It's safe to say that the bank industry is shaking in its boots. On Wednesday, Wal-Mart and Green Dot Bank announced a partnership to offer checking accounts to customers of the nation's largest retailer.
"Wal-Mart customers want easier ways to manage their everyday finances and increasingly feel they just aren't getting value from traditional banking because of high fees," said Daniel Eckert, senior vice president of services for Wal-Mart U.S.
Unlike Wal-Mart's past forays into financial services -- most notably, its reloadable prepaid charge cards -- this one strikes at the very heart of the bank industry. Referred to as the "holy grail of banking," its latest move positions the massive discount retailer to capture a piece of the nearly $3 trillion pie of noninterest bearing deposits.
Wal-Mart's banking ambitions
This is far from Wal-Mart's first attempt to break into the bank industry. But every time it's tried to nose its way in since the late 1990s, the Arkansas-based company has been met with a barrage of opposition from Wall Street and the financial industry's legions of industry lobbyists.
- In 1998, it sought to integrate an Oklahoma-based thrift owned by the Walton family, but the move was rebuffed the following year by the Gramm-Leach-Bliley Act, which restricts commercial entities from operating banks.
- In 2001, it attempted to establish a joint venture with Toronto-Dominion Bank, "offering an array of FDIC-insured checking and savings accounts, as well as certificates of deposit, through in-store financial centers and ultimately through transaction capable electronic terminals in checkout areas in Wal-Mart stores next year." This was rejected by banking regulators who were "concerned that Wal-Mart would effectively have control of the Toronto-Dominion division."
- In 2002, it tried to acquire Franklin Bank of California. ''This is not an attempt to enter the retail banking system,'' a Wal-Mart spokesman said at the time. The move was motivated instead by the retailer's frustration with the high cost of processing debit card purchases.
- And in 2005, Wal-Mart filed an application with the Utah Department of Financial Institutions for permission to operate an industrial bank. The stated purpose was to allow the company to process credit, debit, and electronic check payments, which would save the company "millions of dollars in fees," which could then be passed on to consumers via lower prices. It was again rebuked.
On the surface, the latest plan appears to be much narrower in scope. As opposed to operating a bank itself, Wal-Mart is entering into a partnership with Green Dot Bank, an FDIC-insured institution that will exercise actual control over the deposits.
The value proposition is obvious. "Many so-called 'free' checking accounts aren't really free because they have high overdraft fees," said Steve Streit, founder and CEO of Green Dot Corporation and chairman of Green Dot Bank. "In fact, an independent study by Bretton Woods estimates that consumers pay approximately $218 to $314 per year for a basic checking account."
But in this proposition lies the seeds of a much broader assault on the banking industry. Wal-Mart's previous forays were aimed at minimizing transaction costs; they weren't for the purpose of entering retail banking -- that is, taking deposits and underwriting loans.
This time is different. Not only has Wal-Mart abandoned the mantra about transaction costs -- in part because it's successfully renegotiated them with Visa and others -- but its joint press release issued on Wednesday amounts to nothing less than a direct challenge to banks, almost as if Wal-Mart now perceives itself as a competitor.
The shortcomings of traditional banks
While it's hard to sympathize with Wal-Mart, it's also hard to deny that its entry into the banking industry (by way of Green Dot Bank) might actually be a good thing for millions of Americans. I say this because a non-negligible portion of the retailer's customers don't have access to even basic financial services such as checking or savings accounts.
According to the FDIC's Survey of Unbanked and Underbanked Households, 8.2% of American households are unbanked, meaning that they "lack any kind of deposit account at an insured depository institution." This represents one in 12 households in the nation, or nearly 10 million in total.
On top of this, an additional 20.1% of households are underbanked, meaning that they "hold a bank account, but also rely on alternative financial services providers." Taken together, "more than one in four households (28.3%) are either unbanked or underbanked, conducting some or all of their financial transactions outside of the mainstream banking system."
Lest there be any doubt, the implications are serious:
Access to an account at a federally insured institution provides households with the opportunity to conduct basic financial transactions, save for emergency and long-term security needs, and access credit on fair and affordable terms. Participation in the banking system also protects households from theft and reduces their vulnerability to discriminatory or predatory lending practices.
The irony, of course, is that the banking industry, if it were genuinely concerned about Wal-Mart's encroachment, would cure this issue itself. However, the economics associated with doing so make it prohibitively expensive.
As I've noted before, the average checking account costs the nation's biggest banks between $350 and $450 per year to service. Meanwhile, the average revenue per account comes in around $268 per year. The deficit, in turn, is intended to be offset by the use of additional products.
The problem is that somewhere around 40% to 50% of checking accounts are associated with households that live paycheck to paycheck. Thus, aside from perhaps a credit card, the likelihood that these households would use additional financial products is slim to none.
The net result has been threefold. First, the nation's biggest banks have gone out of their way to exploit and alienate their poorest, and thus least lucrative, customers. Among other things, they've coerced account holders into purchasing valueless add-on products, they've fixed ostensibly neutral arbitration forums, they've reordered debit card transactions in an effort to maximize overdraft fees, and they spearheaded much of the fraud in subprime lending before the financial crisis.
As these channels of revenue have been successively closed by regulators, legislation, and private lawsuits, banks have changed course by blacklisting large swaths of Americans from access to financial services in the first place. Institutions such as Bank of America, Citibank, and Wells Fargo are now tapping into a proprietary database that documents when people run afoul of a bank by defaulting on a loan or failing to pay overdraft fees. The information is used to approve or deny applications for a checking or savings accounts, among other things.
Finally, aside from denying accounts to new customers, large banks are also making an effort to minimize the services they provide to existing customers who don't carry large balances. The corporate strategy at Bank of America, for instance, is to double down on their preferred customers -- that is, those with the largest balances and/or most financial products -- while scaling back the services used most frequently by small account holders.
And, just for the record, these are all the very same points that came up the last time Wal-Mart attempted to nudge its way into the banking industry. As The New York Times' David Leonhardt wrote after the Arkansas-based retailer's 2005 attempt to get an industrial bank charter in Utah:
For all the criticism of Wal-Mart -- much of it deserved -- you simply cannot argue with the fact that the company saves its customers money. It roots out inefficiencies, cuts the price on a product, and forces its competitors to match. That is why it is easily the nation's most popular store.
Now think about what would happen if Wal-Mart applied its legendary price-cutting to banking. Because starting a new bank is quite difficult, banks have been able to get away with things that other companies just can't. They refuse to give you access to money for days after you cash a check, even though the money itself now moves within minutes. And they have long ignored low-income families, because the banks can make enough money elsewhere.
As a result, many of these families pay exorbitant fees to cash checks. They have credit card interest rates and mortgage rates that look as if they came out of the 1980s. It is not just poor people who are ill-served by the financial-services business, either. More than half of American families still do not have their own retirement accounts.
Caught between a rock and a hard space
The point here is that consumers, and particularly those on the lower end of the economic spectrum, are caught between a rock and a hard place. On one side are traditional banks that have a long and colorful history of exploiting the underprivileged. And on the other is Wal-Mart, a retail behemoth that has slashed and burned the U.S. retail landscape since its founding in the early 1960s.
Yet this doesn't come down to a least-worst option. Millions of American households don't have access to banking services to facilitate saving for retirement or provide protection against financial fraud. If banks aren't willing to provide these services, then they should get out of Wal-Mart's way and allow it to do so.