why is wal-mart getting into banking bad?
June 20, 2007 9:31 PM   Subscribe

why is wal-mart getting into banking bad?

I'm not a fan of wal-mart but I fear I am an even greater enemy of the current U.S. banking system. let's face it -- we don't have real competition between banks or the addiction to horrendous fees ($27 overdrafts, anyone?) wouldn't be something they could get away with.

a lot has been made of the fact that wal-mart is catering to low-income residents. twenty-seven percent of them don't have any kind of banking accounts (nightly business report, pbs, june 20, 2007) and most likely frequent the dreadful payday lenders. wal-mart has tried getting a banking charter but withdrawn their application under fierce fire multiple times. now they're trying to still get some financial business going with so called "money centers" and pre-paid visa cards.

the bentonville giant is merciless when it comes to crushing price barriers. banks charge too much for anything they do. this should feel like a good development.

still: everything they have done thus far that initially sounded great ($4 prescriptions) ended up nothing more than a red herring (laughably few pharmaceuticals actually available at that price).

I have the feeling I should be opposed to wal-mart's foray into this field but what am I missing? what is the evil detail not obvious to me? they can't drive prices up, so where's the problem?

privacy: I am aware of the "wal-mart knows everything" argument but I don't think this is a matter most contemporary americans are very concerned with. case in point: myspace profiles.

banks: it's obvious why they wouldn't want competition. this is more about why other people are opposed.
posted by krautland to Work & Money (29 answers total) 2 users marked this as a favorite
It makes an already-powerful corporation that much more powerful. Its a way of getting an extra huge amount of money at their disposal for whatever they want to do with it.

BTW, what you're looking for is a Federal Credit Union. There should be one local to you. Mine doesn't have overdraft fees.
posted by devilsbrigade at 9:37 PM on June 20, 2007

Wal-Mart could easily pull in enough customers to destabilize the small local banks, just like they did to main street shops, wiping out all but the biggest national competition. In a small town without a national bank, having forced out the locals, they'd be free to charge what they want (regulations aside).
posted by nomisxid at 9:40 PM on June 20, 2007

I also have to wonder how objective the loan officer at a wal-mart-bank would be to approve a small business loan that might interfere with the mothership.
posted by nomisxid at 9:42 PM on June 20, 2007

I would suppose that the fear is Wal-Mart's track record of relentlessly using economies of scale would drive otherwise useful companies out of business, and would then be in a monopoly-like position to force changes to the financial landscape.

I didn't say it was a rational fear. Just a fear. ;-)
posted by Cool Papa Bell at 9:43 PM on June 20, 2007

The only thing I could think of is they would could drive out the small community banks. Is that good or bad? Well I guess that depends on your take of whether Wal-Mart driving out the family grocers and general stores in small towns is good or bad. Wal-Mart can offer better prices than the small grocers and stores by leveraging volume. But that puts the small retailers out of business and takes away the community feel of the small towns.

And if you're getting the shaft from your big bank, switch to a smaller bank. As devilsbrigade said, most of them offer services that counter-balance the advantages of big banks such as paying for your ATM fees, doing away with overdraft fees, offering lower balance account minimums.
posted by junesix at 9:44 PM on June 20, 2007

they can't drive prices up, so where's the problem?

nomisxid explains why this is wrong. They can kill off the competition and then charge what they like, institute what policies they like, etc.

Support your local credit union.
posted by LobsterMitten at 9:50 PM on June 20, 2007

I don't think Wal-Mart wants to do everything that banks do -- no home mortgages, small business loans, etc. But becoming a bank will allow it to sell to its customers on credit more easily.

All these people who say that mom and pop banks have better offerings than big banks: Your experiences don't mesh with mine. I recently comparison shopped my current large bank against two other large national banks, four small local banks, three small local credit unions, one medium-sized non-local credit union and two online banks, looking at overdraft fees, savings interest rates, mortgage interest rates, minimum balances, etc., and found that my large bank and one other large bank had far better offerings than any of the other financial institutions. Plus, I've been able to move 8 times in the past 6 years without a hassle. Customer service is another matter, however.
posted by croutonsupafreak at 9:53 PM on June 20, 2007 [1 favorite]

Response by poster: hm. I'm obviously a big-city person, so most of the banks I see are the usual mega-suspects, who don't seem the slightest bit better than what the fears of wal-mart loan officers and the like outline. I did check out credit union 1 recently and found their rates to be exactly the same. this makes me wonder just how much of a role small local banks do play out there.

