Synchrony Financial
Q4 2020 Earnings Call Transcript

Published: 29 Jan 2021

[Operator:]

Welcome to the Synchrony Financial Fourth Quarter 2020 Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Kathryn Miller, Senior Vice President, Director of Investor Relations. You may begin.

[Kathryn Miller:]

Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website.

[Margaret Keane:]

Thanks, Kathryn, and good morning, everyone. 2020 was a challenging year marked by a global pandemic, economic disruption and unrest due to racial injustice. It was a true test to our resilience, our agility and our strength as a business. We're proud of the way Synchrony managed through these challenges. Though there have been significant developments that provide hope that the pandemic will begin to moderate, the virus resurgence and resulting regional shutdown and continued impact on unemployment is something we are still managing through. And though the pandemic continues to impact results, we are encouraged by some of the trends that have developed. Later in the call Brian Wenzel will detail these impacts on the quarter’s results and provide a view on how we think this year might develop. I will provide a high level overview here. Let's first focus on our quarterly results, including some of our recent successes, which are outlined on slides 3 and 4. Earnings were $738 million, or $1.24 per diluted share, an increase of $0.09 over the last year. Loan receivables were down 6% to $81.9 billion and average active accounts decreased 10% from last year, with new accounts down 19%. Purchase volume per account increased 10% over the last year to $602, and average active balance per account increased 4% to just under $1,200. Net interest margin was down 37 basis points to 14.64%. And the efficiency ratio was 37.1% for the quarter. Net charge-offs hit a new low at 3.16%. As a result of our liquidity and funding strategy, in response to COVID-19 impacts on our balance sheet, deposits were down $2.3 billion or 4% versus last year. This includes a strategic decision to slow overall deposit growth given the excess liquidity we have. Total deposits comprise 80% of our funding, and our direct deposit platform remains an important funding source.

[Brian Doubles:]

I want to start by thanking Margaret for all that she has done for Synchrony and for me personally over the last decade. We truly would not be where we are or who we are today without her leadership and it's an absolute honor to succeed her and lead Synchrony into the future. I'm also grateful that we will continue to benefit from Margaret's expertise and leadership in her role as Executive Chair. And I'm excited to partner with her and the Board, our leadership team, and especially our employees as we continue to capitalize on our momentum. There's a lot to be excited about as we continue Synchrony’s journeys. We have a strong business, a winning culture, and a tremendous opportunity to build on the strong foundation. As incoming CEO, I will continue to implement the strategies that we've developed over the last three years, which has enabled the momentum that our business has today. We will continue to leverage our competitive strength, deepen our market leadership, and invest in digital, data analytics and new product offerings to create a seamless customer experience. We will continue to grow our business and drive value for all of our stakeholders, our investors, our employees, our partners, and our customers. On that note, I'd like to shift gears and turn to Slide 5 to talk about just one example of a strategy that we implemented to enhance the utility and value of our offerings, and which has become an important part of our business today, equal payment financing. Fundamental to our business is our objective to provide a full suite of products that can be tailored to serve the evolving needs of our customers and partners while earning appropriate economic returns. Our partners’ most clinical needs are centered on their ability to offer a product that can seamlessly integrate with their digital assets and systems, deliver higher average order volumes and sales, increase conversion rates, and deepen customer loyalty. By the same token, customers have their own unique set of needs, including financing solutions that fit within their budget, are transparent and easy and convenient to use and which offer them flexibility in their purchase and financing decisions. We have extensive experience and installment lending, which has informed our approach to equal payment financing. We think about these products in two categories. First, evolving products. We offer mid and long-term equal payment plans, with promotional periods anywhere from 12 to 152 months depending on the product category. We also offer short-term equal payment plans with promotional periods of 3 to 12 months.

