Will Consumers Dump Banks for Retailers?
American consumers, it seems, have grown increasingly distrustful of banks and many are turning to other sources for financial services.
An article on the Bank Investment Consultant website with a “sound the alarm” headline, New Walmart Kiosks Present Threat to Banks, suggested that a large amount of dollars that pass in and out of financial institutions could get sucked up by the retailer.
“Retailers should shake in their boots, banks should shake in their boots,” Brian Riley, a research director at TowerGroup, told Bank Investment Consultant. “Because if Walmart starts linking their kiosks to doing reloadable gift cards, they have the power to move a lot of transaction money.”
A piece on The Christian Science Monitor website citing the Mercator Advisory Group said the amount of dollars put on prepaid cards will reach $552 billion next year, up from $330 billion three years ago.
Prepaid cards through Walmart and others appeal to the millions of so-called “unbanked” consumers across the country. Cards are used by many in the same way that banking customers use checks and debit cards.
Prepaid cards have gone mainstream by catering to the ranks of the unbanked — people who don’t have a bank account. Nearly one in five Americans are unbanked, a 2009 government report found, and the number is growing.
Not wanting to be left out of this big and growing business, American Express announced this week that it is offering its own prepaid card.
Discussion Questions
Discussion Questions: Do retailers pose a competitive threat to banks in the area of financial services? Would you support legislation that would allow retailers entry into services now strictly limited to financial institutions?
Similar to keeping church and state separated, I think it is a very smart move to keep retailers and financial services separated to help protect the end consumer. No question consumer confidence with large banks is close to an all-time low. The good news is local banking is booming. I speak on a regular basis with two local bank presidents in two different states and the last 3 years have been very good for both their banks. Amazing what can happen when you run a sound business and don’t overextend yourself because of greed.
We can’t have consumers dependent on a retailer for not only their supply of goods, but their banking needs as well. Imagine having to bail out retailers in a few years because they overextended themselves and if we didn’t the economy would collapse? This story sounds really familiar. It could easily happen if we gave them the ability to control both the supply chain and money chain.
I don’t support legislation that regulates any business. Businesses should have free access to markets such as retail or banking. Typically people who use Walmart as their bank are not bank worthy anyway. My experience has been people who don’t have bank accounts have no significant income or assets and don’t understand how a checking account works.
Humans have a tendency to wake up to reality about two weeks too late. If you’d made your doctor’s appointment two weeks ago you might not have had the heart attack. If you’d replaced your tires two weeks ago when the mechanic said you should, you wouldn’t have had the blowout on the highway yesterday. Even some marriages could have been saved if someone had woken up to reality two weeks earlier.
The two most “dead-to-the-world” ‘retailers’ on the planet are banks and airlines – with a couple of good exceptions. In this case non-bank retailers will move into the financial services market because they notice that actual banks are asleep. Hopefully the best thing to come out of that will be banks waking up to the innovative idea of actually being customer centric. As we know, nature – and commerce – abhors a vacuum. Of course, by then it might be too late for the banks.
Oh – and the world will end July 1.
Retailers pose a distraction, at best, to some traditional financial services providers.
I guess my answer to the second question is that in general a free market should, in the end, benefit consumers — provided, of course, there are proper federal guidelines in place to protect them.
Given the federal government’s brilliant track record in regulating the financial services industry to date, I’d have to think long and hard about whether or not retailers should be allowed to compete directly with banks and similar industries.
Any company or store that can do a better job than the existing methodology should be allow to expand into new fields. Nearly every “non grocer” sells food and groceries today. Boundries are for containment not dynamics. Just consider how gasoline boosted Kroger’s first quarter sales results.
Do retailers pose a competitive threat to banks in the area of financial services? Potentially, yes, for retailers who are insightful, innovative, aggressive. And yes I would support legislation that would allow retailers to enter into properly regulated financial services.
We are not talking about Joe retailer getting into banking. We are talking about the Walmart’s and Target’s of the world.
With regard to retailers getting into the banking industry, the more the merrier… Banks could use some competition. (Is that an understatement?) The key, of course is regulation. Strong, tight, unwavering regulation!!!!
But, have no fear. If consumers dumped banks for retailers, the banking industry would react so massively that the retailer banking business would disappear.
