The Journal. - The Unusual Economics of the Bilt Credit Card

Episode Date: June 25, 2024

Rent has long been an expense people wanted to pay on credit cards. In 2022, Wells Fargo launched a credit card with Bilt Technologies that allowed users to pay for rent, avoid processing fees and earn points. But the partnership is costing Wells Fargo millions. WSJ’s AnnaMaria Andriotis reports. Further Listening: -The Fight Over Your Credit Card Swipe  -The Deal That Could Change Credit Cards  Further Reading: -Wells Fargo Bet on a Flashy Rent Credit Card. It Is Costing the Bank Dearly.  Learn more about your ad choices. Visit megaphone.fm/adchoices

I remember getting a credit card in my mid-20s and being excited to earn airline points. And I thought I could rack up even more points if I paid my rent with my credit card. After all, I lived in New York City and rent was by far my biggest expense. But I was quickly disappointed. Disappointed, but you should not have been surprised. That's our colleague, Anna Maria Andriotis, who's an expert on credit cards. And that is because landlords generally do not accept credit cards for rent payments. That's pretty much been, I guess, almost like an unspoken rule in the real estate industry

among landlords, big and small, that credit cards are not accepted. The reason they're not accepted is because merchants typically have to pay a two or three percent fee on every credit card transaction. Why would any landlord, big or small, accept a rent payment that is even a few percentage points less than what they're charging their tenants. So this has been something that some of the largest payments companies in the U.S. have struggled with for decades. How do they make inroads to get this large expense that so many people have every month. A few years ago, a company called Built said it could do the impossible. It was going to allow people to pay rent with a credit card, earn points along the way,

and get landlords to go along with it. Can you just take me to the moment that Built launched? And do you remember that moment? And what did you think? I remember being skeptical and constantly asking, but what landlord would accept fees? I don't understand. That's just the model.

How would that work? And then being told that landlords would not have to pay fees. And then I'm thinking to myself, well, wait a minute, that just throws this big sort of question mark around the entire credit card model, the economics of it. Since the card launched a few years ago, Anna-Marie has been hearing a lot about it. Everybody is talking about this program

and has had, their top question has been, how do the economics work? I don't get it. Welcome to The Journal, our show about money, business and power. I'm Ryan Knudson. It's Tuesday, June 25th. It's Tuesday, June 25th. Coming up on the show, how Bilt's credit card really works. Or doesn't. Attention all soccer fans. From Orlando to Los Angeles, take to the fields of the USA for your next vacation. Ready to kick off?

Discover exciting games and events. Plus, find amazing hidden gems in cities full of adventures, delicious food, and diverse cultures. You'll love it so much, you'll want to extend your stay beyond the matches. Get the ball rolling on your soccer getaway. Head to visittheusa.com. There's a lot of money to be made in credit card partnerships.

Airlines, retailers, or other brands team up with credit card issuers, and the customer gets points or miles or discounts. People seem to love branded credit cards. And for the companies, partnerships attract new customers and encourage loyalty. It all leads to more spending and more money for both sides. There are store cards, airline cards, hotel cards. But for your rent, not so much. There hadn't been any major partnerships for that. And that's always presented an opportunity. It is an expense that millions of people, of course, cannot avoid, right, as tenants. And it is the expense that most people prioritize. You have to pay your rent. And this is one of the biggest opportunities for banks and for card networks, again, like Visa and MasterCard, to increase the volume of payments they have going over

their systems in a significant way. But because there are so many landlords, and none of whom want to pay transaction fees, there hasn't really been a credit card for rent. When Bilt was founded in 2019, its goal was to change that. As it grew, Bilt partnered with large landlords to make it easier for some renters to pay their rent using Bilt. Neither the landlord nor the renter would have to pay any fees, and renters who use Bilt would get points. And if your landlord didn't take a credit card, no problem. A check would be sent to your landlord, and Bilt would still give you the points.

Let's say that you're charging your card $2,000 for your rent. There is a check that is written. There is a separate payment not over the card system that is sent to the landlord for that amount that you've charged to your card. Built isn't a bank, and it doesn't issue credit cards independently. So for its business to really take off,

it needed a big bank to partner with. And that's where Wells Fargo came in, as both a partner and an investor in Built. Wells Fargo is the third largest bank in the United States, offering customers everything from checking accounts to mortgages. But in the world of credit card partnerships, Wells Fargo lagged behind. You have Amazon with JP Morgan, United with JP Morgan, Delta over at Amex, right? Costco is with Citi, and the list goes on and on. And Wells has Dillard's. Dillard's. Dillard's. What is Dillard's? Is that a pickle company? I have to Google Dillard's.

