Walmart And Capital One Call It Quits
IL Bill Prohibits Interchange On Taxes & Tips, CFPB Releases Interpretative Guidance on BNPL, Little Progress In Synapse Bankruptcy
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Walmart And Capital One Call It Quits
Late last month, Walmart and Capital One released a brief statement that the pair will end its partnership to offer cobranded and private-label credit cards.
The move doesn’t come as much of a surprise, after a judge ruled in March that Walmart was entitled to terminate the partnership early, owing to Capital One breaching provisions around customer service levels in the companies’ 2018 agreement.
For now, the experience for existing cardholders will not change. Capital One will retain the $8.5 billion loan portfolio and has said it will transition existing “eligible” Walmart card customers to a Capital One card.
The breakup with Capital One isn’t the first time a Walmart financial partnership reached a contentious end: the partnership with its prior cobrand partner, Synchrony, ended when Walmart brought an $800 million suit against the bank in 2018. The suit was ultimately dropped as part of an agreement ending the partnership and transferring the loan book to Capital One.
While Walmart hasn’t specified what it plans to do now that its exclusive relationship with Capital One has ended, the effort to terminate the partnership early has been widely viewed as a necessary precursor to its majority-owned neobank, One, offering credit cards.
Walmart has long offered various financial services, primarily through partners, and has made repeated, unsuccessful efforts to obtain an ILC bank charter. Part of the impetus to seek its own charter was to bring payment processing in house, savings the discount retailer could pass along to its customers.
But Walmart’s efforts to get a charter were repeatedly met with fierce resistance, and the company partnered with firms like Capital One, Green Dot, American Express/Bluebird, and, more recently, BNPL provider Affirm to offer its shoppers bank account-like services and credit products.
Now, Walmart appears to be gradually shifting from leveraging a constellation of partnerships to consolidating its financial services efforts in One.
One offers banking services through its partnership with Coastal Community Bank, including perks like 3% cashback at Walmart and the ability to add or withdraw cash at any Walmart store. It also offers a credit building loan feature for customers with “Plus” status.
One, through its acquisition of Even Responsible Finance, also offers earned wage access to Walmart employees, with plans to expand the offering to third-party employers.
More recently, One began rolling out BNPL financing in some Walmart locations, presumably with plans to expand to all US stores in the near future.
Adding a credit card to One’s product line up seems like an inevitability at this point. Leveraging One to offer a credit card will give Walmart substantially more flexibility to determine the features — and the economics — of the program.
But building, rolling out, and scaling a credit card program is no easy feat, even for a company as large as Walmart, particularly with a customer base that skews lower-income and lower credit score.
Open questions include who One would use as an issuing partner — Coastal, or another bank partner? — and where the capital for lending would come from, a debt provider, or Walmart itself?
Illinois Legislature Passes Measure Prohibiting Interchange on Taxes & Tips
The Illinois legislature passed a budget bill last week that includes a provision that would prohibit assessing interchange on taxes and tips. The legislation now goes to Democratic Governor JB Pritzker, who is expected to sign the measure.
The state-level restriction is the latest attempt to rein in interchange.
In 2022, the Fed finalized an update to Reg II, extending the requirement for debit cards to support two unaffiliated networks to ecommerce transactions.
Advocates in Congress continue to push for advancing the Credit Card Competition Act, dubbed “Durbin 2.0,” which impose a similar requirement for credit cards issued by banks with more than $100 billion in assets.
And the Fed is proposing, for the first time since it was implemented, to adjust the cap on debit interchange for issuers with more than $10 billion in assets, which would see it lowered to $0.144 plus 0.04% of the transaction value.
The Illinois measure, if signed by the governor, wouldn’t take effect until July 2025.
But, as of now, it’s not clear how the measure will actually be implemented by networks, acquirers, processors, and merchants.
Opponents of the bill warn it could result in consumers needing to make multiple transactions to complete a purchase, with the possibility that merchants could require the tax and tip portion of transactions to be paid in cash or another form of non-card payment.
If the Illinois measure is signed by the governor and implemented, and, if other states choose to follow suit, it is likely to create significant headaches as payment system stakeholders determine how to comply — and what the economic impacts are.
CFPB Issues Interpretative Guidance Classifying BNPL As “Credit Cards”
Late last month, the CFPB issued interpretative guidance confirming that pay-in-four buy now pay later plans are considered to be “credit cards,” thereby entitling users to some of the key legal protections offered by the Truth In Lending Act and its implementing rules, Regulation Z.
The interpretative guidance notes that Reg Z defines a “credit card” as “any card, plate, coupon book or other credit device existing for the purpose of obtaining money, property, labor, or services on credit.”
However, because pay-in-four BNPL is a closed-ended product and typically carries no finance charge, not all provisions of Reg Z apply.
Specifically, the interpretative guidance clarifies that buy now pay later lenders must:
Investigate disputes: Buy Now, Pay Later lenders must investigate disputes that consumers initiate. Lenders must also pause payment requirements during the investigation and sometimes must issue credits.
