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| The Basics | National Bank of Wal-Mart?
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Wal-Mart already offers money-transfer and check-cashing services. The next step is full-on banking. The financial services industry is terrified, but consumers might benefit.
By Liz Pulliam Weston
Wal-Mart has a reputation for squeezing out Mom-and-Pop stores and other low-margin businesses, like unionized grocers.
But imagine for a moment if the world's biggest retailer put the pricing squeeze on one of the world's more profitable businesses: financial services. Who would pay the price? Perhaps:- Mortgage lenders who surprise their borrowers with last-minute junk fees.
- Banks that nickel and dime their small account holders to death.
- Auto lenders who add discriminatory surcharges on loans to black and Hispanic buyers.
- Credit card companies that use every excuse to jack up rates.
- Check cashers and payday lenders that levy usurious charges on their customers.
Wal-Mart's relentless push for ever-lower prices has revolutionized retailing and is sometimes even credited for helping to keep U.S. inflation low. It's not hard to make the leap into imagining the retailer bringing similar price discipline to an industry grown fat on escalating rates and fees. (Fee income now comprises half of banks' total income, according to investment banker R.K. Hammer.)
Organized opposition
You can say I'm a dreamer, but I'm not the only one. Many banking experts predict that Wal-Mart will eventually break into the business -- despite determined opposition from the U.S. banking industry. (Relatives of Sam Walton, who founded Wal-Mart, control a regional bank called Arvest Bank. But in regulators' minds, and in practical reality, that's a far cry from publicly-traded Wal-Mart entering the banking business.)
Wal-Mart may have just taken a step toward that end by applying to create what's known as an "industrial loan corporation" in Utah. The ILC would handle Wal-Mart's credit card, debit card and electronic transactions, saving the processing fees the company now pays to a third party. ILCs typically can't offer checking accounts, but they can take deposits and make loans.
Wal-Mart's previous attempts to create a bank have been cut off at the pass, including once in 1999 when it tried to buy an Oklahoma bank and more recently in its attempts to buy a California industrial loan corporation.
"The banking community's opinion was that the world as we knew it would come to an end" if Wal-Mart were allowed to buy the savings bank, said banking analyst Bert Ely, who well remembers the 1999 tempest. "There was strong, strong, strong opposition."
Other retailers, including Nordstrom and Target, have purchased banks without creating nearly the fuss that Wal-Mart's involvement generates. But those chains don't have nearly the scope or the economic muscle that Wal-Mart flexes.
A different customer base
They also don't cater to quite the same population. Wal-Mart customer's average incomes are below the national average, while Target's are above -- and Nordstrom's, well above. Some analysts estimate that more than one-fifth of Wal-Mart's customers have no bank accounts, which would be about twice the national rate, according to the Federal Reserve. "Wal-Mart National Bank" could bring these customers into the banking fold, offering them affordable bank accounts, credit cards and mortgage loans.
"It could turn out to be a good thing for consumers," said consumer advocate Linda Sherry, editorial director for Consumer Action, "especially the unbanked or those who are suspicious of banks."
It's a pretty big market and one that Wal-Mart has already started to tap. The retailer began offering money orders three years ago and has since added payroll check-cashing and money-transfer services. Today, the company's 3,066 stores and supercenters process about a million financial transactions a week.
The prices are predictably cheap:- A wire transfer to Mexico costs less than $10, compared to $14.99 at Western Union.
- Money orders are less than 50 cents, compared to a buck or more at many banks.
- Checks are cashed for $3, and customers aren't unknowingly steered into short-term loans at 300% to 1,300% interest rates, as happens at some unethical check-cashing outlets.
Wal-Mart doesn't have the check-cashers shaking in their boots -- at least not yet. For one thing, the check-cashers have Wal-Mart outnumbered, with more than 11,000 outlets cashing $55 billion in checks annually, according to the Financial Service Centers of America, a trade group representing the industry.
Likewise, Western Union has far more offices abroad -- 196,000 agents in 190 countries -- than MoneyGram International, the money-transfer service Wal-Mart chose as its partner and which trails with 75,000 agents in 170 countries. MoneyGram has about 10% of the estimated $65 billion that flows out of the U.S. in money orders, estimates Aite Group of Boston, while Western Union has 22%.
How many branches?
Wal-Mart's record on installing branches of partner banks in its stores also seems somewhat tentative, Ely said, with only one-third of the stores offering full-service banking. Banks have recently rediscovered the fact that customers like to have convenient branches, and Ely wonders if many would be willing to drive to their local Wal-Mart even if every store had a branch.
"I'm not convinced (Wal-Mart) would have sufficient branch density," he said, "that it would be attractive enough for customers to do their banking there."
But Ely acknowledges that Wal-Mart could solve the problem with numerous, well-placed ATMs in surrounding communities. The retailer also could be using its relatively low-key partnerships with financial services companies to study the business before making its own, branded push into banking.
"Just look at its Web site if you want to see its intentions," Ely said, quoting from exactly that source: "'A trusted name in financial services.'"
Of course, Wal-Mart National Bank wouldn't stop at providing checking accounts for the poor. The retailer already has introduced a no-fee, 1% cash-back Discover Card for its better-heeled clientele, and if the company did accept deposits, it would need to invest the money somewhere -- perhaps in mortgages and auto loans. That, again, could benefit consumers.
I won't say that Wal-Mart is assuredly more ethical than mortgage lenders who thrive on junk fees or auto lenders who charge minorities hundreds of dollars more for loans than whites with similar credit scores. The retailer's vehement anti-union stance and its policies regarding pay and benefits should give anyone pause.
But its singular focus on delivering "always low prices" to its customers could provide a much-needed shock to financial-service companies who have feasted on customers' pocketbooks for far too long.
Liz Pulliam Weston's column appears every Monday and Thursday, exclusively on MSN Money. She also answers reader questions in the Your Money message board.
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