It's a department store? Yeah. And at the time, Wells had Dillard's. Wells Fargo wanted a partner bigger than the likes of Dillard's. And when the company got a new CEO in 2019, one of his top priorities was to juice up the bank's overall credit card business. So Wells Fargo recruited some executives to go out and build up credit card partnerships. They needed a win. They needed to get a credit card partnership that was going to make a splash. And they believed, and it turned out rightfully so, that the Bilt card would do that.

For Bilt, Wells Fargo was a financial backer that could help its credit card program grow faster. And for Wells Fargo, Bilt could provide a new base of young, high-earning customers. They were interested in getting more young adults as customers. In particular, with this card, they looked at it as what the future can mean for their mortgage business. You're about to get a whole bunch of renters as customers. At some point, these people are going to want to become homeowners.

And Wells could be positioned pretty well with these, you know, cardholders to give them their mortgages. Anna Maria learned through her reporting that Wells Fargo was so interested in a deal with Bilt that it agreed to some pretty surprising terms. There were certain things that were agreed to that were exceptionally generous. Wells agreed to pay Bilt $200 every time a new Bilt card is open. A payment like that is generally reserved for airline credit cards and other highly established credit cards. And about six months after the credit card launched,

Wells Fargo started paying Bilt around 0.8% of each rent transaction. Even though, remember, landlords aren't paying any fees, so there's no revenue coming in from these transactions. The landlords are not paying anything. They're not paying any fees. It's effectively a 0% interchange category that's been created, which I'm not even aware of one ever having existed before, at least not in recent history. Why? Why? Well, that was the arrangement.

There's still a lot of unanswered questions here. Why Wells agreed to do that, I don't know. But they did agree to ultimately pay Bell the fee. The card launched with Wells Fargo in 2022 to a lot of fanfare. More than a million accounts were activated within the first 18 months, and it went viral on social media. There's this credit card product called Bilt, B-I-L-T. The Bilt credit card is one of the first and only credit cards that lets you actually pay rent with it without charging you any fees. So I recently just got the Built credit card and I'm telling you guys, this is one of the most overpowered credit cards that exists today.

It beats out Chase. It beats out Citi. I am loving the card. Who doesn't love earning free money while you're paying rent? There was no doubt about it that from the moment that this credit card launched, there was a lot of buzz around it. Build has shot up both as a valuation as a company. I mean, in January, it hit $3.1 billion in terms of the company's valuation. And the company has some very, I mean, just big name backers. This is a hot company, in other words. This is a hot company. They're moving towards potentially even bigger things down the road, like there's some chatter about maybe at some point, you know, doing an IPO.

Renters love this card. They were racking up thousands of points every month for something that they never used to be able to earn points on. But even as the card took off in popularity, questions lingered about its business model. On CNBC in January, Built CEO Anchor Jane had a tense exchange with the hosts. Let's go back to the math of it, because I do want to understand the economics of it. So you're collecting a fee, a processing fee, transaction fee, every time.

Correct. Which is what percent? Which is what percent? It depends on the type of payment method. You can pay by bank ACH. Okay, but are we talking between 1.5% and 3%? Are we talking Amex style? Jane didn't seem to be able to provide a clear answer.

It really depends if you pay by Amex or pay by Visa or pay by MasterCard. If you pay with your bank, what's the lowest you can get? That's right. And so you get different levels of points. What's the rate for the lowest if you pay by Amex or pay by Visa or pay by MasterCard. If you pay with your bank, what's the lowest you can get? That's right. And so you get different levels of points. What's the rate for the lowest if you pay by bank? It depends on the landlord, too, and the property owner. But just like Stripe and any other... The card was a great deal for renters, landlords, and seemingly for built. But as Anna Maria discovered, not for Wells Fargo.