Unfortunately, they would not react massively to better serve the consumer. They would react massively in Washington to have Congress pass a law to prohibit retailers from participating in banking. That would be a much easier and much less expensive alternative than competing.
While established members of the financial community may think the crisis has passed and that the industry is returning to normal, from the consumer’s point of view, the banking industry has not changed or reformed the practices that got them into trouble. This is a huge issue for consumers and bankers ignore the issue at their peril. Entrepreneurs will always be ready to take advantage of an opportunity in the marketplace. Banks may not be a necessary institution in the minds of some consumers.
Although one major retailer was forbidden to start a bank a few years ago, I believe this IS good for our economy. Competition drives innovation, and if retailers are allowed to create true banking institutions, more services will arise that support saving, investing and other acts that consumers currently do too little of. Few organizations promote as well as retailers. I’m convinced that some pretty cool incentives would arise if they were allowed to compete.
Today, as I stood in line at my local 7-Eleven, I watched a gentleman purchase 4 money orders that totaled over $300, and I also observed him transfer money to another recipient. All this while I waited to pay for my banana.
Keeping in mind that 7-Eleven has over 7,000 stores in North America, and they have longer operating hours than a bank, with convenient parking, and the fact that customers can’t purchase their cigarettes, beer, and potato chips at a bank, but they can do so at 7-Eleven while still handling transactions, yes, banks should be worried. They also should be worried due to the fact that the economy has placed many people in a check-to-check lifestyle, which negates the needs for savings accounts, and puts us more into a transactional society, living day by day.
I can envision that the time will come where a large percentage of people will see their retailer as their financial institution, where they purchase their insurance, their mortgage, their prepaid credit cards, their mobile phone, all while they purchase their groceries.
In the UK, this time has arrived, and it is executed perfectly by Tesco.
It’s interesting how this question evokes politically partisan answers.
It’s probably okay for some retailers to get into this business. Most retail executives, while taking home less money than a Wall Street CEO, generally have more common sense than Wall Street CEOs, and are not going to let their employees bet the farm on collateralized debt obligations and other financial instruments that no one understands.
But what I don’t get is why more Americans aren’t waking up to the benefits of banking with locally owned banks and credit unions, instead of behemoths with thousands of branches. The money stays local, the local institutions tend, on average, to be stable and well-managed, and as a credit union member, I can use my ATM card in thousands of ATMs around the country at no cost. I also get better interest rates. What’s not to love?
Another brilliant marketing move by Walmart. Competitive to banks and credit card companies? Yes, but only to their bottom line on credit card interest. Remember the current offerings–PREPAID transactions–are non risk.
The value to the consumer includes–for those without bank accounts–check cashing at a reasonable rate. The value to Walmart includes the consumers are already in the store when they get their cash. An unintended value to consumers is smaller debt and reducing the urges in the past that resulted in over $950 billion dollars in 2008 of revolving credit.
I would not agree, however, that retailers should be allowed to increase transaction types to include loans.
Yes, there is definitely a good possibility that consumers might rather deal with a retailer they have confidence in, rather than a bank. Loblaws in Ontario partnered with a major national bank, CIBC, a number of years ago and gives shoppers a number of advantages–convenience, location, credit card-loyalty tie ins, and more. While this partnership approach is working in some US areas, like Wells Fargo in CA, it’s not an all encompassing model.
Particularly for everyday transactions, this is a major plus–consumers deserve better financial services. Some retailers could do a great job in financial services for their community. Banking oversight is crucial for any new entry, and should be handled very carefully.
Exactly what do we mean by “banking”? Traditionally the main purpose of a bank was to take in deposits, pay interest on them–imagine that!–and then loan the money back out. OTOH, non financial institutions–supermarkets, the corner bar, etc–have long offered services (check cashing, money orders, and, of course, offering credit) too, so I’m not sure this is really a change.
Prepaid is growing at the fastest rate among all non-cash payment methods including debit card, though it still represents only about 5% of total payments. This is from a 2010 Federal Reserve Payment Study.
It makes sense for retailers to offer prepaid cards to its customer base while incorporating value from rewards programs and other promotional efforts into the overall card value proposition.
This answers a much different question than “should retailers get into banking by procurement of a banking license?” The answer here should be “no.” Stick to the strong suits and avoid the traps of risk and portfolio management. Most retailers have sold their private label portfolios. Why would they want to now obtain banking licenses and get into a risky new line of business?