Although there is no Wal-Mart Bank, there is a Wal-Mart Banco, and its success should tell us something about pathways for resolving the ongoing challenge in the United States to get more people into the banking system.
Wal-Mart is a disruptive force, capable of tranforming not just downtowns but also the business models of any market that it competes in. Wal-Mart wants to get into banking in the United States, but regulators have not allowed it. It is a shame. Wal-Mart would likely create a low-cost financial products that appeal to working class consumers. This is a demographic that doesn't go to banks right now.
In Mexico, it is a different story. Mexico has allowed Wal-Mart to start Wal-Mart Banco. Banking is unusual in Mexico. Fixed-rate mortgages are an innovation that has only developed recently, in the aftermath of the nation's banking crisis in 1994. In any case, Wal-Mart's strategy in Mexico is not surprising. It undercuts its local competitors. Undercutting means something very diffferent south of the border. Loan defaults are very rare, thanks to some unusual debt collection laws, but interest rates are generally very
high. Wal-Mart is not the only multinational bank - HSBC, for example, is also in Mexico.
Wal-Mart understands what low-wealth consumers want in a bank. Wal-Mart Banco touts its low fees, its fixed prices, and its easy service. Wal-Mart doesn't have freestanding branches, but it still is able to reach a lot of households. It has service centers in VIPS, Sam's Club, Superama, Suburbia, and Bodegas Aurrera.
It offers loans with durations of up to one-year. There are no commissions. Interest rates go up when you borrow more money. The minimum loan size is 5,000 pesos -- about $380. Those interest rates are high - the lowest interest rate is 62 percent. But, that's a good rate in Mexico, where HSBC charges more than 80 percent and its not unusual for rates to exceed 100 percent.
On several occasions, Wal-Mart has applied for an industrial banking charter. It attempted to buy an Oklahoma bank in 1999 and a California bank with its own industrial banking charter several years later. Never mind that Nordstrom, Target, and Home Depot all have their own industrial banking charter, the community bankers have lobbied to stop Wal-Mart and they have succeeded.
Their gain could be our loss. Consider how Wal-Mart runs its non-banking financial services. It cashes checks for $3, it will send money overseas for $10 (about one-third less than Western Union), and it sells money orders for 50 cents. Wal-Mart doesn't have a record of outlandish stock options and other gifts to its board, either.
Wal-Mart is getting closer and closer to offering other retail banking services. Walk-up customers can gain access to the payments system through Wal-Mart MoneyCenter. Bill pay is 88 cents per transaction. Wal-Mart offers the Wal-Mart Money Card. The MoneyCard is available through a partnership with General Electric's industrial bank charter (GE Money Bank). Consumers can deposit money onto a card for $4.64. They pay a monthly service fee of $4.94. It's cost-certain: there are no fees for overdraft protection, minimum balance violations, or other nonsense.
Estimates of the unbanked population routinely come in at around 40 million people. The logic is hard to miss - one bounced check fee, at $35, is enough to put many households into a short-term financial crisis. This week, there is a report out from the USDA that 14.9 percent of American households don't have enough money to put food on the table, and one in six are hungry even with access to local food pantries. That is one in seven American families (worldwide, one is six households don't get enough to eat.) Are you telling me that these families are going to be able to handle a bounced check?
BankOn is a national initiative designed to get more households into the banking system. It partners with banks on a state level. Every state is different. Every state has its own plan. Every state has different bank or credit union partners. The basic plan is that in exchange for completing a money management course, unbanked families get a limited-feature account that includes the ability to write checks. It is a tough sell to banks. In North Carolina, the banks don't want to participate if they have to give up even one overdraft fee per year.
Consumers aren't silly. They can see a bad deal. In this case, unless the banks own up to some basic level of public participation in this problem, consumers are going to continue to avoid the banking system.
Wal-Mart is working for them instead.