Wal-Mart's bank fracas: Pros and cons
Analysts say consumers will benefit from a low-cost banking model but independent bankers and small businesses will likely suffer.
NEW YORK (CNNMoney.com) - What's at stake in the Wal-Mart banking debate?
In ongoing hearings before regulators in Washington this week, Wal-Mart (Research) executives pledged that the discounter has no interest in opening Wal-Mart-branded bank branches. Rather, it's seeking regulatory approval to set up a "limited" purpose bank only, that will enable the discount behemoth to save millions of dollars on payment processing fees - that is handling debit and credit card transactions itself rather than farming them out to an existing bank.
But some - mostly banks - fear Wal-Mart will use that so-called industrial bank status to eventually springboard into the commercial bank business, offering deposit, checking and loan services.
Here are the pros and cons ...
Scenario 1: Wal-Mart industrial bank
The world's largest retailer is seeking to establish an "industrial bank" in Utah that would help eliminate third-party transaction costs that it currently incurs from processing of credit, debit card and electronic check transactions in its stores.
The U.S. Treasury Department defines an "industrial bank" as a limited service financial institution distinguished from commercial banks because industrial banks do not offer deposit (checking) accounts or any other type of financial services to consumers.
If approved by the Federal Deposit Insurance Corp. (FDIC) -- the agency considering Wal-Mart's application -- the company said it will cover any potential risks to the agency from the creation of its bank by "maintaining an evergreen deposit account of at least $1 million at the bank."
Wal-Mart. Although Wal-Mart doesn't publicly disclose its processing fees, some analysts estimate it could range anywhere from a couple of cents to about 50 cents or more per transaction. Given that the discounter receives more than 140 million credit, debit and electronic check payments per month, that could add up to over three-quarters of a billion dollars a year in fees.
However, Marty Heires, a walmart spokesman says the savings to actually be in the "single digit millions."
"The biggest implication of Wal-Mart bringing payment processing in-house is the potential for it to save an unprecedented amount of money in yearly fees," said Burt Flickinger, managing director of Strategic Resources Group.
Consumers. The more costs Wal-Mart can take out of the system, the more it's able to pass a portion of the cost saved on to the customer in the form of lower prices.
"Predicated on the fact that Wal-Mart is only interested in an industrial bank and nothing more, this would be better for its customers," said Bart Narter, a senior banking analyst at Boston-based research and consulting firm Celent. "Wal-Mart wants to invest in becoming more efficient, this will generate more cash for Wal-Mart and it can share some of that money with its consumers."
Investors. At a time when the retail giant is facing market saturation in its home market and slowing sales and profit growth, observers say Wall Street is likely to view any cost-saving effort by Wal-Mart as a positive since the freed-up funds can be invested in other areas of its business.
Scenario 2. Wal-Mart commercial bank
Despite its many protestations to the contrary, banking industry insiders, analysts and union-backed Wal-Mart watchdogs groups believe that if Wal-Mart wins approval for an industrial bank, it will eventually expand into retail banking, a move that could "shake-up the banking industry."
Rob Markey, head of Bain & Company's global customer strategy practice, said there's already sufficient evidence to suggest Wal-Mart has a strong interest in the financial services industry.
For instance, the retailer is testing a Wal-Mart branded debit ATM card. Through partnerships with financial service outfits, Wal-Mart lets its customers cash payroll checks, issue money orders and wire transfers at a lower cost. "Wal-Mart isn't licensed as a financial services provider and that's why it hasn't fully expanded its services to consumers," said Celent's Narter.
Assuming Wal-Mart enters commercial banking, who benefits?
Consumers: Wal-Mart's pierced the price umbrella in all the categories it participates in, said Markey. If it's able to become a low-cost provider of core banking services such as debit and checking accounts, Wal-Mart would be entering an industry where people are not too happy with their current institutions. This would create a more competitive environment for banking services, he said.
"For its core low-and-mid income consumers, a Wal-Mart bank could mean huge savings versus traditional banks and other check-cashing centers," he added. "For Wal-Mart shoppers it's another opportunity to conveniently save more money where they already shop."
Wal-Mart and its investors: Because of its large profit pools, financial services are a great way for Wal-Mart to grow its business. In the past, Wal-Mart has successfully expanded into adjacent areas of business.
At the same time, there could be an inherent risk to Wal-Mart if its banks skew towards a low-income, high-risk clientele. Narter said Wal-Mart bank could potentially lose money from checks bouncing. However, other banks that cater to a similar customer base try to offset that risk and make money on these accounts by charging NSF (non-sufficient funds) fees on high-risk deposit accounts, he said.
Banking industry: Jim Reichbach, national industry director of banking and finance at Deloitte & Touche, said Wal-Mart's potential foray into retail banking could shake up the industry. "A Wal-Mart bank would siphon off the customer base of other leading banks, particularly in markets where both Wal-Mart and other banks overlap," Reichbach said.
Investors of big banks: They should be scared because Wal-Mart could capture a huge share of the market, Markey said. "Life will get more difficult for incumbent banks because this new entrant is very aggressive on prices," he said.
Independent/ community banks: Wal-Mart's low-price structure could force smaller regional banks to lose customers and eventually shut down.
Small business: Small businesses depend on community banks for loans to support their operations, said Narter. "If these banks' customers move to Wal-Mart, the banks' deposits drop and they can't afford to make loans. I don't foresee Wal-Mart getting into commercial lending. So who's going to help small businesses in this scenario?"
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