We’re baaaank!
Did you miss me?
A year ago, Wal-Mart was thwarted in its attempt to acquire an Industrial Loan Company (ILC), and I commented about the banks’ fears:
I see banked people
Here we uncover the banks’ real fear: if you boil away all the brick structures, and the need for massive safes, you see a bank as an interface between a retail customer and a financial network. Co-locating that inside a major retail outlet is logical, and efficient — not just for the provider, who adds another ’share of wallet’ capturing opportunity, but also for the customer, who’s there in the story anyway.
Retailers as banks are so logical that if enacted, they would be formidable competition through the dastardly, under-handed, nefarious strategy of charging less.
In
“Don’t fire until you see the signatures of their checks!”
And the customers? Too bad.
Even though I didn’t specifically post it, I was pretty confident that Wal-Mart, rebuffed in its direct effort, would find another way to provide credit to its customer, if only because it’s so eminently logical to do so. Now, a year later, they’re ba-ack, as highlighted in this article from The Washington Post:
Wal-Mart is expanding its financial services, offering check cashing and money orders along with a new prepaid debit card in its ongoing effort to persuade shoppers to spend more time and money in its stores.
The world’s largest retailer said yesterday it plans to double the number of its existing MoneyCenters, where customers can also pay bills or transfer cash, to 450 from 225 by the end of the year.
By the end of 2008, about 1,000 stores are expected to have MoneyCenters, roughly a quarter of Wal-Mart’s locations.
The sense this makes is so vast it cannot be denied.
From last year’s post:
Retailers as banks are so logical that if enacted, they would be formidable competition through the dastardly, under-handed, nefarious strategy of charging less.
In
“Don’t fire until you see the whites of their checks!”
And the customers? Too bad.
In fact, customers probably like it:
The retailer is hoping the new services will boost sales. Wal-Mart’s growth has slowed as it has saturated rural and suburban markets, serving 138 million people each week. Its typical customers, who have an estimated household income of $40,000 to $45,000, continue to be pinched by rising gas prices.
In fact, throughout the developing world (particularly in the transition economics of the former Commonwealth of Independent States), credit decisions made by vendors are a key part of developing a financial economy.
The push into financial services brings the company back in touch with its core customers. Chief executive H. Lee Scott Jr. has said that roughly 20% of Wal-Mart’s shoppers do not have checking accounts.
Mr. Scott wants your hands on Wal-Mart checking accounts
While we might want all wage earners to have checking accounts, some of them don’t, and some — perhaps the illegal immigrants? — perhaps for good reason. Vendor finance increases electronic banking and builds a credit history.
“We’re offering them a safe place and a card to help them manage their money,” Jane Thompson, president of Wal-Mart financial services, said in a written statement.
Wal-Mart has offered basic money services in its stores since 1999, typically through the customer service desk. The pilot MoneyCenter, an area of the store dedicated to such transactions, opened in September 2004. The retailer is working with third-party providers, including MoneyGram International, Certegy, CheckFree Pay and TransUnion, to administer the services.
The Wal-Mart MoneyCard is a reloadable, prepaid Visa card issued through GE Money Bank, with additional services available through Green Dot.
The cards do not require a checking account, and users cannot spend more than the amount placed on the card.
The MoneyCard costs $8.94 and has a monthly maintenance fee of $4.94 unless users put $1,000 or more on the card each month.
Assuming a $400 average positive balance, that’s a 1.25% maintenance fee, probably higher — and there’s no interest on the account. Sounds like a lot, doesn’t it?
There is also a $4.64 fee to reload the card unless it is done through check cashing at Wal-Mart or direct deposit.
There’s another way to view it: checking by another name.
“It’s convenient for the customer,” said Howard Davidowitz, chairman of Davidowitz & Associates, a national retail consulting and investment bank, who had worked with Wal-Mart founder Sam Walton. “They’re already in Wal-Mart.”
Davidowitz wants things to be customer-convenient
The company estimated that its fees were 25 to 50% lower than those of its competitors and saved customers $450 a year.
For many of the unbanked, the alternatives are dreadful, from payday lending on up. The right comparative isn’t against the theoretical fully banked citizens, but against the practical realities these folks face.
I see unbanked people
I haven’t studied the matter, but if people are flocking to Wal-Mart’s cards, there’s a reason — it’s because they’re better than their alternatives.
