Wal-Mart Banking on the Unbanked

Implications: Jane J. Thompson, called prepaid cards and money center services “foundational products” and ““Our concept is to go up the credit ladder of financial services,” The new products, like the prepaid debit card, will be offered through third-party partners, allowing Wal-Mart to sell bank like services without a government license, very important in view of the previous failures and current regulatory climate. .“The logic behind a lot of these services is to increase traffic and do it in a way that puts money in people’s hands,” said Andrew Dresner, a payments industry consultant at Oliver Wyman Financial Services. “You give them a couple hundred dollars,” when they cash their paycheck, “and they will buy other things.” Combine the logic of proximity with the fact that 20 percent of customers, 27 million people do not have checking accounts, and you have a truly potent combination.

Analysis:  

First I believe the failure to win approval for an industrial bank was fortuitous for a number of reasons:

-Asset driven industries are radically different from the revenue driven. The corporate cultures and view of risk make communication and coordination difficult: remember the Sears Dean Witter merger.

-Financial manipulation is more easily done when a company has a financing arm, especially in areas of revenue recognition and credit strength.

-Wal-Mart has a lot of political ’sail area’. The company is high profile as it is, and a bank attached to it would just give their enemies and other stick with which to beat them.

In this area, outsourcing is the key, and promises not to add distractions to its place as a retailer.

This move will tie the lower income customers more firmly to the company. As noted, they have many customers who have no checking account. Most, middle class people don’t understand the numbers, or mentality of this market.

It was not so long ago, that people would visit the local phone company and pay in cash, and perhaps pay other utilities at the supermarket (a new phenomenon) when they cashed a pay check. Other used a check cashing service or similar money service company to get cash, which is also expense, relatively.

The money center will offer a number of advantages over the older systems:

-They will be able to cash their checks and deposit the money in a money card, which will be accepted any place VISA is. Thus, money orders may become a thing of the past for some users.

-The price is lower than a bank. The initial card costs $8.95 with a $4.95 monthly maintenance fee. Cash can be put in for free when cashing a payroll check or direct deposit. Other wise, the reload fee is $4.64.

-The card offers greater theft security by removing cash from the equation and access to bank services to people who may have never been in one.

In a larger sense, just getting people in on payday, for sure, would be a huge boost to business. I am sure now, some families go to the Wal-Mart on payday, any way, and now there would be even greater incentive to a family night out there.

I think that Ms. Thompson’s growth estimates 30 to 40 percent over the next year, are quite reasonable, but I would like to know a bit more on what the base is seen to be. I also believe that they can improve their reach with some changes in the practices described:

-Lower the maintenance fee as far and as fast as possible, hopefully to zero. One of the reasons they don’t use banks is the expense. In my experience, they know to the penny what there check is going to be, and need all of it to get by. They literally do live from paycheck to paycheck.

-If fees are necessary, then see if it is possible to off-set them in part with purchases. A grey area, but like I say, costs are important.

-Consumer finance might better be approached by using a range of lenders not associated with the company. Such would cut down on the possibility of self-dealing or the perception of the same. It would mean that non-recourse debt would stay that way. Consumer finance is a well-developed business. Use that fact to advantage rather than building new.

In summary the result will be better than going into banking or consumer credit. In this way Wal-Mart can shape the new efforts to the core business rather than having taken on a life of their own.