Walmart can end Capital One end card tie early, judge says


It won't be easy for Walmart to find a new partner to replace Capital One, though, said Brian Riley, co-head of payments at Javelin Strategy & Research

The terms of the 2018 credit card issuing agreement between the retailer and the lender laid out a number of customer service benchmarks Capital One was required to meet. The company also had to provide monthly reports on its performance related to those standards as part of the partnership agreement, which was to run through at least 2026, according to The Wall Street Journal. 

A provision of the agreement between the two affords Walmart a unilateral right to end the partnership if Capital One “repeatedly fails to meet certain critical customer service benchmarks,” the ruling noted. 

But the two parties disagreed over the interpretation of that right, and whether customer service issues occurring in the latter half of 2022 triggered Walmart’s right to end the partnership. 

The retailer said its card-issuing partner failed to meet standards in five “critical” categories over a 12-month rolling period, according to the lawsuit. Capital One, however, said the termination right could only be invoked if the company fell short in the same category five or more times in that time period.  

Failla determined “the plain meaning” of the agreement matches Walmart’s interpretation. “The Court declines to relieve Capital One of the consequences of its bargain here,” Failla wrote.

A Capital One spokesperson said Tuesday the company disagrees with the ruling “and we are evaluating our appeal rights.” 

A Walmart spokesperson said the company is pleased with the court’s decision. “As we’ve said all along, the unambiguous terms of the agreement entitled Walmart to terminate the parties ongoing relationship,” the spokesperson said in a Wednesday email. 

If the partnership ends, next year “appears to be the earliest period where there would be an impact” on Capital One, KBW analyst Sanjay Sakhrani wrote in a Tuesday note to investor clients. At the end of 2022, the Walmart portfolio had a loan balance of $8.3 billion — 6% of Capital One’s domestic card portfolio — and it produced $214 million in net income that year. Those figures have likely shrunk since then, he noted. 

“While not positive, we don’t view the ultimate impact as being material to [Capital One],” Sakhrani wrote. The earnings impact “would be manageable” and could be offset “through a combination of expense management and share buybacks using the freed-up capital/reserve,” he wrote. 

Failla told Walmart and Capital One to submit a joint letter by April 19 that addresses the next steps and how they’ll resolve the case’s remaining claims and counterclaims.

“It’s tough to do business with Walmart,” said Brian Riley, co-head of payments at Javelin Strategy & Research. In the retailer’s previous credit card partnership, with Synchrony Financial, Walmart questioned Synchrony’s underwriting strategy, he noted. 

Walmart, which counts more than one million credit cardholders, has now worked with two of the top players in the co-branded cards market, Riley said.

“I don’t think it will be a piece of cake to find a new partner, even though the volume’s attractive,” Riley said. “The stability of the relationship is really important.” 

Riley said he wonders if Walmart will lean on its fintech unit One as the replacement vehicle for its credit card program.

Synchrony had raised flags over credit quality concerns, so Walmart may have to “cover themselves accordingly,” Riley said. 


By Caitlin Mullen on March 27, 2024
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