Wal-Mart said yesterday that the prepaid card and MoneyCenters were the first of many financial services it hoped to offer, though it declined to elaborate.
Several banking associations remained skeptical of Wal-Mart’s intentions.
You’re really doing this for my benefit?
The announcement comes after the retailer’s failed bid to obtain an industrial loan company to open a limited-services bank that Wal-Mart said it would use primarily to accept large deposits brokered through third parties to lower costs of such back-room operations as credit card processing. The company was deluged by criticism — the Federal Deposit Insurance Corp. received 1,500 comment letters on Wal-Mart’s application, the most on any issue — and critics suspected the industrial loan company was just a first step in a broader push into consumer banking.
In case you’re wondering, the ICBA kindly offers you an email letter with its talking points:
The separation of banking and commerce is one of the pillars of our economic system and has helped make it the envy of the world. Keeping banks and commercial firms separate ensures the impartial allocation of credit, avoids excessive concentration of economic power, and protects American taxpayers against an unwarranted extension of the federal safety net.
This is the commercial variant of the old Glass-Steagall argument (brokerage and banking cannot mix), which sounded good in the 1930’s, and is looking shopworn today.
Think what would have happened if Enron or WorldCom owned a bank.
S.1356 closes the last remaining loophole in banking law that allows non-financial commercial firms to own FDIC-insured institutions, and ensures that owners of industrial banks already in existence are adequately supervised.
If the FDIC-insured institution is also regulated by the FDIC, what does it matter who owns it?
John Taylor, president of the nonprofit National Community Reinvestment Coalition, which focuses on financial issues in underserved communities, said Wal-Mart’s latest plan was a means of working around the previous setback.
“I think it’s just bad news all ways around for Wal-Mart to get into the banking business, even if it’s just the foot-in-the-door approach that they’re taking now,” he said. “They’ve scaled down what they’re asking for, but I don’t think they’ve scaled down their intentions.”
Camden R. Fine, president of the Independent Community Bankers of America, said he was concerned that Wal-Mart might move into home mortgages or siphon business from community banks.
From your market share … to my market share
Just what would be wrong with either of those moves? Last year, I wrote:
What defines a bank? Is it a vast physical structure, with imposing granite Greek columns? Is it rather a depository of specie, to be guarded by detectives?
Egbert Souse, accent grave over the E
Is it then simply a receptacle to take deposits of cash and turn then into information? (For in its purest essence, money is simply information acknowledged by all as being true.) Yet if a bank limited itself to the deposit-taking function, it would be as a one-legged Tarzan: banks must put capital to work, by making loans or investments.
In other words, a bank is a continuing marketplace, where money providers (capital sources, including depositors) meet money consumers (borrowers). These fundamentals are captured in everyone’s childhood conception of the bank: the Savings and Loan Institution (note the ‘and’).
Banks are one floor of the capital-markets department store
Where Holmes’s brother Mycroft holds court — thrilling blog post yet to come! [Now posted! — Ed.]
The equilibration between deposit-taking (extracting money from a community) and capital-providing (injecting money in to a community) is the policy justification for the 1977 Community Reinvestment Act (CRA), one of the nation’s most successful interventions and a sterling example of effective public-private partnership. It tasks banks with recycling capital back to where they got it:
What if Wal-Mart’s financial arm were regulated like a bank, and had a similar Community Reinvestment Act obligation?
As we return to ‘what’s in a bank?’ we find ourselves realizing that the question isn’t whether ILCs are banks — of course they are, in all practical function — but rather, what other large financial institutions are de facto banks? That’s the real question, isn’t it? Who is a bank, and what burdens does being a bank entail?
You think you’re a bank?
Those who see no reason why non-banks should not own ILCs say bankers’ real fear is competition, especially from Wal-Mart and Home Depot. Although Wal-Mart insists it would use an ILC only to save money on processing its credit-card and debit-card transactions, bankers fear it will eventually enter branch banking.
This prospect worries the incumbents (who, of course, have no self-interest at stake):
“Someone always pays,” Fine said. “There’s no free lunch, and that’s what people have to understand.”
Evidently you don’t exist
Non sequitur, Mr. Fine. The lunch doesn’t have to be free, just cheaper than yours — which places you in the tenuous position of seeking to claim that what people freely choose is so bad for them they should be denied the choice.
Write a comment