Wells Fargo Bet on a Flashy Rent Credit Card. It Is Costing the Bank Dearly | Hacker News Reader

Wells Fargo Bet on a Flashy Rent Credit Card. It Is Costing the Bank Dearly

wsj.com

38 pointshampelm69 comments

https://x.com/pitdesi/status/1802337976623755701

There was a good thread about this on Twitter which the CEO of Bilt responded to.

Summarizing the WSJ article it sounds like Wells Fargo made some bad assumptions when underwriting the card, specifically:

- 65% of the spend on the card would be non-rent (in reality less than 30%)

- 50-75% of the balances would be revolving (in reality 15-25%)

Here's a direct link to the CEO's response:

https://x.com/ankurjain_2/status/1802370451714281930

The main points seem to be:

- Bilt is helping Well Fargo acquire high value customers.

- It's still early on in their partnership and the numbers can change.

As one of the "systemically important" (too-big-to-fail) banks, Wells-Fargo can make many bets that, when they lose, will ultimately be covered by taxpayers in the next round of bailouts, but if they win, will reward insiders & shareholders in the periods between bailouts.

As they say, socialize the losses and privatize the profits.

> in the next round of bailouts

Haven't they only had one so far, that they repaid with interest?

I'm as pessimistic as anyone else about the Great Recession and our government's response to it, the lack of bankers ending up in jail, no big bank break ups and all that.

However, were WF to make a series of bad business decisions and end up in dire straights, can we really confidently say they'll get bailed out yet again? I want to think that a single bank screwing themselves up would face a markedly different response than the global economy melting down.

Sure, but we did bail out SVB

Actually, we didn't. It failed and collapsed. What makes you think it was bailed out?

To add detail: SVB was a subsidiary of SVB Financial Group, a holding company that owned the bank as well as some other things. SVB still exists, but is no longer a subsidiary of that holding company. It was completely taken over by the FDIC so they could make depositors whole. The former owners lost their biggest business, had to liquidate the rest of their businesses, and filed for bankruptcy a week later. They did not get bailed out.

The thing is, they were not exactly behaving badly. Their big mistake was over-investing in "safe" long-term government bonds. These assets are traditionally considered very low-risk, but rapidly rising interest rates made them lose book value, and some stakeholders got a bit jittery. Then SVB's leadership held a disastrous conference call where they basically said "everything will be fine, as long as there is no bank run", which pretty much instantly kicked off a bank run on ~80% of all their deposits. Even the best-managed banks could not withstand that kind of bank run. SVB basically got unlucky. They were not horribly mismanaged like everybody seems to assume.

That’s fair. I meant to say the customers were all made whole well above and beyond the FDIC limit.

I think that’s a good thing. I’m unconvinced the same wouldn’t happen at WF.

[edit] You edited your comment with a significantly larger amount of preamble, so I’m adding: I agree, and I am very well read on SVB. They were simply unlucky, and perhaps made a bad choice in overinvesting in illiquid bonds, plus bad VC behavior leading to the bank run. None of that was my point.

Remember Silicon Valley Bank?

I think we should let them fail. Not that my opinion matters. Liquidate the business and make sure anyone with savings is made whole, but investors need to take on the losses, that's how it's supposed to work. Yes, I understand that "investors" includes my retirement account, but that's fine. Then maybe we'd see some appropriate consequences for the people in charge. Maybe. Something dramatic needs to happen to shake up the industry, and letting a supermassive bank fail is probably that.

The given reason for the bail outs was systematic risk to the entire banking sector because they were all exposed to the same risks and those risks were more correlated than people believed.

In the case of a big bank making a series of small bad bets it would not really affect others like in this case. Other banks don't care about this product failing. What, IMO, is more likely that just their profitability will suffer till they start making better decisions again and if WF persists with the bad decisions the valuable parts will be acquired.

Yeah that is what I was trying to get at. In such a case I certainly hope the likes of WF would reap what they sowed.

This is a losing bet. The article says it's losing 10 mm/month. Do you think that taxpayers will be covering that loss? Because they won't, because WFC is making more than 10mm/m and is in no danger of going bankrupt.

