Bargin-bin banking grows at Wal-Mart

By Chris Serres

Star Tribune

      Shortly before 7 a.m. on a recent weekday morning, a small crowd formed outside the Wal-Mart store on University Avenue in St. Paul.

      Hopping from one foot to another to keep warm, the men and women waited patiently for the doors to open so they could pay bills, wire money to relatives and cash weekly paychecks.

      "I don't trust banks," said Jose Fernandez, 24, of St. Paul, who wires money from the Wal-Mart store in St. Paul. "They ask too many questions, and their fees are too high."

      In what is considered by some to be evidence of consumers' growing distrust of banks, thousands of low-income Americans are shunning offers of free checking accounts and choosing instead to do their banking at Wal-Mart.

      At Wal-Mart's 48 stores in Minnesota, customers can cash payroll checks, transfer money to family and friends in foreign countries, pay utility bills and buy money orders with fees that are up to 80 percent less than those charged by major banks.

      Wal-Mart doesn't have full banking powers. It can't, for example, take deposits or make loans. But many analysts are convinced that it's only a matter of time before the world's largest company expands its financial service offerings.

      "I would be stunned if sometime in the near future Wal-Mart doesn't find a way to open a bank," said Richard Guha, principal of the New England Consulting Group, a marketing strategy consulting firm based in Westport, Conn. "The company is going to take advantage of every nook and cranny in the nation's banking laws."

      Banks already are gearing up to fight such a move, and normally any foray by Wal-Mart into a new business is met with waves of protests from consumer groups. But even stalwart critics of the retail giant, who are opposed to Wal-Mart's occasionally heavy-handed treatment of suppliers and union organizers, acknowledge that the company is providing a welcome alternative to the big banks.

      "Banks simply aren't providing the kind of transparent pricing that makes sense to low-income workers," said Michael Stegman, director of the Kenan Center for Community Capitalism in Chapel Hill, N.C. "People are voting with their feet and taking advantage of Wal-Mart's discounts" on financial services.

Purchasing power

      By deploying the same low-cost, high-volume strategy it has used for selling consumer goods such as paper towels, Wal-Mart has made many bank fees look almost punitively high.

      In the Twin Cities, customers of the Bentonville, Ark.-based retail giant can wire money to Mexico for $7.87, cash payroll checks for $3 and buy money orders for 46 cents. By comparison, Wells Fargo charges $45 for international money transfers and $5 for money orders. Western Union charges $20 for wiring $1,000 to Mexico, or nearly three times as much as Wal-Mart.

      Wal-Mart aims its financial services at the estimated 10 million American households that do not have checking or savings accounts. "Our clientele for these services tends to be people who are suspicious of bank accounts but still need the services," said Marty Heires, a company spokesman.

      For now, the money that Wal-Mart collects from financial services represents a tiny portion of the retail behemoth's business. Wal-Mart does not break out results for its financial services unit but lumps them into a category called "other income," which totaled $2.97 billion in 2004. That amounted to just 1 percent of the company's revenue.

      Still, the potential for growth is huge, financial analysts say. Last year, for instance, banks and non-bank vendors such as Western Union collected $13 billion in wire transfer fees alone, according to a study by Celent Communications, a financial services research and consulting firm in Boston.

      "It's a lucrative business, even if Wal-Mart captures a small percentage," said Dan Schatt, senior analyst at Celent.

      In its latest move, Wal-Mart introduced a no-fee Discover credit card this month with a variety of perks, including 1 percent cash back on purchases and discounts of 3 cents a gallon on gasoline bought at Wal-Mart pumps.

      By offering these services, Wal-Mart gives customers more reasons to visit its stores more often. And most bank analysts and regulators are convinced that Wal-Mart won't rest until it obtains full banking powers. The retailer tried to acquire an Oklahoma savings bank five years ago but was blocked because federal regulations prevent a non-bank commercial entity from owning a bank charter.

      But that doesn't mean Wal-Mart can't get a bank.

