Walmart & Ribbit's "Fintech" Is Retailer's Latest Confusing Offering
Why Walmart wants a fintech & Green Dot stands to lose the most
Hey all, Jason here.
Well, 2021 is off to a bang - with ~$2.7 billion in financing announced in the past few days (if you want to keep up, recommend subscribing to Nik Milanović’s This Week in Fintech).
But one caught my eye - Walmart’s vague announcement that it’s partnering with Ribbit Capital (Affirm, Robinhood, Credit Karma, etc.) to launch a fintech company. This week, we go down the rabbithole on Walmart’s history in financial services to predict what this venture is really about.
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Partnering with Ribbit Is No Quick Fix for Walmart
Walmart’s announcement this week that it is creating an ambiguous “fintech startup” with leading VC firm Ribbit Capital generated plentiful buzz but was light on details. What’s really going on here?
Let’s start with key elements of the announcement (emphasis added):
“The venture will bring together Walmart’s retail knowledge and scale with Ribbit’s fintech expertise to deliver tech-driven financial experiences tailored to Walmart’s customers and associates.”
Hm, so the market for whatever this “fintech” is includes customers and employees.
“The company will be majority-owned by Walmart.”
“The company plans to add independent industry experts to the board and to build a management team of experienced fintech leaders. It anticipates that growth may come through partnerships and acquisitions with leading fintech companies.”
Curious to see what kind of talent Walmart is able to pull for this, though there is certainly a deep bench in Ribbit’s ecosystem. More interesting is the signaling of partnerships or acquisitions (more on this later).
But before we think about what Walmart and Ribbit may be up to here, it helps to have some historical context.
Walmart’s Confusing History in Financial Services
This announcement is by no means Walmart’s first attempt to gain some type of beachhead in the finance space. Walmart has a confusing bordering on incoherent collection of financial services partnerships and initiatives.
Efforts date to the late 1990s, but really accelerated in 2005.
2005: Walmart Applies for an Industrial Loan Company Charter
In July 2005, Walmart announced it had filed an application for a Utah-based Industrial Loan Company charter. (For more on ILCs, read my recent post on them.)
At the time, Walmart positioned this as a move to lower costs, by serving as its own payment processor for debit, credit, and electronic check transactions, rather than as a move into the consumer banking space. Given some of the limitations of ILCs, I take this positioning at face value.
The charter application was met with fierce resistance, including from then-Chairman of the Fed, Ben Bernanke. Walmart ultimately withdrew the application in 2007.
2006 - present: Walmart Moneycard
The Walmart Moneycard is arguably its most visible consumer finance play.
Concurrent with its pursuit of an ILC charter, Walmart struck a partnership with Green Dot and GE Capital Retail Bank to launch the Walmart-branded general purpose reloadable prepaid card. The card was (and still is!) available on “J hooks” in Walmart stores as well as for order online.
When Green Dot acquired Bonneville Bank in 2011 (renamed Green Dot Bank), GE’s participation was no longer necessary, and it was ultimately dropped from the partnership in 2014.
The Moneycard product has added features over the years, and, at this point, closely resembles offerings from challenger banks like Chime and Varo -- arguably better, if you’re a frequent Walmart shopper:
3% cashback at Walmart (up to $75 per year)
2% APY on savings (on up to $1,000)
Up to 4 linked debit cards for family members
Prize-linked savings to encourage users to save
2 days early direct deposit
No-cost cash deposit at Walmart
No monthly fee (if $1,000 in deposits)
In 2019, Walmart and Green Dot announced an extension of their Moneycard partnership through 2027. At the same time, Walmart and Green Dot announced a “fintech accelerator”, TailFin Labs, “to focus its efforts on developing tech-enabled solutions that seamlessly integrate omni-channel retail shopping and financial services, for both consumers and businesses”.
TailFin is 80% Walmart owned and 20% Green Dot owned and, as part of the agreement Walmart also took a small equity stake in Green Dot itself.
At the time, PYMNTS.com referred to the joint accelerator as “retail’s next big thing.”
However, the announcement of the accelerator appears to have been more PR than reality. I searched for information on the accelerator, and found a Delaware-registered LLC, but no website, and just a single Green Dot employee’s LinkedIn profile that even mentioned the project.
The Moneycard itself is real enough, but, on closer inspection, looks to be more of a brand licensing and customer referral arrangement for Walmart, as highlighted in Green Dot’s annual report:
“Green Dot designs and delivers the Walmart MoneyCard product and provides all ongoing program support, including network IT, regulatory and legal compliance, website functionality, customer service and loss management.”
