Wal-Mart's Big Financial Services Dreams

Today's Wall Street Journal contains a story about Wal-Mart's planned big push into low-end financial services. We are talking here about payroll check cashing, wiring money, and bill paying.

From reading the article, it looks like Wal-Mart, with its size and diversified business lines, will be able to offer these services at a significant discount to the prices typically charged by those vendors who prey on low-income financial services customers. Perhaps the best example is payroll check cashing. Your typical local 'service' provider will charge a user 2-3% of the face value of the check. Wal-Mart charges a maximum of $3/check. Do the math, and for a blue-collar worker who earns $20,000/year and is paid something like $650, net, every two weeks, the average current check-cashing fee is nearly $16. So Wal-Mart will be providing enormous value to low-income consumers, who also happen to be its major target market. The company noted that it also currently processes 1.5-2MM money-services transactions per week.

On first glance, I thought Wal-Mart might get tarred for this business expansion. You can just imagine some consumer advocates picketing the big-box giant, charging that it is merely jumping in to get its share of vigorish from its financially struggling customer base.

But that doesn't seem to be the case at all here. Wal-Mart's money orders cost $.46, compared with $1.30 at the US post office. The company appears to be delivering substantial value to its customers with this suite of services.

However, that said, I don't think it's going to do an awfully lot of good for Wal-Mart over the long haul. In response to charges by a spokesman for the Massachusetts Bankers Association that "Wal-Mart wants people to cash their checks in their stores so they can then make impulse purchases in the store," the company replied that only 'about 14% of people who cash checks at the store make purchases at the same time,' according to the WSJ article. That would work out to about one collateral purchase trip for every 7-8 financial service visits. In effect, 6 times per year.

And, by the way, kudos to the bankers in Massachusetts for managing to come off explicitly as a group of bloodsuckers. By saying it's ok to charge egregious fees on check cashing for poor people, but heaven forbid those people save on the fees and spend some of that extra money on real goods they can take home with them, this group appears to want a monopoly on taking advantage of the least-well off in our society. At least Wal-Mart has demonstrated that, by intervening, they will actually give these poor people real benefits that they can't get from today's banking sector.

So, essentially, what we have is the Schumpterian phenomenon of Wal-Mart weighing in to gut value-added dollars in the low-end financial services sector, in order to transfer some of that value to its customers, thereby strengthening the company's position in that segment. I don't think Wal-Mart will profit, per se, from this move. It is mostly defensive.

In fact, it kind of makes you wonder what happened to Wal-Mart's purported move, last year, upmarket. Isn't this financial service expansion at the low end going to blur that repositioning?

It seems kind of ironic to me, by the way, how things have come full circle. Back in 1974, in my very first marketing class, I learned that Sears was then earning more gross dollars of revenue on the interest in charged on customer credit card balances, than it earned on merchandise margins. Of course, in the intervening 32 years, that has been radically changed. Retailers lost the entire captive financial services business to GE and the banking sector. Now, a large, cost-effective retailer comes back in to underprice the financial service sector on low-end services, in order to build more customer loyalty and, probably, gain some extra margin/square foot of floor space.