[Brian Wenzel:]

Thanks, Brian, and good morning, everyone. Before I begin, I want to congratulate Margaret and Brian on their new roles and thank them for what they have done for Synchrony and for me personally. I speak for everyone in the company when I say we look forward to working closely with them in the next chapter for Synchrony. As we begin 2021, we're encouraged by the developments being made to fight the pandemic, and continue to be inspired by those in the frontlines. For our part, we remain dedicated to keeping our employees safe, in helping our partners, customers and communities during this difficult period, guided by our values and principles and with the partner centric focus, we are working to help our constituents navigate this environment with an eye towards the future and the opportunities ahead of us as we begin to overcome the pandemic.

[Operator:]

. We have our first question from Ryan Nash with Goldman Sachs.

[Ryan Nash:]

Margaret, first, just wanted to say that it's been a pleasure working with you over the last 7 years. I've really enjoyed the opportunity to learn from you and best of luck in your next role as Executive Chair.

[Margaret Keane:]

Thank you so much, Ryan.

[Ryan Nash:]

So maybe I'll kick it off a question for Brian Wenzel. So Brian, the RSA to loans was over 5% in the quarter, just given the better-than-expected credit. And I was wondering if maybe you could just give us a framework how to think about the RSA for 2021? If your base case that you outlined on the slide plays out, can we expect it to kind of remain in this 5% RSA to loans range before eventually dipping later in the year?

[Brian Wenzel:]

Thanks, Ryan. Obviously, the elevation that we've seen as we enter into 2021 was really driven by credit, which was 200 basis points better on net charge-offs. Slightly offset by -- or offset by some of the interest expense and NIM. But clearly, elevated. So I think as you slide into 2021, what you're going to see is as we continue to expect NIM to rise, there will be a benefit that will flow back through the RSA to the retailers pushing it upward. But then as credit normalizes, that will deflate it. So our expectation is it remains a little bit elevated. We would not expect that type of elevation at the end of the year as we exit out of 2021. And I think as you get into 2022 and beyond, it should be back into the normal type range that we've operated in pre-pandemic.

[Ryan Nash:]

Got it. And Brian Doubles, thank you for all the color on the equal payment strategy. Can you maybe just expand on the product offering and how you think it can evolve over time? So if I look, your products generally started around 3 months of financing. So I was wondering if there was potential, we could see some of these short-term products evolve into your own buy now pay later product? And second, just given some of the new players in the space are charging merchants pretty healthy fees for these products, can you maybe just talk about the pricing on merchant discount rates in some of your equal pay products? And can you maybe use pricing as a lever to drive volumes towards your offering and maybe away from some of these newer entrants?

[Brian Doubles:]

Yes, Ryan, that's a great question. I think you really got to take a step back and say, look, our strategy is really to provide a full suite of products that fit both what our partners want, but also what consumers are looking for. And obviously, buy now pay later is a trend that's not going away. Installment loans, a trend that's not going away. If you take a step back and you think about our business, we have such a broad set of partners that you really just can't have a one size fits all strategy. So as you know, Ryan, we sit down with each one of our partners, we sit down and say, okay, what are you trying to achieve? How can we help you drive sales, how can we help you communicate life cycle market to your customers? And that means that they will want to offer a variety of products. In some cases, a revolving product is going to make more sense. In some cases, an installment product is a better fit. If you think about bigger ticket products, that steers more towards longer-term installment, that can be on a revolving product or closed end. And then smaller ticket, the trend that we've seen recently is, that tends to steer more shorter-term and more shorter-term installment. And so again, it comes back to really what the partner wants at the end of the day. Now you make a really good point. Obviously, merchant discount pricing plays into this. The shorter you go and if you're not charging interest on the account, then obviously, you charge a higher merchant discount. And so again, it comes down to what the partner wants and what the consumer wants at the end of the day. Look, I feel great about the product set that we have. The one thing that I would not underestimate, though, is the product is really just one piece of the equation. What we've been working on and what's really important is, how do you embed the product in the shopping journey. And so that -- the way that we integrate is more important than ever. So it really comes down to features and capabilities, even more than the products. At the end of the day, these products are not that complex. It's really about how do we integrate, how do we embed the financing offer throughout the shopping journey.

