Next Up: A Wal-Mart Credit Card?

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In September, Wal-Mart filed notice with Canadian finance authorities that it intends to seek a bank charter in that country. Major Canadian retailers such as grocery chain Loblaw and general merchandise store Canadian Tire already operate banks that offer checking accounts, credit cards, and home loans. Loblaw, for example, operates President's Choice Financial Services, named after its well-known brand of private-label products. Wal-Mart says it may offer a range of financial services—even mortgages—in Canada if its bank application is successful.

Wal-Mart has also been expanding its lending efforts in Mexico (BusinessWeek, 12/13/07). The company opened a bank there it calls Walmex in November 2007 and now has 16 branches in five states. "Mexican banks have been notoriously absent (BusinessWeek, 12/13/07) in credit-granting services to the middle and lower classes," says Thomas Mobille, an analyst who follows Wal-Mart's Mexican operations for Banif Securities. "The recent global financial crisis should only increase their reluctance to lend to these groups, so Walmex has a natural advantage in capturing them as banking customers."

Cash Your Stimulus Check Here

Wal-Mart has used financial services as a promotional tool in the U.S. This summer, for example, the company offered to cash federal economic stimulus checks for free. Wal-Mart says "millions" of customers took it up on the offer. "They've really made inroads into check cashing," says Leslie Parrish, a researcher at the nonprofit Center for Responsible Lending. "It's their target audience."

Some of the retailing giant's other efforts to break into financial services have been less successful. Last year, Wal-Mart withdrew its application (BusinessWeek.com, 6/20/07) to acquire an industrial bank charter in the U.S. The company argued that owning its own bank in the U.S. would lower its credit-card processing fees, but a large outcry from other banks, consumer advocates, and union activists squashed that hope. Wal-Mart can expect continued opposition if it again tries to seek a U.S. bank charter, although the company says it has no plans to do so. It's possible the retailer could find another way to issue its own credit card. "If you're going to bring a company whose business model is volume at the lowest price, what does that mean, say, for mortgages?" asks David Nasser, executive director of the union-funded Wal-Mart Watch campaign. "Are you going to put out as many mortgages as possible and get people into homes they can't afford? I think that's dangerous."

A low-cost Wal-Mart credit card could expand business for the nation's largest retailer. Presently the company generates only about 15% of its sales from customers using credit cards. According to a national study from consulting firm Hitachi Consulting, credit cards account for 22% of the transactions at merchants nationwide. The flip side, though, is that Wal-Mart's lower-income customers could pose a big credit risk if the company begins extending credit directly. "If Wal-Mart can figure out who to extend credit to and not lose their shirt, that would be a home run," says Philip J. Philliou, a financial-services industry consultant who helped H&R Block (HRB) launch its own in-house bank.

Wal-Mart already offers credit cards in a partnership with General Electric (GE), an enormous consumer lender. There are no annual fees for opening a card, and Wal-Mart waives interest payments for as long as 12 months on some purchases made at its stores. But interest rates on the cards can run as high as 25% for some borrowers. If Wal-Mart financed credit-card customers on its own, it could offer better terms. It's not clear exactly what role GE would play if Wal-Mart decided to offer a new, lower-cost card. "We work with our retail partners to meet [their] requirements," says Dori Able, a GE spokeswoman.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.