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When Walmart (NYSE: WMT) entered the credit card arena in 2018, its partner of choice was Capital One (NYSE: COF). The two corporate titans clinched an exclusive long-term deal, promising to bring Walmart's clientele a new age of digital credit card products. Meanwhile, Capital One gained access to Walmart’s sprawling retail empire, a territory boasting consumer spending power that eclipses the GDP of some entire countries. Yet, as the fairy tale goes, not all was destined for a happy ending.
By 2023, cracks in the partnership were showing. Capital One allegedly failed to meet specific customer service benchmarks outlined in their agreement, such as the speed at which charges needed to be posted to a set percentage of cards. In recent court filings, Walmart officially ended its exclusive arrangement with Capital One, citing multiple customer service grievances. However, it's important to note that Capital One still retains $8.5 billion worth of credit card balances from the deal, while charging users interest rates between 19.48% and 29.99% for overdue Walmart Rewards purchases.
As the top-ranked company on this year’s Fortune 500, Walmart is now looking for new partners to fill the void left by Capital One. According to fintech bank analyst Tim Switzer of Keefe, Bruyette & Woods, leading contenders include Synchrony Financial (NYSE: SYF), Barclays Plc (LSE: BARC), and Coastal Community Bank (NASDAQ: CCB). Switzer opines, “They could choose any of those, and it'd be exclusive, or they could choose all three.”
Synchrony Financial stands out as a viable option due to its deep roots in retail credit. Despite the recent acquisition of Ally Lending and its $2.2 billion in loan receivables, nonprime borrower spending has reportedly tapered off. Synchrony already serves Walmart’s sister companies, Walgreens and Sam’s Club, making it a plausible candidate for Walmart's new credit card partner.
Barclays, with assets topping $1 trillion, has ramped up its focus on consumer lending. The bank has offloaded $1 billion in higher-risk credit card receivables to Blackstone and introduced the Xbox Mastercard to U.S. consumers. Barclays is also rumored to negotiate with GM to acquire $2 billion in card balances currently held by Goldman Sachs. However, Switzer suggests that Barclays would likely avoid subprime credit cards.
Coastal Community Bank (CCB) emerged as a third contender. Founded in 1997, CCB has become a pioneer in providing banking-as-a-service, quickly onboarding over 40 clients needing regulatory-compliant banking products. Despite losing 10 clients over 18 months, Switzer believes One, Walmart’s fintech venture, has a shot at becoming the sole provider of Walmart's credit card business or at least one among several.
Then, the “dark horse” candidate is Green Dot Corp. (NYSE: GDOT). Green Dot boasts an extensive network of retailers, including Walmart, Apple, and Uber, enabling consumers to purchase and refill prepaid cards straight from Walmart locations. Despite its stock plummeting from a high of $88.82 in September 2018 to $9.12 today and setting aside $20 million for an anticipated consent order, recent leadership changes and a shift to direct-to-consumer products might make Green Dot a formidable contender for Walmart's credit card business, says Christopher Kennedy of William Blair.
It’s worth remembering Walmart has a history with the financial sector dating back to 2005, when it first applied to become a bank. The move aimed to transfer the interchange fees it pays to process cards onto its balance sheet, a strategy that saw Visa and Mastercard pocket $72 billion globally last year. Brett Rabatin of Hovde Group estimates Walmart could shell out up to $500 million in these fees annually.
While Walmart remained tight-lipped on future plans, it confirmed that more details would be shared with its credit card holders in the coming months. As the clock ticks, traders and stakeholders will watch keenly to see which financial heavyweight lands the lucrative Walmart deal.