[Operator:]

We have our next question from Sanjay Sakhrani with KBW.

[Sanjay Sakhrani:]

My congratulations as well to all. I guess it's a little weird because the credit quality being so strong is affecting you guys a little bit more because you're sharing some of the upside there with the retailers. I'm just curious, as we have the stimulus benefit, like how much of the stimulus benefit is helping credit quality? And do you expect it to wear off at some point? Did you start to see it wear off a little bit in the fourth quarter? I'm just trying to figure out sort of how stimulus -- how long you think credit sort of remains this favorable at this point in time, understanding your forecast that things might revert to the mean?

[Brian Wenzel:]

Yes. Thanks, Sanjay. So stimulus clearly has benefited. We've seen that throughout 2020, most certainly, we saw an influx of payments, right, when the most recent stimulus package hit. So payment rates actually elevated back higher in the early part of January. So clearly, stimulus is in effect, and you do see it wear off. Now what's interesting, more interesting about this latest stimulus is it's not surgical as much. It's going to a broad-based population. So the effectiveness as we continue to move on even with further stimulus, our portfolio shifted. We used to be 27% subprime, now we're 23% subprime. So the effects of that will not hold. So we do assume that when the stimulus burns off here, most certainly from the one in December, but if there's another stimulus that does get enacted in the first quarter, that will burn off, and you'll see payment rates elevate back, and then you'll see delinquencies come back into the portfolio. Well, certainly, we're expecting, given the high level of unemployment that delinquencies will build pretty quickly here as we move out. But again, we haven't seen that to date in the credit metrics that you have seen. So there is a chance, though, that with the future stimulus and if you get the pandemic under control, with the vaccine that you may flatten the ultimate loss curve here and have a bridge, which is what we would hope for.

[Sanjay Sakhrani:]

Got it. And maybe 1 for Brian Doubles, just on -- and Margaret, the Verizon and Venmo Card. I'm just curious, sort of -- I know they're an important part of the growth story at least over the intermediate period as we're waiting for offline to recover. I'm just curious if you're seeing progress and how they're doing relative to your expectations?

[Margaret Keane:]

Yes. I'd say both are doing really well. Verizon, we launched back in the summer, and again, it was our first launch during the pandemic. I think as we started out more online and as the stores have opened up, we're definitely seeing real positive momentum there. People are liking the value prop. So we feel really positive about our Verizon relationship and where that could be. On Venmo, we did the soft launch in the fall, that's gone also very well, and consumers are really liking how the product operates within the Venmo app. I think there's a lot of technology that both parties built out to make that really an integrated experience for consumers, and we are getting a lot of positive momentum there. As we roll out to the broader population soon, we expect that to continue to be a big part of our growth story as we go forward with the company. So 2 really exciting programs, 2 programs where technology and our investments have really paid off, and we look forward to continue to advance our investments in technology as we continue to integrate even further.

[Brian Doubles:]

Yes. The only thing I would add to that is I wouldn't gloss over Walgreens. We're really excited about that relationship, and I put that in the same category as Venmo and Verizon in terms of the opportunity for us. Sanjay, 90 million Walgreen loyalty customers, we're really excited about what that relationship can do for us as well.

[Operator:]

And we have our next question from Moshe Orenbuch with Credit Suisse.

[Moshe Orenbuch:]

Great. And congratulations, both Mar Margaret and Brian. And maybe just a follow-up on that exact question. And clearly, each of these is kind of independently large customer bases and large opportunities. But maybe is there a way to kind of discuss how the combination of the type of customer that has the loyalty to that particular brand and the value proposition kind of translate into a credit offering. And in some way, kind of thinking about the 3 of them and perhaps even ranking them in terms of how you see them kind of contributing to growth at Synchrony?

