Wal-Mart's financial services © Stockbyte / SuperStock

Extra6/22/2007 11:16 AM ET

Wal-Mart plans poor man's 'bank'

A rapid expansion of financial services offered through its vast network of stores could help customers save money and squeeze other players in the industry.

By BusinessWeek

Earlier this year, Wal-Mart Stores (WMT, news, msgs) abandoned plans to create its own bank. The retailing giant withdrew an application for a bank charter in the face of tremendous opposition from competitors, as well as from politicians in Washington and state capitals.

But the world's largest retailer certainly hasn't given up hopes of taking on the financial-services industry. The Bentonville, Ark., company on Wednesday announced it will offer a host of financial services to customers through Wal-Mart MoneyCenters, including check cashing, bill payments and international money transfers. Wal-Mart will open financial-services centers in 450 stores by the end of 2007 and in 1,000 stores by the end of 2008.

As part of its services, the company will issue a Wal-Mart MoneyCard, a prepaid Visa card, that will cost $8.95. It can be used like a credit card to shop online and to pay for gasoline and merchandise at other retailers. The card will be available at most Wal-Mart stores by year-end.

"Many of our customers are paying too much, traveling too far and not being well-served," says Jane Thompson, the president of Wal-Mart financial services.

The move could prove to be a boon for consumers. Wal-Mart has brought down the fees for services like check cashing by 50% in certain markets, and it's likely to have a similar effect with its broader financial-services push.

"They are going to put a squeeze on margins and prices for transactional services, money transfers, check cashing, and I think it's good for the industry," says Bruce Temkin, the principal analyst for Forrester Research (FORR, news, msgs), a consulting and research firm. "The core model of banking hasn't changed in decades."

Likely rivals who will see their profits squeezed -- local check-cashing shops, traditional banks and money-transfer players such as Moneygram International (MGI, news, msgs), First Data (FDC, news, msgs), the U.S. Postal Service and Western Union (WU, news, msgs) -- may not be so pleased.

'It's a matter of credibility'

Those who see this as Wal-Mart's back-door entry into the banking business immediately denounced the move.

"Wal-Mart has said before publicly that they were interested only in processing payments and weren't going to offer financial services," says Republican Rep. Paul Gillmor of Ohio. "It's a matter of credibility when they promise something and do the opposite."

Gillmor, along with Rep. Barney Frank, D-Mass., is co-sponsoring a bill that would prevent nonfinancial commercial institutions from operating a bank. The bill passed the House with 96% of the vote and is pending in the Senate.

For Wal-Mart, financial services offer a promising new avenue of growth. The company has struggled to revive its once-robust sales and profit growth. Its comparable-store sales were down 3.5% in April, the largest monthly decline since 1979. A strategy to move upscale with trendier apparel and fine home goods hasn't panned out.

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prepaid debit cards (c) Larry Bray/Getty Images
Wal-Mart adds new products
Jane Thompson, the president of Wal-Mart financial services, says customers should benefit from the introduction of prepaid debit cards and the expansion of in-store money centers.

But financial services may be an easier expansion because the move largely involves selling more to the same customer base.

"Wal-Mart is a dominant player in retail and has had a lot of problems broadening out its customer base or moving into urban areas, so it has to reach into other lines of business," says Bert Ely, a banking consultant. "Consumer financial services is a natural extension of its business."

Ely points out that these services are mostly aimed at Wal-Mart's core shoppers who don't use banking services and won't necessarily broaden the customer base. However, Wall Street analysts applauded the move and say that the company will see gains in the long term.

"Providing a private-label debit-card service under the Wal-Mart banner could increase both brand equity and frequency of visit," says Adrianne Shapira, a retail analyst at Goldman Sachs (GS, news, msgs). "Financial services are higher margin (versus retail), and executive commentary suggests that profitability of MoneyCenter square footage is among Wal-Mart's highest."

Wal-Mart has piloted these services at some stores in the past year.

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