Why Wal-Mart Will Help Finance Customers

In what some say is a back-door move into banking, Wal-Mart has started selling financial services to customers

Earlier this year, on Mar. 16, Wal-Mart Stores (WMT) abandoned plans to create its own bank. The retailing giant withdrew its application for a bank charter in the face of tremendous opposition from competitors, as well as from politicians in Washington and state capitals.

But the world's largest retailer certainly hasn't given up hopes of taking on the financial-services industry. On June 20, the Bentonville (Ark.) company came back with an announcement that it will offer a host of financial services to its customers through WalMart MoneyCenters, including check cashing, bill payments, and international money transfers. Wal-Mart will open financial-service centers in 450 stores by the end of 2007 and in 1,000 stores by the end of 2008.

As part of its services, the company will issue a Wal-Mart MoneyCard, a prepaid Visa card, which will cost $8.95. It can be used like a credit card to shop online, and to pay for gasoline and merchandise at other retailers. The card will be available at most Wal-Mart stores by yearend. "Many of our customers are paying too much, traveling too far, and not being well served," says Jane Thompson, president of Wal-Mart financial services.

Opposition from Congress

The move could prove to be a boon for consumers. Wal-Mart has brought down the fees for services like check cashing by 50% in certain markets, and it's likely to have a similar effect with its broader financial-services push. "They are going to put a squeeze on margins and prices for transactional services, money transfers, check cashing, and I think it's good for the industry," says Bruce Temkin, principal analyst at the consulting and research firm Forrester Research (FORR). "The core model of banking hasn't changed in decades."

Likely rivals who will see their profits squeezed—local check-cashing shops, traditional banks, and money-transfer players such as Moneygram International (MGI), First Data (FDC), the United States Postal Service, and Western Union (WU)—may not be so pleased.

Those who see this as Wal-Mart's back-door entry into the banking business immediately denounced the move. "Wal-Mart has said before publicly that they were interested only in processing payments and weren't going to offer financial services," says Rep. Paul Gillmor (R-Ohio). "It's a matter of credibility when they promise something and do the opposite." Gillmor, along with Rep. Barney Frank (D-Mass.), is co-sponsoring a bill that would prevent nonfinancial commercial institutions from operating a bank. The bill passed the House with 96% of the vote and is now pending in the Senate (see BusinessWeek.com, 7/6/07, "Wal-Mart: Stay out of Banking, Period").

Smaller Rivals Beware?

For Wal-Mart, financial services is a promising new avenue of growth. The company has been struggling in recent years with ways to revive its once-robust sales and profit growth. Its comparable store sales were down 3.5% in April, the largest monthly decline since 1979. A strategy to move upscale with more trendy apparel and fine home goods hasn't panned out.

But financial services may be an easier expansion since it largely involves selling more to the same customer base. "Wal-Mart is a dominant player in retail and has had a lot of problems broadening out its customer base or moving into urban areas, so it has to reach into other lines of business," says Bert Ely, a banking consultant based in Alexandria, Va. "Consumer financial services is a natural extension of its business."

Ely points out that these services are mostly aimed at Wal-Mart's core shoppers who don't use banking services and won't necessarily broaden the customer base.

However, Wall Street analysts applauded the move and say that the company will see gains in the long term. "Providing a private-label debit-card service under the Wal-Mart banner could increase both brand equity and frequency of visit," says Adrianne Shapira, retail analyst at Goldman Sachs (GS). "Financial services are higher margin (versus retail), and executive commentary suggests that profitability of MoneyCenter square footage is among Wal-Mart's highest." (Wal-Mart has piloted these services at various stories in the past year.) Wal-Mart's stock dropped 22 cents on June 20, to close at $48.59.

Of course, as with any new area that Wal-Mart decides to target, experts expect that many Main Street financial-services shops like check-cashing outlets will fold as the services start rolling out. In the past decade, Wal-Mart has become the largest supermarket, selling more grocery and food items than any other retailer. It's also the largest toy store, and it's on the way to becoming the largest seller of electronics goods. Meanwhile, rivals have filed for bankruptcy, including supermarkets Winn-Dixie Stores (WINN) in Florida and Penn Traffic in Pennsylvania; toy stores FAO Schwarz and KB Toys; and, earlier this month, electronics-goods chain Tweeter Home Entertainment (TWTR).

Skills for the "Underbanked"

But financial-services experts view this as a positive for the industry that might inadvertently clean up some of its usurious practices. Wal-Mart caters to customers with little or no access to banking services, people who are often described as the "unbanked" or "underbanked.&quot According to ACNielsen, 42% of Wal-Mart shoppers have yearly household incomes of less than $40,000. Many of these consumers pay high fees to subprime and payday lenders for cashing checks and receiving credit. Bank consultant Ely says that those money services and transmitters ought to fear Wal-Mart's expansion. "Wal-Mart will bring increased efficiency and bring down prices," says Ely.

Wal-Mart already has brought on a bonanza of savings for consumers. Wal-Mart says it conducts more than 2 million money-services transactions a week. Last year, customers who used Wal-Mart's services saved an average of $450 a year, or nearly $40 per month, the company said. The opening of additional Wal-Mart MoneyCenters will put more than $320 million back into customers' pockets, according to the retailer. Plus, some consumers are acquiring new financial skills. "As we piloted the card, we were happy to see how quickly our customers began using it to manage their money," says Thompson. "They immediately understood the value and how to take advantage of benefits, such as direct deposit or loading their paychecks in our stores. The acceptance has been exciting to watch because it means we've met a real need for our customers."

Forrester's Temkin says the retailer's expansion may also contain a generational aspect. Traditional banks have focused on their longstanding customers, what he calls "seniors and boomers." But younger people may be more open to handling financial transactions with companies that aren't really banks at all. "There's a whole new generation of consumers who are going to form their opinion of what banking is based on everything that's out there—and they go to Wal-Mart," he says. "Who knows, in a decade Gen Y might think that Wal-Mart is as much of a bank as Bank of America (BAC)."

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