Walmart also represents a huge portion of Green Dot’s revenue, as a critical distribution channel not only for its Walmart-branded product, but for its own Green Dot-branded products as well:
“Our operating revenues derived from the several products and services we offer through Walmart stores and other Walmart distribution avenues in aggregate represented approximately 34%, 36%, and 40% of our total operating revenues for the years ended December 31, 2019, 2018, and 2017, respectively.”
Meanwhile, financial services are currently but a rounding error for Walmart, accounting for less than 1% of its net sales, according to its 2020 annual report.
Walmart has capitalized on Green Dot’s dependency, demanding a higher commission rate in renewed agreement, per Green Dot’s 2019 annual report:
“Under this new agreement, the sales commission rate we pay to Walmart for the MoneyCard program increased from the prior agreement. Consequently, we expect our sales and marketing expenses in 2020 to be negatively impacted by the increased commission rate.”
While Green Dot and Walmart’s partnership runs through 2027, Green Dot may be the real loser if Walmart develops a competitively positioned consumer fintech product.
2012 - present: American Express Bluebird
Though it already had the Moneycard program with Green Dot, Walmart worked with American Express to pilot Bluebird, a prepaid debit card, in 2011, and moved ahead with rolling it out widely in 2012.
At the time of launch (reminder: 2012), Walmart and Amex used language that is echoed by challenger banks today:
“Bluebird has been developed for the tens of millions of Americans who are looking for advanced capabilities such as deposits by smartphone and mobile bill pay, fee transparency, and no minimum balance, monthly, annual or overdraft fees.”
Bluebird offered a pretty robust feature set, including payroll direct deposit, remote check deposit, sub-accounts for family/friends, and even peer-to-peer payments to other Bluebird users.
Given American Express’ premium branding and its less common acceptance (particularly at lower end merchants), this partnership always struck me as odd; my cynical side thinks it was a play to appease Obama-era bank regulators.
In 2017, Amex sold off its prepaid card technology and assets, including Bluebird, to specialty player InComm payments -- confirming there wasn’t strategic alignment with the wider Amex business. Walmart continues to offer the card.
2019: Affirm, Capital One, and… Walmart Pay?
On the consumer lending side, Walmart has also inked deals with Capital One (2019) and recently IPO’d fintech darling Affirm (also 2019). Both had some odd quirks that haven’t helped consumer adoption.
For the credit card, users could get 5% cash back on in-store purchases -- if they linked the card to “Walmart Pay,” a QR-based payment mechanism in Walmart’s app.
Other credit, debit, or gift cards could also be used with Walmart Pay - though it’s unclear what advantage (if any) this has for consumers vs. Apple / Google Pay or tapping a contactless card itself.
Affirm, best known as an online “buy now, pay later” offering, was handicapped from the start of the Walmart partnership, as 89% of Walmart’s business is still done in-store.
The clunky workaround was to have users apply via Affirm’s site ahead of time and scan a barcode at the Walmart checkout as a payment mechanism -- hardly “point of sale” financing.
Why is Walmart Pursuing Fintech?
With a business as large as Walmart’s, moving the needle is inherently difficult. What’re some possibilities of how a fintech play could impact Walmart’s overall business?
I see four key possibilities:
Reduce cost of processing payments
Remember, this was the original play when Walmart sought to start its own ILC back in 2005. To achieve this, Walmart needs to go beyond its current “Walmart Pay” offering to create a closed loop effect where it is on both sides of the transaction - cutting out fees paid to third parties like Chase.
To do this, Walmart would need to capture consumers’ direct deposit into their fintech offering. This would allow Walmart to process payments from a user’s affiliated payment cad/wallet in-store or online essentially as a ledger transfer, cutting the third party out of the loop. Walmart would also earn interchange for payments to other merchants.
But for this to work and make a meaningful impact on Walmart’s business, the fintech offering would need to reach mass adoption among Walmart shoppers - something that seems unlikely given the performance of existing Walmart-affiliated offerings.
Facilitate spending by offering credit
Walmart’s consumers tend to be lower/middle income and are more likely to experience income volatility. Offering credit to address liquidity constraints on spending is a logical move to keep merchandise moving.
But it seems unlikely this is the primary focus of the project, given Walmart already has deals in place with Affirm and Capital One to offer credit to shoppers. Actually running a lending business (vs. referring a customer or partnering) is a complicated, capital-intensive, regulatorily complex undertaking.
Strengthen e-commerce positioning
While Walmart has an undeniable bricks & mortar advantage vs. Amazon, it knows it’s behind in e-com -- that’s why it paid $3.3 billion to acquire Jet.com in 2016. The acquisition is widely credited with helping Walmart improve Walmart’s share of sales via e-commerce from a paltry 3% to 11% (Q3 2020).
