June 20, 2007
Retailers Pushing Financial Services
Wal-Mart may have failed in its attempt to open its own industrial bank, but that is not stopping the retailer from offering many of the same types of services offered through financial institutions.
The chain is expected to announce today that it is expanding the financial services its offers past check cashing, money orders, transfers and express bill payments to others, such as mortgages, home equity lines of credit and discount stock trading. It will also launch the Wal-Mart MoneyCard, a prepaid, reloadable Visa card.
Today, Wal-Mart offers financial services at MoneyCenters in 225 stores. The chain intends to bring that number up to 1,000 by the end of next year.
According to a report by MarketWatch’s Jennifer Waters, “More financial services themselves aren’t likely to bloat the top line, but the additional foot traffic that they would create could and certainly would benefit same-store sales results.”
Wal-Mart is one of a growing number of large retailers looking to cash in on financial services. Just last week, for example, Kroger launched a website (www.krogerpersonalfinance.com) where consumers can obtain mortgages, home equity loans, gift cards, pet insurance and other products.
Gary Huddleston, director of consumer affairs for Kroger, told The Dallas Morning News, that the company’s current financial services can be traced back to chain’s offering of a co-branded credit card. “Once we introduced that [about three years ago], it seemed like a natural progression to get into other services like mortgages, home loans and the pet insurance.”
Discussion Question: What do you make of the increasing number of retail chains looking to expand into financial services?
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The “why” in this one is as simple as looking at the list of stocks held by any large cap “value fund” these days. They are loaded with financial services companies because that’s where the reliable sources of free cash flow and dividends come from. Said another way, financial services are highly profitable and (sub-prime mortgages notwithstanding) are reliable cash generators. They require no inventory and almost all the infrastructure necessary to provide them is either already resident in a major retailer, or more likely, readily outsourced. What’s not to like?
With many retail chains looking to expand into financial services, I believe that some will succeed but most will not. I do believe that Wal-Mart has the wherewithal to make it work. In the grocery channels, the potential is certainly in place, however, I’m less optimistic that it will work out in the long run.
Retailers are perfectly positioned to offer financial services. In a sense this is nothing new, so consumers are sure to be open to it.
Old school example: running a tab at the general store. New school example: store credit card, such as Saks Fifth Avenue or Talbot’s card.
It’s the advent of new payment technology that makes this interesting at this juncture. The holy grail will be to make these accounts-payable resident on cellphones, which will work in a contactless near-field scanner. Location-based, real-time communications & promotions round out the B2C dialog.
Get the picture?
I don’t think most consumers like to have multiple credit cards taking up space in their wallets. People like to have one or two cards that have a low rate, that are accepted by many retailers and will give them rewards. I use my Continental card on almost everything so that I get my frequent flyers.
Although Wal-Mart is well positioned to enter this financial market, I think the only way they (or any other retailer) will be successful is if they can offer a low interest rate as well as give users a reason to switch from their current cards where they are likely getting “points” or a percentage of their spending back each year.
I think there is a big difference between lending and savings or investment. I might not trust a supermarket with my nest egg, and certainly would not trust them to make creative investment decisions. But if they are giving ME money (a loan or a mortgage), they have to worry about me, not the other way around. I think it adds value and connection between the shopper and the retailer, building a sense of community. I like it.
Seems to me Sears went down this road a couple decades back when they launched the Discover card–and discovered they didn’t know how to be in the financial-services business.
Of course, we’ve since seen they don’t know how to be in the retail business, either, and WM clearly does have that basic skill mastered.
So if they’re willing to hire the folks who understand financial services and then let them market those services properly I can see them as a traffic-builder for same-store sales, as the article suggests.
I can also see WM as an agent of financial education in what are now grossly underserved markets. Part of the chain’s customer base has never been exposed to the Magic of Compound Interest and in fact harbors a deep distrust of traditional banks. If WM can overcome that, it will have done a service to that segment that could almost make up for years of exploitation.
I’m with David on this one. Wal-Mart is already enormously powerful…too powerful to some. I’m not sure if the public has the kind of blind trust it takes to open the door to yet more personal data to them (or any other retailers) and trust that their data will be cared for appropriately. Looking at some of the fall-out from the T.J. Maxx data breach, one might ask the question on why and how retailers are properly qualified to take on our finances as well. A prepaid, reloadable Visa card? Sure! My home equity loan and bill payments? Not so sure.
We’ll have to wait and see, but it seems that having trusted 3rd party financial providers that serve as gatekeepers between our money, our “global” spending data and our many spending outlets is simply more realistic.
I think Wal-Mart getting into the Financial Services business is wonderful. As most Americans are totally ignorant when it comes to finances (I offer credit card debt levels and the backlash AGAINST social security change as proof), I would hope that Wal-Mart can communicate the basics to the American Public. Maybe if Wal-Mart told people that they have to save to support themselves when they get old they would listen! Maybe Wal-Mart could do a better job of convincing people to buy health insurance so they could avoid the financial disaster that a major illness could bring. Maybe Wal-Mart can provide a means of explaining financial services to America that makes enough sense and is simple enough that people can understand. Maybe Wal-Mart can provide information that the public can understand and use to make choices. I have subscribed to the Wall Street Journal, Barons, Money Magazine and have a portfolio with a major financial institution and as of yet, no one has done any of the above for me! Give Wal-Mart a chance!
I think large retailers like Wal-Mart can be very successful in offering financial services for a couple of reasons…1) if Wal-Mart is doing 25% or more of their transactions via credit cards they would take in a considerable number of dollars by eliminating credit card fees paid to banks; and 2) the interest rate charged to consumers would well exceed the rate at which an asset-rich company like Wal-Mart might pay to borrow funds to absorb the consumer debt. They only need to cover themselves against the temptation to extend credit to the large number of high risk folks who shop in their stores.
I worked for an unnamed department store retailer one Holiday season that made $6-8 million a year on store operations but also made $100 million plus annually on credit card interest and fees.
If I may add another perspective here, there are examples of success with this strategy internationally and you only have to look at Tesco in the UK for this. Within the last ten years, there stores currently have over one pound in every ten spent on shopping within the UK. Let us see what their new US concept does, given time!
I agree with the prior comment that they will be successful, however, more based on their core strategic model or hammering down costs. As stated, they backed into banking IMO to reduce the expense paid on credit card transactions.
I would imagine credit unions and banks said similar things when GM, Ford and Chrysler entered the car financing market. Now these divisions are nice profit centers for their respective businesses.
The Financial Services industry still has some of the best net margins of any industry out there. It follows then that new entrants (Michael Porter) will run onto the playing field in an effort to grab some of that income. This in turn will increase competition and drive down costs.