[Margaret Keane:]

Yes. I don't know if we could rank them yet because it's still early. But I'd say that our experience has always been that customers can compartmentalize them. So if you think about Venmo, I think that's going to become more of an everyday use card, particularly with folks that use that app all day long. And we think as it's integrated into that payment mechanism, and the ability to really split payments and actually experience that back and forth between how people spend. But I think the big opportunity on Venmo really is the fact that you can use that card now in broader merchants. So I think as the QR code becomes more of a go-to type of technology, it's still not where it needs to be but we think that's really the other big opportunity with Venmo. So you have the in-app experience where people are working together to purchase things. But then in-store or the QR code opportunity presents a whole different -- I think, different set of experiences and maybe broaden stack customer base for us. So we're excited about that. On the other 2, it really is the value prop that I think makes another big difference where for Walgreens, what we do know, and we know this through CareCredit that people do compartmentalize their healthcare spend. And as consumers are being asked to really bear a bigger burden on healthcare spends -- spend, we view this card to be a great way for us to enter into the broader space of healthcare. You know that's been part of our strategy. I should also say that it's building on the relationship we already had with Walgreens because we already had the card -- the CareCredit card accepted in Walgreens. Now this is really tying our card with their value prop, connecting the 2 together and really allowing customers who have healthcare needs and wellness needs to really leverage that and then get the rewards. And then again, we're going to work towards making all this digital. So it's a really seamless, frictionless experience for the consumer. And then Verizon is really -- I think the value prop on Verizon in terms of how you use Verizon, I think all -- I joke all the time for those who -- I'm old, so I have kids who are old, they're still on my plan. You never really get the kids off the plan, by the way, leveraging that value prop and using that towards your bill, I think, is another really positive momentum that we're seeing. So we think all 3 of these programs have real growth potential. I think it really demonstrates for us our ability to really be agile in a very difficult environment to roll out during the pandemic and to really meet the needs of what I would say are really strong value props, leveraging technology.

[Moshe Orenbuch:]

Got it. And I certainly know what you mean about the phone plan. As a follow-up question there. Given -- Brian Wenzel, given what you talked about in terms of the capital positioning, how strong it is. And I mean, simply, I mean, you guys earned over $1 billion this past year and the balance sheet shrunk. And so how do you relate the $1.6 billion of buyback authorization to that? I mean, it feels like that could get stronger over time and maybe just kind of talk about how that was developed?

[Brian Wenzel:]

Yes. Thanks, Moshe. So it's important to note that the announcement that we made and the Board authorized is slightly different than we’ve historically done. This is for a calendar year. Obviously, the Fed has put some restrictions in for the first quarter, but we're going to go through our process. We've been going through a quarterly process from a governance perspective, looking at loss stresses, looking at the way our balance sheet will perform. And I think if you go back a quarter, we weren't sure we'd be in this position to start the year. We were thinking more back half of the year. But I think as we talked with the Board, we recognized the strength in the capital and liquidity of the company, we recognized the stability of the company as we progressed through the back half of 2020. As we look into 2021, we -- again, it's uncertain. There's going to be volatility, but we're optimistic that the pandemic comes under control in the first half and that the macroeconomic piece picks up. So we thought it was prudent to start. We'll go through a process and submit our formal capital plan to the Fed at the end of March, beginning of April. And then we'll circle back with what that amount is. We think that's a prudent amount, right, given this is a transitional year, right, relative to the visibility and uncertainty. So obviously, we haven't changed our long-term view with regards to capital and where we want to get to. It's just really the pace. And so we're comfortable that this is a good place to start, and we can always revisit as we move through the year.

[Operator:]

We have our next question from Mihir Bhatia with Bank of America.

