Wal-Mart and Banking, Once Again

Lawrence J. White writes,

it is exactly this demographic group—low- and moderate-income households—that is most in need of reasonably priced financial services. The percentage of U.S. households that are unbanked (i.e., do not have a bank account) or underbanked (i.e., have an account but rely on non-bank providers for some financial services and products) has been a longstanding policy concern. The most recent data (from a FDIC report that covers 2015) in this regard—based on a survey of more than 36,000 households nationwide—show that 7% of all households were unbanked and an additional 20% of all households were underbanked. Unsurprisingly, the percentages are substantially larger for low- and moderate-income households

Pointer from Mark Thoma. I wonder, though, whether Wal-Mart really has an advantage in serving these households as a bank. It is one thing to develop a great logistical system for moving products from far-flung suppliers to stores. It is another thing to deliver financial services to people with relatively low transaction sizes and more difficulty avoiding default.

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19 Responses to Wal-Mart and Banking, Once Again

  1. collin says:

    I wonder, though, whether Wal-Mart really has an advantage in serving these households as a bank.

    Isn’t that for Wal-Mart to find out? Also, what if Wal-Mart is only marginally more competitive but the real goal is drive more to the store. Maybe a small portion of the store is a lot cheaper to run than a bank branch that services more high end customers. Probably simplest reason for the under-banked is the various over-draft, account and other fees. Wal-Mart offer program that avoid these fees with levels store transactions.

    It seems like if we want to lower the under banked, it seems giving Wal-Mart a banking license is easier way for the government without resorting to Postal banking.

    • collin says:

      And realize:

      1) The on-site retail market is shrinking and this is a simple to increase traffic away from Target, Sears, etc.
      2) Just think banking with Wal-Mart make drive some on-line business here. You have an account with Wal-Mart and you save 2% on-line purchases and you have less bank fees. I am sort of surprised Amazon is not hitting the door here.

    • Jeff R. says:

      Also, what if Wal-Mart is only marginally more competitive but the real goal is drive more to the store.

      They’ve rented space inside their stores to banks for years, which I think is aimed at driving the foot traffic. Actually operating the branches themselves may be for a somewhat different purpose, I suspect, given all the regulatory hurdles involved.

      • collin says:

        I seen that in some grocery stores but a lot of these closed down during the Great Recession as they got consolidated with other branches.

        My question here is why does Wal-Mart need to prove themselves viable before a license? If we want more competition to Big Banks and less under-bank, it seems like the Wal-mart option is letting the private sector decide. Heck, I would not be surprise Wal-Mart tries in 25 stores and turns out to be a failure. (We have to remember successful corporations make all kinds of mistakes.) There are a numerous reasons why it fails or does not fulfill it promises, but we can’t know until Wal-Mart tries. I am sure why Arnold is not supporting this.

        • Jeff R. says:

          Good points. I am just thinking that in terms of foot traffic for a retail store, banking is probably the least useful complement for attaining that these days since it’s so easy to do on line. I set foot inside a bank branch about twice a year these days.

          Maybe Wal Mart’s real interest is just in becoming its own banker. When I worked in the banking industry, we had a few weird banks as clients that had been started by large organizations to meet their own credit needs. Example: there was a bank in the Midwest that had been started by a group of insurance companies to provide financial services for the independent agencies that sold insurance for them and was funded at least in part by the large cash reserves the insurance companies kept on deposit there to pay claims with. The other obvious examples here are the employee credit unions you can find all over and something like GMAC/Ally Bank being GM’s consumer finance division.

          Maybe Wal Mart thinks they can trim their working capital costs by borrowing their customers money via bank deposits?

  2. BenK says:

    Seems to me that they can tie those transactions to low-margin sales to increase the margin across the whole value chain, yes? So that a deposit, withdrawal, transfer, purchase becomes instead a ‘deposit, purchase’ with fewer interfaces?

    Also, the banking system has spent years slandering the check cashing services; perhaps Walmart can capitalize on all that bad press.

  3. MS says:

    It’s an anecdotal observation, by consumer credit is still a hot area of fintech. That is, companies like Paypal, Bread, Affirm, Klarna and others, are all trying to streamline the point of sale extension of credit . . . and then sell their services to Walmart, BestBuy, Target, etc. It seems that Walmart would do that on its own, if it could.