      Seven states issue charters for so-called industrial loan companies, or ILCs, which are granted limited banking powers. Commercial companies can charter an ILC in one state and use it to make loans and collect deposits elsewhere. GE Capital, Pitney Bowes, Volvo and General Motors, among others, own ILCs.

      Wal-Mart already leases space to banks. Nearly 1,000 of its 3,600 stores nationwide have full-service bank branches inside them. For instance, the Bank of Elk River operates branches inside Wal-Mart stores in Maple Grove and Elk River.

      But in most cases, Wal-Mart does not share in any of the revenue these branches generate, and some analysts say the retailer is forfeiting billions of dollars in lost income by not bringing those services in-house.

      If Wal-Mart had an ILC charter, it would be able to offer everything from checking and savings accounts to mortgages, car loans and even small-business loans. Heires declined to comment on whether Wal-Mart plans to open a full-fledged bank, saying the company does not discuss future actions.

'Trusted name'

      Wal-Mart is making no secret of the fact that it has bigger ambitions. On its website, the company refers to itself as a "trusted name in financial services." Wal-Mart now provides credit reports online and has begun printing the same kind of paper checks you can buy at a bank for about one-third the cost.

      "We are very interested in expanding these offerings," Heires said.

      But if the retailer pursues plans to become a full-service bank, it can expect fierce opposition from banking groups, which already are crying about unfair competition.

      Banks face strict rules that prohibit the tying of loans to other financial products. For instance, a bank can't offer a discount on an insurance policy as a carrot for a loan.

      Wal-Mart, however, faces no such restrictions. The company can offer steep discounts on consumer goods if consumers buy their financial products.

      "You worry about coupling discounts with things banks can't offer," said Joe Witt, president and chief executive officer of the Minnesota Bankers Association. "You could go to a [Wal-Mart] store, open a home equity line of credit and get 50 percent off diaper purchases or building supplies. But we can't cross the financial line and get into [selling] commercial products."

      Yet the bankers' complaints have attracted little sympathy from consumer groups, which say the banks have made themselves vulnerable to outside competition by imposing and raising fees on everything from bounced checks to ATM transactions. In 1997, banks charged an average fee of $17 for a bounced check; now, many banks charge twice that amount.

      All told, the amount banks collect in fees, as a percentage of total revenue, has doubled in the past seven years, according to R.K. Hammer Investment Bankers of Thousand Oaks, Calif.

      "It may not be fair that Wal-Mart can find a back-door way to start a bank," said Tony Plath, a professor of finance at the University of North Carolina at Charlotte. "But who really cares? That argument isn't going to resonate with the American public, which is tired of paying higher fees" for banking services.

Less expensive

      If the retailer does start a bank, Sheng Thau, 19, of St. Paul said she would be among the first to open an account at Wal-Mart.

      Her husband, Mikey Yang, 25, has an account at a major bank, but it doesn't do him much good when he needs to deposit a payroll check. Typically, the bank puts a five-day hold on the funds, which means he occasionally gets hit with a $30 overdraft fee and can't access the money when he wants it.

      Thau and Yang figure they could avoid the fees by cashing their checks directly at Wal-Mart, where they shop at least twice a week.

      "It would be really convenient," said Thau, who spoke while feeding nachos to her son, Aison, 2, in Wal-Mart's snack area. "It would save us a trip to the bank, and we probably wouldn't have to worry about overdrafts anymore."

      Others said they like the transparency of Wal-Mart's fees. At the store in St. Paul, the fees for the store's financial services are posted with large digits -- similar to a sign outside a gas station -- above the customer service desk. Typically, the product list is written in both English and Spanish.

      At least three times a year, Fernandez wires money to his mother and brother in Mexico from the Wal-Mart store in St. Paul. He used to wire money from local banks, but they usually asked him for several forms of identification and urged him to open an account before sending the money.

      "It's a lot faster here," said Fernandez of the money transfer service at Wal-Mart. "And I shop here all the time, so it keeps me from having to make a separate trip."