For years, bankers have been arguing among themselves about how to profitably offer services to low-income Americans. Last week, with the rollout of a partnership with Green Dot Bank, Walmart may have settled the question, effectively saying, “Banks can’t. But we can.”
Walmart sees money to be made by filling the financial needs of customers who want services such as bill paying and check cashing but aren’t going to keep a significant amount of money on deposit. Without those deposits to lend against, banks can’t earn interest income, their most traditional route to profits.
As a result, banks have made little effort to reach out to such customers, leaving them with little or no connection to the banking industry. Within the business these unwanted customers are known as the “unbanked.” They generally manage their financial services needs through a patchwork (and expensive) combination of products available from storefront check cashers, providers of money orders and other high-fee service providers.
Bankers dedicate annual conferences to the question of how to profitably serve the unbanked. The thinking is that with tens of millions of Americans in that situation, there must be a way to make money off them. So far, though, nobody has succeeded, and that’s largely due to the banking industry’s business model.
A large part of the problem is that the low-income customer generally needs the kind of services that banks really would prefer not to offer: in-person check cashing, money order sales, and other transactions that require a face-to-face meeting in a physical branch.
Banks have, for a decade or more, been trying to push consumers out of those expensive brick-and-mortar branches and into remote services that are much cheaper and more efficient to offer. That strategy has worked so well that low-income consumers have been pushed out to the point that they simply don’t have banking relationships anymore.
Walmart spotted this void years ago and began trying to fill it with inexpensive check cashing, money orders and online bill-pay transactions, all offered from existing stores.
Walmart’s entrance into those areas is just part of a long history of drama between the nation’s largest retailer and the banking industry. Years ago, Walmart made several attempts to secure a bank charter, which would have allowed the company to set up an FDIC-insured financial institution. At the time, Walmart insisted that is was only interested in being able to process its own credit card transactions without paying a third party processor’s fees. But the banking industry’s representatives in Washington were having none of it, and they launched a full-court press lobbying push that, over several years, defeated Walmart’s repeated efforts.
Walmart was, at the time, already offering basic transactions, which the giant retailer has only expanded since then. The addition last week of a low-fee electronic checking account from Green Dot may have at the same time acknowledged that the banking industry’s efforts were successful, and that they ultimately didn’t matter.
Walmart is ideally placed to offer the kind of services that low-income customers need but banks don’t want to offer. The company can place its financial centers in existing stores, which already attract the same customer base, without substantially increasing its expenses. The added banking services, not incidentally, can bring customers to those stores, with paychecks in hand, where they can buy any of the thousands of consumer products Walmart sells.
The verdict may not be officially out, but it now looks as though the question of serving the unbanked has largely been solved, and the banking industry came out on the losing end.
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