Wal-Mart Unveils a New Weapon in the War on Dollar Stores: Cheaper Money Transfers

Wal-Mart Stores (NYSE: WMT  )  has unveiled what could be its most potent weapon in its war on drugstores and dollar stores: money transfers. The discount giant has teamed up with Ria Financial Services, the retail money transfer arm of electronic payment giant Euronet Worldwide, to launch its new Walmart-2-Walmart Money Transfer Service.

This service will let customers wire up to $900 that can be picked up at any of Wal-Mart's 4,000 stores. Customers will be able to transfer either cash or debit cards such as the Bluebird checking and debit card product that Wal-Mart already offers in conjunction with American Express. Wal-Mart already offers money transfers and money orders from Money Gram International in its stores.

This service is a direct threat to dollar-store operators like Family Dollar and Dollar Tree that do not offer financial services. It could also be a big boost for Wal-Mart's small-box concept, Walmart Express. Walmart Express already offers prescriptions and gas, while dollar stores offer neither. Now it will be offering what could be some of the cheapest non-bank financial services in town.

News reports indicate that Walmart-2-Walmart will be cheaper than the company's competitors. A customer can use Walmart-2-Walmart to transfer between $50 and $900 for just $9.50. Competitors charge between $11 and $76 for the same service, a Wal-Mart press release cited by Slate's Alison Griswold stated.

Financial services as a loss leader
Wal-Mart's plan seems to be to use financial services as a loss leader. Wal-Mart is hoping that people who come in to get or send low-cost money transfers will also shop at Wal-Mart.

This plan probably won't threaten drugstore operators like Walgreen and CVS Caremark or supermarkets such as Kroger, which also offer money transfers and money orders. The potential harm to supermarkets and drug stores is that cheaper transfers will cost them some of their business.

Instead, it seems squarely aimed at the dollar stores. The idea is to offer services that dollar stores don't at a lower price. Walmart-2-Walmart will give people yet another reason to shop at the 270 to 300 small-box locations that the chain plans to open this year.

Will money transfers help Wal-Mart?
Financial services make up only a tiny fraction of Wal-Mart's revenue, around 1% according to Reuters. Yet the company's management team thinks they are important.

The company implemented Walmart-2-Walmart in response to customers' complaints about high-priced wire transfers, senior vice president of services Daniel Eckert said. Eckert's comments indicate that Wal-Mart considers money transfers a potential new revenue stream.

There is some logic to that thinking; a white paper from the United States Postal Service's Office of Inspector General noted that providers of non-bank financial services made around $95 billion in 2013. It should be noted here that that figure includes all non-bank financial services, including check cashing and payday loans. Wal-Mart doesn't offer payday loans.

Increasing its volume of money transfers could help Wal-Mart sell more of some other financial products such as money orders and prepaid debit cards. It might also boost Bluebird, the checking alternative Wal-Mart offers in conjunction with American Express.

Once again, Wal-Mart has demonstrated its ability to identify a new stream of revenue and aggressively tap it. By bringing money transfers in house, Wal-Mart is trying to control costs and offer further deep discounts.

Can It Work in the age of PayPal?
The potential drawback to this service is the level of demand for it. Services like PayPal -- part of eBay  (NASDAQ: EBAY  )  -- and Xoom offer an easy-to-use, lower-cost alternative that can be accessed from any computer without having to go to Wal-Mart.

There are 110 million PayPal customers alone, according to PayPal's own statistics. What should be even more worrying for those in the money-transfer business is that 74% of PayPal's customers are under the age of 55. These statistics seem to indicate that younger people go online and not to the store when they want to transfer money without a bank.

To make matters worse, the middle class customers that Wal-Mart needs to attract are those most likely to use a service like PayPal to transfer money. Around 15% of PayPal users have a graduate degree, and 16% of PayPal users make more than $75,000, according to PayPal's website. Wal-Mart might discover that the demand for old-fashioned wire transfers might not be there. The investment in Walmart-2-Walmart might not pay off.

The launch of Walmart-2-Walmart demonstrates the dilemma that Wal-Mart is in. The retail giant needs to develop new streams of revenue to maintain its position, yet the demand for those services might not exist. Wal-Mart still has the ability to roll out new products and services quickly, but it has not shown if those new products and services can actually make money.

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