepared to run with slim margins, expect large volume, and be responsive to a business that will continuously seek to drive down costs. It is not easy, but the sheer volume of the worlds largest retailer is a vendor’s dream.
Capital One must have read the same content when they won the Walmart private label credit card business from Synchrony. Walmart did not take the same approach Amazon recently deployed.
Amazon, the top online retailer, recently parsed their card payment business into three sectors, aligning with top players in each. American Express has the business sector, Chase delivers the Visa co-brand, and Synchrony issues the private label credit card.
In contrast, Walmart moved its entire business to Capital One.Today’s WSJ describes Walmart’s recent move.
- For nearly two decades, Synchrony Financial SYF -0.14% was the exclusive issuer of Walmart WMT 0.29% credit cards. The Connecticut-based bank stationed dozens of employees in Walmart’s headquarters city of Bentonville, Ark., some of its executives lived in the same gated community as their Walmart counterparts, and employees would hit the same golf course and hunt quail together.
- That came crashing down in July, when Walmart told Synchrony it was switching to Capital One Financial Corp. Walmart executives had grown irritated because, among other issues, they wanted Synchrony to share more of the cards’ revenue and approve more applicants, according to people familiar with the situation.
- The breakup was the latest reminder of how the once-pervasive business of store credit cards is changing and forcing issuers like Synchrony and Citigroup to rewrite their playbooks.
It will be interesting to see how the relationship plays out. Capital One is a well-run company. They are traditionally masters in using technology to segment risk and price.
Walmart’s issues centered on revenue and underwriting.
- Walmart had expected to get more revenue from the deal in previous years, but loan losses cut into the amount the retailer was receiving, according to people familiar with the matter. Losses stood at roughly 9% of outstanding balances on Walmart cards this spring, one of the people said.
As you can see in Mercator’s recent report on the private label card industry, part of the PLCC business strategy is to embrace more customers. That means you will lower your FICO score bands down to a level that risk can be tolerated.
This is a high risk/high reward play.
Walmart’s 9% loss rate was reminiscent of Target’s double-digit loss rate right before the recession. Issuers could forecast their high-risk segments on a lagged basis, just by watch the erosion at Target. That relationship is not in today’s numbers. 9% loss rates at Walmart are inconsistent with the bank card industry currently writing off at less than 4%. There is deterioration on the bank card side, but nowhere near double digits like Walmart.
The WSJ article is covers the story very well continuing with Synchrony’s “Plan B”
- Synchrony has been rejiggering. It is continuing to build partnerships with online merchants and is expected to announce soon that it will issue cards for ride-sharing service Lyft Inc., according to a person familiar with the matter. The bank is also continuing to expand medical loans for procedures like dental work and fertility treatments, and this year it began issuing general-purpose credit cards after a long hiatus.
Lyft is great, but it surely won’t (or should not) bring the kind of customers you need in a PLCC business. Money is made on revolvers that do not pay the balance every month. You certainly don’t want customer who start revolving on their rides.
Overview by Brian Riley, Director, Credit Advisory service at Mercator Advisory Group