Yes, because money is fungible, and Wells-Fargo (& its "systemically-important" peers) receives via its privileged positions a de facto non-stop rolling bailout in addition to any occasional "crisis" larger headlingebailouts.

This fumble – at "just" $120mm losses per year – is still pretty small compared to its billions in income. A drop in the bucket!

But the reason they can take, and survive, any number of such unwise swings at no material risk to their insiders & shareholders is that their overall income is largely a function of their oligopolistic power & bottomless access to cheap federal money. They just have to avoid drawing on it "too much", in a "too unseemly" manner.

They can push that advantage a little more when they lose more elsewhere, as long as their coarse risk and overall results look similar to their peers – who are similarly pressing their special advantages around the edges.

So there won't be a specific measly transfer from public funds, "this is covering your failed Bilt program", of course. But they can just lean on their advantages a little more, and "keep up with the Joneses" in their peer banks in coarse indicators, with everyone at the trough (executives, politicians, politicians' pet projects, major shareholders) not facing any even marginal negative feedback.

And in some next major macro reversal which puts all banks of the same class in danger, it'll all be papered over again – bringing them up to some level of stability without regard to how many extra hundreds of millions leaked through Bilt-style errors or sweetheart deals to favored groups. So de facto, retrospectively, all those leaks were "free" to the insiders.

I think you're making mountains out of molehills.

If you believe all that then it sounds like you should invest 100% of your assets in systemically important bank stocks. If they have literally zero risk due to unending bailouts then your risk-adjusted returns will be amazing.

That'd be a good plan, if you could count on the loot flowing fairly & proportionately to any commoner who buys shares on the public markets. But in a rentier racket this big, that doesn't happen.

Large amounts go to management insiders, or are kicked-back to politicians & their allies or pet causes via donations or sweetheart deals to favored projects – which might show up as "losses" on "failed projects" eventually, but hey, it can all be covered out of the privileged rolling take from everyone on the outside.

https://archive.is/jsLi5

Wells Fargo color scheme works for me. Red = danger, yellow = warning - the signal colors for Stay Away.

ref:https://duckduckgo.com/?q=wells+fargo+"fined"

After using them recently for financing a house purchase, I recommend everyone take heed of this warning. I went in with low expectations for a mortgage broker and was still extremely disappointed.

Something I never entirely get about the credit card business is how they can offer deals without it being obvious they only make money if you make mistakes?

If it was a good deal for me, surely the bank loses some money on that?

The pejorative term that credit card companies use for people who pay off the entire balance every month is "deadbeats". https://www.cnbc.com/select/credit-card-deadbeat/

I guess. Revolving credit is expensive for the bank to hold. They have to allocate a lot of capital to back the revolving unsecured debt compared to other secured loans. I think they'd rather just make money on the regular fees and not have to worry about people holding balances. By providing credit they can charge a higher transaction fee than a debit card so that's their value add. Retailers are willing to pay for that access to consumer credit.

That's why credit cards are so popular in America vs other countries. They can charge a transaction fee that actually makes a profit. If they are regulated to a low fee then they can't give cards to anyone but the highest of FICO scores because the debt itself is so risky.

The interest and fees on accounts that carry a balance are enormously lucrative for the banks.

I don't know.. Maybe in the good times. They are highly risky though and require a lot of capital backing that may not show up directly on the P&L.

https://www.reuters.com/business/finance/bank-america-profit...

I guess I could look more into the 10-K and see if that information is transparent to the public.

I mean, deadbeats are probably still worth it in the long run. Over a long enough horizon eventually a person who pays off their cards every month runs into an emergency that will put them in a situation where they get stuck in a debit trap, them the banks eat for free.

Meanwhile, if I don't pay off my balance, they ding my credit scores. Seems like they want to have their cake and eat it too.

This anecdote and using the word "deadbeat" is oft repeated but doesn't really have much basis in reality (even the article you linked doesn't cite any sources for the term). Credit card transaction fees generate revenue regardless of when you pay.

