BY TRICIA JUHN
The entry of Wal-Mart into banking in the U.S. and Mexico signals a tectonic shift in the landscape of retail financial services on both sides of the border. What does this mean for consumers, competitors, and the financial service industry?
In the United States, Wal-Mart announced plans to open “Money Centers” in a third of its 3,300 U.S. stores by the end of 2008. Customers will be able to cash checks, pay bills, and buy money orders. There are 200 Money Centers right now, which conduct nearly 2 million financial transactions per week. In late June, Wal-Mart also announced its new prepaid Visa debit card, which can be used wherever Visa is accepted.
Next month in Mexico, Wal-Mart will open its first bank branch under the trade name Wal-Mart de Mexico Adelante, in the border town of El Toreo. After the initial training period, Wal-Mart de Mexico expects to roll out 85 branches by the end of 2008, which would put financial services in one of every ten Wal-Mart locations in Mexico.
Wal-Mart is signaling its intent to go after the unbanked portion of the U.S. population – approximately 10 percent of the U.S. adult population if you take industry numbers, or as high as 70 million new customers by Wal-Mart’s count.
Just over 40 percent of Wal-Mart shoppers in the U.S. have household incomes under $40,000, the segment of the population least likely to have access to basic financial services. Money centers will give this portion of the population, generally households with income but no savings, access to services they either don’t have now, or can only get at a premium.
By leveraging its size and scale, Wal-Mart is able to do in the financial services what it does with retail items: undercut competitor pricing. For example, the average cost for cashing a pay check is 10 percent of gross – so a customer would pay $50 to cash a $500 paycheck. Wal-Mart will do it for a flat fee of about $3.50.
In late June, Wal-Mart unveiled its Visa pre-paid debit card, which can be used anywhere that takes Visa. Just as Money Centers are competing with traditional banks and check-cashing services, the Wal-Mart Visa debit card is well positioned to eat into the market share of money-transfer institutions. It’s less expensive and more secure than wiring cash, gives the sender more control over the expenditure, is more accessible than methods that require a bank account. The card is targeted for those who don’t have access to traditional credit cards.
The card is not free. It is purchased with a onetime fee of $ 8.94 + monthly maintenance fee of $4.94. There is no fee for monthly deposits totaling $1000. No interest is paid. Many banks have attempted to launch similar programs & had failed. Experience shows that the Latino unbanked community likes a hands-on cash-based process; card based services are suspect. Moneygram may be expensive, but it is a trusted and reliable cash-based service.
Wal-Mart will have to prove their card product before it will be adopted on a large scale. Likely first adopters will be moderate income individuals who have been kicked out of the traditional banking system due to bad credit or a bad listing on ChexSystems, the bank wide bank database of bank customers with a blemished banking history (e.g., abundance of bounced checks or nonpayment of fees). The industry is waiting to see how Wal-Mart will fare. Consensus is that Wal-Mart can easily afford to invest the time and money to educate the larger unbanked Latino community and can operate at a loss until the product is known and respected within the community. If the Wal-Mart card proves successful, we will see other financial institutions offering similar services, reaping the benefits of Wal-Mart’s greenfield investment into consumer education.
In Mexico, the target market are the 44 million medium- and low income unbanked Mexicans who earn between MXP$2,000-MXP$8,000 per year and have historically been excluded from any kind of financial services whatsoever. The entrance of Wal-Mart improves access not only by going after a segment traditionally considered too poor to be good banking customers, but also by putting more branches in more places – in Mexico, there are only 8 bank branches for every 100,000 people.
THINNING THE HERD
In the U.S., Wal-Mart Money Centers will hit small independent banks in rural and secondary suburban markets were Money Centers are set up, as well as businesses that offer similar services (like payday advance centers and check-cashing centers). Bulge bracket firms like Citi and Bank of America operate in urban centers, where Wal-Mart is not a consideration, but sooner or later, even the very largest firms will have to respond with a strategy of their own – they cannot afford to simply concede this customer tranche to Wal-Mart without a fight.
The ultimate effect of Wal-Mart entry into banking services is unclear. The largest banks have given up on banking the low-income unbanked. Their Spanish-language marketing now focuses on the more profitable Spanish speaking small businessman or homeowner. Following the Wells-Fargo model, the largest banks make their greatest profits cross selling multiple products to the same client – there is not the same profit opportunity available by offering multiple entry level financial services to a low income customer.
The largest banks would be quite happy for Wal-Mart to front load the risk of developing the poor and unbanked into moderate income individuals, which the big banks may then absorb into their retail banking scheme. Big banks are well aware that the Latino community is quickly moving into the middle class within a generation of immigrating. They would prefer to pickup this segment and avoid the costs of developing the immigrant generation.
Small banks are more concerned by the loss of income from a Wal-Mart that is able to centralize all transactions – like the largest banks, few small banks have a dedicated outreach program to the unbanked, nor do they offer entry-level financial services to non-customers. The immediate threat is to the MSBs.
Over the long term, the failure of the big banks to engage the Latino community early on, may be their undoing. Thus far, the Latino consumer is loyal to a single institution and this loyalty spans across generations. If Wal-Mart engages the immigrant generation and within the next 10-15 years develops a sophisticated full retail banking model into which the highly-valued first generation prefers to bank, then we anticipate an all-out brawl between the retail and banking giants. Of even greater concern will be competing corporate banks like Toyota’s “Lexus Savings Bank,” which is looking to cross sell multiple bank services to affluent Lexus car owners.
Is this a legitimate concern for the big banks? From a branding standpoint, can Wal-Mart create a brand with which both entry level and moderate income individuals can identify?
In retail, Wal-Mart failed to “Target-ize” themselves by offering higher quality goods to higher income individuals because those individuals didn’t want to shop at Wal-Mart. In fact, most moderate and higher income consumers perceive Wal-Mart as not only undesirable, but wholly offensive.
Banking is different from retail because it is easy for one bank to open multiple branches under different bank names offering the same banking services. Wal-Mart could develop one brand for the unbanked located in one store and another brand for the middle income banked off-site. They would be aided in this brand differentiation by the fact that most banking services are moving online, where it will be easy to create a “middle income” presence with very little incremental investment.
The small independent banks played a large role in keeping Wal-Mart from getting a banking license. The bulge brackets, however, have significantly larger resources, both financially and politically, to advocate for themselves. It will be interesting to see what happens to banking when these two segments – the world’s largest depositary institutions and the world’s largest retailer – fight each other in the regulatory arena as well as the market place.
In Mexico, Wal-Mart’s ability to tailor financial service offerings by location (just as they do with their off-the-shelf product mix) will translate into lower prices for consumers. The downward pressure on prices should bring down fees industry-wide in the medium-term as other retail banks are forced to respond with competitive product offerings.
Tricia Juhn is director of the financial services practice of U.S.-based consultancy InfoAmericas.