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slash legal slash ca dash pru dash disclaimer for info on Kraken's undertaking to register in Canada. The built credit card hasn't panned out well for Wells Fargo, according to current and former Wells Fargo employees that Anna Maria spoke with. The reason is partly because at the start of the partnership, Wells Fargo made a bunch of assumptions about how customers would use it. Number one, Wells expected that around half to three-fourths of the dollars charged on the card would carry over from month to month, basically generating interest charges. Meaning people would be carrying a balance. They wouldn't be paying off their credit card every month, so they would be charging interest. Right, exactly. They would be carrying balances and that the bank would be

receiving interest payments from cardholders. But Wells Fargo underestimated how savvy built cardholders would be. They were just charging their rent on the card so that they could get the points. What they were seeing was that many cardholders would charge their rent and then a few days later would pay it off in full. They wouldn't even wait for the statement to arrive or for the billing cycle to close. So the people who are signing up for the billed credit card are just like just purely maximizing it for the points. They're not using it as like becoming their main credit card. Correct. I mean, they're gamers. When you are relying on interest income, that becomes a problem. On top of this, customers weren't really using their built credit card to pay for other stuff,

like eating out or clothes or shopping, as much as Wells Fargo expected. As a result, Wells Fargo wasn't making as much money from regular transaction fees as they thought they would. Wells Fargo wasn't making as much money from regular transaction fees as they thought they would. So it became clear pretty quickly that for Wells Fargo, the math wasn't mathing. How much has this partnership been costing Wells Fargo? So it's been millions of dollars a month for Wells Fargo, with some months being as much as $10 million. $10 million a month?

Yes. So is it common for a contract, for a credit card partnership, to be losing money in the beginning? Yes, it is. But the losses are greater than Wells had expected. Because almost nothing about the assumptions, the key assumptions, that they made internally at Wells for this card have panned out. In a statement, Bilt said the Wall Street Journal's reporting was an inaccurate representation of its partnership with Wells Fargo

and that it's committed to a long-term partnership that benefits all parties, especially customers. Do you have a sense of like, why were Wells Fargo's projections so off? The projections were off in large part because a card like this had never existed. There was no apples to apples comparison of like, how would cardholders treat this card? You know, how would they spend with it? So it just was unprecedented. That's it. Wells Fargo's contract with Bilt runs until 2029, but Ana Maria says the company's renegotiating terms of the deal now. It has a long way to go. And it's not uncommon to renegotiate pieces of an existing contract in the credit card industry, though it is uncommon to renegotiate so early on in the life of the contract. Right, just two years into a seven-year deal.

So what Wells has said to Bilt is that it does not intend to renew the contract past its scheduled end date of 2029 unless the economics are changed in its favor. Wells Fargo said in a statement that there's been no conversation among decision makers to exit the Bilt agreement. The headaches for Wells Fargo go beyond just the card's economics. So as if the generous financial arrangements, the payout, you know, wasn't enough, as if the internal projections at Wells being completely off weren't enough, then there was a fraud incident last summer. Normally, totally random credit card numbers and expiration dates are issued on new accounts. But the process with the built card

wasn't random enough. Fraudsters basically created fake accounts. They put together account numbers that were fake but worked, expiration dates that were fake but worked, and they went shopping, and Wells incurred losses as a result. Plus, Annamaria's sources told her that they were worried the built cards could be used as a conduit for money laundering. I'll use myself as a hypothetical example that the quote-unquote rent that I charged to my built credit card and that I designated as something that should be paid to you in your name, and a check is being written out to you in your name, where is the verification? How is it proven and rock solid that number one, you are the owner of the apartment that I live in? Number two, that the payment I'm sending you truly is for rent and not for something else.

Right. I'm just renting this room from this guy and here's his address. Exactly. Wells Fargo said, quote, we have not experienced any meaningful money laundering issues with Built. So what does the story of Built so far mean for like sort of this ultimate dream of people being able to pay rent with their credit card? Well, look, on the one hand, you know, the saying of if it's too good to be true probably is. I mean, I think that's what we're seeing here, except that the entity holding the bag right now

is not, it's Wells. The consumer right now is making out really well on this card, really well. And I mean, it's for the consumer, it's a good story. You're able to get points on probably the biggest expense you have per month and redeem them for whatever you'd like to redeem them for. It seems like, you know, people have been asking this question, like, how can Bilt make it work? Like, how does this make sense? And it turns out that, at least in part, the answer is, well, because Wells Fargo is holding the bag.

And they're suffering big losses. That's right. In a statement, Wells Fargo said co-branded credit cards, like the one with Bilt, are just a, quote, "'modest piece of the company's overall credit card business strategy.'" The company added that it takes multiple years for the initial launch of any credit card to pay off,

and that it looks forward to continuing to work with Bilt to deliver a great value for customers. That's all for today, Tuesday, June 25th. The Journal is a co-production of Spotify and The Wall Street Journal. Additional reporting in this episode by Gina Heap. Thanks for listening. See you tomorrow.