I always assumed banks made money on credit cards from the transaction fees. I think the interest rates are mostly there to scare you into paying your bill. It seems like once a CC balance gets out of control the bank's ability to recapture that money is limited since the card is unsecured.

I guess they make more money off the people that use a CC as as a temporary loan and always repay but customers with that risk profile are generally one step away from never paying it off.

FYI, latest Q-10 of American Express has Merchant Fees at approximately double the revenue from interest payments. At least there it is true.

[0]: https://s26.q4cdn.com/747928648/files/doc_financials/2024/q1...

And the fees are basically pure profit while the interest payments have a huge cost and risk.

https://www.bitsaboutmoney.com/archive/anatomy-of-credit-car...

It is simple really, there are more suckers paying high credit card interest than there are people collecting credit card rewards. As someone who always pays your bill off every month any rewards you collect are essentially paid for by people with interest payments

There's multiple revenue stream for banks as it relates to credit card.

There's interchange, interest, annual fees and more.

Easy. There's a few customer profile: 1) People who will always pay it in full 2) People who incorrectly think they're 1) but wont pay in full for some reason 3) People that don't understand the cost of 20% APR 4) People that need the money and don't have a choice

Plus CC make money on transaction fees and sometimes annual fees.

Credit is basically mandatory to survive in the US today. Most live paycheck-to-paycheck, wages have been stagnant for decades, and prices have been increasing. Add in the fact that people are both exhausted from work and that there's fewer domestic "partnerships" that allow division of labor (however that might occur), you have more opportunities for slick marketing and financial jargon to make unappealing terms slide past people.

Even worse, in my opinion, is the proliferation of the buy now pay later schemes even apple are embracing

At least with layaway plans, you had delayed gratification.

Most of your specific points are false. In fact, the majority of Americans self-report that they have at least 3 months of emergency savings, and this is backed by savings account data.

Credit is necessary for some people, but the actual number is closer to 20% than 50%.

Got a source?

This article says 58% of Americans say they live paycheck-to-paycheck: https://www.cnbc.com/2024/04/09/most-of-americans-are-living...

This article mentions 78%: https://www.forbes.com/advisor/banking/living-paycheck-to-pa...

The definitions of "paycheck-to-paycheck" are different in different surveys.

For example, in the second one you linked the question asked was something like "How difficult would it be for you if your paycheck was delayed by one week?" and they took anybody who said more than "not difficult" as "living paycheck to paycheck". My definition is more strict.

I don't know what your definition is, because you didn't provide the requested source.

Here's another one showing more than 50%: https://www.prnewswire.com/news-releases/69-of-americans-in-...

There's another one I remember reading at some point (it was definitely older than these, but I don't remember where it was from) where the question was something along the lines of "do you use a credit card for monthly payments" with the assumption of a "yes" meaning they couldn't pay it otherwise and were paycheck-to-paycheck by necessity. It completely ignored the people who use credit cards for the protections or convenience.

The Forbes article linked above shows that 80% of Americans have $2,000 or less in savings. That's 80% of everyone, not just people living paycheck to paycheck.

That directly contradicts your claim that the majority has 3 months of emergency savings unless you're so out of touch to think that $2,000 is enough to last people 3 months.

These are self reported numbers, and contradict the numbers from the federal reserve, individual banks, and credit card companies. My main problem with the claim is this. If credit were required by the majority of people, how can it be the case that fewer than 50% of people maintain a balance on any card?

Just FYI, I recommend the Fed's "Report on the Economic Well-Being of U.S. Households" for metrics like this.

Some stats:

https://www.federalreserve.gov/publications/2024-economic-we...

> Eighty-two percent of adults had a credit card in 2023. They were nearly evenly split between the people who paid off their balances in each of the previous 12 months and people who carried balances from month to month at least once in the prior year. Just about one-quarter said they carried a balance most of the time during the prior 12 months.

> Fourteen percent of people used BNPL ["buy now, pay later", an alternative to credit cards] in the prior 12 months, up 2 percentage points from 2022.

https://www.federalreserve.gov/publications/2024-economic-we...

