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|  | JANUARY 27, 2005
By Wendy Zellner Wal-Mart, Your New Banker? It can't be or own a full-fledged bank -- yet -- but its partnerships and in-store financial services are giving the industry jitters Wal-Mart Stores (WMT ) didn't get to be the world's biggest retailer by giving up easily. So despite being twice thwarted by lawmakers in its efforts to buy a bank, it has quietly but tenaciously expanded its foothold in financial services. In its latest move, announced on Jan. 21, the retailing giant is introducing a no-fee Wal-Mart Discover credit card that offers 1% cash back, which it will launch with GE Consumer Finance (GE ) in March. This relentless push into financial services is starting to send shivers through the banking industry. Few believe Wal-Mart will stop with basic services as it applies its low-price, high-volume formula to yet another business category. And while other companies, from Nordstrom (JWN ) to General Motors (GM ), have bank and thrift charters or hybrid Federal Deposit Insurance Corp.-insured industrial loan companies (ILCs) in tow, no one trips alarms like Wal-Mart. ON THE MOVE. Many community bankers are convinced the behemoth won't rest until it has obtained full banking powers. "It's not a question of if Wal-Mart is going to be a bank, it's a question of when," says D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte. Clearly, Wal-mart is on the move. Over the past three years, the giant has steadily built alliances with financial-service providers, such as MoneyGram International (MGI ) and SunTrust Banks (STI ), enabling it to offer services such as bargain-price money orders and wire transfers. It has bank branches operated by partners in nearly 1,000 of its massive supercenters. And it has stepped up the pace. SunTrust is experimenting with nearly 45 in-store bank branches co-branded as "Wal-Mart Money Center by SunTrust," with plans to expand to about 100 of them by early 2006. UNDERSERVED CLIENTELE. Already, Wal-Mart customers are reaping the benefit. They can cash payroll checks for just $3, transfer money to Mexico for $9.46, and buy a money order for 46¢. Some competitors charge twice as much. Many are mostly high-margin, highly fragmented businesses in which the poor and immigrants are sometimes at the mercy of unscrupulous operators. "Traditionally, nonbank vendors of financial services have charged an arm and a leg," says David Robertson, publisher of The Nilson Report, a newsletter about credit and debit cards. Adds Gary Stibel of New England Consulting Group in Westport, Conn.: "Wal-Mart is giving people in lower-income brackets opportunities in financial services they never had before." Financial services could open a rich new vein of profits for Wal-Mart as it seeks to remain a growth company. By one rival's estimate, the market for services that Wal-Mart already offers is worth about $5 billion a year in fees, leaving plenty of room for it to slash prices while making a profit. As it has with other goods, Wal-Mart will slowly "collapse the price umbrella," squeezing check cashers and wire-transfer leader Western Union Financial Services, predicts Robert Markey Jr., consultant Bain & Co.'s director for financial services. SOME CLOSED DOORS. For the time being, though, the basic services it offers represent little more than a rounding error for the $287 billion goliath. Wal-Mart doesn't break out results for the unit, lumping them into the company's "other income," which totaled $2.1 billion in the first three quarters of the last fiscal year. That was up 31% but amounted to just 1% of total revenues. Still, there's huge growth potential. Says banking consultant Bert Ely of Ely & Co. in Alexandria, Va.: "They're developing, in customers' minds, a link between Wal-Mart and going to the bank. That has powerful long-term implications." Not all financial-service suppliers are willing to ride this tiger. Jane Thompson, president of Wal-Mart Financial Services, concedes that "some of the leaders in the industry don't want to hurt their margins and don't want to work with us." But MoneyGram, with a market share of around 1% in global money transfers, is a distant No. 2 to Western Union, which has 12%. For such players, Wal-Mart promises huge volumes of business through its 3,100 U.S. stores and more than 100 million customer visits a week. As the underdog, MoneyGram was already cost-conscious and focused on growth, not on protecting margins -- a perfect partner for Wal-Mart, says MoneyGram Vice-President Daniel O'Malley. And it can't hurt to learn how Wal-Mart does business, notes SunTrust Executive Vice-President Christopher Holmes, especially if Wal-Mart achieves full-fledged banking status.
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