Wal-Mart's March into Financial Services Unsettling to Some

When Wal-Mart Stores Inc. abandoned its plans to own a bank operation in 2007, it didn’t shelve the idea of offering financial services.

Last month, the Bentonville retailer unveiled its latest entry into the financial services arena by offering customers a cheaper way to transfer money to any of its 4,200 Wal-Mart stores in the United States.

Less than two weeks after making that announcement, Wal-Mart revealed a new partnership with AutoInsurance.com of Fort Lee, New Jersey, to allow customers to compare prices on auto insurance policies and purchase coverage. The program currently is in Arkansas and seven other states, but Wal-Mart hopes to offer the service nationwide in about 12 months.

The financial services are a way to lure customers into Wal-Mart stores, said Howard Davidowitz, chairman of Davidowitz & Associates Inc., a retail consulting and investment banking firm in New York.

“What this says to their core constituency is, ‘Look, this is another reason to come see us,’” he said. “And if you can do more for your core customer, that customer is going to come to the store. … I think this is very wise.”

But the offering of financial services has some in the banking industry uneasy.

“I think anytime a large national retailer, like Wal-Mart, creates a payment mechanism that does not go directly through the banks … it’s got to be of some concern to the banks,” said Jack Milligan, editor of Bank Director, a trade publication that covers the banking industry.

According to a Bank Director survey released last week, 58 percent of an audience of 120 bank directors and executives described themselves as being “very concerned” about nonbank competition offering financial products, such as PayPal, Google or Amazon, and not being held to the same regulations as financial institutions.

Still, Wal-Mart maintains it has no plan to revive its dream of operating a bank, said Daniel Eckert, senior vice president of services for Wal-Mart U.S.

“We have found a model that has proven both successful for our customers as well as for our partners,” Eckert told Arkansas Business last week. “We do best when we are a retailer. … We’re about partnering with financial institutions that have a shared alignment to serve the customer and to partner with Wal-Mart to do that.”

In late 2011, Wal-Mart and American Express partnered to start a pilot program that would become Bluebird, a pre-paid card that acts like a checking account. That partnership is thriving, Eckert said.

“Bluebird was shaped by feedback from consumers who said they were not getting the value they expected from traditional checking account and debit services because of increasingly higher fees,” Wal-Mart said in an October 2012 news release that announced the card.

Eckert said the card was designed to serve the “unhappily banked segment.”

Bluebird now has more than 1 million accounts and more than $2 billion has been added to the cards, he said.

American Express also said it is pleased with the service. “Ninety percent of Bluebird customers are new to American Express and nearly half of them are under the age of 35,” Alpesh Chokshi, president of International Payment Options for American Express, said in an email statement to Arkansas Business. “This shows us that we’re truly opening up the American Express brand to the millions of Americans who increasingly feel they aren’t getting the value they expect and deserve from traditional financial services companies because of high fees.”

Chokshi also said American Express has found that customers are using their Bluebird cards to pay bills such as rent and medical bills.

“This makes us very optimistic about the long-term potential of Bluebird as a true alternative to debit and checking,” he said.

Protests Quell Effort

Wal-Mart wanted to get into the banking industry in 2005. It applied for a specific type of limited state bank charter in Utah and said it planned to handle electronic payment processing.

“We have stated several times publicly in oral and written testimony, our business plan does not include branch banking,” Wal-Mart Financial Services President Jane Thompson said in a statement to the Federal Deposit Insurance Corp. in October 2006.

But by March 2007, the protests from the banking industry were too much. Wal-Mart withdrew its application for the industrial loan company charter.

“Unlike dozens of prior ILC applications, Wal-Mart’s has been surrounded by manufactured controversy since it was submitted nearly two years ago,” Thompson said in a news release. “At no stage did we intend to use the ILC to establish branch banking operations as critics have suggested — we simply sought to reduce credit and debit card transaction costs.”

While withdrawing the Utah charter application, Thompson said Wal-Mart planned to offer new financial services — and it followed through. About three months later, Wal-Mart announced it was adding 1,000 Money Centers in its U.S. stores. At the time it ran 225 Money Centers that offered services such as check cashing, money orders, bill payment and money transfers.

