Synchrony Financial (SYF) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to the first day of KBW's 11th Annual Fintech Payments Conference. Though we regret not being able to host this event in person, we're excited to have all of you joining us virtually today. And looking forward to hopefully returning to an in-person format for our 12th conference in 2022. My name is Sanjay Sakhrani. I lead the consumer finance and payments research coverage here at KBW. And over the next 3 days, we're going to be hosting a number of fireside chats with executives for many of the leading companies across the fintech and payment space, in addition to a number of panels that we're going to dive into key topics on, impacting the industry today and reshaping its future. We have a full lineup this year as it will be our largest conference ever hosted at KBW for the sector. It's an indication of how much interest there is. So I'm personally looking forward to some of the thought-provoking conversations and hope that you're all able to come away with some key new insights. To kick things off this morning, I'd like to welcome our first set of speakers from Synchrony Financial. With us from Synchrony, we have Brian Doubles, the current President of the company currently, and he was recently appointed the next CEO after 20 years at the company. We also have CFO, Brian Wenzel. We're really happy to have both of you here again for our annual conference. And I want to start by wishing Brian Doubles best of luck in his transition to his new role in just a few months and start with a question on that transition.

Brian Doubles, maybe you could talk about your prior 20 years experience at Synchrony and how that's going to help shape the vision of the company going forward. And if there's anything at the top of the list that you'll focus on to drive Synchrony going forward.

Yes. Thanks, Sanjay. It's great to be here with you again, albeit virtually. I share your sentiment that I hope we're back together in person next year. But look, I couldn't be more excited about taking on the new role April 1. There's frankly a lot to be excited about as you think about Synchrony. And there's really -- as I step back and think about it, there's 3 big areas that we're focused on to drive long-term value. The first is, not surprisingly, continuing to focus on the large partner programs. We're launching new programs with Venmo and Verizon. Really excited about both of those opportunities. I think we -- those can easily be top 10 programs for us in the future. And we actually launched Venmo live full launch last week. So that's fully available and out there now. And we're just really excited about the prospects. There's also a lot of opportunity, I think, in our existing programs. And this is something that you talked about, my experience in the company. I think getting more deeply penetrated in our existing programs is still a really big opportunity that's oftentimes overlooked. We just recently renewed Sam's Club. We launched a new value proposition, which is really exciting. And so I think in the large partner space, still a lot of opportunity to grow. And then the other big area, while we're growing the large partner programs, is really focused on diversification. And as we talked about in the past, Sanjay, I think it's underappreciated how much opportunity we have in CareCredit and Payment Solutions. CareCredit now is accepted in over 200,000 locations. We just announced the Walgreens program, which I think is going to be another program that has top 10 program kind of ability as you think about the next 10 years. And so really exciting opportunities in CareCredit and then Payment Solutions as well. We feel really good about the home and auto networks. And then lastly, we talked last year about the Synchrony Mastercard. And the Synchrony Mastercard, we took a little bit of a pause in the midst of a pandemic, but I think this is a great product, a lot of great growth opportunity there as well. And so that's really the second big area that I'm focused on. And then lastly, just continuing to enhance the customer experience. As I take a step back and I think about where we're winning today, it really is about digital data analytics and really creating that seamless customer experience. That's how we're renewing programs. That's how we're competing for new business. So again, a lot to be excited about as I think about the future.

It seems like you guys got a lot of things going on there. I guess related question to some of your points. If you look across the 3 segments over this past year or so, the segment that's held up the best in terms of loan growth has been Payment Solutions. So I'm curious sort of what's been driving that defensive nature in that segment. And then maybe you can just elaborate a little bit more on the opportunities outside of card, then we'll get into card after that.

Yes. Payment Solutions, it was a bit of a surprise last year. We saw a lot of strength in powersports actually, and then anything tied to the home. Not surprisingly, right? And so powersports, I'd say, was a bit of a surprise just because I think, as people weren't traveling, right, they had a lot of discretionary savings, and they looked at that and they said, "I've been saving up for a vacation. I'm not going to take the vacation, so I'm going to spend it on something in the powersports arena, a jet ski an ATV, things like that." And then anything tied to the home was really strong all last year, not surprisingly. People took an opportunity to -- whether it's remodel a kitchen, buy some furniture for the living room, obviously, outfitting the home office. And so we saw a lot of strength there as well. And I think that's why that platform held up a little bit better. As you look at in comparison to Retail Card, I think in Retail Card, we saw a ton of strength in our purely digital players, not surprisingly. And we did see -- early on, we struggled a little bit in some of the more traditional retail programs, but even those have now started to come back. And then CareCredit. I think as you look at CareCredit, struggled a little bit, obviously, in April and May. That has continued to come back as we move through the year. I do think, if I look at all 3 platforms, the one thing we've done a lot of research around this, there is a real pent-up desire to spend across all sectors, whether you're talking about traveling, entertainment, taking trips, which spurs a bunch of different categories of spend, or whether you're talking about even elective health care. People have put off and postponed a lot of elective health care that they plan to get done. And I think that will certainly come back once we have a widely distributed vaccine. So that will be interesting to see, but I'm very optimistic about the second half of 2021.

