Is Walmart ready to take on banks after its divorce from Capital One?

Bloomberg

The demise of the short-lived and acrimonious credit card partnership between Walmart and Capital One Financial is raising new questions about the retail giant's ambitions to compete with banks.

The two companies announced Friday that their relationship was coming to an end, which gives  Walmart options as it seeks to get better plugged into its shoppers' wallets. One potential avenue is to find a new bank for a run-of-the-mill credit card partnership.

The more aggressive route by Walmart would be to take on banks by becoming a one-stop financial services provider. It could do that with the help of an outside fintech firm, but analysts think it's more likely that it will look internally through its majority-owned fintech, called One. One runs a debit card, is testing out buy now/pay later options, and, with the addition of a credit card, could be closer to becoming the financial super-app Walmart has long sought.

"It might be time for One card to rule them all," quipped Richard Crone, head of Crone Consulting.

Walmart declined to comment on its plans. But executives at the retail giant have long been eyeing an expansion into banking services, undeterred by the company's failed 2006 attempt to gain a bank charter.

Walmart wants to "centralize all financial solutions on one platform so it doesn't feel like it's 25 different things," Julia Unger, a top Walmart's financial services executive, said at the American Banker Payments Forum in 2022. She said the retailer's vast shopping and payments data from its 4,600 stores and its website enables it to perform alternative underwriting on loans beyond traditional credit scores.

"The strategy isn't to give everyone credit but give them a path to credit," Unger said. 

In 2021, Walmart partnered with the fintech investment firm Ribbit Capital to launch what's now known as One. The joint fintech venture made two acquisitions in 2022: the early wage access firm Even Responsible Finance and One Finance, which offered savings tools, ATM access and mobile financial tools. 

The One debit card offers 3% cash back at Walmart stores and a 5% rate on savings.

The retailer also separately offers buy now/pay later loans through a partnership with the fintech Affirm that dates back to 2019. But CNBC reported in April that One had started offering those services at some Walmart stores, raising the prospect that Walmart could scrap its Affirm partnership. 

Affirm has declined to comment on the CNBC report. Asked about the issue on a recent Morning Brew podcast, Affirm's chief financial officer said the company's focus is "making sure we delight the consumer and … drive better business outcomes for our merchants."

Alex Johnson, founder of the Fintech Takes newsletter, said Walmart's severing of ties with Capital One may be continuing the retailer's pattern of "using partners until they can find a way to do it directly."

To offer a credit card, Walmart would still need to partner with a bank, much like its current debit card partnership with Coastal Community Bank in Everett, Washington. But Walmart, long known as a tough negotiator, would get the flexibility to design a "more tailored set of products that prioritizes the financial health of their customers," Johnson said. 

Big banks' partnerships with retailers often involve a "push and pull," Johnson said. Banks and merchants can earn more interest from customers who carry balances each month. But those customers' higher interest payments can strain their finances — giving them less spending room to make more purchases at stores like Walmart.

Through its majority-owned fintech, Walmart can design a set of products that fits its "big and diverse customer base," Johnson said. It could launch a higher-tier card for customers who regularly pay off their balances while directing shoppers with lower credit scores to buy now/pay later options and offering rewards-based debit cards to those who might not qualify for BNPL loans.

"In a classic co-branding model, the retailer or the merchant would have not a ton of flexibility," Johnson said. So now some big retailers are "trying to exert a great deal more control" over their card programs, he explained.

The breakup of the Walmart-Capital One relationship followed a lawsuit in which the retailer argued that its bank partner was not fulfilling the terms of their arrangement. Walmart said last year that the McLean, Virginia-based bank "was consistently unable to meet" certain customer service standards related to payment processing, card issuance and transaction posting.

Capital One disputed Walmart's claims, arguing that the retail giant was trying to wiggle out of a contract when it found the economic terms unpalatable. It also argued that Walmart had fallen short of its obligations to market the card to more customers.

"Walmart is positioning itself to compete directly with Capital One to provide credit and payment products to Walmart customers," Capital One said in a court filing last year.

In March, a federal judge sided with Walmart, writing that the contract between the companies clearly dictated that the bank's "repeated customer service failures entitled Walmart" to end the partnership.

It was not the first time that a Walmart credit card partnership went south. Capital One took over the partnership after Walmart sued its prior partner, Synchrony Financial.

Under the termination deal between Walmart and Capital One, the bank is hanging onto an $8.5 billion loan portfolio as well as servicing responsibilities.

For now, the user experience for holders of Capital One-Walmart cards will remain the same. A Capital One spokesperson said the company will "convert existing eligible Walmart Card customers" to a Capital One credit card. The bank is "actively shutting down new applications for the Walmart card" and will communicate any changes to existing customers well in advance, the spokesperson said.

Analysts who cover Capital One said that the breakup will have a small impact on the bank, since the Walmart portfolio makes up a small portion of Capital One's total loans. If anything, the analysts were positive about the news.

Capital One will be able to "pick from the better quality customers" in the $8.5 billion portfolio, Moshe Orenbuch, an analyst at TD Securities, wrote in a research note. And rather than sharing revenues with Walmart, Capital One will get to keep all of the income from its newly converted card customers, he noted.

The fact that Walmart didn't have another bank lined up to take over the portfolio "also speaks to the industry's discipline" in declining to accept less-than-stellar terms, Orenbuch wrote.

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If Walmart does strike out on its own, it will face the formidable challenge of managing everything that running a credit card entails — underwriting, billing, handling complaints and the vast range of rules surrounding credit card programs.

Walmart will have to close customer accounts or decline applications, perhaps risking that upset customers will end up preferring to shop at Target, said Brian Riley, a consultant and co-head of payments at Javelin Strategy & Research. And it will have to decide just how much credit risk it wants to absorb on its own balance sheet, rather than Capital One's.

"It's not as easy as it looks," Riley said. "And that's something that Walmart has to be very wary about."

The Wall Street giant Goldman Sachs, which expanded into credit cards by partnering with General Motors and Apple, struggled in the business and has since scaled back. It's also faced scrutiny from regulators over credit card management.

In 2021, Walmart hired two former Goldman executives who were key to its consumer push: Omer Ismail and David Stark.

Running a credit card is easier said than done, but Walmart's sheer size helps, said Aaron Press, research director at Worldwide Payment Strategies.

"It's hard to pull off," Press said. "It's a heavy lift, but they have a lot of resources."