> Near the end of 2023, 72 percent of adults were at least doing okay financially, meaning they reported either "doing okay" financially (39 percent) or "living comfortably" (33 percent). The rest reported either "just getting by" (19 percent) or "finding it difficult to get by" (9 percent)... The 72 percent of adults doing at least okay financially was essentially unchanged from 2022 yet was down 6 percentage points from the recent high of 78 percent in 2021 (figure 1).

https://www.federalreserve.gov/publications/2024-economic-we...

> Table 17. Largest emergency expense individuals could handle right now using only savings

> under $100 (18%)

> $100–$499 (14%)

> $500–$999 (10%)

> $1,000–$1,999 (10%)

> over $2,000 (48%)

(Which I find this hard to reconcile with the following from the same page:)

> In 2023, 54 percent of adults said they had set aside money for three months of expenses in an emergency savings or "rainy day" fund—unchanged from 2022 but down from a high of 59 percent of adults in 2021.

I disagree with the statement that credit is basically mandatory. The issues you raised may be real, but borrowing money does not solve any of them, it just hides them. My experience is that credit cards are predatory and offer an easy alternative to basic fiscal responsibility: Living within your means (more humbly than you might want), knowing what expenses you should expect and planning for them.

Utility bills, rent, taxes are predictable. Even most car repairs should not be an emergency. If you buy a car, or know anyone that has ever owned a car, you can confidently know that you will have unexpected car-related expenses. It happens to everyone and it should not be a surprise. If you own a car, immediately start putting some money aside so that when you get a flat, or crack the windshield, or need a new bearing, it's not an emergency.

If you have children, teach them money management. It's one of the most valuable skills for adult life. Additionally, talk to your local school district about teaching financial literacy courses!

> My experience is that credit cards are predatory and offer an easy alternative to basic fiscal responsibility: Living within your means (more humbly than you might want), knowing what expenses you should expect and planning for them.

There's a wrinkle here: basic fiscal responsibility currently exists at odds with the reality most people need to exist within to be content.

30 years ago, a middle-aged person in the United States could generally (though not always) count upon financial progress, and this mirrored most of American history. Financial progress is a synonym for societal progress in many ways.

That's no longer the case. A middle-aged person today is less likely to own property, have adequate savings, be debt-free, etc. than their parents were.

Credit has become a way to numb the fact that more and more of the money never trickles down. The fact that it's available and so widely used points to a society that's looking for that easy alternative, but not to basic fiscal responsibility; instead, one to basic access to the value created by labor.

> basic fiscal responsibility currently exists at odds with the reality most people need to exist within to be content.

Thanks for pointing that out. There are expenses that have gone up significantly compared to the average income. At the same time, the bar for "contentment" has gone up significantly

I live in the Midwest. Many of these neighborhoods have homes in the 1200 sq ft range (111 m^2), with two bedrooms, maybe a third small one, one bathroom and a basement. Talking to older neighbors, it used to be normal for a family with five or more children to live in a house like this. Cars were simpler and more affordable. There was one phone line per household, not per person. There was no internet access or cable TV subscription. You mowed your lawn with a mechanical, human powered device.

There's nothing wrong with having a bedroom for each child, but is it necessary for contentment? Definitely not.

On the other hand: https://news.ycombinator.com/item?id=40680380

Ignore the story, look at the comments. The commenters aren't stupid, they've enough brains to master English grammar, I'm sure they know how many Americans live paycheck-to-paycheque.

I don't understand the attitude. It must be some sort of apples-plus-oranges addition that's very different from mine. I just don't get it.

It's a good deal for you and I.

But half of the population are of below average intelligence.

For those people who don't "make mistakes", the card issuers are still earning:

• part of the 2-3% added to every charge

• fees from promotional marketing, guided by the info in your purchase history, to those customers

• fees from related services the same customers may purchase from the same bank

Even when the high rewards cards marketed to conscientious low-credit-risk customers send back some of that 1-3% as "miles" or "points" or "cash back", the other information/marketing values about high-spending, reliable-paying customers remain interesting.