CU's don't strike me as a likely candiate for going under since they don't strive to make a gigantic profit but to serve their members.
posted by krautland at 9:56 PM on June 20, 2007

Best answer: How about the simple fact that the card is riddled with fees to nickel-and-dime you to death? $0.75 for a balance inquiry, $3.50 to see a teller, $2 to withdraw from an ATM, $2 for a paper statement, $2 to speak to a human on the phone, $5 monthly maintenance fee, $4.64 to deposit, ... It all adds up, especially if you're in the bracket of the population that this is aimed at. Of course, it can't possibly be much worse than what you currently face at the "payday loan/check cashing hut".
posted by Rhomboid at 10:17 PM on June 20, 2007

Best answer: This is a complex issue. All things considered, it would probably be good for the average Wal-Mart customer -- which I'm going to probably unfairly characterize as below the national average in household income and more likely to be a minority. Wal-Mart has really aggressive pricing and other tactics, but those are all based on commerce. Financial services would actually benefit from the huge volume does. Rather intuitively, a fixed fee hurts the poor in a non-linear fashion. The less you have the more it hurts and the more you have the less consequential it becomes. A Wal-Mart Bank would have higher accountability and one would assume lend to minorities and others who don't really have a local bank, as the old adage goes, why are there no banks in poor neighborhoods. Wal-Mart has high accountability and a national profile. Local Bank USA won't get the same media coverage for denying a loan to a qualified minority or other discriminatory practices.

Theoretically, Wal-Mart pays up the ass in credit and debit fees at their store. I am sure they command a low percent on each transaction, but it has to add up at least a couple executive salaries. They'd be able to increase profits by bringing more of that in-house and not have a middle man.

Even though several commercial entities have banking arms, I am generally against a commercial establishment having a banking arm. There isn't the same amount of regulatory oversight associated with ILCs, I would be wary of the banking division trying to makeup for revenue from the commerce side or vice versa. The runaway problem of making up profits, even unintentionally, is just too great.

I wouldn't mind seeing Wal-Mart use its might to force competition, but I don't want to see that same might be used to take down our banking infrastructure. Big gorillas fall hard, and it is often the completely unknowable unknown that causes it.
posted by geoff. at 10:18 PM on June 20, 2007 [1 favorite]

I should clarify and make my point a little succinct: I believe that Wal-Mart would offer much better financial services than its target demographic currently receives. It is the systematic risk to financial institutions by a marriage of commerce and banking that I am most afraid of.
posted by geoff. at 10:22 PM on June 20, 2007 [1 favorite]

The idea that Wal-Mart can't raise prices because of price competition is a naive mistake that only a first-year economic student would make.

Never mind the idea that they could drive the local banks out of town and then develop a local monopsony on the supply of credit, just as they've done in many communities with the supply of, for example, basketballs. That's a valid concern but it's not the only one.

Another one is the idea that a giant megacorporation worth hundreds of billions of dollars would be going after low-income people. We have enough problems in this country with gutted fair-lending laws, collection agents that don't respect Federal laws when going about their business, and hidden fees and surcharges that totally screw over low-income people.

Low-income people lack the education to know they're being screwed over, they lack the time and knowledge to be able to be on top of their financial matters, and they lack the ability to retaliate or even seek recourse effectively because they can't afford a lawyer.

Now let's look at Wal-Mart's track record with low-income people. Let's see: hire illegals for less than minimum wage and then lock them into the store with a padlock and chain to do after hours cleaning. If the padlocked-shut store should, for example, catch fire, the Wal-Mart default policy effective until recently would let these workers burn to death.

OK, so this is how Wal-Mart treats low-income people. Is this really the corporate attitude that we would like to invite to enter the market to become the primary lender and fiduciary agent to low-income people? I mean, I know we all hate poor people, but do we really hate poor people that much?
posted by ikkyu2 at 10:22 PM on June 20, 2007

Low-income people lack the education to know they're being screwed over, they lack the time and knowledge to be able to be on top of their financial matters, and they lack the ability to retaliate or even seek recourse effectively because they can't afford a lawyer.

Gosh, good thing they have you looking out for them, huh?

Look, the demographic that Wal-Mart serves is chronically under-banked. A lot of banks don't think they can serve low-income people profitably - it's hard for them to change their cost basis. So Wal-Mart looks at a population it already serves profitably, doesn't see a lot of competition in banking, and sees an opportunity.

Lack of banks has a variety of bad effects, for example, lower savings rates and lack of access to capital. Lack of access to capital, in turn, makes it difficult to start businesses, buy houses - basically, it makes it very hard to escape poverty.

(if any of you are thinking to yourselves "start businesses! be realistic! these people are poor!" go soak your heads, seriously.)

(Side note: we could more domestic microfinance initiatives. Ideally we would have just given freed slaves their 40 acres.)

Maybe Wal-Mart will be a crappy bank. But a crappy bank is better than using your mattress and the local check-cashing place.

do we really hate poor people that much?

