Wal-Mart Is Now Wal-Bank?
Retail giants such as Wal-Mart, Kmart, and Best Buy are jumping on the bandwagon to provide financial services in their stores to millions of unbanked Americans. These retailers are bringing a $320 billion industry of alternative financial services out of the shadow of the formal bank system under the radar of federal regulators.
A 2009 Federal Deposit Insurance Corporation (FDIC) survey revealed that approximately 30 million American households are either unbanked or underbanked. “Unbanked” households are those without a checking or savings account, and “underbanked” households are those that have a checking or savings account but rely on alternative financial services. The unbanked and the underbanked are particularly vulnerable to predatory practices by non-bank check-cashing services, payday loans, rent-to-own agreements, or pawn shops. Susan Ehrlich, President of Financial Services for Kmart, who was recently named to the Federal Reserve’s Consumer Advisory Board, explained that, “if the only viable alternatives for so many consumers are payday lenders and cash-checking operations, there is a lot of room for a national retailer to step in and help them manage their money.” While this seems to be part of the reason why these retail giants are entering the market to provide check cashing services, the main incentive seems to be the hopes that the customer will use some of the cash in the store.
Kmart, for example, is piloting financial centers where consumers can cash checks and pay bills in 23 Kmart stores in Illinois, Los Angeles, Puerto Rico, and Wisconsin. At the beginning of the recession, Kmart reintroduced a layaway program in its stores at Christmastime, and the program was so successful that Kmart began offering it year-round.
Another retailer, Best Buy, has also entered this market, launching a bill-payment service in a handful of markets. According to the FDIC’s survey, while many of the unbanked think that they don't make enough money to warrant a bank account, others simply don't trust banks or come from cash-based cultures. Best Buy’s bill-payment kiosks, operated by Tio Networks, cater to Hispanic shoppers who are often wary of banks. Despite this, many are willing to sign up for complicated cell phone plans at Best Buy, and executives say it was a short step to paying the bills in the store as well.
The biggest player of all retailers offering financial services is Wal-Mart. According to a September 2010 US Banker story, Wal-Mart has MoneyCenters in about 40% of its nearly 3,000 SuperCenters. Through economies of scale, Wal-Mart is able to offer lower fees—$3 for check cashing and another $3 for prepaid cards—than other smaller players that have dominated the market in the past.
Wal-Mart’s presence in financial services is not limited to its own stores. The company’s Sam’s Club subsidiary has a partnership with Superior Financial Group, a nonbank lender, to offer online loans of up to $25,000 to small-business owners at a 7.5% interest rate over 10 years. Moreover, Wal-Mart recently acquired an equity interest in Green Dot, a marketer of prepaid cards that filed an application to be a bank holding company after acquiring Bonneville Bancorp of Provo, Utah. Wal-Mart is also partnering with Jackson Hewitt to offer tax filing advice to in-store consumers.
As more and more retailers are attempting to take advantage of the number of unbanked and underbanked consumers, it is important to note that, while these retailers may offer less expensive, convenient alternatives to check cashiers and payday lenders, ultimately these services will not bring such consumers into the mainstream financial services industry. Instead, programs and products such as Bank On are required. Bank On San Francisco—the first of its kind in America—brought together city leaders, local community organizations, and 15 banks and credit unions to promote available financial products and services to bank the unbanked. As a result, it brought more than 70,000 previously unbanked San Franciscans to the financial mainstream within five years. Now nearly 70 cities/states/municipalities use the Bank On model to provide access to mainstream financial services for low-income consumers. Moreover, the President’s FY 2011 budget proposal included funding for a Bank On USA Initiative, which the U.S. Treasury has begun to develop. This initiative would promote access to affordable and appropriate financial services and basic consumer credit products for underserved households. To ensure that such access occurs we must talk to Congress and ask them to include funding for the Bank On USA initiative in FY 2011.
This article was coauthored by Ji Won Kim.