  4. Handle says:

    1. Walmarts have pharmacists nd opticians, why not tellers?
    2. A big motivation was to reduce card transaction costs, which raises the question as to why, in 2017, the big card processor duopoly is still able to charge merchants high fees – why hasn’t technology and competition made this much cheaper over time?

  5. B.B. says:

    Cheaper for Walmart? Maybe that depends if it gets regulated as a bank. The entire “shadow banking system” evolved to evade regulations. The incentives haven’t changed.

    And what is a bank anyway? Is Walmart’s goal to lend to households with modest income. A credit card can do that. Or personal loans. Walmart can issue bonds to finance such lending. It doesn’t have to issue bank deposits.

    Alternatively, it could give people “bank accounts” which can have checks. But Walmart doesn’t need to make loans to service bank accounts.

    We assume that “banks” make loans and issue bank deposits. But those are separate services and don’t need to be linked, except by custom and regulation.

  6. Matthew Young says:

    They manage a two side flow, goods queuing up and customers queuing up. The WalMart banks can manage the customer flow by letting customers defer purchases in favor of high deposit rates when the store is crowded. This assumes the banking risk is much smaller that the customer queuing risk. But the customer queuing risk is high, we get mass riots. WalMart has available technology to do just that,make changes in deposit rates, asynchronously and suddenly warning customer that skipping the line today in favor of tomorrow has high rewards.

  7. Lord says:

    I think the idea was to auto deposit to prepaid Walmart cards and wallets. Decline any uncovered transactions. No funds, no charges, no payments, self balancing. No credit or tellers necessary. ‘Which items would you like not to buy?’ at checkouts.

  8. Kevin Dick says:

    Wal Mart doesn’t need any expertise in banking at all. They can acquire or partner with companies that do. What Wal Mart knows how to do is relentlessly optimize interactions with people that shop at Wal Mart. Seriously, you would not believe the levels of technology and expertise they bring to bear to the minutiae of such interactions. They also have incredible leverage with their suppliers. Again, you would not believe how they relentlessly squeeze as much surplus as possible out of that relationship.

    All they need is permission to experiment and they will find the lowest cost way to serve this market.

  9. Tom G says:

    ” 7% of all households were unbanked and an additional 20% of all households were underbanked. Unsurprisingly, the percentages are substantially larger for low- and moderate-income households”
    << what percentage of these folk are Wal Mart customers? Probably close to 100% for the "underbanked", a phrase only true for those who are more credit worthy than the credit they're now getting.

    Any who believe in a Free Market must support Wal Mart's banking trial, trusting
    " they will find the lowest cost way to serve this market."

    Payday loans and full credit history, plus selling almost everything legal that the low income buyers want, and Wal Mart will know more about individual credit risk than any BigBank card.
    With Big Data analytics operating on their own customers buying PLUS income/ deposit/ pay/ fin services, plus actual responsibility in getting paid and paying for stuff — they'll have huge data advantages for personalized banking services for the responsible and mostly responsible poor.

    Offering Auto loans within 3 years; mortgages within 5 years is my guess — at lower rates for good customers.

  10. Tom G says:

    Also a big step towards a low-cash / cashless living for the poor — who are most frequently the targets and victims of thieves.
    When their no-money wallet gets stolen, they report it, stop payments, and get a new card. Might even reduce crime a bit, as thieves learn that converting a stolen Wal Mart card into some cash becomes more difficult: not accepted anywhere else; digital photo of every customer at Wal Mart; alert when buying habits are different.

  11. ColoComment says:

    “It is one thing to develop a great logistical system for moving products from far-flung suppliers to stores. It is another thing to deliver financial services to people….”

    Do you really think that WalMart wouldn’t propose this without running the numbers up, down, and sideways? Without having squeezed the brains of financial services consultants? Besides, “financial services” are really just another product line, sold under some different regulations; you hire people to do it.
    Besides, WalMart needs to do *something* to combat the Amazon invasion. I just yesterday read two interesting articles on Amazon:
    1) an overall look at its past success from Mark Perry, here: https://www.aei.org/publication/amazons-phenomenal-rise-in-market-value-the-most-remarkable-case-of-wealth-creation-business-success-in-history/

    2) and from techcrunch, a look at its spiderwebbing of services, here: https://techcrunch.com/2017/05/14/why-amazon-is-eating-the-world/

  12. Handle says:

    One question is why didn’t Walmart just try to buy an existing bank. For insurance, China’s Alibaba, also a big retailer, is currently in the process of trying to buy MoneyGram.

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