Wal-Mart Takes Another Run at Banking Biz
By George Anderson
The nightmare of bankers everywhere may be about to come true. Wal-Mart Stores, which has been turned away in California, Canada and Oklahoma, may finally be approved to establish an industrial bank in Utah.
If approved, Wal-Mart would be able to process electronic checks as well as credit and debit cards. It would also be able to offer consumers loans and federally insured accounts of deposit, with some limitations.
Being able to process its own electronic transactions would save the retailer a significant amount of money.
Moderator’s Comment: How big a competitive advantage would being able to process its own electronic transactions give Wal-Mart? Would Wal-Mart getting
approval to establish an industrial bank set off a scenario where other retailers followed suit? –
George Anderson – Moderator
The best comparison would be Sears. They established a very successful insurance company, Allstate, and the profits from the credit card loans often rival or exceed the merchandising profit.
Similarly, GMAC is one of the largest mortgage lenders as well as being a major car loan source, and GMAC profits exceed GM’s manufacturing profits.
Banking has economies of scale, and WM might as well use those to augment its profitability.
I am wondering, will WM use the bank to:
1. Improve margins by reducing costs of credit processing?
2. Price loans at maximum rates (used to be called “usury”) above 20% like many department and specialty stores with private-label cards?
3. Pass economies of scale onto customers to offer extra-low rates, leading to greater price competition for banks?
BTW, it doesn’t require a company the size of WM to own a bank. Many national and regional chains could do this, too. There are numerous profitable banks for sale for less than $10 million.
The 100,000 lb gorilla just got bigger and badder and moved onto a new playing field. Bad news for those that may try to play catch-up.
If Wal-Mart’s industrial bank is approved, forget about retail expansion or the addition of slightly higher-end merchandise. The true earnings generator will be its credit division.
And with an in-house financial and credit division in place, I would go one step further and tap into the cash consignment industry (a rapidly growing tens of billions of dollars industry, that for many Central and South American countries represents their #1 foreign income source), allowing Wal-Mart customers to send money to their relatives back home.
Financial services: that’s how Wal-Mart will rule the world.
Mark’s point is well taken about the ability of other companies to add financial services to their mix, but of course the trick is in doing it well. Retail and banking are very different animals, and there is no guarantee Wal-Mart will be good at it. With their economic power, they can command very favorable terms on anything, and skim profits off services offered to their consumer base without the hassle of running the company. It remains to be seen whether they can extract as much profit while being responsible for the costs and risks of those businesses as well.
Wal-Mart is pretty much in the banking business anyway. Many of their new stores offer financial services, such as money orders, check cashing and tax preparation. Heck, I even ordered my last batch of checks to be printed from Wal-Mart. I don’t think we have to worry until they start offering mortgages.
RE: Wal-Mart and Banking
The word “indescribable” fails to cover the impact on financial services and other retailers.
I don’t think “Another Run at Banking Biz” reflects much of an understanding of Wal-Mart. They played with it, have refined it, and are moving forward with a plan. These people have looked at some fairly large companies (GE, GM, Ford, etc.) and realized that there is more money to be made in finance than retail. Combining finance with retail isn’t a new concept but it sure has some fantastic synergies for Wal-Mart: reduction of fees; collection of interest; bundling of services. This is very powerful stuff and has the potential to increase Wal-Mart’s profits by 15 to 25% over the next five years.
Wal-Mart has strong family ties to the banking business dating back decades with the Robson family. I assure you they fully understand the potential and will execute well.