[Mihir Bhatia:]

And also, let me add my congratulations to both Margaret and Brian. Maybe we can -- I wanted to start with -- maybe just going back to your comments on Walgreens, I guess my first question just really to clarify, is it going to sit in CareCredit or is it going to be in your Retail Card sector? Because it looked like from your release, it was in CareCredit. And then my follow-up on that would just be, are there -- is there any implication of that? Because I think historically, your CareCredit has had no RSA or a lot lower RSA. And just in terms of the program, is there something we should be thinking about specific to Walgreens, which makes it different than a typical co-brand or Retail Card program?

[Margaret Keane:]

Well, I'll start and then Brian can talk about the RSA. But look, I think one of the things that we have said for a while now is that we believe that we have a unique insight into the whole healthcare wellness space given our CareCredit platform. We've expanded that platform all through last year as we've expanded into hospital network through just our acquisition of Allegra Credit. We believe that consumers -- and by the way, it does sit in CareCredit. So I should clarify that. Does sit in CareCredit. We believe that the everyday spend around wellness is an area where consumers are looking for rewards. We believe Walgreens is a great partner because we were already in there accepting the Walgreen -- the CareCredit card. So we believe this space is a real ripe opportunity because of our unique knowledge and experience in this space for over 30 years, and we really see Walgreens as a way for us to really continue to expand and differentiate ourselves in the healthcare business. I don't know, Brian, if you'd mentioned the RSA.

[Brian Doubles:]

Yes. So the one thing I'd add on to Margaret's comments is when you think about the capabilities, we already have a CareCredit dual card that operates there. And we'll certainly -- while we're a big business, the ability for us to really take the tools, technology, talent that exists in that, manages the co-band relationships inside the Retail Card will most certainly partner with those folks combining the healthcare and knowledge of that. We have in other platforms, so in the payment solutions platform, we do have some limited RSA. So you would see some RSA here, but again, that's a $10 billion platform for us. So I wouldn't consider it to be material most certainly in the early part here. So -- but you will see some develop over time there.

[Mihir Bhatia:]

Understood. And then if I -- just my other question was just going to be on capital and going back to some of your comments on deploying capital and getting your capital ratios closer to your peers, I feel like you had excess liquidity the entire time you've been public. So I guess, is there an opportunity or interest in deploying some of that capital via portfolio acquisitions or through other inorganic growth, whether it's M&A or something else that we should be thinking about? Or do you just feel like you have enough on your hands between Walgreens, Venmo, Verizon, the economy reopening, that near term, that's probably more what we should be focused on?

[Brian Wenzel:]

Yes. Great question. When we think about the capital priorities of the company, the first priority for us is the organic growth that we have. So when you think about some of the longer standing existing programs, whether it's an Amazon or PayPal or TJX, Sam's, Lowe's, there's lots of opportunity to continue our penetration march there. These newer programs, Verizon, Venmo, Walgreens will most certainly -- we'd like to deploy capital into that. So that's our first priority to grow that piece. But we will have capital beyond that ability to grow the book. If you think about the capital generation of the business, you think about the resiliency and the return, you think about the resiliency of the RSA, we will have excess capital, which then our next priority is to maintain our dividend and provide that back to shareholders. And then beyond that, we believe there will be excess that will be deployed first in share repurchase to the extent that we find an acquisition that makes sense, whether it be a portfolio or businesses, we'll look to do that.

[Margaret Keane:]

I think that was demonstrated this quarter by the acquisition of Allegro. So if the right opportunity comes along, that fits with our long-term strategy and is at the right return for us, we certainly are looking at those opportunities should they come forward.

[Brian Wenzel:]

And that's the key point. Still in this part of the cycle, I'm not sure valuations have checked up enough where we would do something large. But to the extent that they do and an opportunity exists, we would gladly deploy that capital for the long-term value creation.

[Operator:]

We have our next question from Don Fandetti with Wells Fargo.

[Don Fandetti:]

Brian, we're getting more questions around regulation, and I just wanted to sort of get your perspective on how you're thinking about that risk? And is there any parts of your business that could become more of a focus from mostly the CFPB et cetera?

