Wal-Mart's Sort Of Foray Into Banking

Behold the wonders of the pithy headline. Reading the news over the past couple of days, you would think something big has happened - namely, that Wal-Mart (NYSE:WMT) is getting into the banking business and will begin making small business loans through its Sam's Club subsidiary.

Not so fast.

What Is Really Going On
When you look a little deeper, you see that Wal-Mart is actually partnering with Superior Financial Group, a non-bank lender, to offer Superior's financial services through its Sam's Club locations. In other words, by engaging in this move, Wal-Mart is as much a bank as having Verizon (NYSE:VZ) kiosks makes Wal-Mart a cell phone/telecommunications company.

Importantly, there has been no indication from Wal-Mart that the company is taking any role in the underwriting process and sharing any of the risk in these loans. Moreover, though I am not an expert in every nuance of banking regulations, I do not believe they legally could, as they are not set up as a bank or non-bank lender.

If my analysis is correct, and Wal-Mart is not active in the underwriting and risk-sharing, then this is simply just another product for Wal-Mart and Sam's Club to sell. In addition to Kellogg cereal on aisle 9 and Dole bananas in the produce section, there will be a kiosk or office (and online site) where business owners can apply for loans. By offering this service, I am sure that Wal-Mart hopes they will drive additional membership and shopping, in addition to $50 per funded loan (according to the Seattle Times) that they will get.

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A Game-Changer? I Doubt It
Though I expect Wal-Mart's haters to point this as yet another example of the company trying to encroach in another hallowed American industry (though I am not sure how "hallowed" banking is anymore), I am not sure it will be all that successful or change much of anything.

First, Costco (Nasdaq:COST) has tried something like this before. Actually, make that three times before. In each case, Costco found the results to be too unsatisfactory to be worth continuing. What makes that especially significant is the fact that Costco launched these ventures in partnership with KeyCorp's (NYSE:KEY) KeyBank, American Express (NYSE:AXP) and Capital One (NYSE:COF) - three of the leading small-business lenders in the country.

If arguably the best warehouse club operator in tandem with the best small business lenders cannot make the concept work, is Wal-Mart going to do much better? Granted the 7.5% interest rate on these loans is attractive, and loans offered through Sam's will include a sweetener of a $100 discount on the fees. Nevertheless, businesses often want more comprehensive relationships with their lenders, and Superior's focus on loans (and relatively little else) may limit its overall appeal.

The Bottom Line
All things considered, I do not think that AmEx, Capital One, Wells Fargo (NYSE:WFC) or other lenders are too concerned about this move by Wal-Mart. The Sam's Club/Superior Financial tie-up cannot offer all of the services that they offer and, so long as small businesses keep their deposits in place (and earning next-to-nothing), I think they will be happy to cede a little bit of their lending business.

For Wal-Mart, too, this is no game-changer. A best-case scenario will see them capturing more business and market share in the warehouse club/business supply segment as business owners come for the loans and stay for the groceries. Even in a worst-case scenario - say widespread complaints about Superior's practices - Wal-Mart has plausible deniability ("they were just a partner") and still gets a small piece of each loan. Proof again, perhaps, that headlines do not always tell us much about what is really going on. (For more on what made Wal-Mart great, check out The CEO Dream Team - Walton, Schwab, Marcus And Blank.)

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