Synchrony: Resilient Consumers Embrace ‘Pay Later’ Options as Credit Trends Normalize

Synchrony Financial posted fourth-quarter results that showed charge-offs increasing as management pointed to credit normalization in the months ahead, and said the firm was also gaining traction in Pay Later options offered at checkout.

Supplemental materials released alongside earnings on Tuesday (Jan. 23) indicated that purchase volumes, overall, gained 3% to $49.3 billion.

Loan receivables surged 11% to $103 billion.

And the company noted that average active accounts were 5% higher at 71.5 million.

Average balances per account were 8% higher, standing at just under $1,400 in the most recent quarter.

Net charge-offs gained year over year and quarter over quarter. The 5.6% NCO rate in the fourth quarter represented a surge over the third quarter’s 4.6% reading and the 3.4% rate in the year ago period.

CEO Brian Doubles said on the conference call with analysts that “credit continued to normalize his fourth quarter … net charge offs reached pre pandemic levels in line with our expectations and contributing to a full year net charge off rate of 4.87%, still below our target underwriting range of 5.5%  to 6%.”

Investors sent the shares down 2% at the start of trading on Tuesday.

Gaining Traction in Pay Later

The company continues to scale its Pay Later solution, and now has more than 200 provider locations in our health and wellness platform, according to the CEO. Partners offering the solutions see a 20% lift in new accounts, and Doubles said that 95% of Pay Later sales stem from net new customers.

With a nod to the recent acquisition of Ally Lending’s POS financing business, Doubles said that — with 2,500 active merchants and more than 450,000 borrowers in the home improvement and healthcare verticals — Synchrony “will create a differentiated solution in the industry simultaneously offering both revolving credit and installment loans at the point of sale.”

Digital sales were up 9% to roughly 39% of total 2023 sales, and Doubles said that its online marketplace attracted more than 220 million visits by shoppers through the year.

CFO Brian Wenzel said on the call that purchase volume in the health and wellness segments increased 10% reflecting broad-based growth in active accounts led by dental and cosmetic verticals. Lifestyle purchase volume increased 3% with stronger average transaction values in outdoor and luxury segments.

“We saw some shifting categories as consumers shifted from travel spend to clothing,” said Wenzel, “and from gasoline and automobiles towards spend at grocery and discount stores. We have not seen any meaningful changes in the overall composition between discretionary and non-discretionary spend.”

Looking ahead, said the CFO, “we see the consumer remaining resilient as they manage through inflation and higher interest rates.” And as Doubles said later in the call: “We do not see a shift where the consumer is trying to really stretch dollars. We do see our transaction values down and frequency up a little bit, which means that … they are trying to be efficient with their dollars, but not really pulling back.”

Deposit activity shows that average savings account balances are returning to a rate closer to pre-pandemic levels during 2023 and remained “relatively steady through the third and fourth quarters at year end.” Overall savings balances are about 9% above 2020 levels. Net charge-offs, according to commentary on the call, should be in the range of 5.75% to 6%, peaking in the first half before returning to pre-pandemic seasonal trends.