Can you dig in to sort of the e-commerce trends that you mentioned in terms of the strength that you've seen there and maybe what surprised you? And how much of this sort of sustains going forward? Because there's always this view that there's been a pull forward, but some of it will be ceded back to non e-comm, sort of off-line. So maybe you can just talk about that push and pull. And then I guess a question we get a lot is, some of the largest e-comm players have chosen to partner with Synchrony. Maybe you could just talk on what the secret sauce is that you guys have that's providing for that.

Yes. I think a lot of what we saw in terms of the transformation to digital this past year is actually a lot of it is going to be permanent. Because I think what we saw was, even our more traditional brick-and-mortar retailers were transforming themselves and actually accelerated their transformation to digital through the pandemic. One of the things we did back in March is we kind of took a step back and we said we're going to kind of reassess the whole strategic plan and really divert resources to help to support our partners. Because they were calling us and saying, "Hey, contactless cards. Maybe that wasn't a top 3 priority. Now it is. We want to accelerate our ability to do Digital Apply inside of SyPI, inside of our app." And so we actually kind of reset the strategic plan for 2020 based on what our partners needed. We rolled out contactless solutions. We rolled out digital cards. We actually accelerated a lot of digital service capabilities. There were -- everything that I'm talking about was already in the pipeline. It was being worked, but we knew we had to act fast to support our partners as best we could. And I don't think this will go back. Certainly, stores are going to open. People want to go back into the stores and they want to shop. But a lot of this, I think, in terms of contactless and other things are permanent. Those are permanent changes that won't go back. And I actually feel like we were really well positioned headed into the pandemic just because of the investments we've been making over the past 5 years. And a lot of the things that we've designed, SyPI is a great example. They're easy for the partners to implement, right? It doesn't require a lot of work on their part. And it's easy for us to turn on functionality. It's almost -- I'd say it's a flip of the switch, which is our technology team would tell you it's more complicated than that. But it's things that can be done very quickly to provide that functionality to our partners. And so now we're getting 60% of our applications through the digital channel. And once you apply for something in the digital channel, do you have any interest of doing it in person kind of the old-fashioned way? So that's a trend that I'd say is definitely here to stay. I would expect that number just to continue to increase. The online sales penetration in retail cards is over 50% now. Now I do think some of that will get ceded back as you start to see people go back in the stores. But a lot of this, I think, is really here to stay. And then on your -- the second part of your question.

Can I ask one question before you guys add that second part? But like customer acquisition, like definitely, that's probably been more challenge online versus off-line because there's been a long history and method to getting customers off-line. But do you think that's going to have an impact going forward? Or has that even evolved from your view?

I think that's even evolved. I think that's even evolved. I know, even for myself, I'm doing -- everybody's doing everything digitally now. And even -- customer service is a great example. Today, people don't want to call and talk to a person. They want to self-serve. When we rolled out the forbearance plans in the midst of the pandemic, we did that and people could go and kind of self-serve based on the hardship that they were feeling. I mean that's just another example of trying to provide a complete wing-to-wing digital experience across the whole kind of financing process.

Got it. So maybe the second part of that question was the secret sauce that you guys have the most preeminent e-comm players out there.

