With a 17% share of vehicle sales in the United States, you’d think consumers would be lining up for the GM Credit Card. The bonus scheme is attractive, with the ability to redeem unlimited points, a 7X bonus structure for GM purchases, and 15,000 bonus points just for getting the card.
Three years after the WSJ reported that Goldman Sachs paid $2.5 billion to take over Capital One’s decade-old co-brand partnership, beating Barclay card at the bidding table, the co-branded credit card portfolio is searching for a new partner. In a November 7, 2023 WSJ article, Goldman is now hawking the GM Cobranded contract. The Goldman Apple Card has been rumored to be on the block for months, where the WSJ reported that “Goldman Is Looking for a Way Out of Its Partnership With Apple.”
Exiting Credit Cards is Not as Easy as Exiting a Loan Business
Goldman’s first retreat from consumer credit was when they shed the GreenSky buy now, pay later business. When Goldman was trying to make their mark in retail banking, the firm made an all-stock purchase of lender GreenSky on September 15, 2021. According to Yahoo Finance, two years later, Goldman “reached an agreement to sell lender GreenSky to a consortium led by investment firm Sixth Street Partners.” The Financial Times pegged Goldman’s sale price at $500 million, “about a quarter of the price the Wall Street bank paid for the online lender in 2022.”
It will be interesting to see where the GM relationship ends up, and it will likely set the tone for Goldman’s third retreat, the Apple card. Pricing for cards will be trickier than pricing for loan sales, especially BNPL loans. And finding the right buyer, suitable for a relationship with Apple, requires a lender with high aspirations and the ability to address a large market.
In valuing the portfolios, loans have fixed risk, which comes in at a high point when loans originate and diminishes over time as the loan pays down. In revolving credit, you not only deal with the current standing balance but also the contingent liability from open credit lines.
Don’t forget that the contingent liability comes from Goldman Sach underwriting standards, which Barrons reported as having lost $3 billion in less than three years as it “pushed into consumer and transaction banking.”
The GM Card, Who Wants it?
Plenty of lenders will want the multimillion account relationship. Still, about a dozen credit card issuers can assimilate the volume, handle the throughput, and effectively manage the cardholder relationships. Goldman will likely need to belly up with a portfolio discount or a risk-share agreement.
American Express has been placed as a likely buyer for the Apple card, but the issuer/network is hitting on all cylinders (tacky automobile metaphor); with stunning earnings and continued growth, it would seem that the GM card would be of little interest on a par-valued deal. Chase is already in almost one out of every two households and mastered the co-brand business decades ago. With Amazon, Marriott, United Airlines, and many others, it does not need to pick up GM unless it comes in at a fire sale price.
Barclays would be a potential option, and it might be self-fulfilling to pick up a contract they lost from the Goldman bidding. Again, it would require a steep discount. Citi targets iconic companies like Home Depot, Best Buy, and the like and could handle the volume. Still, the business is sailing along with strong operating results, and who needs someone else’s underwriting? Bank of America could handle the volume, but their Q3 results brought in 1.1 million new credit card accounts, so do they really need it? Wells Fargo has grown fast with cards with long introductory rates and increased rewards.
The list continues. Capital One had the GM card for a decade, and they knew the ins and outs of cobranded credit cards long before they picked up the Walmart relationship from Synchrony. TD Bank, another top card issuer, is testing an attractive alternative fee-based card, and though it also offers co-brand cards, it might not incline either GM or Apple.
So, What Next?
The most critical issue is who takes over the GM and Apple cards. Will the buyer require Goldman to press down credit lines to better align with risk? How will either portfolio perform in a high-interest, inflationary cycle? To what extent will Goldman Sachs take a haircut on the credit card portfolios?
We do not expect either sale to happen before year-end, though if it does, expect pricing to be punished to Goldman. But the learning lesson here is that no matter how much capital a business has, you can’t jump into the ring in credit cards and expect well-established issuers to welcome you to the world of consumer credit. Credit cards… it is a tough world out there, for lenders too.
Overview by Brian Riley, Director of Credit /Co-Head of Payments at Javelin Strategy & Research.
