Walmart offers a range of financial services and could offer even more to underbanked households. So why does current regulation and public sentiment stand in the way of that expansion?
Many of the business models challenging the status quo of retail banking are technological. Companies like Lending Club are removing the necessity of traditional banks, and in many cases getting customers a better deal.
However revolutionary crowdfunding might be in the future, a very different model poses the biggest threat to the regulatory and competitive environment today, and it happens to be the largest retailer in the US.
For the last decade, Walmart has aggressively opened financial services. The latest of these is offering on-the-spot tax refund checks. Most US federal tax refunds are direct deposited into bank accounts now, but for those who do not have an account the wait can be weeks. Walmart will charge seven dollars to customers who have their taxes done at any of 25,000 accredited tax preparers.
Earlier forays by the company include check-cashing services, money transfers, and auto insurance. In addition, Walmart sells starter kits for checking accounts that are offered through Green Dot Bank. But while this suite of financial services makes it look more and more like a retail bank, Walmart still cannot do the one thing that would make it a bank: take deposits and make loans.
It might seem like it would be more efficient for Walmart to start offering those services. It would come with a long list of benefits, topped by protection from the Federal Deposit Insurance Corporation (FDIC). Standing in the way, however, is the need for regulatory approval, which it probably could not get.
Walmart’s Past Attempts to Become a Bank
If history is a guide, an attempt now by Walmart to seek approval to offer FDIC-insured deposits would not be successful. In 2006, the company attempted to take advantage of a widely used loophole that allows a company to offer financial services without falling under the Federal Reserve’s regulatory authority, like traditional banks do.
Setting up an Industrial Loan Company (ILC) would let Walmart offer all the services that a consumer would recognize as financial services, but still requires FDIC approval. ILCs were originally intended to issue unsecured loans to low- and middle-class workers in the early 1900s – which coincidentally is the same customer base that a Walmart bank would serve – but a law change in the 1980s allowed them to also accept FDIC-insured deposits. Today, most major banks have ILCs, as do corporations that offer loans like General Electric, BMW, and others.
The ensuing outrage eventually led to the company withdrawing its application. Thousands of public comments and a letter from nearly 100 lawmakers condemned Walmart’s banking ambitions. The most straight-forward criticism was the worry that as a bank, Walmart would exert its power to benefit its retail business. There could theoretically be anti-trust concerns over unfair bundling of services.
On a regulatory level, the ILC arrangement feeds into worries about financial stability – a concern that was felt even back in 2006. Outside of the Federal Reserve’s regulatory net, a Walmart bank would be helpless if it fell under duress since the FDIC has much more limited resources to prop up temporarily insolvent banks. This is quite similar to the fate of firms like AIG and Countrywide just a few months after Walmart’s application.
Another possible motive for Walmart to launch an ILC is to avoid the fees charged by Visa and Mastercard for credit and debit card payments. In this sense, it would be matching similar responses by its main competitor, Target, which has an ILC in connection with its branded credit card.
The Positives of a Walmart Bank
A Walmart bank may have been decried as bad for consumers, but when looked at from a different angle, may well be empower millions of Americans to get services they otherwise cannot. It is for this reason that the debate over Walmart’s banks looks so similar to the debate over crowdfunding financial services.
The FDIC estimates that 9.6 million American households are underbanked, defined as having used alternative, many times expensive, financial services like loan sharks in the last 12 months. Since Walmart’s customers skew toward lower-income Americans, a bank operated at Walmart would be able to give more universal access to financial services.
If a regulatory goal of the federal government is to increase access to financial services – which it is since it helps avoid bankruptcy and encourages financial literacy – then one way to reach that goal is a Walmart bank. Of course, there are others as well, but Walmart fits the bill for many reasons.
In the United Kingdom, the two largest grocery chains, Tesco and Sainsbury’s, each have their own banks that offer savings accounts, loans, mortgages, and insurance. The experiment there has seemed to go off without major negative consequences (Tesco is embroiled in a major controversy over its financials, but not because of its bank).
With that said, those concerned about the arrangement’s competitive consequences may be justified. Tesco is clear in its Annual Report that its bank is a marketing tool for the business as a whole. The main difference, however, is that the Tesco and Sainsbury’s banks are regulated by the Financial Conduct Authority, which also regulates the wider banking sector.
Right now, Walmart reportedly has no plans of filing to become a bank again, but the controversy its previous applications caused and its more recent auxiliary financial services offerings serve as an example for how evolving business models are not compatible with the existing regulations.
As the marketplace comes up with new solutions to fill gaps in financial services, the regulatory framework will have to update itself so as to not inhibit these ideas while still protecting the consumer.