Yes. A big part of that, I think, is it's a little bit of an intangible. It's our willingness to partner and to integrate into their digital properties. And that sounds easy, but it's actually very complex when you think about the wide range of partners that we have. You take a Venmo for instance. They're leveraging our API architecture and calling our APIs to create that credit experience inside of their app. And that's a very kind of sophisticated technology stack that we've developed with Venmo, right? A lot of this is not 100% Synchrony-developed. We work in partnership with our partners and their digital teams to create these solutions. And it's really important. Because you know how frustrating it is when you're inside an app and you click to go do something and you get kicked out of that experience to a website or to another digital property. We've been very focused on being completely integrated, whether it's through our API architecture or SyPI. When you're inside one of our partners' apps and you're doing anything related to the credit program, you can't tell, you can't tell the difference. Whether it's GAP, whether it's Sam's Club, you feel like you're inside of their environment, their user experience. And that's what all of our partners want. And I think it's our willingness and our ability to create that experience and do it very quickly. I mean SyPI, it really is a plug-in. I mean it is something that you can plug in very quickly. Our partners don't have to do much on their side. Now the Venmo API architecture is more -- is a little more complex in that Venmo wants to control 100% of that user experience. And then they call to our APIs for anything related to credit, but it's 100% integrated. When you go into that experience, you don't know that you're in something that Synchrony developed or something that Venmo developed. And I think that's really important, that ability to integrate. And what we're doing now, Sanjay, which is really exciting and I think a big opportunity for us. We're taking that and we're translating it to the small- to medium-sized partners. And that's more challenging in a lot of ways because you have to create that same SyPI-type experience where they don't have to do a lot of work on their side, but you still get all the credit functionality and it fits inside of their experience. And so I think that's a big opportunity for us. It's been a lot easier, I think, when -- our big partners, they have digital teams, hundreds of people, right, that can codevelop with us. With small- to mid-sized partners we have to do a lot of that on our own and just make it really easy for them to implement it.

And are you usually working with a provider on their part? Or is it still their internal teams where you're helping them sort of provide that connection?

It really runs the gamut. I mean we have hundreds of thousands of partners. And you can imagine the range of sophistication varies greatly. And that's why we try and put more of it on ourselves, because we know that if we have to get necessarily their technology teams to prioritize it, that's harder, right? If it's a lot of work on their side, that can be harder. So we try and do as much of it on our side and make it really easy for them to integrate it.

I guess speaking to the evolution of technology, this pandemic has also given rise to buy now, pay later. It's been a big, big sector for growth. And obviously, you guys talked about it on your earnings call. But maybe you could speak to what your strategy is as it relates to defending your turf, so to speak, with that product. I know you guys have SetPay. It has $15 billion of balances at the end of 2020. Do you envision sort of pivoting and making that a buy now, pay later product? Or do you kind of stay the course of the way things are?

Yes. Look, we've been really pleased with SetPay. And one of the reasons we've been talking about it more is, obviously, the buy now, pay later trend, the fixed installment equal pay trend, it's not going away, right? We're very clear on that. It's here to stay. For certain types of products, it makes a lot of sense. Customers want it. Our strategy, if you take a step back, is really to provide a full suite of products that meet the needs of our partners and our customers. And as you said, we do $15 billion in equal pay installment. SetPay is not all that different, frankly, from a buy now, pay later product. We can go as short-dated as 3 months at 0% interest. And so it really comes down to us sitting down with a partner and saying, "What products do you want to offer your customer, depending on the customer base, but also depending on the product, right, that you're financing?" Not surprisingly, bigger-ticket purchases in the furniture space tend to be longer installment loans or near more towards a revolving product. A lot of our partners like revolving products, right? And so what we have, in a lot of cases, is a hybrid approach, where we have a revolving account so that the partner can have that ongoing relationship with the customer, but you can put an equal pay installment product on that account, right? So think about it as kind of multiple products under one account. So you still have that relationship, but you can open an equal pay installment loan depending on the purchase. And so it really does come down to us sitting down with a partner and saying, "What products do you want?" And we want to have all of those products in our suite and the ability to offer them. And so like I said, look, the buy now, pay later term is not going away. That's a product that's here to stay. For certain partners, it's going to make a lot of sense for us to offer that. But some partners are going to want to stay with a more traditional product, and we'll have that as well. I do think the $15 billion that we do in equal pay, that will continue to grow. And it will probably start -- it will probably grow faster than the rest of the business. So it will be a bigger percentage over time is my guess. But it really is going to depend on the partner and the type of customer that they have and the products that they want to offer them.

Do you think some of them are prominent buy now, pay later firms that are competing with you on some of your merchants' website, have something better from a technology standpoint relative to what you guys have that enables them to be growing at the rate they are? Or what do you think it is that's sort of enabling that growth?

In a lot of cases, Sanjay, they're growing off a much smaller base, right? So that's part of the story. In some cases, it's hard to tell. But in some cases, they compete based on -- they're maybe willing to underwrite a little bit deeper than we are. And one thing we do, as you know, we stay very disciplined on how we underwrite, very disciplined around our return profile. But with that said, you can certainly make money on these products. We believe that our SetPay product is very competitive. And look, at the end of the day, a fixed installment or equal pay installment loan is not all that innovative. I think it really comes back to the point I made earlier around the customer experience. How do you make it really easy to apply? How do you use data and all the technology capabilities that we've been investing in to make it a really good experience for the consumer? Because that's what's -- at the end of the day, that's what really matters. And I think that's what the fintechs have done really well. They've done a great job, I think, on the customer experience on the front end, making it easy to apply, take out the loan. And I think we have a very similar offering and experience in that sense.

