Banking Without The Banks: Will You Save?

By Stephanie Powers | September 20, 2010 AAA
Banking Without The Banks: Will You Save?

Just about every retail venue dabbles in some form of financial service. Department stores have had store credit cards for decades; oil companies have their own gas cards; the local grocery store offers money orders and money transfers. It's a win-win situation adding value to customers, increasing markets for banks and money transfer agents, and of course adding dollars to the retailer's bottom line. The types of services available remain widely competitive with room for growth. (For more, see Credit Card Perks You Never Knew You Had.)

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One-Stop Shopping
The extra services that retailers offer to their customers are just that - extra. In-store financial services caused a big stir because banks feared the potential exodus of customers away from traditional banks. That hasn't happened in part because the banking industry aggressively lobbied to keep mega retailers like Wal-Mart (NYSE:WMT) from gaining a bank charter.

If the world's largest retail chain applied its renowned cost-saving principles to traditional financial services, banks may actually have something to worry about, but for now, Wal-Mart and other retailers like Target (NYSE:TGT), Safeway (NYSE:SWY) and Costco (Nasdaq:COST) are focusing on the segment of the population that typically does not use deposit accounts. It is a good market to target. The 2009 FDIC Survey of Unbanked or Underbanked Households indicates 30 million fall into this category in the U.S.

Retailers sell financial services through partnerships with state-regulated financial institutions offering money orders, money transfers and money cards. They become agents for money transfer organizations with vast networks of international outlets. The biggest include Western Union (NYSE:WU) with 410,000 locations worldwide. Moneygram (NYSE:MGI) offers essentially the same services at 203,000 locations in 190 countries. Sender and receiver agents share commissions from customer paid transaction fees.

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Money Transfers
In 2009, Western Union reported that 85% of customer-to-customer money transfers involved at least one non-U.S. location. Customers pay a transfer fee and currency exchange rates apply. The country with the largest recipient of money transfers from U.S. immigrants is Mexico. In 2006 $24 billion was transferred to individuals in Mexico, according to the Pew Hispanic Center Research Report. Given the economic downturn, 71% of individuals in the U.S. who normally transfer money to Mexico or other Central American countries say they continued to send money last year, just at reduced amounts.

Money Orders
Of unbanked U.S. households, 81% use money orders. Most communities have easy access to them in grocery stores, convenience stores and discount chains. The prices for money orders depend on the amount and location. The U.S. Post Office offers domestic money orders starting at $1.10.

Money Cards
Unbanked consumers can still benefit from the use of money cards. Sixteen-percent of people without bank accounts use money cards. The reloadable cards operate similarly to debit cards. All that is required is an initial deposit and a fee of $3.00. Customers can also have their paychecks deposited onto the cards. Money cards use traditional debit systems, Visa (NYSE:V) or MasterCard (NYSE:MA), which means you can use your Wal-Mart money card at Target or any other place debit cards are accepted.

Credit Cards
There are a lot of choices when it comes to credit. You can get a card from just about every place you spend money including gas stations and grocery stores. Large retailers offer proprietary charge cards (only for use in their stores and must be paid off every month) alongside co-branded credit cards. Retailers are not just being nice to you when they offer credit. Of course they want to sell you more of their products, so large chains like Macy's (NYSE:M) offer extra discounts and sneak previews of sale items to card holders. You can benefit from all the extras if you shop there often enough. Just make sure any interest you pay doesn't cancel out all the perks. (Learn more credit card pros in 10 Reasons To Use Your Credit Card.)

Like many other cards, stores offer incentives to open an account. Beware of cash-back options that may appear on your statement as a cash-advance purchase.

You don't always need a "card" to receive credit. Some retailers have special payment plans for large purchases. You may still need to qualify as if you were applying for a card.

The Bottom Line
For alternative financial services, consumers choose nonbank outlets because they are convenient and less expensive. Retailers are required to abide by the same customer protection and privacy policies as banks, and they often partner with credible, well-established financial organizations. Together they serve a wide range of financial needs, without requiring a bank account. (To learn more, read Understanding Credit Card Interest.)

For the latest financial news, see Water Cooler Finance: Poverty Rates Increase – And So Do Millionaires.

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