Frequent Miler on the Air - Bilt is costing Wells Fargo dearly. Should you duck & run or double down? | Coffee Break Ep15 | 6-18-24

Episode Date: June 19, 2024

(00:00) The Wall Street Journal reported friction in the relationship between Wells Fargo & Bilt. What was reported and what do we make of the details? Find out in this episode of Coffee Break. (01:16) What the Wall Street Journal Article says (02:01) Digging into article details a bit about the Bilt / Wells Fargo relationship (06:34) Fraud and Money Laundering Concerns (09:44) The Wells Fargo and Bilt response (10:34) WSJ article key points quick summary (11:12) Our take about what this all means Visit frequentmiler.com/subscribe to get updated on in-depth points and miles content like this, and don’t forget to like and follow us on social media.. Music Credit – Beach Walk by Unicorn Heads

Here we go. This is not your typical Frequent Miler on the Air episode. This is a standalone segment we're calling Coffee Break. Each Coffee Break segment will cover a single topic related to miles and points. And each Coffee Break is limited to 20 minutes or your money back. Enjoy. Today's coffee break. Built is costing Wells Fargo dearly. Should you duck and run or double down? We've seen a lot of startups make a big splash with too good to be true offerings only to drown later. Is this a sign of a sinking ship? Backing up a little bit. So it's a Wall Street Journal article that is making all the buzz that announced that Bilt is costing Wells Fargo dearly.

Bilt is that loyalty program that rewards people for paying rent. It's also a credit card that has no annual fee. We've talked about it a lot on our show. Let's dig into this. Is the Wall Street Journal article telling us we should be ducking and running? Yeah. So the headline of the article said, Wells Fargo bet on a flashy rent credit card. It is costing the bank dearly. And then the subheading said said the bank, Wells Fargo,

is renegotiating the deal with the startup after incorrectly forecasting key revenue drivers. The body of the article went on to say that Wells Fargo has told Bilt that it doesn't intend to renew their contract, which is scheduled to end in 2029, unless economics are changed in its favor, in Wells Fargo's favor. So people are worried. We had quite a few people who reached out and said, what should I do? Should I transfer out all of my built points now? Is the writing on the wall? Is it all about to collapse? What's going on? Yeah. And we'll get into that exactly, our answer to that soon. But let's dig into the article a little bit more. Here's some more details that we found in the article. Wells Fargo launched the built card in 2022. And according to the article,

Wells Fargo is losing as much as $10 million every month on the program. And Wells Fargo has stopped bidding on new co-branded credit card programs. So that is like they did the built one, they did choice privileges cards recently, and they're about to launch an Expedia card, but they're not expected to do any more anytime soon of co-branded cards. And Wells has told Built that, and this is again, this is from the article,

that cardholder behavior isn't providing a path for profitability for the bank and that more customers who carry balances and use the card for everyday purchases are needed. It goes on to say that Wells pays Bilt a fee of about 0.8% of each rent transaction. So I need to explain that a little bit. Built lets you pay rent with your built credit card without the landlord having to pay a transaction fee. So I always thought it was built eating the cost of paying that transaction fee, but it turns out it's Wells Fargo eating that cost. So that's pretty interesting. Actually, it's not just Wells Fargo eating the cost.

They're paying extra to built for the privilege of doing that. And so that's helping built cover the cost of rewarding people for paying rent. So that's really interesting. Wells also pays built $200 every time a new account is issued. And it goes on to say the bank assumed around 65% of card purchase volume would be non-rent, generating interchange fee revenue. The reality is inverted, meaning that the majority of the spend on these cards is actually rent, where Wells is losing money as opposed to gaining money.

And Wells also expected that around half to three-fourths of dollars charged to the card would carry over month to month, generating interest charges. The reality ranges between around 15% and 25%. Many customers pay the rent off within a few days of charging it to their cards, weeks before their statements arrived. And so we're being savvy, basically. The built cardholders are doing what's right for them, not what's right for Wells Fargo. Big shocker there. Oh, that's pretty interesting to me. I'm going to hop in real quick and we'll talk more about our take on this in a bit. But I think there's a couple of things worth highlighting here. And one, of course, is like Greg said, that Wells is paying built every time somebody uses their card for rent, which is interesting because they're paying built more for the points than the points

are worth if you use them towards rent in the future. So even if you're collecting points on your rent every month and using them for rent, which is a bad deal, we don't recommend doing that. But built is actually earning a profit on that, which that blew my mind. And the fact that the bank assumed 65% of card purchase volume would be non-rent. I also find that interesting. Rent is the most expensive thing for most people that rent, right? I mean, it's like the biggest expense for month to month. So I'm find that interesting. Rent is the most expensive thing for most people that rent, right? I mean, it's like the biggest expense for month to month. So I'm surprised that they thought that average people were spending far beyond the cost of their rent, especially in large cities where rent is quite expensive. I was surprised to find that was their expectation. Yeah, I think it was bad forecasting on Wells' part, I guess. And they probably didn't expect so many people would get the card and use it primarily only for rent.