So one of your peers in the industry made an acquisition because they felt like build versus buy just made more sense to buy. I mean do you feel like you have all the assets you need inside of the category? Or do you feel like you might need to acquire some capabilities there?

Again, we looked at buying -- we chose to build. I think, building for us gave us the flexibility to really meet the needs of our partners. It was obviously a lot cheaper. The valuations in this space are pretty rich. And so because we had SetPay largely built at that point, it made sense for us to continue down that path. And it also allowed us to customize it and integrate it with our other financing offers. And I think that's an important point as we start to think about buy now, pay later. In a lot of cases, you're not going to make a return on that first loan, right? You're charging something to the merchant. You're charging something to -- you're charging nothing to the consumer. And so the way I think about it is actually the cost to acquire a new customer, right? And you want to be able to offer them additional products and services down the road that earn a more attractive return. And so SetPay, what that did for us, it allowed us to integrate it with our entire product suite. And so that strategy just made a lot more sense for us. And we weren't too excited about paying some of the premium valuations that are out there right now.

Totally understandable there. Final question on buy now, pay later. I mean as you are talking to your merchants, obviously, they're giving you feedback in terms of what your competitors are doing relative to you. Some of the players talk about enhanced marketing capabilities as a result of the buy now, pay later product. I mean do you feel like there's a huge difference in terms of that? Or is that something that can be overcome within your pitch?

Yes. I don't feel that's a real differentiator compared to what we do. Again, I think where we've seen real competition on buy now, pay later, it tends to be, "Hey, we think we can go a little bit deeper" or "We think we can attract a different category of customer." And we can do that through our SetPay product. Again, we're going to stay very disciplined around underwriting and returns. The benefit we have in being able to offer some of these programs is not only can we look at this as the cost to acquire a new customer and then move them in to other products over time, we can also wrap a SetPay or buy now, pay later product into one of our overarching existing agreements, right, which can make the profitability and the return profile work for us. So I think we have some degrees of flexibility and options -- various options to make this work from a return and a risk/reward standpoint.

Got it. So I want to bring Brian Wenzel in on the conversation and talk about the other favorite topic, which is credit quality. I mean it's always a favorite topic, as Brian Doubles knows. But you guys have been fairly conservative in your outlook for some time now, and rightfully so. I mean it's still quite a volatile backdrop. But maybe you could just talk about what you're seeing inside your customer space and how you feel like the stimulus will play through your numbers as we move through the rest of the year, especially in some of the more -- some of the updates we've gotten since earnings on stimulus?

Yes. Thanks, Sanjay. So if you first think about the last stimulus that's come through, it's really continued to buoy the consumer. So when you think about their health, as we entered this quarter, we kind of thought about -- just start with sales for a second, being roughly in line with the second half, which is flattish. We've actually seen stronger sales. As we've entered into 2021, we think buoyed by stimulus, that has continued to increase our payment rate which has given us a little bit of pressure from an asset perspective versus our expectations, create a little bit of excess liquidity. So I think from a margin perspective, that's going to have an impact here in the first quarter. But obviously, there will be an RSA benefit. But it really says stimulus is working as it flows to the consumer. Now if you flow that through to credit, we continue to see really good credit performance. We're down 130 basis points in January on the 30-plus, 210 basis points on charge-offs. The forbearance accounts are moving through like we thought they would and designed. But really, the underlying credit has been terrific. And there's a couple of factors here. One, we got the portfolio in very good shape from the '16 to '17 credit normalization activities, and we have done an awful lot with our partners with regard to data sharing, bringing different data points in, using different models. So I think we're much more surgical. Here, if incremental stimulus does come through, Sanjay, this is one where this could be the flattening of the loss curve that we expected. We'll see in the design if it's very broad-based, has a little bit less impact, I think. And certainly, we'll continue to pressure payment rates as we move up, but help sales. It is more targeted. I think it definitely will compress the peak of the loss curve. So I'm not sure I would characterize it conservative. I think we used our best guess. We don't really have a playbook for a pandemic, and the record amount of stimulus has come through. But we're -- we feel really good about where credit is. And most certainly, we're optimistic with regard to the sales performance and the health of consumer. So we're really set up, and we've kind of talked about this back half acceleration across all facets of the business.