This past September, 2020, Walmart also launched a subscription service competitor to Amazon Prime, dubbed Walmart+.
Potential synergies include bundling Walmart+ with a debit account product -- if a user sets up direct deposit for their payroll, for example.
Increase loyalty with rewards
While other Walmart partner products offer various cashback rewards, Walmart will have more control over the economics if they actually own and operate the program. And while debit card rewards are becoming more common, they tend to be geared towards higher-income consumers, who are likely to earn superior rewards with a high-end credit card while paying the balance in full each month.
Walmart could offer a competitive debit cash back rate or, better yet, a higher cash back rate if redeemed for Walmart purchases.
Ok, Ok, So What’s the Fintech Play?
OK, so there’s plenty of reasons for Walmart to pursue developing some kind of consumer fintech offering. But what are the routes to actually execute that?
Build It
Walmart has partnered with Ribbit Capital as a minority investor in whatever this venture is. But while Ribbit has an impressive portfolio, investment expertise doesn’t necessarily translate to build and run expertise.
Building new, innovative business units within established companies, even when carved off and given space, is notoriously difficult -- and expensive (just ask Goldman.) And attracting talent is also likely to be a challenge for Walmart.
For these reasons, I’m highly skeptical Walmart and Ribbit will try to build something on their own. The announcement did mention partnering -- and there are plenty of candidates in Ribbit’s portfolio who could help power a consumer product, including: Affirm, Credit Karma, Cross River Bank, Figure, Revolut, Robinhood, Upgrade, and Wealthfront.
Buy It
The announcement specifically floated the idea of fintech acquisitions. And with the Jet.com acquisition, Walmart has demonstrated its willingness to spend big to shore up a glaring strategic weakness. Might we see Walmart make moves to buy itself a foothold in the consumer fintech space?
Chime
If Walmart is looking to straight up buy users, Chime would be the logical choice. Its user base of low/moderate income users aligns well with Walmart shoppers.
But with a reported valuation of $14.5 billion -- for 8 million users (both probably higher by now), Walmart would be paying a whopping $1,800 per account (and surely much higher on an active, primary account basis).
Varo Bank
Varo’s user base is also generally aligned with Walmart’s demographics, and it boasts somewhere north of 1 million customers, and presumably a lower valuation -- but having secured an OCC national bank charter, it’s impossible for Walmart to take majority ownership, due to the separation of banking and commerce required of bank holding companies.
Buy Existing Infrastructure & Extend It
With European fintech imports to the US struggling, Walmart could pick up the US assets of N26, Revolut, or Monzo. Revolut seems unlikely, as it is well-capitalized and seems very committed to building a worldwide consumer banking platform.
N26 is up and running in the US and reached 500,000 accounts in 2020. Monzo remains in beta in the US, and faces financial pressure at home, with auditors raising red flags about its ability to continue as a going concern.
While neither target the typical Walmart shopper, either could be quickly re-skinned into a Walmart-branded fintech offering and expanded with e-commerce and loyalty offerings.
Just Buy a Bank Already
While Walmart couldn’t acquire an OCC-regulated national bank charter, it could make a second pass at applying for -- or acquiring -- an industrial loan company charter.
While there was a complete moratorium on new ILCs following the 2008 financial crisis, there’s recently been a thaw, with applications from Square and Nelnet both approved.
Acquiring an ILC would fulfill Walmart’s 2005 goal of lowering payment processing costs for all customers and provide it a foundation to build a competitive fintech product.
However, with only ~24 operating ILCs, takeover targets are limited, and any acquisition would need to be approved by state banking regulators and the FDIC.
This All Makes Enough Sense — If Walmart & Ribbit Can Execute
A consumer fintech play makes sense for Walmart - if they can execute and attract a meaningful number of users (a big if).
While the vaguely worded announcement Walmart released had commentators aflutter, especially with Ribbit Capital onboard, time will tell what becomes of Walmart’s latest financial services project.
Given its track record with false starts like its ILC app, middling initiatives like Bluebird, and its vaporware accelerator with Green Dot, I’d put my money on a mid-sized acquisition that Walmart leans into by extending with its Walmart+ subscription service, competitive rewards, and markets heavily across its in-store, online, and paid channels.
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Great article and explanation of the ILC landscape. I didn't realize there were just 24. I honestly think this is more of a PR thing a la Tailfin Labs. Or perhaps it's some sort of agreement that gives Walmart non-compete access to Ribbit's startups (ie- no Amazon or Target). Can such a thing exist?