by Mark Friedman on Monday, Feb. 25, 2008 12:00 am
On Nov. 12, Wal-Mart opened the first four branches of Banco Wal-Mart in Mexico. Banco Wal-Mart already has 22 locations and is expected have at least 80 by the end of the year.
Meanwhile, Wal-Mart's plans to open a bank in the United States appear to be dead.
Earlier this month, the Senate Banking Committee approved a bill that would prevent retailers from owning the sort of limited bank charters that Wal-Mart previously had sought, just as they are prevented from owning commercial banks. The bill now is headed to the full Senate for a vote, but a date hasn't been set.
If the bank ban passes, Wal-Mart doesn't appear to mind.
"There are no such plans at this time" to pursue a bank in the United States, Wal-Mart spokesman Kevin Gardner said last week in an e-mail statement to Arkansas Business.
Wal-Mart is instead focused on growing its Mexican bank.
Gardner wouldn't say how many new accounts Banco Wal-Mart has opened.
Banco Wal-Mart could be a hit, though, for the Bentonville retailer.
"What you find in Mexico is the type of people who shop there often don't have the regular checking accounts," said Refugio Rochin, a professor of Chicana/Chicano Studies and an economist at the University of California at Davis. "So if Wal-Mart is installing something that allows the buyers to have credit, it makes sense that buyers could also take advantage of the Wal-Marts for banking."
But Wal-Mart Watch, a nonprofit advocacy group in Washington, D.C., isn't happy with Banco's interest rates. Interest on the savings accounts is 1 percent and interest on consumer loans - which can be used only to buy Wal-Mart items - is 75 percent annually.
The loans provide credit to people who wouldn't otherwise have access to credit cards, Gardner said.
"It doesn't sound like it's that helpful to low-income people," said Stacie Lock Temple, a spokeswoman for Wal-Mart Watch. "It sounds like it could easily get them into a cycle of debt and not being able to afford what they are purchasing."
Gardner said Wal-Mart studied the market and concluded that its products are "very competitive compared to similar products."
He also said other factors should be taken into account when looking at the interest rate. For example, he said, the products in Wal-Mart's stores are cheaper than at other retailers.
Wal-Mart also considered the risk to the company in loaning money.
And Wal-Mart has a program to reward customers who pay on time. The plan works like this: In a 12-month payment plan, if the customer isn't late, Wal-Mart will give the customer a gift card loaded with the amount of the last monthly payment, Gardner said.
As Banco grows, the interest rates might improve. But for now, the rates "are attractive considering the demographic that we are targeting as potential customers," Gardner said. "We are constantly evaluating our products in order to make them even more appealing to the market."
But even to Rochin, Wal-Mart's 75 percent annual interest rate seems high for the Mexico market.
He said that if Mexicans knew about the rate, "they would probably choke and not do it. The problem has been they often trust American businesses, and they may be taken in by this trust without realizing what they would end up paying."
Rochin said he didn't know the going rate for similar loans in Mexico, but Business Week recently reported that Mexican for-profit banks charge customers with poor credit between 50 and 120 percent annual interest rates.
'Easy and Simple'
After failing four times to get a U.S. bank - most recently applying for an industrial bank charter in Utah - Wal-Mart vowed not to try again. Instead, Wal-Mart turned to Mexico, where the company's international division started in 1991.
By November 2006, Mexico's finance ministry awarded Wal-Mart de Mexico the license to organize and operate a bank in the country.
"I don't know all the politics behind it, but they obviously have been able to overcome any political objections ... from banks and retailers down there," said Bert Ely, a banking consultant in Alexandria, Va. "It's interesting it doesn't seem to have been a big issue down there in the way that it was an incredible issue up here."
Wal-Mart's Mexican bank was a way to provide banking services to customers who don't have access to affordable credit plans, according to a Nov. 12 Wal-Mart news release.
The bank currently has several products, including an interest-bearing savings account that is tied to a debit card.
To open a savings account, customers need 50 pesos, or about $5. No minimum balance amount is necessary to keep the savings account open.
To open a checking account, a Mexican customer will need 1,000 pesos, or just under $100.
Another product allows customers to have credit to buy items in Wal-Mart.
Wal-Mart also has space set aside in the store to help customers choose the best product. The bank is open every day from 8 a.m. to 10 p.m.
"It is with this in mind that our specialized service has been created, to offer easy and simple basic banking services, without the need for troublesome paperwork, ambiguous and confusing contracts or complicated clauses," Eduardo Solñrzano, chairman of the board of directors for Banco Wal-Mart, said in the Nov. 12 news release.
The Mexican government will regulate the banks similarly to the way banks are regulated in the United States, Gardner said.
Wal-Mart already has proven to be successful in Mexico, Professor Rochin said.
