It’s too bad Wal-Mart (NYSE: WMT) wasn’t allowed to enter into the banking industry, as it would have quickly shown the other poorly-run banks how to do it right and for far less.
In 2007 Wal-Mart has applied for a banking charter and was refused after the banking industry lobbied the government to not allow them to compete with them; something they are surely sorry for now, as tons of new regulations are attempting to do what Wal-Mart would have otherwise done through free market capitalism – forced them to lower prices.
Wal-Mart is for the most part a well-oiled capitalist machine, and now that they have their system close to being perfected, they can just about enter any competitive sector or market and compete in it quickly and efficiently.
One example is with prepaid debit cards. Serving what many identify as the unbankable, Wal-Mart has offered them a great way to use their capital at a very cheap price. As of this writing, a Wal-Mart customer buying a prepaid debit card pays only $2. Compare that with the overdraft fees of up to $35 a pop from banks and you can see why they’re afraid of Wal-Mart by this one product alone.
Look at what the banks have been doing in contrast with credit cards alone. Now you get to be a great customer of theirs and get rewarded with an almost 30 percent interest rate for the privilege of using their cards. And this is during difficult economic times and after being bailed out by those very customers they allegedly serve.
Like other Wal-Mart competitors, banks and financial institutions don’t get them and what they see that they don’t: huge opportunities to serve and make money from the under-served. In the case of the prepaid debit cards, Wal-Mart has sold over 2 million of them since February 2009, which amounted to over $2 billion in transactions. This doesn’t take into account their other financial services like check-cashing, paying bill services and money transfers.
Wal-Mart is doing in financial services what it always has done the best: make money from a large number of transactions rather making more from fewer transactions. With most the opportunities and growth lying with those that don’t interact with the banking system at this time, Wal-Mart has tapped into a great market that will offer them huge rewards in the future because they understand what they need and want and are willing to provide it for them.
The reason Wal-Mart will revolutionize this market is the big banks can’t operate without using secret and/or added fees that would significantly boost their bottom line. The customers Wal-Mart is reaching out to can’t afford those huge fees and so aren’t marketed to by the banks. But Wal-Mart knows how to meet their financial needs in a way the customer can afford and Wal-Mart can make a profit, and I’ll bet it won’t be too many years down the road when the non-chartered First Bank of Wal-Mart does as much financial business as some of the largest banks in the world. I hope they do and I think they will.
If Wal-Mart had been granted a banking charter, a lot of the nonsense we see today wouldn’t be happening, such as attempts for the government to control the pay of banking executives, bailouts, regulations on products like credit cards and overdraft fees for accounts.
Wal-Mart would have done what capitalism does best, and that is disciplined their competitors through their competitive expertise, forcing the prices of the services they offer down or experience an exodus of their customers to do banking with Wal-Mart.
This is going to be a lot of fun to watch as the banking industry will continue to be made to look bad overall as Wal-Mart shows them how to do it in the financial products area they’re allowed to compete it. How much longer will it take for public pressure to make the politicians allow Wal-Mart to compete for their banking dollars?