Funny, I was about to ask the same thing.
posted by lbergstr at 10:40 PM on June 20, 2007

Well, right, lbergstr, that's the opposite side of the argument. It's not only opposite to what I posted, it's opposite to what krautland was asking for. So I gotta ask, what's your point?

I hope poor people in the US get good banking someday, like rich people already do. I'm not particularly sure that Wal-Mart is the company to provide that, but if they do, well heck I think that's great.
posted by ikkyu2 at 11:39 PM on June 20, 2007

hm, i can't help but think that refutations of on-topic answers (whether correct or not) are also on-topic. but then, i would.
posted by lbergstr at 11:54 PM on June 20, 2007

My long time bank was bought by the bank owned by the Walton family. They charge a lower overdraft fee than my original bank. Both of them give me free checks and a free debit card. The new one has free online banking. I used to have to pay for that privilege.

Wal-Mart has no plans to start a real bank, certainly not a bank for poor people. What they wanted to do was set up a "bank" that could be a member of the card processing networks. The bank would only exist to process credit transactions from Wal-Mart. The purpose of this? To eliminate the part of the processing fee they pay to the bank(s) that handle it for them now. That way they only have to pay the Visa/MC/Amex/Discover network fees.

It's got nothing to do with what one would traditionally call a bank.
posted by wierdo at 12:45 AM on June 21, 2007

Best answer: Both geoff. and wierdo make good points. I'm torn between my loathing for Wal-Mart and my loathing for the banking industry. OK, that's too harsh -- contempt for, perhaps. Obviously the banks are a little scared of what Wal-Mart could do to them, and they've been lobbying against this for some time.

No, they wouldn't be a full-service bank. At first. But it's precisely the idea that they can pick and choose which lines of business to be in -- and lock other institutions out of -- that has the banks peeved.

In a lot of ways this is nothing new. There were similar backstop actions when Sears and GM got into the finance industry.

Now, there are two views of whether Wal-Mart as a whole is good for consumers. One is the Hayekian market efficiency view. Wal-Mart, by accelerating the exit from the market of undercapitalized local businesses, and the exit from US shores of expensive labor-intensive manufacturers, has increased the efficiency of the market, allowing the consumer to buy more for less. Certainly that view was well represented in my town where the city finally permitted a Super Wal-Mart after years of zoning and planning hearings. "We love our Wal-Mart!" letters to the editor were a regular third (the others being the NIMBY residents next to the site, and the Wal-Mart is Evil for X, Y or Z reason crew).

The other view, of course, is that Wal-Mart takes away business from local owners and ultimately takes away jobs from the local owners' employees.

There's little reason to believe that either of these views will be borne out any less in the banking sector.
posted by dhartung at 1:33 AM on June 21, 2007

The only indisputable fact is that Wal-Mart getting into banking is bad for other banks; if it weren't for them all the consumer activism on the issue would just be so much ignored noise.

The entire anti-Wal Mart movement is like that: threatened big competitors, aided by useful idiots. It's no convenience that Wal-Mart was able to have its way with mom-and-pops and their minimum wage employees for 30 years -- they lack the resources to fight back. When Wal-Mart pushed into groceries, all of sudden they were threatening big supermarket chains and the big dues levies of their workers' unions.
posted by MattD at 3:51 AM on June 21, 2007

no coincidence. no convenience, either, but that's not really the point.
posted by MattD at 3:52 AM on June 21, 2007

Mod note: a few comments removed -- if your answer doesn't have "wal-mart" and "bank" in it it should probably go to metatalk
posted by jessamyn (staff) at 6:20 AM on June 21, 2007

Walmart getting into banking might be better than the short-term loan companies that are gouging the poor with usurious interest rates, but from the sound of tose fees, it's a marginal improvement. They might cause typical banks to lower fees in response to competition. Small local banks have already been nearly wiped out by big megabanks; Walmart is late to this party.

Walmart is fiercely anti-union and has traditionally treated its employees poorly. They have been significantly cited for gender discrimination. The anti-Walmart crowd have been pretty successful at making them improve their employment practices.

Lots of good points above. Some of the public reaction is anti-Walmart pile-on, plenty of it is thoughtful concern about the effect on the economy.
posted by theora55 at 6:33 AM on June 21, 2007

How about the simple fact that the card is riddled with fees to nickel-and-dime you to death?

