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

by Pallavi Gogoi

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.