This week, Walmart rolled out a checking account designed for its low-income customer base. What I’m about to say next might surprise you: That’s fine.
Five years ago, I might have worried more about the potential for financial trickery or abuse. But now we have a Consumer Financial Protection Bureau (CFPB), and it was created for situations like this, to prevent financial operators of all kinds from preying on their customers. In fact, depending on Walmart’s business arrangement on these accounts, they may face increased regulatory scrutiny of their entire business, not just banking.
Walmart has longed to get into financial services for some time. It tried to obtain its own banking license at one point, but then withdrew the idea after resistance from lawmakers and regulators. It already offers money transfers, cashes checks and sells prepaid debit cards. So the checking account just completes the menu.
The retail giant’s ambition has to do with its low-income customer base. According to the latest statistics from the Federal Deposit Insurance Corporation (FDIC), more than one in four households have little or no access to traditional banking. As a result, they use alternative financial services like payday loans or check cashing stores, which cost the average family over $2,400 a year in interest and fees, a substantial chunk of their annual income.
The high cost of these alternatives means, well, less money to shop at Walmart, so the retailer has incentives to offer a simpler and cheaper product. Walmart wants to gain back customers who have left for low-cost alternatives, and offering banking could entice them. Customers are likely to appreciate a bank account that makes it a little less expensive to be poor. I’d prefer that a non-profit entity like the U.S. Postal Service provided low-cost bank accounts, but while we wait for that, it makes sense to create alternatives, both to save people money and to get them on a path to using stable financial services, which is practically a prerequisite for modern society.
For this endeavor, Walmart has partnered with Green Dot Bank, best known for its prepaid cards. The new checking product, GoBank, will be sold exclusively at Walmart stores starting next month. After purchasing a $2.95 starter kit, anyone over 18 years old with proper ID can set up a “checkless” checking account within minutes, without needing to submit a credit report.
The accounts are FDIC-insured, can be accessed by cell phone, and include mobile check depositing, online bill pay, personal budgeting tools, person-to-person money transfers to other GoBank customers, and a MasterCard debit card that can be used at over 42,000 in-network ATMs to withdraw cash.
Most important for Walmart, the fees are low. GoBank charges no overdraft or minimum balance fees, and an $8.95 monthly membership fee gets waived if customers make $500 in monthly direct deposits. With “free” checking a thing of the past, GoBank carries some of the lowest prices in the industry.
It’s not all great. The accounts don’t earn interest. The “early payroll” feature, which allows customers with direct deposit to start spending their payroll funds up to two days before the money arrives, sounds like a terrible idea from a personal budgeting standpoint. The GoBank account agreement acknowledges that the company “may share your personal information with service providers.”
It also states that GoBank “requires all disputes to be resolved by way of binding arbitration,” a growing practice for retail products but one that seems dangerous for a bank account. This limits individual and class action lawsuits for any abusive conduct, instead remanding disputes to an arbitrator handpicked by the bank. One study alleged that corporations win 99.8 percent of all arbitration cases.
The real fear is that Walmart and Green Dot could lure customers in with the promise of low fees and then gradually change the rules to increase profits. Fortunately, customers would have the CFPB on their side. Since its creation under the 2010 Dodd-Frank law, CFPB has been fairly adept at targeting consumer-based financial fraud, returning billions of dollars to those tricked by various schemes. In June, the bureau issued a request for information about mobile banking, so the product Walmart will sell is already in its sights. Regulators there are even studying the impact of mandatory arbitration in financial product agreements.
CFPB already has the authority to supervise Green Dot’s banking services. However, it can also examine non-bank purveyors of financial services, and depending on the manner in which Walmart makes money from GoBank, that supervision could extend to them. “If Walmart is involved with the design of the product, getting a share of the profits, etc. it’s a different story,” said Adam Levitin, a law professor at Georgetown University.
Officially, Walmart would not comment on its financial stake in GoBank. However, economic research firm Moebs Services suggested that Walmart would get a cut of the swipe fees triggered when customers use their GoBank debit card. That could certainly make Walmart a third-party “service provider” under the Consumer Financial Protection Act.
As Levitin pointed out with respect to Apple’s move into mobile payments through the new Apple Pay service, such a designation would open Walmart up to CFPB examination, as well as the federal statute against “unfair, deceptive or abusive acts and practices,” or UDAAP. Seen as “the most dangerous weapon in the CFPB’s arsenal,” UDAAP gives CFPB a broad mandate to root out and enforce any manner of practices that harm consumers. What’s more, Levitin explains, under the statute, UDAAP would apply to any of Walmart’s activities, not just banking. States can also enforce under UDAAP, meaning enterprising Attorneys General could investigate Walmart as well.
A Walmart spokesperson told the Washington Post that the company believes compliance with CFPB strictures “applies to its issuer, Green Dot Bank.” And CFPB regulators aren’t tipping their hand either. But the consumer agency has filed a number of enforcement actions under the UDAAP statute, and has said it would reserve the right to do so again on a case-by-case basis.
So Walmart may want to win over millions of customers with an attractive banking option. But that could come at the cost of putting its whole business model under the spotlight. That’s good for consumers, who for decades got scarce protection from the federal government, particularly on financial services.
Elizabeth Warren created the concept of a consumer agency so your bank account would be just as protected from blowing up as your toaster. This kind of security is just what she had in mind.
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