[Margaret Keane:]

Yes, Don, I'll take that. It's -- we are -- I'm assuming this is in relation to the new administration. I would say we've been around for a really long time. We've had all administrations. We feel confident that even in the new administration, we'd be able to manage through any changes that they may make. I think we feel like we're well positioned. And look, I think the regulation and the focus is really always on this whole idea of being fair and transparent to consumers and I think that's our job. So we have the infrastructure in place, we have the people in place. We're trying to ensure we're doing all the right things from a consumer perspective and also working with our partners in this as well. So we're not overly concerned. I mean, look, there'll probably be more things coming out, but we'll adjust as we have to.

[Operator:]

We have our next question from Betsy Graseck with Morgan Stanley.

[Betsy Graseck:]

Margaret, it's been such a pleasure working with you. And I know you're still going to have like fantastic influence over at Synchrony in your new role. But thanks very much for all the time that you've given us over the years. And Brian, looking forward to even working with you closer.

[Brian Doubles:]

Thanks, Betsy.

[Margaret Keane:]

Thank you very much.

[Betsy Graseck:]

Okay. A couple of questions on SetPay. Just wanted to see if you could give us some color on the take-up rate at your partners and things like what percentage have been rolled out to? How much do you think you can push that in 2021, which is a period where I think you're going to see some of the pure-play guys really push hard to get into merchants? So want to get an understanding of that from you? And whether or not the partners that you have today with another being PL platform can add SetPay on top of that? Or do you have to wait for their programs to come up for RFP in a few years? Just some color there would be helpful.

[Brian Doubles:]

Yes, sure, Betsy. It really does come down to the individual partner and what they're trying to achieve. And I think obviously, this is a hot topic. That's why we put a slide in the deck today just to kind of lay out in more detail how much of this business we actually do today. I don't think it's well-known that we have $15 billion of balances that are on equal pay products, both short and long-term. And I think it really does come down to partner choice. So as I said, we sit down with each one of our partners, in some cases, they love the idea of an equal pay product because that's what the consumer wants. That's what their customer wants, but they want to put it on a revolving product. And part of the reason for that is it gives them an ongoing relationship with the customer, right? It allows them to drive the repeat usage. It allows them to do the life cycle marketing. All of those things that are really important to our partners and that, frankly, they've been trying to drive for the last 5 or 6 years. We always talk to you about how much reuse we get on the card. And that's a big priority for our partners is creating that lasting relationship with their customer. And then we also have some customers that, depending on their customer base and the types of products they sell, that they're actually interested in more of a short-term closed end installment product. And so we're able to provide that as well through SetPay, and we can do that very short-term, we can do it longer term. But it really is customized for the individual partner in terms of what they're trying to achieve. The one thing I can tell you is we are seeing slightly higher growth rates on those installment products than we're seeing on the other products in the portfolio, which I think is good news. I mean, we absolutely have to stay ahead of that curve. It's rapidly evolving. But the product is just one piece of the equation. I touched on this earlier, what our partners really want to make sure we can do. And this is very different depending on the types of partners is how do we integrate into their digital point of sale. And if I look across the investments that we're making in the company, that's one of the biggest ones. So it's not enough just to have the product, actually having the product is the easier part in a lot of cases. But how do you integrate seamlessly inside of all of our partners' digital assets. So how do you do that online? How do you do it in their mobile app? And you can imagine, given the breadth of our partner base, we have to have solutions that customize for each of those individual partners. And so it really is more about the experience than the actual product at the end of the day. Did I answer your question?

[Betsy Graseck:]

Yes, I guess the -- my underlying question here is do you anticipate -- I understand that you have a significant amount of balances on this equal pay product today. SetPay is a slightly different tone to that, a slightly different offering. And I'm wondering if this is, in your opinion, 2021 is a year where that take up by your partners is going to be explosive or is this normal course for you? And there -- we really shouldn't expect to see that much difference in how your partners interact with you on the equal pay product?

