Data Dive

Data Dive: Walking The Walk Edition

Data Dive: Store Cards and Lending Regulations

There is an election in the U.S. tomorrow, a hotly contested one on many fronts. In the months leading up to it, the world has become a very talky place. And, until the ballots are all cast and counted, we will see a lot more conversation, but not much action, particularly on cable news.

Luckily for the news-hungry, payments and commerce has been the opposite of late – particularly as the last quarter of 2018 winds down. There’s been no shortage of recent action, and last week some of it was pretty direct. There wasn’t a lot of talking tough, but there sure was a lot of getting tough.

Walmart and Synchrony Are off to See the Judge

Breaking up, as the song says, is hard to do.

A week or so ago, we reported that Synchrony no longer wanted Walmart’s business. On Thursday morning, news broke that the nation’s largest retailer is suing its longtime credit card issuer, alleging breach of contract.

In a suit filed in the U.S. District Court of the Western District of Arkansas on Thursday (Nov. 1), Walmart alleges that Synchrony used underwriting standards that  hurt Walmart financially, and is seeking damages of $800 million.

Walmart and Synchrony announced the end of their long-term card partnership in July, with reports that Capital One would now be Walmart’s new issuing partner.

In late October, The Wall Street Journal reported that the Walmart and Synchrony negotiations broke down on two points: Walmart’s desire to see more share of the care revenue and its desire to see a larger number of applicants approved.

According to internal anonymous sources, loan losses stood at about 9 percent of outstanding balances on Walmart cards as of this past spring — meaning Synchrony was reluctant to meet those terms. In 2017, Walmart began testing loans from Affirm as an alternative after asking Synchrony to approve more applications for credit. Walmart also reportedly introduced Synchrony to ZestFinance, which makes software that helps lenders approve consumers who otherwise would be denied credit.

Synchrony, through a spokesperson, noted that the suit was a negotiating tactic that they intend to fight.

“This lawsuit is nothing more than an attempt by Walmart to exert leverage and avoid the contractually defined process for valuing the loan portfolio,” the Synchrony spokesperson said.

In response, Walmart sent PYMNTS the following statement: “Synchrony breached its contractual obligations to Walmart and, as a result, the damages to our company are estimated to be at least $800 million. We made every attempt to resolve this business dispute and avoid litigation; however, Synchrony has failed to take responsibility for its actions. We fully expect Synchrony to manufacture counterclaims in an effort to shift the focus away from its own conduct.”

In the lawsuit, Walmart contends that loan losses on its cards increased after Synchrony moved some customers with Walmart-only store credit cards to a Walmart co-branded card. Walmart contends the move was intended to boost usage – thus revenue – but said that approach generated additional losses that hurt the retailer’s bottom line.

The end of the relationship with Walmart is a blow for Synchrony, since the retailer accounted for about $10 billion, or 19 percent, of retail card balances at the company.

Synchrony had noted prior to the filing at the end of last week that they had “worked very hard” in talks with Walmart and negotiated with the retailer in “good faith.”

And Walmart wasn’t the only one getting tough last week: Some big-name issuers also announced that lending standards will be toughening up.

Capital One and Discover Tap the Underwriting Brakes

Despite the fact that unemployment is at record lows – and wages showed their largest gains in the year last week – both Capital One and Discover Financial Services have announced plans to tighten lending standards.

Wall Street Journal reports indicate that both firms are taking a step considered unusual under currently favorable economic conditions by adopting a more cautious approach in setting credit limits. Neither firm thus far is reporting indications that consumers are struggling to pay their current debts, or that their ability to do so is declining. But both firms do seem to be preparing for the end of economic recovery, whenever it may be.

“In so many ways, one can’t help but be struck by … just how good the economy [at] this point is,” Capital One Chief Executive Richard Fairbank said on the company’s earnings call. “And in some ways, it almost feels too good to be true.”

Discover and Capital One’s consumer bases are similar in that they may have non-prime credit scores, and often aren’t affluent. About  33 percent of Capital One’s domestic card balances are owed by consumers who are considered sub-prime. Banks that tend to cater to more affluent consumers – JPMorgan Chase and Citigroup, for example – are still signaling strength in their consumer bases. Discover and Capital One, on the other hand, are focused on both controlling initial spending limits and dialing back the speed with which they let customers increase their limits.

Among other changes, Discover is also more tightly limiting the number of credit card balance transfer offers to consumers it deems as higher-risk, and deactivated several cards that haven’t been used to limit the chance that a consumer with a sudden desperate need for credit will tap an underutilized Discover Card. The card company also noted that it expects to see an uptick in losses on personal loans, and has thus limited organizations in that area as well.

And speaking of stopping an emergency before it happens…

Whirlpool and Sears Fight it out Over Appliances

In the wake of Sears’ recently declared bankruptcy, Whirlpool wants its stuff back.

Specifically, it wants the appliances that shipped just before Sears declared Chapter 11 bankruptcy.

Whirlpool no longer sells under its own brand name at Sears, but it does still sell appliances it manufactures under the Kenmore brand name. In a letter filed in court last week, it has formally demanded that Sears return all merchandise that was received in the 45 days before it filed for bankruptcy.

The company has further demanded that Sears “refrain from selling, disposing or using … for any purpose whatsoever” the merchandise it received during that time without permission from the U.S. Bankruptcy Court.

At the time of the bankruptcy filing, Sears listed $6.9 billion in assets and $11.3 billion in liabilities. Sears hasn’t had a profit since 2011, and has sold both real estate assets and (more recently) the Craftsman brand over the years, as well as taken on several billion in debt. There are also reports that Sears is mulling an offer for the Kenmore appliance brand.

Sears vendors, worried that their goods will be liquidated and their debts will remain unpaid as they will be the last paid in a bankruptcy action, have begun filing suit against Sears to protect the assets sold to the failing chain shortly before the filing.

InGear Fashions filed suit against the company two weeks ago, claiming nearly $840,000 in unpaid invoices.

Whirlpool and Sears both declined to comment in the latest filing.

So what did we learn this week?

If you’re looking for a little less conversation and a little more action, you probably have about 48 hours to go before the mainstream news is safe again. Lucky for you, payments and commerce will likely keep it action-packed in the meantime.

Happy Monday.

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