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Wal-Mart Banks on the 'Unbanked'


Its new Mexican lending arm taps a fresh source of growth

Every day 2.5 million people walk through the doors of a Wal-Mart (WMT) store in Mexico, generating nearly $20 billion in sales last year. Now they are potential customers of Banco Wal-Mart, the chain's new lending operation. So are the company's 12,000 Mexican suppliers, as well as its 155,000 employees. "We want to leverage this traffic we have in our stores," says Julio B. Gómez, Banco Wal-Mart's chief executive.

As in the U.S., Wal-Mart is Mexico's largest retail chain. It has 997 locations, including supercenters, food and clothing stores, and restaurants. It has diverted many Mexicans from traditional commerce and stirred occasional opposition from local merchants. But the president of Mexico's central bank, for one, publicly credits Wal-Mart's high-volume, budget-conscious retail strategy with helping tame inflation to the low single digits. Mexican regulators say they expect the newly chartered Banco Wal-Mart to spark competition that eventually could lower the cost of consumer borrowing.

For the moment, though, Wal-Mart is taking advantage of a market where annual interest rates often exceed 100%. A supercenter just west of Mexico City offers a side-by-side $1,100 Whirlpool refrigerator for 104 weekly payments of $23, which works out to an annual percentage rate of 86% and more than doubles the cost, to $2,295.

"We are not saints," Gómez told industry analysts in a Nov. 12 Webcast. "We've come into this business for volume and profitability similar to our other businesses, or else we wouldn't invest." Asked separately about Wal-Mart's rates, spokesman Raúl Arguelles says: "We offer very competitive [financial] products that we will be constantly evaluating to make them even more attractive."

When Wal-Mart sought a banking license in the U.S. two years ago, its path was blocked. Among the obstacles: American banks, unions, grocery store owners, and both Republicans and Democrats in Congress. Even then- Federal Reserve Chairman Alan Greenspan weighed in with worries about lightly regulated "industrial loan corporations" that could hobble the financial system. So the company looked south, where regulators couldn't have been more pleased to welcome Banco Wal-Mart.

Sixteen Wal-Mart bank branches are already offering installment plans on electronics and household appliances. By the end of next year, Banco Wal-Mart expects to operate in 100 stores, and it projects that it will be profitable within four years. It also intends to offer credit cards and micro-loans for entrepreneurs.

Consumer finance offers a fresh growth opportunity for a company whose huge outlets are maturing in Mexico as in the U.S., says Wayne Hood, a retail analyst at BMO Financial Group (BMO). "Their idea is, you have a core group of loyal customers who are unbanked' who shop every day. Why not try to provide them banking services?" he says. "It's easier to do in Mexico because the regulatory environment isn't as tough."


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