Refund returned products or cancelled services: When consumers return products or cancel services for a refund, Buy Now, Pay Later lenders must credit the refunds to consumers’ accounts.
Provide billing statements: Consumers must receive periodic billing statements like the ones received for classic credit card accounts.
The interpretative guidance does not, however, require BNPL providers to assess borrowers’ ability to repay, nor does it require providers to furnish data to the credit bureaus. The CFPB lacks the authority to require creditors to furnish such data.
The CFPB is accepting comments on the guidance until August 1, 2024, and it will then become effective 60 days after publication in the Federal Register.
Two leading BNPL providers diverged significantly in their reaction to the news.
Klarna cofounder and CEO Sebastian Siemiatkowski wrote on X that the company has been calling for regulation of BNPL for many years, but that the CFPB’s interpretative guidance was misplaced. He wrote in part:
“The CFPB has overlooked FUNDAMENTAL differences between BNPL and credit cards:
Klarna BNPL has NO interest! NO revolving! Our business model relies on customers paying us back, in contrast to CCs that WANT YOU to revolve as that is how they make money
99% of Klarna’s payments are repaid with a default rate of less than 1% globally
31% of Klarna’s customers paid their bills off early, 65% paid on time and only 4% incurred a late fee
In contrast 4 in 10 American credit card users are carrying credit card debt month to month. 4 out of 10?!”
Siemiatkowski’s critique seems to center on the Bureau’s classification of BNPL as a “credit card” more than the substance of the interpretative guidance. The guidance doesn’t speak to how BNPL firms structure their products or underwrite, service, and collect on loans.
Klarna rival Affirm’s cofounder and CEO Max Levchin struck a different tone, taking to X to applaud the CFPB’s efforts and writing in part:
“Greatly respect CFPB’s efforts to protect and support consumers. Also pleased that the Bureau is promoting consistent industry standards (many of which already reflect how Affirm operates) that all participants will have to follow…
Clarity and a level playing field from CFPB = good for consumers & Affirm. Rest of the industry should step up to live up to our promise vs. repackaging the same old gotchas from credit cards in shinier wrappers!”
Little Progress Apparent In Synapse Bankruptcy, With Users Still Unable To Access Funds
It’s now been more than three weeks since end users lost access to their funds as a result of Synapse revoking Evolve’s access to its “dashboard,” and Evolve’s subsequent decision to freeze certain funds and payment processing capabilities — leaving many users of platforms like Yotta, Juno, Copper, and Gig Wage desperate, angry, and seeking answers.
It does appear the number of impacted users, which Synapse’s filings claim could be as high as 10 million, is likely more in the hundreds of thousands.
Yotta, which appears to be the largest program impacted, has about 85,000 impacted customers, and Evolve’s filings with the bankruptcy court put the total number around 200,000.
Questions about the accuracy of Synapse’s records and financial stability have been brewing for sometime, which may have led to many of the middleware company’s larger clients, like Mercury and neobank Dave, migrating off of the platform.
According to reporting at The Information, Synapse’s business partners and its board, including Andreessen Horowitz’s Angela Strange, were aware of reconciliation problems for at least two years. Andreessen Horowitz is also a major investor in business banking startup Mercury, which abruptly cut ties with Synapse last October and publicly sued the company, alleging it was in financial distress and “collapsing,” in moves that appear to have hastened Synapse’s demise.
Yet some fintechs still seemed to be caught off guard by Synapse’s collapse and the impact on their end users. For instance, Yotta cofounder and CEO Adam Moelis, son of investment banking billionaire Ken Moelis, told CNBC that (emphasis added) “[w]e never imagined something like this could happen. We worked with banks that are members of the FDIC. We never imagined a scenario like this could play out and that no regulator would step in and help.”
Last Friday saw former FDIC Chair Jelena McWilliams appointed as the Chapter 11 trustee, but there has been little visible progress since then.
On Friday, May 31st, McWilliams and representatives for the four banks involved, Evolve, Lineage, AMG, and American, reached an agreement to enable the parties to disclose and discuss documents and information necessary to resolve the situation, including “confidential trial balances or other financial account reconciliation information exchanged by the Banks regarding Synapse.”
The goal of the agreement is to expedite the flow of information necessary to reconcile Synapse’s records with actual funds held at the four banks, while protecting the confidentially of said information as appropriate and necessary.
In a separate filing on Friday, May 31st, the unsecured creditors committee applied for authorization to employ two law firms, Boies Schiller Flexner and Saul Ewing, as the committee’s counsel.
The first status hearing since McWilliams’ appointment is scheduled for Friday, June 7th.
Other Good Reads
What does the Cantero decision mean for national banks? (Bank Reg Blog)
Supreme Court punts the NBA preemption analysis back to the Second Circuit (Consumer Finance Monitor)
With the latest existential threat gone, will the CFPB finally grow up? (American Banker)
Why fintech upstarts have failed to unseat UK banks (FT)
Inside the Collapse of Synapse: Missing Funds Were Known to Investors, Banks for Years (The Information)
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