Wal-Mart Sets Its Sights on Bank Customers

In pursuit of more customers, and the avoidance of high bank fees, Wal-Mart (WMT -0.29%) has essentially made itself into a bank. Even if it can't be one officially.

This week, the Arkansas-based company announced it's partnering with American Express (AXP 5.03%) to offer the Bluebird card, an alternative to debit cards. Bluebird has no setup fees, no monthly fee, no annual fee, and a long list of other no-fee options. Wal-Mart's play is aimed at capturing the "unbanked" or "underbanked" market, the 28% of Americans who don't use a traditional checking account on a regular basis.

But Wal-Mart already has check cashing services, a credit card through Discover, and a prepaid card through Green Dot (GDOT 2.49%). So, why this new endeavor? Banks charge retailers like Wal-Mart an average fee of 2% every time a customer uses a debit card at their store. That may not seem like much, but the National Retail Federation says swipe fees are the second or third highest expense for retailers, after employee salaries and health care benefits.

If Wal-Mart's Bluebird card is even marginally successful, it could mean less fees paid to banks and more money in Wal-Mart's wallet.

Prepaid cards ain't what they used to be
Let's first talk about what the new Wal-Mart cards aren't. The Bluebird card isn't the shoot-I-forgot-it-was-her-birthday prepaid money cards you buy at the drugstore as a gift. Think of them more like a debit card, just without the checking account. Cardholders will be able to withdraw cash from 22,000 ATMs for free and make purchases anywhere American Express is taken (which Visa likes to remind us isn't everywhere).

Wal-Mart is hoping to offer the underbanked something different than a debit card. And they're probably the best ones to do it. About 85% of Wal-Mart's retail transactions are done through cash. Because the new cards provide protection for customers if their card is lost or stolen, and offer features like roadside assistance, over-the-phone customer service, and mobile banking, Wal-Mart thinks it can steer some cash customers to the Bluebird card.

If you can't join 'em, beat 'em
If you haven't noticed, banks can make some good money. Wal-Mart knows this, and that's why it's spent about a decade trying to get into the banking business. But after significant pushback from the banking industry, regulators, and politicians, Wal-Mart is forging its own path. That's not to say the banking industry isn't savvy to this prepaid market, either.

JPMorgan Chase (JPM 1.42%), U.S. Bank (USB 1.19%), Wells Fargo (WFC 2.98%), and others all have prepaid cards similar to what Wal-Mart is rolling out. But Wal-Mart's advantage over the banks is that unbanked and underbanked Americans are less likely to use a bank account because of low monthly income, mistrust, or cultural reasons. So they're not likely to go knocking on a bank's door for prepaid cards. Also, the Bluebird fees are below most other competitor's rates and they offer unlimited free customer service calls.

Source: NerdWallet.

NerdWallet, which researches personal finance products for consumers, says the new Bluebird card is one of the best prepaid options available. That's because the Bluebird fees are nominal -- $2 at the most. But that's not to say Wal-Mart won't benefit from the cards. American Express is charging Wal-Mart, and other merchants, a discounted rate,  which will be less than current debit and credit swipe rates. Both companies get around the current swipe fee laws by treating the new cards like a traveler's check, rather than a debit card.

So maybe it's good for Wal-Mart they never did get that federal bank charter after all.

What to watch for
If you're keeping an eye on Wal-Mart's stock, then consider that the prepaid card market is largely unregulated, and a lot of people want to change that. If and when more rules are put into place Wal-Mart might have to adjust their strategy, which could impact potential revenue from the cards. Also, Wal-Mart and American Express aren't disclosing the details of this partnership, so it's still unclear how much the retailer could make from this.

A recent article in Businessweek says prepaid debit cards are starting to move into the hands of mass-market consumers. By the end of 2013, $90 billion is expected to be placed on prepaid debit cards. If Wal-Mart's Bluebird card can steal some these potential customers away from banks, it'll not only have the opportunity to make a little money from the cards, but it could save a boatload in swipe fees as well.

And if all that isn't enough, the Bluebird digs Wal-Mart's competitive moat just a little deeper. Dollar stores have tried to compete with the retailer by adding additional payment options for their customers, but with the Bluebird's low fees, free balance reloads and a list of other free services, they might be fighting a losing battle.