It also unveiled a prepaid “MoneyCard” through a partnership with GE Money of Fairfield, Connecticut, and Green Dot Corp. of Monrovia, California. The card was aimed a Wal-Mart customers who don’t have bank accounts or have limited access to banking services.

The services added revenue to Wal-Mart. Financial services and related products revenue, such as money orders and prepaid cards, total less than 1 percent of its annual U.S. sales, which were $279.4 billion in the fiscal year that ended Jan. 31.

Wal-Mart also has a relationship with Arvest Bank of Fayetteville, which is owned by the heirs of Wal-Mart founder Sam Walton.

Arvest has some locations inside Wal-Mart stores and didn’t necessarily have to bid for the space. Arvest paid Wal-Mart approximately $1 million for rent for its fiscal year that ended Jan. 31, according to Wal-Mart’s most recent proxy filing. Wal-Mart expects to receive about the same amount from Arvest during the current fiscal year.

Money Transfers

Eckert said Wal-Mart began thinking about starting a money transfer service about two years ago after it received complaints from customers who found it confusing and frustrating to transfer money in the United States.

“We felt that there had to be a different solution,” he said.

He said Wal-Mart partnered with Ria Money Transfer, which is a subsidiary of Euronet Worldwide Inc. of Leawood, Kansas, to provide the service, which is called Walmart-2-Walmart.

Wal-Mart’s money transfer service fee is, on average, much cheaper than other money transfer services in industry, Eckert said. He said if someone transfers $900 to another Wal-Mart store, its rate is $9.50, while some competitors charge as much as $75 or more.

Wal-Mart’s transfer service will be competing inside its own stores with MoneyGram International Inc., which has been in Wal-Mart locations for about 12 years. “MoneyGram is still a great partner of ours,” Eckert said. MoneyGram offers more options for consumers such as where the money is delivered and offers transfers to other countries.

Still, MoneyGram lowered its 2014 revenue outlook by 8 to 10 percent because of Wal-Mart’s entry into the money transfer business. Wal-Mart is MoneyGram’s largest partner and represented 26 percent of its 2013 revenue of $1.5 billion.

Wal-Mart’s move into the money transfer business comes as the industry is growing. Global consumer money transfers were an estimated $525.5 billion in 2013, up 4 percent from the previous year, according to an April report from the Aite Group LLC, a research firm in Boston that focuses on the financial industry. The global volume is expected to reach $554 billion this year, and Aite projects that by 2016 the volume will hit $622.4 billion, double the total from 2005.

One of the reasons for the growth in money transfers is the large number of people who don’t have a checking account. Eckert said that about 8 percent of the U.S. population doesn’t have a checking account and another 20 percent are considered “underbanked” and might just have a basic checking account.

Targeting that audience could help attract customers. And Wal-Mart could use the boost. Wal-Mart’s same-store sales numbers have been slipping. In February, the retailer reported its fourth consecutive quarter of declining sales at stores that have been open at least a year, a key indicator of a retailer’s health.

“Wal-Mart is really putting on a full-court press as of late with a lot of different ideas and initiatives … centered on driving footsteps into the store,” said Jason Long, the owner of the Shift Marketing Group, a St. Louis marketing firm that works with suppliers.

And he said he thinks the service will entice people to come to the stores.

Auto Insurance

Wal-Mart’s Eckert said his company’s partnership with AutoInsurance.com also developed out of customers’ frustration with the auto insurance industry. “As we investigated, we found that there was no great service out there” allowing consumers to compare and shop for auto insurance policies, he said.

He said Wal-Mart felt it could make a difference.

In the pilot program in Pennsylvania in 2013, customers who used the website reduced their annual insurance cost by nearly $1,170 on average. Eckert said Wal-Mart is now focused on getting the insurance product nationwide.

Wal-Mart is always listening to the concerns of its customers and looking for ways to offer them more services, Eckert said.

Wal-Mart’s moves into the financial services sector have been “very strategic,” said Ben Jackson, senor analyst of prepaid advisory service of Mercator Advisory Group Inc. of Maynard, Massachusetts.

“Which is, of course what you’d expect from them,” Jackson said. “They understand where their business lies, and so they’re going to focus on those things that help them with that.”

Eckert said he couldn’t disclose any of the company’s future plans in the financial services sector.

“You’ll have to stay tuned,” he said.