Wal-Mart Will Hedge Its Bet on Banking

Implications: The suggestion that Wal-Mart will boldly go where no bank has gone before raises several questions. How can Wal-Mart undercut competitor pricing in order to expand into banking? Is Wal-Mart willing to lose money from a banking strategy to gain market share? Does the unbanked and underbanked marketplace present a big market opportunity for Wal-Mart?

Analysis: The premise that Wal-Mart will boldly go where no bank has gone before is simplistic. Wal-Mart is not the first retailer to try out the banking business. Sears in the US, Tesco and Sainsbury in the UK,  and Loblaws in Canada are just some of the examples of retailers going into banking.

In the early 1980s, Sears, which at the time was the largest retailer in the US, decided to diversify into financial services. Sears already owned Allstate Insurance. Then it bought Allstate Savings & Loan, based in California; Dean Witter, primarily a retail brokerage; and Coldwell Banker, a real estate brokerage. Ultimately, these businesses never generated enough synergy to make the cross selling strategy a success. The banking unit never achieved a strong market share. Sears finally gave up and either sold or spun off the units as its retail franchise succumbed to Wal-Mart, Target and other more successful brands.

The UK and Canadian retailer strategies involve partnerships with banks. In the US, this is likely to be Wal-Mart's only option for quite some time. It already has partnerships with GE Money, Moneygram, and Sharebuilder. And, it rents out store space to banks like Woodforest National Bank.

With no banking franchise foundation, pursuing a price cutting strategy is a loser as enough low cost operators exist in each banking product category to make it a long shot proposition for Wal-Mart, regardless of who Wal-Mart hires. The meltdown in subprime mortgages over the past 12 months shows that Wal-Mart's unbanked and underbanked target market has high risk and uncertainty, neither of which are attractive to Wal-Mart. Watch for Wal-Mart to hedge its US bet by expanding its in-store MoneyCenters that deliver services provided by its partners.

Where Wal-Mart would most like to gain some economic benefits is to reduce its payment transaction costs, specifically the interchange fee it pays for all card related transactions. Watch for more from Wal-Mart on this front - as it does not need a banking charter to cut its transaction costs. The GE MoneyCard is a first step.

If Wal-Mart decides to operate a bank, then the best market opportunities will be in Latin America. Wal-Mart would like a high percentage of consumers who are underbanked or unbanked. The US does not qualify on this measure as only 8% to 10% of adult households fit this criteria. While 10 - 12 million or so households is a big number, it pales in comparison to the market opportunity in Brazil and Mexico. One long term opportunity for Wal-Mart would be to use a Mexican or Brazilian bank to capture the banking business of family members working in the US.