I worked in CC loan and processing for a period of time. Issuing cards is really a form of hedging. They make money on some and lose on others. The point is to win more than you lose. That's all. There are secondary and tertiary ways of making money off of the cards too. They can sell the pool of underperforming cards for a smaller sum of money, and they can write off losses to help with other ventures. Just a couple of examples.

nitpick: its not hedging, its risk diversification.

It’s not really the main point of the article so it gets glossed over, but it sounds like Bilt was deterministically generating card numbers and expiry dates? That’s wild.

This whole deal is very confusing.

What exactly was Bilt Technologies providing? My expectation is they would used AI/BigData/TheForce to identity which renters are likely to be balance carriers. How did they not hold any risk for the leads/users they generated?

So Wells eats the HUGE interchange fee from the rent, and then divides the piddling remaining fees with BILT and pays them $200 for each customers?

The use case, is give landlord this card alone, set for auto pay, and earn “points” but then do all other spending on a higher reward card it seems like? What were the points? Cards are routinely paying 2% cash back…

Bilt "Rewards" is a way for shady Wells Fargo to advertise to, extort fees from, and monetize a captive market of apartment leasees. It's a bunch of annoying, gotcha capitalism bullshit soon-to-be-former leasees like me don't give two shits about.

> way for shady Wells Fargo to advertise to, extort fees from, and monetize a captive market

So standard fare for a rewards program? Not sure how this is any different than what chase, amex, or anyone else does to their rewards members - all of them use (and sell) your purchase and balance history for that stuff.

Except, this is a not optional rewards program. It's a rent bill paying service masquerading as one through captive exploitation.

It isn’t. It’s exactly the same. The only difference is that Bilt provides an ACH account number / routing number for one payment per month: rent. And if you can’t ACH, they’ll mail a check for you.

That’s it. That’s the only difference.

Maybe that was the plan, but the article makes it sound like the money is flowing the other way: renters can use it to get a bit of money out of Wells Fargo, which is why they lose money on it.

Just because companies are trying to make money doesn’t mean they succeed.

Loss leaders taken too far, sure. They're controlling a lot of float by collecting rent for zillions of apartment complexes and then monetizing relationships with other vendors like Lyft and indirectly through rev sharing with credit card processors used by local merchants like restaurants.

From their app:

Bilt Card $0 annual fee¹, 1x points on rent, 2x travel¹, 3x dining¹, 1x other purchases¹, and no transaction fees for paying rent.

It seems like they're idiots if they're just giving away money when they're a captive platform their users cannot opt-in or -out of, because their payment customers are/should be the mega apartment management companies. It could also be that they over-expanded headcount for the amount of revenue (and lack of profits) they currently have.

Bilt is shit. My apartment complex megacorp changed to them about 2 months ago.

On signup, the have an opt-out credit card application where they try to force a credit card on you, they failed to disclose they charged a 3% fee for paying with a credit card until after signup is completed. They send unsolicited ads for random products and services as push notifications with no opt-out.

I'm also not renewing my lease, and this is one of my reasons.

Most apartment complexes charge a fee for paying by credit card no? That's always been my experience before Bilt. If you apply and pay with the Bilt card you shouldn't be paying any fee.

If it's not disclosed, it's a surprise charge. End of discussion.

Failed to disclose what? I get that you're annoyed but I'm struggling to see what you're annoyed about.

Re the push notifications is it from the Bilt mobile app? Both Android and iPhone allow you to disable all notifications from an app.

"Costing the bank dearly" = losing $10 million a month, which is trifling for Wells Fargo.

The Bilt card is a no brainer for any renter who qualifies. There is zero opportunity cost to the points earned on rent.

Exactly.

Pay your rent on your card, get points.

Color me shocked that customers who float their monthly rent on a credit card are not the solid foundation that one can build a banking business on top of.

"We will make up for it in volume!"

One of the primary issues noted in the article is that not enough cardholders were floating their monthly rent, and instead they were immediately paying it off just to collect rewards.

That’s not how it works; you back the rent payment by a bank account. You technically could float it, but the Bilt app tries really really really hard to make sure you don’t.

Reply on news.ycombinator.com