You know, I think that's happening a lot too. But you're right. Even if people use it for all their spend, you know, even if they use it for all their spend, when people have very high rent, it's going to be the majority of their spend on their credit card. Yeah, there's no way 65% would be like other stuff for most people anyway. And then to expect that half to three quarters of that would get carried as a balance, what they were expecting, most people were going to be carrying their rent every month as like an interest bearing balance. That seems like a weird expectation to have if you want your card holders to be long-term good customers. But anyway, I just thought that was interesting. Right, right. Yeah, it is interesting. And there's a couple other interesting points in the article

that aren't really specifically about the built Wells Fargo relationship, but I found them very interesting, so I wanted to highlight these. One is about credit card fraud. The article says the program has also been hit by fraud. Random account numbers and expiration dates are generated when new cards are given to customers, but the process for the built card wasn't so random, which opened the door to swindlers. Last summer, they created fake built accounts and went shopping with them, leading to losses for Wells. So I remember this. I mean, we posted about how lots of people were seeing fraudulent charges on their built credit cards at one point. It was pretty, I think, early on when Wells started issuing these cards and it was a big problem for a while, but they seem to have addressed that. So that's very interesting and weird that they apparently were generating card numbers that were not random.

Wow. How that all happened. I can't imagine. Crazy. That's nutty. Another very interesting part of the article is about money laundering. It says that the partnership also poses money laundering risk, which the companies have worked to address. When consumers charge rent to their cards, a third party company sends a check to

that amount to the person or entity the cardholder says is the landlord. That is easy for Bilt to track when it is one of the real estate companies that participate in Bilt's rewards program, and hard when it's a mom-and-pop landlord or other company. A Will's spokesperson said that the bank hasn't experienced any meaningful money laundering issues with Bill. I'm just pointing this out. There's no particular agenda behind me pointing out other than often in the points and miles world, a lot of great opportunities for earning points have been closed because of money laundering. That is, businesses that try to stop people from money laundering also often stop things that are great ways of earning points and miles. And it's just very interesting to me that this Wall Street Journal article pointed out that

paying rent is a way that people could money launder. I'm not really sure why they want to advertise that to potential money launderers. I didn't get that. I didn't understand that either. I was like, A, why would you highlight it? And B, like, so Wells said that it hasn't been significant, right? So like, where did that even come into the article then? My thought was like, if Wells isn't saying this has been an issue and Bilt isn't saying this has been an issue, like what did that have to do with anything? I just didn't get it. But anyway, yeah, like you said, yes, I'm sure that risk is there. It's got to be.

But yeah, I don't know why that was there. Yeah. That's fun stuff. So what will Wells and B built have to say about this well from the article a wells fargo spokesperson said as with all new card launches it takes multiple years for the initial launch to pay off we look forward to continuing to work together to make sure it's a win for both built and wells fargo uh anchor jane ceo of built on x formerly twitter quoted or said when we quote wells Fargo went on the record with

the Wall Street Journal stating there's been no conversation among decision makers to exit the built agreement to suggest otherwise is false. The Wall Street Journal chose not to run this. Now, obviously, we don't know any of the inside details as to what was told to who or when or why or how. But that's what Uncle Jane has to say from Bilt that Wells apparently told the Wall Street Journal that they didn't intend to exit the agreement. Who knows, but

that's their take anyway. Right. So to sort of summarize things, this Wall Street Journal article is saying that the Bilt agreement has been bad financially for Wells Fargo, but the agreement goes until 2029.

Yeah, 2029. And that both Wells Fargo and Bill, they publicly have stated, yeah, we're not planning on parting ways, basically. That there's no, we're continuing to work together anyway, is what they say. Whereas the article is saying they're planning to part ways in the future. All right. So what's your take? What do you think about all this?

Are you worried? Are you concerned? Are you going to transfer out your goal points? Should other people? What do you think? Yeah, I get why people are worried. And as I said at the start of this, that there's often these splashy startups that have a lot of venture capital money. And so they make available these great deals that are too good to be true. And then after a while they go kaput. And people have been worried that built is that. But I think you should actually be comforted by this article if that's your worry rather than worried about it. Because for one, the Wells Fargo contract goes through 2029. So you've got plenty of years to use your Bilt card and not have to worry about anything bad happening there.

The other reason you should be comforted is Bilt is doing really well. For every customer that's being added to getting a credit card, Wells Fargo is paying Bilt $200. Plus, Bilt is earning money with each of these rent payments that covers their expenses for providing rewards. So overall, it seems like this is all good news for the long-term stability of Bilt. So I'm not making a judgment when I say this about is Bilt a good thing or bad thing. I'm just saying from what I read in the article, it looks like if you're worried about Bilt collapsing, you shouldn't be. It all looks like good news to me from the point of view of what's happening with built finances. What do you think? They said there's been a million new cardholders. There were a million new cardholders in the first

18 months, and it's now been more like two years. So in the first 18 months, that sounds like $200 million going to build just for each new card acquisition, right? And then they earn money with each rent payment on top of that. So like you said, that's to say nothing of, I have to assume that Built is getting some money from the loyalty programs that it partners with or whoever gets featured on rent day or like their local merchant offers,

I assume are getting funded by. So like there's lots of other ways that probably I assume money is coming in and this is like gravy. So it seems like really good news for built. I think that anybody like anybody who was concerned that, oh man, when's all the venture funding going to collapse? Like this shows me that venture funding probably hasn't been a, a, a factor at all. Like Wells is paying them enough to cover the cost of the reward program, it seems. So I don't know. Yeah, like you said, I think there's less reason to be concerned. I also think it's interesting.

