Story summarized from Business Week
FEBRUARY
7, 2005 — "It's
not a question of if Wal-Mart's going to be a bank, it's a question of when."
So says D. Anthony Plath, professor of finance at Charlotte’s University of
North Carolina.
Wal-Mart is legally constrained from being a bank, or from owning one, but it already has partnerships with banks, and already provides in-store financial services—some of which are undercutting competitors’ prices. And the giant super-chain’s ambitions to do much much more is giving the financial industry the jitters.
Although other companies, like Nordstrom and General Motors, have brought banks and thrifts or hybrid Federal Deposit Insurance Corp.-insured industrial loan companies under their wings, they don’t set off alarms in the financial industry the way Wal-Mart does.
In 1999, Wal-Mart tried to acquire an Oklahoma savings bank, but was blocked by the Gramm-Leach-Bliley Act, the result of an overhaul of federal banking law. And in 2002 California’s legislature put the skids to Wal-Mart's efforts to purchase a small industrial loan company (ILC).
But
Wal-Mart Stores Inc didn't rise to first place among world retailers by
accepting defeat without a fight. In spite of its bruises, it has steadily
increased its activity in financial services. The latest move, made public Jan.
21, 2005, introduces a no-fee Wal-Mart Discover credit card offering cash
rebates of 1%. It will jointly inaugurate the service with GE Consumer Finance
this March.
Wal-Mart is not likely to be satisfied with such basic services. It is expected
to apply its successful low-price/high-volume blueprint to much broader horizons
in the financial world. A lot of bankers think the gargantuan retailer won't be
satisfied until it has full banking powers.
Wal-Mart already has more than a foot in the door. In the last three years it
has forged cooperative ventures with financial-service providers MoneyGram
International and SunTrust Banks making it possible to provide low-priced money
orders and wire transfers. Bank branches operated by partners now operate in
nearly 1,000 of its supercenters. SunTrust is beta testing almost 45 bank
branches in Wal-Mart stores called "Wal-Mart Money Center by
SunTrust," and expects to have 100 of them by 2006.
Wal-Mart customers are already seeing benefits. Payroll checks can be cashed for
only $3, money can be transferred to
Mexico for $9.46, and a money order costs only 46 cents. Prices for these items
at some competitors are twice these figures. Outlets handling these transactions
are typically high-margin businesses that take advantage of poor people and
immigrants—sometimes illegally. In such a greedy environment Wal-Mart’s
offerings will be welcome.
David
Robertson, publisher of The Nilson Report, a newsletter about credit and
debit cards, says that "Traditionally, nonbank vendors of financial
services have charged an arm and a leg." Gary Stibel of New England
Consulting Group in Westport, Conn, says, "Wal-Mart is giving people in
lower-income brackets opportunities in financial services they never had
before."
As Wal-Mart tries to stay growing, financial services could be lucrative new
source of profits. A competitor estimates that services already offered by
Wal-Mart are worth $5 billion a year in fees. That gives them a lot of room to
reduce prices and still make a profit. Using an apt metaphor, Robert G. Markey
Jr., says Wal-Mart will "collapse the price umbrella," putting
pressure on check cashers and wire-transfer leader Western Union Financial
Services. Markey is consulting firm Bain & Co.'s director for financial
services.
The basic services Wal-Mart offers now add up to a mere “rounding error” on
the balance sheet of the $287 billion company. The results for the financial
services unit are not called out separately, but are included along with
"other income," which totaled $2.1 billion for the first 3 quarters of
the past fiscal year. This was an increase of 31%—but was still only 1% of
total revenues. There's a lot of growth potential, says Bert Ely of Ely &
Co., banking consultants in Alexandria, Va. "They're developing, in
customers' minds, a link between Wal-Mart and going to the bank. That has
powerful long-term implications."
Some financial-service suppliers
aren’t eager to get on board the Wal-Mart express. According to Jane J.
