Underpaid Genius

Wal-Mart and the credit unions stand to benefit from the migration from banks, but which is better for the public interest?

Andrew Martin and Stephanie Clifford via NY Times

Four years ago, Wal-Mart abandoned its plans to obtain a long-sought federal bank charter amid opposition from the banking industry and lawmakers, who feared the huge retailer would drive small bankers out of business and potentially conflate its banking and retail operations. Ever since, Wal-Mart has been quietly building up à la carte financial services, becoming a force among the unbanked and “unhappily banked,” as one Wal-Mart executive put it.

Even before the recent outcry against banks, the services had become popular with cash-poor customers, many of whom never had a bank account and found the services more affordable than traditional check-cashing operations. Now newcomers to the ranks of the banking disaffected are helping to swell the numbers, Wal-Mart officials said.

The run from banks is happening elsewhere, too. In the last four weeks, as anger over debit card fees festered, more than 650,000 customers signed up for credit unions, according to the Credit Union National Association. The association was still tallying how many additional consumers had signed up on Bank Transfer Day, an initiative on Saturday to abandon traditional banks organized by people associated with Occupy Wall Street.

“We have a tremendous opportunity ahead of us, and it’s largely due to what you’re seeing around us happen in the industry,” said Daniel Eckert, the head of Wal-Mart Financial Services. “We’re not a bank, but we can serve a lot of types of functions you would see someone go into a bank for.”

Wal-Mart says it has no intention of reviving its plans to become a full-blown bank that could make loans and accept federally insured deposits. But the retailer has obtained bank charters in both Mexico and Canada, leading some bankers to suggest the company is laying similar groundwork in this country.

”It’s the proverbial camel’s nose under the tent,” said Terry J. Jorde, senior executive vice president at the Independent Community Bankers Association. “Once they get in and offer some financial services, they will continue to push for other products.”

Wal-Mart said it was simply offering financial products for less than its competitors, much the same way it does for underwear, detergent and milk. Wal-Mart does not produce the financial products, but sells them on behalf of financial firms. In doing so, the retailer is able to avoid financial regulations and, because of its size, offer steep discounts.

For instance, it offers prepaid debit cards via the Green Dot Corporation. The cards cost up to $4.95 to buy and $5.95 a month to maintain at other retailers, while at Wal-Mart they cost $3 to buy and $3 a month to maintain.

Wal-Mart officials declined to provide details on how much money it makes from financial services, or how many customers it serves. However, company officials and outsiders both said Wal-Mart’s financial products are gaining share.

Wal-Mart is saving a huge amount of money for the unbanked or marginally banked population, and the regional check cashing services — and banks — are losing out to their machinery.

Regional credit unions don’t necessarily have the wherewithal to compete with Wal-Mart either, unless they want to operate check cashing services at the break even point, or below, as a public service to the community.

This unbanking is going to be a huge trend, and millions will defect from traditional banks, into service like Wal-Mart, Paypal, and offerings from Google and Apple, I’m betting.

(Source: underpaidgenius, via stoweboyd)