So if we consider the cost of your favorite card, whatever it may be, that typically offers a welcome bonus of 75,000 or 100,000 points or something like that, plenty of cards on the market that offer a bonus like that. And in many of those cases, the bank is additionally paying a commission to an affiliate or they're paying a referral bonus. So we just take like average referral bonuses of 20,000 points and we put that together with the 75 or 100,000 that's on there. Looking at probably a cost to the bank in general for most cards of at least a thousand bucks for a new customer on those types of cards. So, so here, I think it's kind of interesting, you know, if they're looking at if you compare,

this seems like a significantly lower cost per customer because the built card has no welcome offer. So I think if they're losing, quote, unquote, $10 million a month on this, I'm not sure that that's really representative of the scary thing it sounds like. I mean, I don't know. Again, maybe Wells is going to cut and run in 2029. We don't know for sure. But it seems to me like the cost of developing an entire transferable currency reward system and getting all of those partnerships and getting the merchants on board and creating the card linked offers and all that stuff has got to be a lot. I would think that 10 million a month is probably relatively reasonable for creating a program like that, considering that Wells didn't have to build it, right? Like built already did. So,

so that actually doesn't even necessarily seem like a huge investment to me. I think. Go ahead. Right. No, I think that's exactly right. That, that national banks, when they, when they launch credit cards, they spend far, far more than $10 million a month to get these things out there. The purpose, they expect to lose money. They are acquiring new customers. That costs a lot of money. You could very easily argue that this is a cheap way for Wells to acquire new customers and to be able to cross sell other things like mortgages and things that they described in the article.

So I'm not convinced that Wells is going to walk away from the contract in 2029 either. But who knows? I mean, if they set a strategic direction to, you know, get away from co-brands, then maybe they will. But I'd be very, very surprised if another major player didn't step in and say, hey, we'll take it. Yeah, we've got a ready-made rewards program. Like, I think that probably what's appealing to most programs, banks, loyalty programs, et cetera, is that built customer base, theoretically, at least, skews very young, right? So they skew relative to most loyalty programs and things like that. So it's access to a young customer base that probably if they're renting, they're relatively

new to a lot of other stuff. So there's an opportunity to sell them checking accounts and savings accounts and investment accounts and mortgages and all those other things. And so I imagine that'll be attractive to some financial entity, even if it's not Wells. So if Wells, like I said, decides that they do want to get out of this, which maybe they will, I wouldn't be shocked if somebody else steps in. So, yeah, I think the biggest thing is this is running through 2029 and Bilt seems like they're bringing in plenty on this. Wells Fargo, you know, questionable as to whether it's worth it to them. It might be still, I think, even if they are losing 10 million a

month in the long run, I think it might be worth it to them. But even if it isn't, I think that there's no sense to panic, no reason to panic about points for now. I mean, are we going to continue to see amazing rent day bonuses? I don't know. I don't know who funds that still. That wasn't addressed in the article. But but I think at the very least, I don't know. I don't know who funds that still. That wasn't addressed in the article. But I think at the very least, I don't think you need to dump all of your points right away because they're not going anywhere for at least another five years, right? Right. Yeah, no, totally. And that's the answer to the question. People wondering, do I need to cut and run now? No. Do whatever makes sense to you. But I think your points are as safe now as they were a week ago before the article came out. It may be safer because like we said,

now we know about how long the deal goes for. So as an aside, I find it very interesting to kind of read between the lines of the article about the value for banks of having co-brand cards versus their own cards. So, like, you know, Wells Fargo has to pay a lot to co-brands uh because the co-brands are sort of are basically selling the cards for them um and that's in contrast to when wells fargo produces their own cards where they do the advertising themselves and and you can see wells fargo had introduced recently their autograph journey card and made their autograph cards transfer the points transferable. And, you know, that's all great stuff. And that's their own bank cards. And it sort of just tells me it's just something I never thought about before, that when a bank issues their own cards,

maybe that they can afford to be more generous with the benefits of those cards than they can with co-brands. And so, you know, when I think about other ecosystems like Chase and Amex, where their own ultimate rewards, membership awards are more generous than the co-brands. Now I'm starting getting a sense of why. Yeah, very interesting. Fascinating stuff. So our takeaway is probably no reason to panic now. It doesn't seem that way. And it seems like if anything, probably you should have a little bit more confidence for the time being. Anyway, this shouldn't have probably hurt it anyway. So we'll see what happens. We'll see how it all shakes out. But thank you very much. If you enjoyed today's episode, please go to

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