Why Wal-Mart Needs To Expand Into Financial Services

By Jonathan Berr | April 28, 2014 AAA

Wal-Mart Stores, Inc. (NYSE:WMT), the world’s largest retailer, has been inching its way into the financial services business for years, much to the chagrin of the nation’s bankers. Investors and consumers, though, should be rooting for the chain to succeed.

The latest move came earlier this month when the Bentonville, Ark., company announced plans to expand its presence in the money transfer business with it called Walmart-2-Walmart, which allows customers to transfer cash between its more than 4,200 U.S. stores. The theory behind the offering, and it’s a good one, is that people who receive the money will spend some of it at one of its locations.

Not surprisingly, incumbent cash transfer players such as MoneyGram International Inc. (Nasdaq:MGI) and The Western Union Co. (NYSE:WU) will feel the squeeze. Shares of MoneyGram tumbled by 17% on the news. Western Union fared better but only because much of its business happens overseas.

Indeed, Walmart has encountered many obstacles as it pushes into financial services. In 2006, it withdrew its application for an industrial bank charter, essentially a banking license, with the Federal Deposit Insurance Corporation amid fierce opposition from traditional banks. Undaunted, the retailer has pressed ahead. In October 2012 it teamed with American Express Co. (NYSE:AXP) to create Bluebird, a fee-free alternative to debit and checking accounts featuring a prepaid American Express card. Customers can now load up to $100,000 to their account, which has many of the features of a traditional checking account and carries FDIC insurance.

Pundits have asked whether Walmart should be allowed into banking at all given accusations over unfair labor practices and its overall impact on the economy. But no one has ever accused the company of being bad at running a business, which can't be said about many of the banks which stand to lose if Walmart is allowed to offer banking. To wit: Bank of America Corp. (NYSE:BAC), Wells Fargo & Co. (NYSE:WFC), Citigroup Inc. (NYSE:C) and JP Morgan Chase & Co. (NYSE:JPM) all received multi-billion dollar government bailouts.

Stagnant Shares

Shares of Walmart have barely budged over the past year, underperforming the broader S&P 500 Index, which gained more than 17%. The stock is certainly cheap, trading at a forward multiple of 14.7, a discount to the valuation of rival Target Corp. (NYSE:TGT), which the market values at 15.2. Walmart trades at a 4% discount to its average 52-week price target of $81.43. The stock isn’t a compelling value now, but investors should keep a close eye on Walmart’s efforts in financial services because it has a potential to bolster growth.

In fact, it seems likely that Walmart will expand its foothold in the financial service world because it has little choice. U.S. same-store sales, a key retail metric measuring activity at stores opened at least a year, have fallen for four quarters. Though Walmart has laid the blame for its woes on macroeconomic factors such as the weather, the company’s problems are more serious. Walmart has come under fire for not having enough workers at its stores to keep its shelves sufficiently stocked. The retailer also has posted dismal customer satisfaction ratings for years.

Unfortunately for Walmart, the company also is losing ground in its core market of low-income shoppers to the dollar stores, which is why the company is likely going to wade further into financial services. Walmart needs to give consumers as many excuses as it can to shop at its stores. Financial services are a good place to start.

Serving The "Unbanked"

Walmart can serve low-income customers far cheaper than conventional banks. For one thing, the retailer doesn’t need to open new branches because it has plenty of room in its existing stores to do so. There certainly is plenty of demand for these services amongst what experts call the “unbanked.”

The FDIC estimates that about 43 million adults and 23 million households lack a bank account. Many of these people wind up paying high fees for financial services such as check cashing, rent-to-own operations and pawn shops. African Americans, Latinos and other minorities are the most likely to be unbanked.

“When you consider the cost for cashing a bi-weekly payroll check and buying about six money orders each month, a household with a net income of $20,000 may pay as much as $1,200 annually for alternative service fees - substantially more than the expense of a monthly checking account fee,” according to a study by the St. Louis Federal Reserve.

The Bottom Line

The potential for growth in financial services is too great for Walmart to ignore. Whether the retailer can successfully execute at strategy to take advantage of the opportunity is hard to say, but it would be surprising if it didn't try.

 --Jonathan Berr does not own shares of the aforementioned stocks.

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