This is the part that bothers me. The book Nickel and Dimed (heh, funny) details the ways in which it costs more for a person to be poor. I have a free checking account with my bank; I have to maintain a small daily average balance. And I do, so I get to bank for free. I don't think it's fair that the people have the least money and who need money the most are the ones paying the most to manage their money (see: payday loans, check-cashing, pawn shops).
posted by ThePinkSuperhero at 8:51 AM on June 21, 2007 [1 favorite]

Response by poster: the argument that the card is riddled with those naughty little fees is a powerful indicator to me that they wouldn't be any better. most people really do not study their rate charts, they drive five miles to save three dollars on gas and then pull into the bank next door and get cash for a $3.50 fee. I do think it's fair to say that an exponential share of these guys fall into wal-mart's target demographic.

also understood is the point that they could raise prices once they did kill their local competition but I consider that somewhat of a hypothetical point. the southwest airlines influx in many markets has caused other fares on the same routes often to collapse significantly and instantly and even after years most fares haven't gone back up to original levels. with so many large and small competitors now being somewhat lulled in by "everyone doing it," I think one bank shaking things up and making a big deal about it could be a very interesting experiment - but wal-mart does not have the track record that would make me believe they'd do it.

funny thing is ... I think they could convince me to support their efforts if they only made their offering actually better.
posted by krautland at 9:26 AM on June 21, 2007

My first thought was "will they offer credit cards?" Not that banks are paragons of virtue here, but credit card debt is bad stuff and the borrower, not lender, is usually the one that suffers.
posted by lorimt at 10:19 AM on June 21, 2007

You wait. They will set it up so that if you work at Wal-Mart, you will only be paid via automatic deposits to an account at THEIR bank. I look on this suspiciously because it reminds me of "company store" type setups like the mining industry used to use and abuse. The have too much control over the dispensation, use and tracking of your own money if you work there.
posted by erikharmon at 12:28 PM on June 21, 2007

the southwest airlines influx in many markets has caused other fares on the same routes often to collapse significantly and instantly and even after years most fares haven't gone back up to original levels.

Have you been watching the news at all, krautland? I know you can't have been on a plane recently, or you could never have posted that. Customer satisfaction with air travel has been declining precipitately for years and it is now at an all-time low.

Cheapest isn't always best; cost pressures aren't the only driver of an effective market. Route and fare competition were deregulated in 1979; the consensus is that this was a disaster for the consumer of air travel, mitigated slightly by the availability of marginally lower fares.

Take that graph of what price competition did to airline customer satisfaction. Now erase "customer satisfaction" on the Y axis and write in "airplane mechanical safety." Should we deregulate that part of the airline business too?

What about banking? Do we want Wal-Mart's best business practices in the banking arena? Do we want to endorse those conflicts of interest?

For a recent and instructive example, check out the story of the New Century Financial Corporation. This lowest-common denominator approach to subprime mortgage lending put hundreds of thousands of people in mortgages they were destined to default on, ruining their credit and their financial futures. Meanwhile, executives and shareholders walked away with billions of dollars; other shareholders were bankrupted when the company went into Chapter 11.
posted by ikkyu2 at 12:46 PM on June 21, 2007

I know someone who is a prime candidate for Wal-Mart's financial services. This is a friend of my partner's who lives up north. He's on SSDI, but also works under the table for cash cleaning peoples' houses. You understand, he does not report any of his working income to Social Security or the IRS. He has no bank account, and he is afraid of any sort of paper trail or electronic record that might document his off-the-record income.

So, when he gets his monthly check from the government, he cashes it at a check-cashing place, and pays an exorbitant fee. If one of his customers gives him a check, he does the same thing.

When he came to visit us recently, he carried too much cash with him and also had a VISA gift card that he bought for himself somewhere. Although I personally think he's a little crazy and I couldn't live that way, I understand why he doesn't have a bank account. I think that Wal-Mart would probably give him a better deal, better service, and lower fees than his neighborhood check-cashing store. I don't intend that to be much of an endorsement.

Understand, there's millions of people in the US who live in a cash-based underground economy. They might be on Welfare or Social Security, they might be undocumented, they might be in some other status. I think that Wal-Mart recognizes that many of these people are smack-dab in the middle of their customer base, and so the company is expanding their services to them.

As for "real" banks -- big institutions or community banks -- they're in a different market. The Wal-Mart I shop at has a BofA, a Chase, a Wells Fargo, and a WAMU all within one block. Wal-Mart is looking for the customer who isn't going to one of these for their financial services.

An aside: Please don't hate me for shopping at Wal-Mart. My only supermarkets close by are Wal-Mart and Flagship Randalls, which is basically an overpriced Safeway clone targeted toward upper-income people. There's also a SuperTarget, which carries prime beef and beautiful expensive produce, but not much for grocery shoppers of modest means. There's an HEB opening soon, and I promise to shop there when it arrives.
posted by Robert Angelo at 6:36 PM on June 21, 2007

I think the Consumerist said Congress passed a law that will prevent stores like Wal-Mart and Home Depot from ever starting a bank - something about they have to make 85% of their revenue from financial transactions to start a bank.

Can't find it there on Consumerist, but here it is from Google.
posted by IndigoRain at 9:09 PM on June 21, 2007

Ah, Consumerist link.
posted by IndigoRain at 9:10 PM on June 21, 2007

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