Wal-Mart Stores (WMT) has long faced opposition from banks and labor unions to its attempts to break into the U.S. banking business. So the retailer’s founding family has come up with another way to get credit to its customers: Progress Financial. One of a growing number of financial institutions serving Hispanic customers who don’t have bank accounts, Progress Financial has morphed into a kissing cousin of Wal-Mart’s stores. The company is run by a former Wal-Mart executive. A Wal-Mart director sits on the lender’s board. And the founding Walton family’s venture capital firm is its largest shareholder. “We had always hoped there would be some relationship with retail,” says James Gutierrez, who founded Progress Financial in 2005 and was chief executive officer until last year. “Wal-Mart is the low-price leader, and that appeals to a certain demographic. There’s a lot of overlap.”
With Progress Financial, which lends under the brand Progreso Financiero, the family that controls Wal-Mart can put money into the hands of an important group of customers, if only indirectly, through a network of more than 80 branches. The branches make loans of as much as $3,500, and most are located a short drive from a Walmart. The Waltons’ venture capital firm, Madrone Capital Partners, “saw we could build a relationship with these customers,” says Gutierrez, now a partner at Insikt Ventures, a VC that has invested in lenders.
Borrowers can opt to receive their $500 to $3,500 loans on purchase cards, which can be used like debit cards. They can make loan payments at the lender’s branches or at retailers including Walmart, 7-Eleven (3382:JP), and CVS Caremark (CVS). Sandra Perdomo, a San Francisco resident, says she recently spent about $300 from a Progress Financial loan at a nearby Walmart.
Progress Financial isn’t a bank and can’t take deposits, so it has borrowed at high interest rates from hedge funds to make loans, Gutierrez says. It also has raised venture capital, including tens of millions of dollars from Madrone, public filings show. “As we got larger, they saw a growth opportunity and decided to put more in,” Gutierrez says. Last year, Madrone significantly boosted its ownership in Progress Financial, he says. In April 2012, two weeks after announcing Gutierrez’s departure, the lender said that Raul Vazquez, previously Wal-Mart’s executive vice president of global e-commerce, would be the new CEO.
Wal-Mart has no direct relationship with the lender, says Wal-Mart spokesman Dave Tovar. Madrone’s investment in Progress Financial and Wal-Mart director Aida Alvarez’s place on the lender’s board are “separate and apart from Wal-Mart,” he adds. Madrone didn’t return calls. Vazquez, through a spokesman, declined to comment.
Banks and unions fought Wal-Mart’s application to open a Utah-based industrial bank in 2005, and the retailer eventually dropped the application. Since then, Wal-Mart has opened in-store financial centers where customers can cash checks, pay bills, and transfer money. The retailer also has offered prepaid debit cards in partnerships with American Express (AXP) and Green Dot (GDOT), which offers prepaid MasterCard (MA) and Visa (V) cards that can be reloaded or set up to receive a customer’s paycheck.
Progress Financial is among several companies targeting what it estimates to be 23 million U.S. Hispanics unable to get traditional loans because they have limited credit histories. Since the company began lending in 2006, it has lent out more than $550 million, Vazquez wrote in an April letter to a division of the U.S. Department of the Treasury. Progreso Financiero is regulated by the three states where it operates: California, Illinois, and Texas. It has more than 250,000 customers and has said it plans to have 1 million by the middle of next year. The company, which has yet to report a profit, charges interest with an average annual percentage rate (APR) at or below 36 percent, according to its website. While that’s higher than interest traditional banks charge, several federal agencies consider 36 percent an acceptable rate cap on small-dollar loans.
Still, Liana Molina, a campaign organizer at consumer advocate California Reinvestment Coalition, views Wal-Mart’s ties to Progress Financial with caution. “We’re concerned about people getting into consumer debt that perhaps they shouldn’t,” she says. “It’s one thing to support entrepreneurs and small businesses. It’s another to provide a loan for someone who wants a big-screen TV.”
Brian Melzer, an assistant professor of finance at Northwestern University’s Kellogg School of Management, calls Progress Financial’s rates a welcome alternative to payday lenders’ triple-digit rates. “Progreso fills an important niche,” he says. “They take people who banks won’t take risks on. … These people are getting access to credit. A certain amount of that is going to be spent at Walmart.”