Thompson, president of Wal-Mart Financial Services, "some of the leaders in
the industry don't want to hurt their margins and don't want to work with
us." MoneyGram is not one of the reluctant brides. It is running only a
distant second to Western Union now, which has 12% market share in global money
transfers, dwarfing MoneyGram’s 1%. So what’s to lose? Wal-Mart can catalyze
an immense amount of business from more than 100 million customer visits a week
in its 3,100 U.S. stores.
As
an also-runner, MoneyGram wasn’t too concerned about protecting margins, but
was thinking about growth—a perfect fit for Wal-Mart, says vice-president of
MoneyGram, Daniel J. O'Malley. Another advantage of working with Wal-Mart—it
will be helpful to see how Wal-Mart does business. This from SunTrust’s
Executive Vice-President Christopher T. Holmes. It will be even more helpful if
Wal-Mart actually gets into the banking business.
Could Wal-Mart in fact become a full fledged bank? To do so, it would have to
overcome existing federal prohibitions against combining banking and commerce.
The pertinent legislation was intended to keep big companies like Wal-Mart from
squeezing competitors by denying them credit. Another no-no would be moving
losses from a retail company to a bank insured by, for example, the FDIC.
The
word on the street—or in the vaults—is that Wal-Mart will find a way past
those restrictions. Vice-president of Independent Community Bankers of America,
Ronald K. Ence, says Wal-Mart was active in Washington last year lobbying for
expansion of the bank-like prerogatives of the Industrial Loan Companies. A bill was passed in the House in 2004 that would have permitted
unlimited interstate banking, but only for those with at least 85% of their
business in financial services. The bill did not pass in the Senate,
If Wal-Mart were to gain the right to conduct full-bore banking, it could offer
everything from checking and savings accounts to mortgages, car loans, and even
small-business loans, and do so at prices well below those of its competitors.
"There's no question, they want to have a nationwide financial-services
network. If they do, there's no doubt in my mind they'll be able to do to
community banks the same thing they've done to the local grocery store and the
local hardware store and the local clothing store," says Ence.
Wal-Mart says its plans for future growth aren’t dependent on owning a bank.
"Our strategy is what you see," says Wal-Mart's Thompson. She was once
executive vice-president of Sears, Roebuck & Co.'s credit business. The
financial services Wal-Mart offers are intended for lower-income customers and
employees, many of whom don't have a bank account—and there are an estimated
56 million American adults who fit in that category. Providing these services
for [financially] underserved customers “gets right at what we like to be
known for," says Thompson, who moved to Wal-Mart in early 2002. The
[financial] units’ profits, she says, are not as important as the fact that
these services attract customers to the stores.
"My
whole thing is about starting with the customer," Thompson says. She has
learned from Sears's problems in the 1980s as the company tried to build a
financial supermarket. She joined Sears in 1988 and took over its credit
operation in 1993. In that period, the store invited onto its premises offices
of Allstate insurance, Dean Witter brokerage, and Coldwell Banker Real Estate.
But Sears discovered that many of its customers didn't feel comfortable buying
securities and insurance—or houses—from the same store where they bought
washer/driers.
Wal-Mart may be attempting to avoid Sears' errors, but its actions suggest that
the company has ambitious goals. Wal-Mart calls itself—on its Web
site—"a trusted name in financial services." And in stores, the
money centers that are already up and running bear the potent Wal-Mart brand.
And
a spokesman for Ace Cash Express Inc., the nation's biggest check-cashing chain,
Eric C. Norrington, claims Wal-Mart hasn't impacted significantly on Ace’s
growth or price
structure. Instead, "Wal-Mart has validated the importance of this market
segment. That's attention we welcome," he says.
But
complacency can be fatal, as some retailers—including toy stores, groceries
and jewelers—have discovered. Considering Wal-Mart’s longstanding interest
in financial services, their technological know-how, their access to capital,
and their national clout, banks—especially small and midsize banks—may be
justified in being paranoid. Even big ones should stay on their toes. "The
mistake would be to stick your head in the sand and try to convince yourself
that Wal-Mart is not a factor," says Bain’s Markey. Whatever the
obstacles, Wal-Mart appears to be set on a steady course to becoming a force in
consumer finance.
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Original story for Business Week by Wendy Zellner