When Walmart made the transition to credit cards in 2018, it turned to one of the largest banks in America, Capitol One. The two giants signed an exclusive, long-term deal that promised to help Walmart bring its customers the latest in digital credit card products, while Capital One essentially got the keys to Walmart’s kingdom: access to a retail market larger than the GDP of some countries without all that annoying competition.
It did not work. In 2023, things started to fall apart when Capital One violated terms in its contract that dictated certain customer service requirements, including how long it would take to charge a minimum percentage of cards. Last month, Walmart ended its exclusive deal with Capital One, citing multiple problems with the bank’s customer service in court documents — but not before Capital One had collected $8.5 billion in credit card balances, which it will keep. Capital One charges customers between 19.48% and 29.99% on overdue Walmart Rewards purchases.
Walmart, No. 1 on this year’s Fortune 500 list, is now likely looking for potential replacements, with top candidates including Conn.-based Stamford. based Synchrony Bank, London-based Barclays and Washington state-based Coastal Community Bank, the fintech bank said. researcher Tim Switzer of Keefe, Bruyette & Woods. “They could pick one, and it would be exclusive,” Switzer says. “Or they can choose all three.”
Mapping the competition
Synchrony Bank is a subsidiary of Synchrony Financial. In March, Synchrony bought Ally Lending for an undisclosed amount, absorbing $2.2 billion in loan receivables, although executives said in their latest investor call for the first quarter of 2024 that spending from non-prime borrowers was slowing. Synchrony, a spinoff from the credit division of the shuttered GE Capital Retail Bank, already offers a credit card for Walgreens and Walmart sister company Sam’s Club, and specializes in retail credit cards, including those from JCPenney and Lowe’s.
As for Barclays, the bank approved a plan in February 2023 to prioritize consumer lending. As part of that plan, the bank with more than $1 trillion in assets sold $1 billion in higher-risk credit card receivables to Blackstone. It has since made its Xbox Mastercard available to US consumers and is reportedly in talks with GM to receive $2 billion in card balances currently held by Goldman Sachs. According to Switzer, Barclays would likely shy away from subprime credit cards, or cards designed for people with poor or limited credit.
CCB was founded in 1997 as a community bank serving Washington State. The company was one of the pioneers in offering banking as a service and quickly acquired more than 40 customers, allowing them to develop products that require a banking license and regulatory compliance. Since March 2020, CCB shares have grown 366% to $44.35, peaking at $53.23 in January 2022 when Walmart announced that its stealth fintech startup Hazel had purchased two fintech companies, One and Earn, funded by CCB. Although the company has reportedly lost 10 customers in an 18-month period, Switzer says, “It’s reasonable that One at least has a chance to become the sole provider of Walmart’s credit card business… or to become one of the to become many.”
The dark horse
Walmart could also choose option D: none of the above.
Several analysts from Walmart’s banking partners have reported this Fortune that Capital One’s new competitor could be one already familiar with the world’s largest retailer.
According to William Blair’s Cristopher Kennedy, a fourth candidate that is already part of Walmart’s existing banking stable is Austin-based Green Dot Corp., a holding company that owns Green Dot Bank, which has a network of thousands of retailers, including Walmart. Apple and Uber. Subprime account holders and others can purchase prepaid cards purchased at Walmart and other network locations, and similar to when you visit a bank branch, top them up and withdraw them directly from the Walmart cashier.
Now that shopping is increasingly happening online, this is becoming less and less attractive. Making matters worse, it had to set aside $20 million as a precaution against the “estimated liability” of a proposed consent order. Despite the problems that have sent the bank’s shares down from a high of $88.82 in September 2018 to $9.12 today, Kennedy says a recent change in leadership at Green Dot and a new, direct-to-consumer product that offers less relies on retail purchases, the it is a contender to take some of the market share from Capital One. “They work with very large companies,” Kennedy adds. “They have a proven model to do that, and so they have the assets to be a major player. But unfortunately you haven’t really seen that opportunity taken advantage of yet.”
Half a billion dollars
Walmart made its first foray into the financial industry in 2005, when it applied to become a bank, ostensibly to move the interchange fees it pays to process cards onto its own balance sheet. Last year, Visa and Mastercard collected $72 billion in fees worldwide, and Brett Rabatin, head of Hovde Group’s equity research department, estimates that Walmart pays as much as $500 million in such fees.
While Walmart did not comment for this story, it responded to our request with the statement on Capital One’s site, saying that “additional information will be provided to Walmart credit card holders in the coming months.” CCB CFO Joel Edwards cited non-disclosure agreements with his partners, and a Green Dot spokesperson said the company did not want to speculate on the fallout from the end of Capital One’s exclusive deal. Synchrony Bank did not respond to request for comment and Barclays declined to comment.
This story originally appeared on Fortune.com
