Wal-Mart nears pilot deal to offer customers installment loans

Finance company Upstart Affirm Inc. is in talks to offer installment loans to Wal-Mart stores Inc.

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customers, people familiar with the matter said.

The development is the latest sign of retailers’ desire to reach new customers with limited credit histories, and the increased competition faced by credit card providers such as Synchrony Financial.,

SYF 3.13%

the exclusive issuer of US credit cards for the world’s largest retailer.

San Francisco-based Affirm is run by PayPal co-founder Max Levchin. Affirm and Wal-Mart, which is based in Bentonville, Ark., are set to reach an agreement on a pilot project in which Affirm would offer installment loans to certain Wal-Mart buyers in the United States starting this fall, people said.

Funding would initially be available in select locations and for select online customers, although it could expand later if the program proves successful enough. Affirm’s loans will largely be for more expensive Wal-Mart items like tires and other purchases over $200, a person familiar with the matter said.

Installment loans, which are designed to be repaid on a certain date, generally appeal to buyers who want to spread their payments over time. Affirm’s installment loans have fixed annual percentage rates that often range from 10% to 30% depending in part on the borrower’s creditworthiness.

Rates for purchases made with Synchony Wal-Mart credit cards are variable and range from 17.9% to 23.9%. Affirm doesn’t charge late fees to borrowers, whereas those fees on Synchrony’s Wal-Mart cards can be as high as $38.

Affirm loans are often for people who don’t have enough borrowing history to get a credit card. The company’s average loan is around $750, but its loan sizes can typically reach $10,000. The company has repayment periods ranging from three to 24 months with an average term of nine months.

At Synchrony, the average balance per active store card account across the company was $935 in the second quarter, according to an analysis by Autonomous Research.

Affirm would not issue cards, but its loans may offer some customers another financing option. It could create new problems for Synchrony, the largest US credit card issuer, whose shares have fallen 17% this year on fears that rising defaults could hurt profits. Warren Buffett’s Berkshire Hathaway Inc.

bought Synchrony shares during the second quarter, giving the stock a boost last week.

US consumers are going into debt again, while credit card charges rise after a long decline. Many retailers, under pressure from online competition, are looking to expand their customers’ access to finance in order to boost their sales.

Wal-Mart is one of Synchrony’s largest retail card partners, accounting for more than 10% of its total loan interest and fees in 2016, according to data from the lender.

Synchrony, spun off from General Electric Co.

has been the exclusive issuer of Wal-Mart credit cards for 17 years.

He will retain that position, although some Wal-Mart shoppers may soon choose between taking out a Synchrony credit card or an Affirm loan to shop at Wal-Mart.

Affirm and Wal-Mart have been in contact since 2014, but talks resumed last year when Wal-Mart became more interested in increasing financing approvals for customers, one of the people said.

Retailers are partly dependent on their credit card issuers to approve large numbers of shoppers, hoping this will boost sales. The sales slump that has hit many retailers recently is likely adding to that dependency, said Matthew O’Neill, an analyst at Autonomous Research who covers the in-store credit card industry.

Wal-Mart has so far bucked the retail trend as its U.S. same-store sales have increased for 12 straight quarters. The retail giant, however, faces more competition from Amazon.com Inc.

More and more retailers have been looking for alternative options separate from their credit card issuers in an effort to get more approvals. This includes signing an additional lender who will approve borrowers that the primary lender will not approve.

For their part, card issuers must balance the desire to increase purchase volumes with the need to maintain credit quality and control losses. This has become more important over the past year as the credit performance of card issuers has begun to deteriorate after years of extremely low default rates.

Synchrony plans to make adjustments to its underwriting approaches with new technologies and models, according to people familiar with the business. It is testing technology from providers such as ZestFinance, which has software that helps lenders determine the risk of consumers, including those with little or no credit history, people familiar with the matter said.

In addition to helping increase approvals, the efforts could help Synchrony reduce fraud and losses, the people said.

Affirm began providing financing to buyers of online homewares retailer Wayfair last year Inc.,

allowing them to spread the cost of purchases over several months. Similarly, Expedia Inc.

and Motorola Mobility LLC are among companies that have also turned to Affirm to supplement or replace their existing credit card relationships.

Write to AnnaMaria Andriotis at [email protected]

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