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Wal-Mart: Your New Banker?


Wal-Mart Stores Inc. (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.

The retailing giant's 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. 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's 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-priced 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.

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 cents. Some competitors charge twice as much. These 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 (FDC), predicts Robert G. Markey Jr., consultant Bain & Co.'s director for financial services.

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 potential for growth. 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."

PERFECT FIT FOR UNDERDOGS

Not all financial-service suppliers are willing to ride this tiger. Jane J. 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 J. O'Malley. And it can't hurt to learn how Wal-Mart does business, notes SunTrust Executive Vice-President Christopher T. Holmes, especially if Wal-Mart achieves full-fledged banking status.

Could Wal-Mart really become a bank? First it would have to take on current prohibitions on combining banking and commerce. The laws were designed to prevent a big player such as Wal-Mart from denying credit to competitors or shifting losses from its retail business to an insured bank. But many expect Wal-Mart to overcome those rules. Ronald K. Ence, vice-president of Independent Community Bankers of America, says Wal-Mart lobbied last year to expand the banklike powers of the ILCs. A bill that passed the House, but not the Senate, in 2004 would have allowed unlimited interstate banking, but only for those with at least 85% of their business in financial services.

Wal-Mart denies any such lobbying. It tried to buy a savings bank in Oklahoma in 1999, only to be blocked by the Gramm-Leach-Bliley Act, which overhauled federal banking law. And the California legislature halted Wal-Mart's plan in 2002 to buy a small ILC.

Yet if Wal-Mart were to gain full banking status, it would be able to offer everything from checking and savings accounts to mortgages, car loans, and even small-business loans at prices that rivals could be hard put to match, let alone beat. "There's no question, they want to have a nationwide financial-services network. If they do, there's no doubt in my mind they'll be able to do to community banks the same thing they've done to the local grocery store and the local hardware store and the local clothing store," says the community banker group's Ence.

Wal-Mart insists its financial plans don't depend on owning a bank or a thrift. "Our strategy is what you see," says Wal-Mart's Thompson, who was once executive vice-president of Sears, Roebuck & Co.'s (S) credit business. The services Wal-Mart offers are aimed squarely at its core, lower-income customers and employees. Many are among the estimated 56 million American adults who don't have a bank account. "Helping the underserved customer gets right at what we like to be known for," says Thompson, who joined Wal-Mart in May, 2002. More important than the unit's profits, she says, is that these services bring customers into stores more often.

She seems to have learned from Sears's ill-fated effort in the 1980s to create a financial supermarket with its Allstate (ALL) insurance, Dean Witter brokerage, and Coldwell Banker Real Estate units. Sears lost focus on its core business and found that many customers didn't want to buy mutual funds or insurance from the same place that sold them appliances. "My whole thing is about starting with the customer," says Thompson, who joined Sears in 1988 and took over its credit operation in 1993.

BEING SMART BY BEING WARY

Even though Wal-Mart may be following a gradual approach to avoid Sears' mistakes, it occasionally hints at bigger ambitions. On its Web site, Wal-Mart describes itself as "a trusted name in financial services." In stores, it's slapping its powerful brand on the money centers operating in them.

So far big rivals say Wal-Mart isn't hurting them. 7-Eleven (SE), which offers check-cashing, money orders, and the like through 1,000 electronic store kiosks, says it's focused on convenience, not offering the lowest price. Likewise, Eric C. Norrington, a spokesman for Ace Cash Express Inc. (AACE), the nation's biggest check-cashing chain, says Wal-Mart hasn't affected his company's pricing or growth. "Wal-Mart has validated the importance of this market segment. That's attention we welcome," he says.

But as toy retailers, grocers, and even jewelers have painfully discovered, complacency in the face of Wal-Mart can be suicidal. Given the giant's long interest in the financial arena, technological savvy, cheap capital, and instant national reach, small and midsize banks, in particular, are right to be paranoid. Even big ones should be wary. "The mistake would be to stick your head in the sand and try to convince yourself that Wal-Mart is not a factor," says Bain's Markey. For no matter what the obstacles, Wal-Mart seems determined to be a force in finance.

By Wendy Zellner in Fayetteville, Ark.


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