Mexico has a population of 108 million, and in 2007 Wal-Mart de Mexico stores had 957 million customer visits. In 2006, Wal-Mex had sales of $18.3 billion, a 20.2 percent increase over 2005.
"Wal-Mart's done a good job at marketing itself but also adding low-cost items to consumers," Rochin said.
Once Mexicans find a store they like, they keep returning, Rochin said.
"Mexican people are very dedicated shoppers to companies that they feel are honest and fair with them," he said. "So maybe Wal-Mart's figured this out and that providing services like [banking] would develop the loyalty even more."
Rochin said it's unclear how many Mexicans already used banks. Wal-Mart said it believes that 30 percent of its bank clients previously did not have bank accounts.
Ely, who is a principal of Ely & Co. and covers banking regulation and financial services, said it might take years before the impact of Wal-Mart's banks is known because Wal-Mart doesn't break out its financial services activities in U.S. Security & Exchange filings.
But he thinks Wal-Mart's banks could be a big business by bringing banking to the masses at a lower cost.
"To the extent that happens, it's going to be a win-win for everybody," Ely said.
The Mexican banking move also might help Wal-Mart in the money-transfer business, Ely said.
Earlier this month, Wal-Mart renewed its contract with MoneyGram of Minneapolis, which provides money transfers.
"I certainly expect [Wal-Mart's Mexican Bank] to have a favorable impact on the money-transfer business," Ely said. "How significant it will be is another story."
Robert Dodd, an analyst at Morgan Keegan & Co. who covers the money-transfer industry, said he doesn't know what effect Wal-Mart's banks will have on the remittance market, which last year accounted for $24 billion being sent from the United States to Mexico.
But he doesn't think Wal-Mart's gains will be much, if anything.
MoneyGram, which is the second-largest money-transfer company behind Western Union, already had 20,000 payout locations in Mexico, Dodd said.
"The bank was not something that really triggered anything in my mind that was going to make a great deal of difference to [Wal-Mart's money-transfer] strategy down there, frankly," Dodd said.
Dodd said Wal-Mart's revenue tied to the money-transfer business was $200 million in 2006. He didn't have a figure for 2007.
Some Bankers Concerned
Even though Wal-Mart has said it doesn't plan to pursue opening a bank in the United States, some bankers aren't resting easy.
Temple, the spokeswoman for Wal-Mart Watch, said she fears Banco is a test run for Wal-Mart opening a bank in United States.
Wal-Mart's Mexican bank "just tips their hand to what [Wal-Mart's] true intentions were in the United States," said Camden Fine, president and CEO of the Independent Community Bankers of America. "That is what they really wanted to do, was get into the full-blown retail commercial banking" industry.
Wal-Mart has said having its own bank would lower its costs. It had hoped to open an industrial bank in Utah - just as competitor Target Corp. of Minneapolis did without protest - to avoid paying debit card transaction fees, saving about a penny every time a debit card is used in a Wal-Mart store nationwide.
Fine said the ICBA is working overtime to get the legislation passed that will prevent commercial firms from owning industrial banks, also known as industrial loan companies. If the full Senate approves the bill, it then will go to a conference committee to iron out the differences with the House version of the bill, which passed in May.
Fine hopes to get the bill signed by President Bush by the end of the year.
History of Opposition
Wal-Mart has a history of being blocked from entering banking.
In 1999, Congress passed the Gramm-Leach-Baliley Act, which excluded Wal-Mart from acquiring a bank charter or a federal savings bank charter, adding language to the legislation at the last minute because the retailer had announced it was buying a federal thrift.
Then Wal-Mart was stopped by regulators when it wanted to partner with Canada's Toronto-Dominion Bank's subsidiary TB Bank USA.
And in 2002, Wal-Mart tried to buy an industrial loan company in California, but was blocked by that state's legislature.
Its July 2005 application for a Utah state charter resulted in unprecedented public hearings held by the Federal Deposit Insurance Corp. and was officially withdrawn by Wal-Mart in early 2007, after the FDIC announced a moratorium on approving ILC charters.
Fine said the ICBA is opposed to the mixing of banks and commercial firms.
"We don't believe that the FDIC insurance safety net should be extended to commercial firms," Fine said. "We don't think that retail commercial firms should either directly or indirectly have a hand in insured bank deposits."
The ICBA doesn't have a problem, though, with Target's industrial loan charter.
"This is where the intention comes in," said Stephen Verdier, senior vice president and director of congressional affairs for the ICBA. "Target's ILC is a pretty limited operation, and they've never indicated they are going any farther."
Target offers credit to businesses that are its suppliers, he said.
"It's pretty much what people had in mind when the ILC charter was authorized by Congress in 1987," Verdier said.
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