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Can We Serve the Unbanked Without Wal-Mart?

Adam Rust's picture

Posted August 13, 2010

Wal-Mart says that serving low-income households "plays to our DNA," and it seems that this concern extends to their analysis of banking.

Wal-Mart's analysis of the un-banked and under-banked is frank.Here are a few spicy tidbits:

  • More Americans with incomes below $35,000 believe that its more likely that they will save $500,000 by winning the lottery than by saving their money and making modest investments.
  • Only 40 percent of Americans have enough savings to handle emergencies.
  • Non-white families are four times more likely to be un-banked than are white families. Thirty-five percent of Latino families are un-banked.

They also recognize that this is a huge market. Wal-Mart's own estimates peg the number of un-banked at 28 million, and the under-banked at 45 million. I can't speak for Wal-Mart, but I imagine that they would prefer to have their bank business to go along with the other ranges of goods and services that they already meet in that population. Wal-Mart knows that other businesses are tapping a lot of sales from this group. Americans spend more than $13 billion at check cashers, money transmitters, and payday lenders. That doesn't include refund anticipation loan providers, although the collective fees (bank and junk) could surpass $1 billion annually.

What this Means

When a firm with so much reach into low-and-moderate income households makes clear that they would like to expand their financial services business, policy makers can't just ignore their interest.

As best as I can, I would like to paraphrase how one prepaid card executive put it: "How can you seriously claim to be involved in the un-banked, and not be working with Wal-Mart?...don't pretend by offering a few financial literacy seminars."

The Wall Street Journal estimates that 100 million Americans visit a Wal-Mart each week. If you can accept the assumption that there is some income bias, and if you acknowledge that it probably biases down, then you quickly come to believe that their reach into the typical under-banked household (income generally less than $50,000) is extensive.

The Bank On initiative has sought to move more people into banking. This movement started in California, where it was able to get some buy-in from a few banks. It gained attention from foundations, as well as from Brookings. That momentum didn't have much reach into North Carolina. North Carolina's banks would not agree to waive even one overdraft fee per year for the program. Ultimately, the partnerships necessary to market this program could never develop. Consumer advocates refused to go along with what Bank On was ultimately offering them. They said  a collective "no" to advising people to sign up for an account with overdraft. There were other problems; Bank On never really had a satisfying answer for people with a ChexSystems block. There was a cart before the horse problem, too: in North Carolina, the financial literacy infrastructure that the program needed to use in partnership with the accounts was always something that was on hold, contingent upon getting banks to offer accounts.

In the absence of that, banks do offer financial literacy. Fifth Third has a wonderful bus that will come into any community, take deposits, and roll on out. Fifth Third recently moved to raise fees on its basic checking accounts. Actually, lots of banks are doing that. JP Morgan Chase, Wells, and Bank of America has all mentioned plans to force consumers to pay more for basic checking services. Each also spends lots of time supporting financial literacy endeavors. They're eager to sponsor conferences for that, too. However, they're not planning to provide banking accounts for poor people.

That underscores why more and more often, people will be leaving the banking system. This is what investors call a secular trend.

Green Dot provides prepaid cards for Wal-Mart. That brings them a lot of business, but it also means that they are very dependent upon Wal-Mart for their business. In their S1, Green Dot acknowledged that Wal-Mart sales constituted 63 percent of their revenues. Three other stores each had more than 5 percent. Yet is that unusual? According to Streit, even a giant brand like Pepsi gets 30 percent of its sales through Wal-Mart. I can't find a reference for that statement. USA Today has culled some of these indicators. Rayovac, a battery manufacturer, says that 27 percent of its sales revenue is at Wal-Mart.  Procter & Gamble and Dial identify 17 and 24 percent of their sales, respectively are at Wal-Mart. The point here is that this store is the new marketplace.