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The name “Wal-Mart” has become somewhat of a lightning rod for those who value buying local and supporting small business and labor rights. Recently Wal-Mart has entered into an even more contentious business—the banking industry—and the lightening has increased.

As reported in a previous blog, Wal-Mart, along with other large retailers, has jumped on the bandwagon to provide financial services. Wal-Mart’s new MoneyCenters offer a variety of products, such as its prepaid  MoneyCard. Customers like Wal-Mart’s late hours, as well as the MoneyCard’s  flat $3 monthly operating fee and no overdraft fees. As one Wal-Mart executive put it, Wal-Mart has been building à la carte financial services, becoming a force among the unbanked and “unhappily banked.” The MoneyCard acts just like a credit card, except that it is prepaid, and can be used to purchase goods and services. Wal-Mart’s MoneyCenters also provide services such as check cashing, international money transfers, direct deposit, and bill paying all at a competitive rate.

In July 2005, Wal-Mart submitted an application for a bank charter with the Federal Deposit Insurance Corporation (FDIC). Subsequently, the FDIC received over 1,500 letters about the application, with the majority of respondents vehemently opposing Wal-Mart's foray into banking. Ultimately Wal-Mart withdrew its request for a bank charter in early 2007 after a great deal of opposition from banks and legislators, including Rep. Barney Frank (D-MA) who introduced a bill aimed at preventing nonfinancial commercial institutions, more specifically big box stores, from operating banks.

Wal-Mart’s financial products aren’t without faults. Customers may not realize that they may need a Social Security number to apply for the card, thereby excluding immigrant populations who rely on other forms of identification such as Matricula Consular Cards or ITINs. Matricula Consular cards are photo identification cards issued by Mexican consulates to Mexican nationals living outside the county. Individual Taxpayer Identification Numbers, or ITINs, are issued to foreign nationals by the Internal Revenue Service as a tax processing number and can also be used as a valid form of identification at some banks. For more information on ITINs, check out the upcoming issue of the Clearinghouse Review.

The MoneyCard also has hidden fees, aside from the $3 monthly rate, such as charges for balance inquiries and ATM withdrawals and other fees that are not clearly stated. These are the same types of fees and transparency issues that caused people to flee from banks in the first place. Moreover, prepaid products, such as the MoneyCard, act as electronic cash. Therefore they do not build credit, nor do they help people save or build assets. Additionally, prepaid cards, unlike credit cards, are not covered by Regulation E of the Electronic Funds Transfer Act (EFTA) and therefore often do not have the same protections as debit or credit cards, such as:

• a cap on losses when cards are lost or stolen or when unauthorized charges are made;
• assurances that missing money will promptly be re-credited; or
• clear and conspicuous disclosures of all fees before signing up.

Wal-Mart is not the only one trying to cash in on the 30 million Americans who remain unbanked or underbanked. Target recently entered the field with an American Express prepaid card, and Kmart and BestBuy have their own Visa and Mastercard prepaid cards. Target’s prepaid AmEx card has fees similar to Wal-Mart’s MoneyCard, such as a $3 fee to load money onto the card, and a $3 fee per ATM withdrawal after the first free ATM withdrawal per month. Target’s card does not, however, have a monthly fee. Thus far, Wal-Mart has the lowest monthly fee and the lowest activation fee of such retailer cards. After all, Wal-Mart’s slogan is “saving money, living better.”

While these prepaid cards may provide an easy way for people to begin accessing financial services, they do not help customers save for the future or build credit, because they are not linked to either bank or savings accounts. Instead, programs such as BankOn, which promote real savings and responsible financial education, are ultimately better options. Bank On programs are voluntary, public/private partnerships between local or state governments, financial institutions, and community-based organizations that provide low-income un- and underbanked people with free or low-cost starter or “second chance” bank accounts and access to financial education. This innovative program, which began in San Francisco, California, has spread to cities and states across the country that want to help reduce barriers to banking, such as allowing ITIN numbers to be used to open accounts, and increasing access to the financial mainstream for consumers.

