Why Walmart broke up with Capital One—and the dark horse bank set to benefit

When Walmart made a push into credit cards in 2018, it turned to one of the largest banks in America, Capitol One. The two giants signed an exclusive long-term deal that promised to help Walmart offer its clients the latest in digital credit card products, while Capital One was basically given the keys to Walmart’s kingdom: access to a retail market larger than some nations' GDPs without any of that pesky competition.

It didn't work out. Things started to fall apart in 2023 when Capital One violated terms in its contract that dictated certain customer service requirements, including how long it would take to post charges to a minimum percentage of cards. Last month, Walmart ended the exclusive deal with Capital One, citing in court documents multiple issues with the bank’s customer service—but not before Capital One accumulated $8.5 billion worth of credit card balances, which it will retain. Capital One charges customers between 19.48% and 29.99% for past-due Walmart Rewards purchases.

Walmart, No. 1 on this year’s Fortune 500 list, is now likely courting potential replacements, with top candidates including Stamford, Conn.-based Synchrony Bank, London-based Barclays, and Washington State-based Coastal Community Bank, according to fintech bank researcher Tim Switzer of Keefe, Bruyette & Woods. “They could choose any one of those, and it'd be exclusive,” says Switzer. “Or they could choose all three.”

Sizing up the competition

Synchrony Bank is a subsidiary of Synchrony Financial. In March, Synchrony bought Ally Lending for an undisclosed amount, onboarding $2.2 billion in loan receivables, though in its latest investor call for the first quarter of 2024, executives said nonprime borrower spending slowed. A spinoff of the lending arm of the shuttered GE Capital Retail Bank, Synchrony already offers a credit card for Walgreens and Walmart sister company Sam’s Club, and specializes in retail credit cards, including JCPenney and Lowe's.

As for Barclays, the bank approved a plan to prioritize consumer lending in February 2023. As part of that plan, the bank with over a $1 trillion in assets sold $1 billion in higher-risk credit card receivables to Blackstone. It has since then made available to U.S. consumers its Xbox Mastercard and is reportedly in talks with GM to receive $2 billion of card balances currently held by Goldman Sachs. According to Switzer, Barclays would likely shy away from subprime credit cards, or those designed for people with poor or limited credit.

CCB was founded in 1997 as a community bank serving Washington state. An early mover providing banking as a service, the company quickly onboarded more than 40 clients, helping them build products that require a banking license and regulatory compliance. Since March 2020, CCB stock has grown 366%, to $44.35, peaking at $53.23 in January 2022 when Walmart announced its stealth fintech startup Hazel had bought two fintech companies, One and Earn, banked by CCB. Though the company reportedly lost 10 clients over an 18-month period, Switzer says, “It's reasonable that One, at least, has a chance to become a sole provider of Walmart's credit card business…or to be one of several.”

The dark horse

Walmart also could choose option D: none of the above.

Multiple analysts covering Walmart’s banking partners told Fortune that Capital One’s new competitor could be one already familiar with the world's largest retailer.

According Cristopher Kennedy of William Blair, a fourth, dark horse candidate already among Walmart's existing stable of banks is Austin-based Green Dot Corp., a holding company that owns Green Dot Bank, which has a network of thousands of retailers, including Walmart, Apple, and Uber. Subprime account holders and others can buy pre-paid cards purchased at Walmart and other network locations, and similar to when visiting a bank branch, top them up and make withdrawals directly with the Walmart cashier.

As shopping continues to move online that's increasingly less attractive. Making matters worse, it had to set aside $20 million as a precaution against "estimated liablity" of a proposed consent order. Despite the struggles that have seen the bank's shares fall from a high of $88.82 in September 2018 to $9.12 today, Kennedy says a recent change in leadership at Green Dot and a new a direct-to-consumer product that's less reliant on retail purchases could make it a contender to pick off some of Capital One’s marketshare. “They work with very large companies,” adds Kennedy. “They have a proven model of doing that, and so they do have the assets to be a big player. But, unfortunately, you haven't really seen that opportunity been captured yet.”

Half a billion dollars

Walmart made its first play into the financial sector in 2005, when it applied to become a bank, ostensibly to move the interchange fees it pays to process cards to its own balance sheet. Last year, Visa and Mastercard collected $72 billion in fees globally, and Brett Rabatin, head of capital markets advisory firm Hovde Group’s equity research department, estimates Walmart pays as much as $500 million in such fees.

Though Walmart didn’t comment on this story, it responded to our request with the statement on Capital One’s site, which says that “additional information will be provided in the coming months to Walmart credit card holders.” CCB CFO Joel Edwards cited non-disclosure agreements with its partners, and a Green Dot spokesperson said the company didn’t want to speculate on the implications of the end of Capital One’s exclusive deal. Synchrony Bank did not respond to request for comment and Barclays declined to comment.

This story was originally featured on Fortune.com