[Brian Doubles:]

I think you're definitely going to see higher growth rates in SetPay than you see kind of broadly across other products. With that said, I wouldn't consider it explosive growth because it really comes down to what the partner is trying to achieve at the end of the day. And we do have some partners that are very focused on a strategy where they like the equal pay product, but they'd like to see us sit on a revolving account where they can continue to drive the repeat usage and continue to have that ongoing relationship.

[Margaret Keane:]

And I think the other piece is customer choice, right? What does the customer really want?

[Brian Doubles:]

Yes. And for some…

[Margaret Keane:]

Our job is to really offer the products and position them in the right way to the consumer so that they can have consumer choice. And I think one of the things we're very focused on is making sure that's integrated in our digital assets. So it's a choice for a customer.

[Brian Doubles:]

Yes. At the end of the day, it comes down to what our partners want and what the consumers want. And again, given the breadth of our partners, we have to be able to provide a very full product suite revolving short-term, long-term installment, and we'll be able to do that. But it does come down to the partner and what the customer wants.

[Operator:]

We have our next question from Bill Carcache with Wolfe Research.

[Bill Carcache:]

I also add my congrats to you both, Margaret and Brian. You have a lot of great new programs that you're investing in as you look to the resumption of growth in new and active accounts coming out of this. But can you give a bit more color on how you're gauging what the right level of investment is, your guidance for operating expenses calls for higher investments, but maybe you can give a little bit more context, maybe in terms of an efficiency ratio?

[Brian Wenzel:]

Yes. Thanks, Bill. So we've continued -- even during a pandemic, different than a lot of our peers, we did not slow down any of the investments, whether it was in technology or in resources we've allocated towards these growth initiatives, we reprioritized certain things inside of that, that were greater short-term opportunities. So we've maintained that so for us, we're going to continue to invest. I mean, 2020 was a big year for us when you think about the investment to stand up a Venmo and Verizon. And again, we're looking forward to a full Venmo launch here in 2021. So we've invested quite a bit. Walgreens comes right behind this. We continue to drive core productivity in which we're continuing the investment. And again, the way we're positioning the company for the longer term, Bill, is to look at -- if I'm thinking out 2025, what is an above-average ROA, and we're going to drive that efficiency ratio back down into a range where it has been more historically but really delivers that ROA given the revenue mix and loss content that we see in that portfolio mix. That being said, we are going to find ways in order to either increase the margin of the portfolios or to drive incremental costs out to maintain and perhaps expand that investment technology. That is something that we want to do and we feel we need to do for the medium and long-term.

[Bill Carcache:]

That's super helpful. Separately, on capital, can you give a little bit of more color on how you guys are thinking about the CECL and CARES Act phase-ins on your ability to return excess capital? And I guess, just is there a possibility that we could see you guys increase that $1.6 billion authorization under a favorable macro scenario where you guys end up releasing a sizable amount of reserves as we progress through 2021?

[Brian Wenzel:]

Yes. So let me unpack that. The first piece in all our modeling as we move through '20 and really '21, we've always modeled in the transition adjustment relative to CECL and, most certainly, that would come out of -- we view the capital generation in those years as we move out. This is roughly around, I think, 60 basis points assuming that the rules stay intact. We are continuing, to be honest with you, engage with dialogues with our stakeholders about a form of permanent capital relief because we obviously believe that when you look at our Tier 1 plus reserves at 27% that is very high, where we are and that we believe that there should be credit, whether it sits in Tier 2 or in Tier 1 relative to CECL. So that's always been a factor as part of our plans and shouldn't really impact it. With regard to your second part of your question, that the improvement in the macroeconomic scenario, most certainly, we're not tied to the $1.6 billion. That's where we view it today. We're going to go through our capital planning process here in the first quarter and get our capital plan approved by the Board in March, submit it in April. And then hopefully, we'll come back to you in the second quarter with a fuller perspective. But there is a scenario where clearly we can return potentially more capital. I think right now, $1.6 billion is we're sitting January 29 and transition in a year that is a little bit uncertain is not a bad place to start the year at. So we're going to continue to monitor the same way of quarter out. We thought we weren't going to do anything until the back half of this year. So we'll continue to evaluate it, Bill.