Although prepaid cards like the Wal-Mart MoneyCard may, in some cases, be a good first step (assuming that fees are both reasonable and clearly disclosed), they do not encourage the same saving mentality that opening a BankOn account does. Until such a mental shift occurs, the 30 million un/underbanked Americans will still be economically disenfranchised.   

This blog post was coauthored by Alison Terkel.

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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.

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Remember the show, Let’s Make a Deal, with Monty Hall? Well, it's back--sort of. For more than a year, Congress has been saying that it’s close to making a deal on legislation to overhaul America’s health care and financial systems. 

The original Let’s Make a Deal show was based on the show’s host, Monty Hall, offering deals to members of the audience. The contestants usually had to weigh the possibility of an offer being for a valuable prize, or an undesirable item. In its simplest format, a contestant was given a prize of medium value (such as a television set), and the host offered the contestant the opportunity to trade for another prize. However, the offered prize was unknown. It might be concealed on the stage behind one of three curtains, or behind "boxes" onstage, or within smaller boxes brought out to the audience.

Congress seems to have brought this classic TV game show back. “We’re close to a deal,” on health care legislation. “We’re close to a deal,” on financial reform legislation. 

Health Care Reform

The need across the country for health insurance reform has not abated. Americans agree that the nation's health insurance system is broken, but Congress still hasn’t sent a bill to President Obama to fix it. The current deal on the table is for the House to pass the Senate’s bill and then for both chambers to pass a budget reconciliation bill that resolves their differences. The proposed deal would ban insurance companies forever from denying coverage to children with preexisting conditions and from dropping coverage when an individual becomes sick. Insurance companies would no longer be able to randomly hike premiums or to impose lifetime or annual limits on the amount of care someone can receive. All new insurance plans would be required to offer free preventive care so that illnesses may be caught early. Young adults will be able to stay on their parents’ insurance policies until they are 26 years old. Uninsured individuals and small business owners would have the same kind of choice of private health insurance that members of Congress get for themselves. And individuals who do not have insurance coverage through a large group could be part of a bargaining pool that negotiates lower rates. Also, if an individual is ineligible for Medicaid but still can’t afford the insurance offered through the pool, she or he would receive a tax credit to assist with this cost. Finally, this deal would provide a new, independent appeals process if a claim has been unfairly denied.

It’s time for Congress to take the deal and make health insurance available and affordable for all.

Financial Regulation Reform

After the catastrophic financial crisis, President Obama called for the creation of an independent Consumer Financial Protection Agency, which would have as its sole mission the protection of consumers. It would create and enforce clear rules to ensure fairness of credit card terms and conditions, overdraft loan programs, payday and car title loans, and mortgages. In the fall, the House of Representatives passed legislation creating such a new Consumer Financial Protection Agency, which would provide the type of consumer protections that should have been in place all along. The Senate, however, has been debating the issue for months.

Specifically, Senate Republicans and the financial-services industry have opposed the creation of such an entity. Instead they would prefer that the Federal Reserve continue to be responsible for consumer protection as part of its regulation of nationally chartered banks. The central bank has always been responsible for the health of the nation's largest banks and the safety of American borrowers; however, its failures in both roles have been well documented. For years, the Federal Reserve primarily focused on monetary policy over bank supervision and often made consumer protection an afterthought. As a result, millions of American families have been left unprotected and financially unstable.

Additionally, the Federal Reserve only regulates banks, which would mean that the so-called shadow banking system of payday lenders, debt collectors, and loan originators and servicers would remain unregulated. The power of these entities has been demonstrated by the huge role they had in the current economic crisis. Allowing them to continue their predatory practices without being regulated would not be a deal on reform but rather a continuation of the status quo. Lawmakers have repeatedly said that they are close to a deal on this very divisive issue. Yet, proposals to let the Federal Reserve remain the primary regulator of consumer protection laws, is not a deal, it’s just the status quo. 

Well Monty, Where’s the Deal?

Congress seems to be weighing the possibility of whether reforming health care and financial systems will ultimately be valuable prizes, or undesirable items. Yet, rather than holding onto its existing undesirable prizes, Congress should choose Door #1, quality, affordable health insurance reform NOW and a dedicated agency to monitor and rein in the reckless behavior of financial institutions. 

Well Congress, where’s the deal?
 

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