It entices customers with cost savings, professional management, attractive products - and then drives competitors out of business.
Usually it aims at other general merchandise and grocery retailers. And due to its obsessive focus on costs it has earned a reputation for heartless management practices, shifty personnel policies and socially questionable community impact. But this time it is taking on the banking industry. Compared to those guys, the retailer could just as well call itself 'Mother Teresa-mart.'
Yup, the enemy of my enemy is my friend. And for the moment, the bankers are everyone's enemy. The bankers are claiming - saying they would never be quoted about this in public, though they are happy to leak it to all and sundry - that they are well-rid of these low end customers because they arent profitable enough. Which may be true if you buy into their current conception of themselves in the post Glass-Steagle era. But that creates a strategic problem. If you are not fulfilling the essential financial service of lending to commercial and industrial customers, then maybe you are no longer worthy of government benefits and protection. You're just another sharp-elbowed financial whiz out for himself. And classical economics teaches us that such worthies can take care of themselves. In fact, want to do so.
So, this suggests that the bankers may want to be a bit more careful about whose business they disdain. Because the time may be coming when their most aggressive competitors turn out to have been their former customers. JL
Andrew Martin and Stephanie Clifford report in the New York Times:
Americans say they are fed up with banks. They are protesting on Wall Street and raising a ruckus over outsize fees. Now there is a surprising beneficiary: Wal-Mart.
Geoffrey Cardone, a 26-year-old factory worker, said he dumped his bank account because he felt that he was being nickeled and dimed by fees. His new payday ritual includes a trip to the Wal-Mart here in northeastern Pennsylvania.
“It’s cheaper,” said Mr. Cardone, who was charged a flat fee of $3 to cash his paycheck. Many check-cashing stores keep a percentage of the check, which tends to be higher.
The Wal-Mart here has a clerk in a brightly painted Money Center near the entrance, like more than 1,000 other Wal-Marts across the country. Customers can cash work and government checks, pay bills, wire money overseas or load money on to a prepaid debit card. At most Wal-Marts without dedicated Money Centers, the financial services are available at the customer service desks or kiosks.
Four years ago, Wal-Mart abandoned its plans to obtain a long-sought federal bank charter amid opposition from the banking industry and lawmakers, who feared the huge retailer would drive small bankers out of business and potentially conflate its banking and retail operations. Ever since, Wal-Mart has been quietly building up à la carte financial services, becoming a force among the unbanked and “unhappily banked,” as one Wal-Mart executive put it.
Even before the recent outcry against banks, the services had become popular with cash-poor customers, many of whom never had a bank account and found the services more affordable than traditional check-cashing operations. Now newcomers to the ranks of the banking disaffected are helping to swell the numbers, Wal-Mart officials said.
The run from banks is happening elsewhere, too. In the last four weeks, as anger over debit card fees festered, more than 650,000 customers signed up for credit unions, according to the Credit Union National Association. The association was still tallying how many additional consumers had signed up on Bank Transfer Day, an initiative on Saturday to abandon traditional banks organized by people associated with Occupy Wall Street.
“We have a tremendous opportunity ahead of us, and it’s largely due to what you’re seeing around us happen in the industry,” said Daniel Eckert, the head of Wal-Mart Financial Services. “We’re not a bank, but we can serve a lot of types of functions you would see someone go into a bank for.”
Wal-Mart says it has no intention of reviving its plans to become a full-blown bank that could make loans and accept federally insured deposits. But the retailer has obtained bank charters in both Mexico and Canada, leading some bankers to suggest the company is laying similar groundwork in this country.
”It’s the proverbial camel’s nose under the tent,” said Terry J. Jorde, senior executive vice president at the Independent Community Bankers Association. “Once they get in and offer some financial services, they will continue to push for other products.”
Wal-Mart said it was simply offering financial products for less than its competitors, much the same way it does for underwear, detergent and milk. Wal-Mart does not produce the financial products, but sells them on behalf of financial firms. In doing so, the retailer is able to avoid financial regulations and, because of its size, offer steep discounts.
For instance, it offers prepaid debit cards via the Green Dot Corporation. The cards cost up to $4.95 to buy and $5.95 a month to maintain at other retailers, while at Wal-Mart they cost $3 to buy and $3 a month to maintain.
Wal-Mart officials declined to provide details on how much money it makes from financial services, or how many customers it serves. However, company officials and outsiders both said Wal-Mart’s financial products are gaining share.
“It is a big focus,” said Tien-tsin Huang, an analyst at J.P. Morgan. “They’ve invested in these Money Centers, and they’ve been very, very successful; they’ve all adopted the low-cost, low-prices model, and I think it’s brought in a lot of traffic that they normally wouldn’t see, meaning the lower-end demographics that typically use check-cashing services at rival stores.”
He added, “It’s clearly growing a lot faster than what we normally see for check cashers.”
Jennifer Tescher, chief executive at the Center for Financial Services Innovation, which focuses on finding financial services for those not well served by banks, said Wal-Mart brought much-needed competition — and lower fees — to financial services.
“I think it’s one of the best things that has happened in the last 10 years for underserved consumers,” she said. “There is now much more choice in the marketplace for consumers, where they can vote with their feet.”
In research conducted a year and a half ago, Wal-Mart found that more than 60 percent of the customers using its financial services had bank accounts. When Wal-Mart asked those people how much their banking activities cost them over the last six months, the answer was between $200 and $400, Mr. Eckert said, with overdraft fees, minimum-balance charges and so forth.
Here in Dickson City, just north of Scranton, Pa., many customers said Wal-Mart had become their de facto bank, even if it technically is not one.
Courtney Houlihan, 24, said she dropped her bank account because of the constant fees, including $400 for overdrafts. She now comes to Wal-Mart to cash her checks.
“I always come here,” she said. “I don’t like banks anymore.”
Johnell Cremard, 18, said she too cashed her work checks at Wal-Mart. “I don’t trust my bank,” she said. “They miscounted my money twice.” Wal-Mart charges 1 percent to cash checks under $300; and cashes checks from $300 to $1,000 for a flat $3 fee.
Not every customer gushed. Marc Roman, 33, came into the Money Center to load his prepaid debit card and was surprised by what he called “hidden fees.” He put $300 on the card and was charged $9 — $3 for loading the card and $6 in maintenance fees for the previous two months.
Even so, there is no disputing that the fees at Wal-Mart are competitive. Some check-cashing operators say the prices are so low that they cannot imagine how it makes money. Clifford Schein, president of Cliff’s Check Cashing in the Dallas area, said his firm charged an average of 1.5 percent of the value of the check to cash it. “Their price is not sustainable to make a profit,” Mr. Schein, said. “If you look at the check cashing itself, it’s like a dumping price.”
Richard Hunt, president of the Consumer Bankers Association, said he was not so bothered by Wal-Mart’s prices as by the fact that it does not face the same regulations as banks. His association has raised the point with the new Consumer Financial Protection Bureau, which is considering how to regulate nonbank financial entities.
“If they want to enter into the field, we welcome them to it,” he said. “Just make sure they play by the same rules.” For Wal-Mart, which has been struggling with sales and foot traffic, turning stores into quasi-banks has one indisputable advantage: more shoppers with money in their pockets.
“I cashed my check,” said Barbara Reif, who was with her husband in Dickson City. “And now I’m going to go shopping.”
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