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Even if Walmart Inc. is successful in terminating its contract with Capital One Financial Corp. to issue private-label and co-branded cards on the retail behemoth’s behalf, the loss is not likely to have a major impact on Capital One’s business, says a research note from Keefe, Bruyette & Woods.
The reason, the New York-based investment banking firm says, is that Walmart’s card program accounted for just 3% of earnings in 2022, the loss of which can be “easily offsetable by paring back on areas such as marketing and other expenses in a worst-case scenario.”
Walmart sued Capital One last week, claiming the card issuer failed to meet several service-level agreements (SLAs) at least five times over a rolling 12 calendar-month period. That triggered a clause in the contract that gives Walmart the right to terminate the deal, according to the complaint. The notice of termination must be delivered to Capital One within 90 days after Walmart learns of the fifth SLA failure, the complaint says. Capital One has been issuing cards on Walmart’s behalf since 2019.
In a statement emailed to Digital Transactions News, Walmart says it is terminating its deal with Capital One as a result of the SLA failures, which Capital One acknowledged to the retail giant in writing, according to the complaint. “The SLAs are thus essential to preserving the quality customer service at the core of Walmart’s brand,” the complaint says.
Performance metrics within the SLAs include timeliness of transaction posting and replacing a card within five business days. Some 97% of conforming payments must be posted within one business day of receipt, according to the SLAs, while 99% of non-conforming payments must be posted within five business days of receipt. Some 99.9% of electronic conforming payments must be posted by the next business day.
Despite the allegations in the complaint, Keefe, Bruyette & Woods contends Walmart’s decision to terminate its deal with Capital One is part of a strategy to negotiate a more favorable contract.
“Our understanding is that [Capital One Financial] has a solid economic deal and Walmart wants better terms (i.e., asking for a renegotiation multiple times), particularly as the macroeconomic backdrop weakens…. These actions are standard Walmart operating procedures when it wants a better deal, and clearly [Capital One] is not willing to concede to the merchant’s wishes,” the research note says.
Capital One echoes that sentiment. “Walmart’s lawsuit is an attempt to renegotiate the economic terms of the partnership it agreed to just a few years ago, or end the deal early,” the card issuer says in a statement emailed to Digital Transactions News. “These servicing issues were immaterial and cured by Capital One pursuant to the terms of the agreement, without harm to customers, the program, or Walmart. Capital One disputes that Walmart has any right to change the terms of the existing partnership mid-stream, and we will vigorously protect our contractual rights in court.”
Keefe, Bruyette & Woods notes that Walmart used a similar tactic with Synchrony Financial, which administered the big-box retailer’s credit card program prior to Capital One. Walmart’s contract with Capital One reportedly runs through 2026, but 2025 would be the earliest year in which the bank would feel a financial impact from the loss of the portfolio if Walmart’s lawsuit is successful, according to the research note.
At the end of 2022, Walmart’s card portfolio totaled $8.3 billion in receivables, or about 6% of Capital One’s domestic card portfolio, and generated $214 million in after tax net income.
“Capital One has developed a leading credit card product for Walmart and its customers and is proud of the value that we’ve delivered to both,” the card issuer says.