[Kathryn Miller:]

Vanessa, we have 5 more people in the queue, but time for only 1 more question.

[Operator:]

We have our last question from John Hecht with Jefferies.

[John Hecht:]

Congratulations, Margaret and Brian, and welcome, Kathryn. A question -- another question on the RSA. I'm just wondering, I mean, because we can look back at historical average levels and understand it may be elevated because of the charge-off cycle. Number 1 is, is there anything different, like where that maybe our average RSA should sit over time? I don't look where it was, it sounds like there might be some modest change because of the Walmart transition. But is there anything else that would change the long-term kind of average RSA levels?

[Brian Wenzel:]

Yes. Thanks, John. So the simple answer is no. I mean, Walmart, clearly, if you strip that out, we'll push the RSA higher because it operated at a lower RSA level than the company average. Absent that, there's nothing fundamental. I think what's challenging people, and I can appreciate it from an outside-in perspective is CECL has dramatically impacted the profitability of the company. And it's very difficult. We've lagged CECL, but when you don't see delinquency formation at a retail partner, it's difficult to go to them and say, okay, even though I haven't seen delinquencies, they're going to come at some point, here's $100 million, $200 million. So that is unfortunately pushing the RSA higher here. And then when you look at credit really outperforming the loss in NIM, we have a highest RSA. I think when you look at it over time, if you look at '20 and '21 combined together, it's going to get back down the average. And most certainly, as we exit the pandemic, there's nothing structurally that they should operate at different level ex the Walmart impact.

[John Hecht:]

And my last question is -- and you've talked about some of the new products, and I fully appreciate the customer-centric focus of the new products. At what point do though the kind of mix of the new products start to impact, call it, the economics of your business? I mean, for instance, the closed end product might have a bigger merchant discount that would flow through a different -- I imagine a different line item in your P&L. So at what point should we envision changes in that mix? And what might that -- like what form might that take?

[Brian Doubles:]

Yes. Thanks, John. I'll just start on that. I mean, look, as you know, we are pretty disciplined around pricing. And I think we try and maintain pricing that gives us an overall and attractive return either for the program or the product that we're underwriting. And so that will remain consistent. I think there are certainly trade-offs. And I think how you earn on these products is a little bit different. Obviously, shorter-dated promotions, you're maybe getting more merchant discount, you're getting less off of the APR or the consumer. But I wouldn't see having a material impact on our overall profitability return, longer term, you might just see the components change, which, as you know, both of those run through net interest income. So I don't think you wouldn't see it have a significant impact there. I don't know, Brian, if you'd add anything.

[Brian Wenzel:]

Yes. The only -- I mean, John, we have $81 billion in assets. So I think to try to move metrics materially, this would have to be incredibly large. I mean, obviously, you see growth rates in much smaller competitors. But at $81 billion, it shouldn't have a material effect relative to most certainly short and medium-term with the way our P&L is constructive.

[Brian Doubles:]

I think the best way to think about it is these are going to be really attractive avenues for growth for us longer term. This whole product strategy, we do a lot more of this business than I think people realize. I think we -- obviously, we're well-known for revolving credit, but we do a lot of installment. It's something we're very comfortable underwriting. We're very comfortable with pricing. And like I said, we're seeing a little bit better growth there than the other products that we have. So I think that's exciting at the end of the day. Again, it comes down to partner and customer choice, and we're in a position to be able to provide whatever that solution is for our partners that they want.

[Operator:]

And thank you. This concludes our question-and-answer session. Thank you, ladies and gentlemen. This concludes our conference call. We thank you for your participation. You may now disconnect.