Wal-Mart Stores Inc. is unique in the payments industry. It is the only financial services provider that allows a customer to pay bills electronically, transfer money to friends and relatives, and purchase an affordable set of bath towels. That combination of discounted retail goods with equally inexpensive financial products has proven a formidable business model.
Pundits may haggle over the degree of Wal-Mart's influence on the industry, but an impact it has had - not only in driving down fees across the prepaid card sector, for example, but also in fostering a deeper relationship between service providers and customers. And yet the Bentonville, Ark.-headquartered company's role as a payments trendsetter (and its prominence generally) has been over 30 years in the making.
Jim Grabow, former Senior Director of Financial Services at Wal-Mart, noted that the company was in the vanguard of POS automation when it electronified its cash registers in the 1970s. Wal-Mart was also instrumental in mitigating, to a degree, the power of the card brands through the 2003 "honor all cards" ruling and an October 2004 U.S. Supreme Court decision, according to Grabow.
In the "honor all cards" case, Wal-Mart and other big retailers, representing 5 million merchants across the United States, were successful in knocking down a Visa Inc. and MasterCard Worldwide rule that forced merchants to accept all of the card brands' cards. The victory allowed merchants more control over what cards they took for payment at the POS.
Likewise, in successfully appealing to the Supreme Court, Wal-Mart opened the way for issuers of MasterCard and Visa cards to also issue cards from other card brands to generate more revenue. Wal-Mart, through its banking relationship with Visa card issuer General Electric Co., was the first to take advantage of the ruling when it launched the Wal-Mart Discover card, Grabow said.
Grabow called both instances "game changers" for the payments industry, altering the landscape for the better - with Wal-Mart central to each outcome.
Wal-Mart reported $405 billion in sales for its 2009 fiscal year (which ended in January 2010). It operates over 4,300 stores in the United States and more than 4,000 additional stores abroad. It employs over 2.1 million. It donated $423 million to charity globally in fiscal 2009.
But what is perhaps the most telling statistic comes from a 2009 IHS Global Insight study, cited by Wal-Mart, that said the retailer saves the average American household $3,100 yearly. And that number is not based solely on how much people save by shopping at Wal-Mart, but everywhere else, too, due to the company's impact on its competitors. It is therefore a barometer of Wal-Mart's effect on the entire economy.
That size and scale has translated profitably with Wal-Mart's foray into the prepaid card industry, begun in 2005. In a keynote address at Prepaid Card Expo '08, Wal-Mart's President of Financial Services Jane Thompson said the Wal-Mart MoneyCard, issued by Visa and distributed by Green Dot Corp., was used to make 2.2 to 3 million transactions weekly through money orders, money transfers and the cashing of checks.
In tandem with the MoneyCard are Wal-Mart's Money Centers - in-store financial service centers first rolled out in 2009. There are 1,000 to date, with 500 more to be added by the end of 2010. Grabow said the MoneyCenters took Wal-Mart's prepaid business "to a new level," allowing customers easy and convenient access to Wal-Mart's prepaid services.
When its competitors were routinely charging $9.95 activation fees on their prepaid cards, Wal-Mart lowered that fee on its MoneyCards to $3.00 in February 2009. A few months later nFinanSe Inc. equaled that price on its general purpose reloadable cards. Wal-Mart's low fees are "definitely a market driver," said Jeff Johnson, Division Manager for Prepaid Products at First Data Corp. Furthermore, Wal-Mart has been a leader in implementing payroll cards for its employees, with First Data supplying the processing through its Money Network Payroll Distribution Network. While the program helps Wal-Mart save the environment (fewer trees cut down for paper payroll checks), it also saves the retailer on overhead costs such as printing and shipping of checks.
Given its size and prominence, it is easy to overstate Wal-Mart's importance to the prepaid card industry, however. That is the opinion of Gwenn Bezard, Research Director at Boston-based consultancy Aite Group LLC. The increasingly competitive nature of the prepaid industry is as large a factor as Wal-Mart in driving down fees, according to Bezard.
"I think Wal-Mart is contributing to a trend that would have happened, or is happening, regardless of Wal-Mart's presence," he said. "They are obviously a significant player in retail, so they attract attention. But the trend in getting more of [the] prepaid product out in the market for consumers, that trend is happening; it's a force shaping the market, with or without Wal-Mart."
Bezard coauthored a 2009 study entitled Wal-Mart: A Rising Force in Alternative Financial Services. In the study Aite examined the relationship between Wal-Mart and unbanked and underbanked consumers - roughly 80 million in the United States.
Aite defined these financially underserved individuals as those who are also patrons of check cashing stores, since getting checks cashed is a prime activity of people who do not have access to traditional bank accounts. Aite found that, of its survey sample of 400 patrons at check cashing stores in the state of Virginia, 80 percent shop at Wal-Mart at least once a month. But, of that 80 percent, only 19 percent of their check cashing activities in a three-month period were performed at Wal-Mart.
That statistical relationship is indicative of Wal-Mart and the prepaid card industry as a whole, with many players enjoying relatively small market shares.
"It depends on which product you're talking about," Bezard said. "But you look at prepaid, for instance. The penetration of the unbanked and underbanked population is very, very small."
Bezard puts that penetration at only about 10 percent. The Aite report therefore concludes that Wal-Mart can do a better job of winning over people who use check cashing services.
But easier said than done, according to the Financial Service Centers of America Inc. (FiSCA), a national trade association representing the financial service center industry, made up of check cashing and payday lending businesses. Activation and reload fees may be lower on prepaid cards than the average percentages FiSCA's constituents charge people to cash payroll checks, but that is evidently not the entire equation.
Ed D'Alessio, Deputy General Counsel for FiSCA, said financial service centers have an advantage over Wal-Mart in several areas, namely convenience, accessibility and service focus. "Financial service centers tend to be open longer, if not 24/7," he said. Furthermore, many of the 13,000 centers nationwide are located in inner cities, while Wal-Mart "tends to be a creature of suburbia," he added.
Another factor is the focus financial service centers have on just that - providing financial services. "Everything in that location is geared toward the customer's financial needs," D'Alessio said. "You're not going to get lured by merchandise sales [as you might] on the way through or the way out of Wal-Mart. You get in, you get out."
D'Alessio highlights loyalty as yet another positive in the service sector's favor. "One of the things the industry takes great pride in is being of the community," he said. "They hire local folks who speak the local language. So stores routinely have customers that go there for years. So there is a likability, a loyalty there."
FiSCA's customer satisfaction surveys seem to bear this out. D'Alessio said 95 percent of financial service center customers rate the stores in which they do business as good to excellent. D'Alessio points to the lines out the doors of such stores on payday Fridays as confirmation of FiSCA's analysis.
Wal-Mart considers itself community-centric as well. Former Wal-Mart executive Grabow, now Chief Retail Partners Executive at FSV Payment Systems, said that focus is borne out by the community and regional bank branches found in many Wal-Mart stores.
Atlanta-based SunTrust Bank and Texas-based Woodforest National Bank have in-store branches throughout the Southwest and East Coast. Another participant is Orlando, Fla.-based Urban Trust Bank, which is focused on serving minority communities in urban areas. To date Urban Trust has 23 branches inside Wal-Mart stores in Florida.
Robert L. Johnson, founder of Black Entertainment Television and the first African-American billionaire, is Chairman of The RLJ Companies - the holding company of Urban Trust. "We like to think of ourselves as a pioneer in terms of matching our customer base with a dynamic customer service company like Wal-Mart," he said.
Because Wal-Mart is not a bank (its 2007 application for an industrial loan company charter was denied), Urban Trust can provide services Wal-Mart cannot, Johnson said. Customers therefore can utilize the prepaid products in the MoneyCenters or bank through Urban Trust.
Wal-Mart has "kept that customer in a positive relationship with the store," Johnson said. "And they made that transaction with the customer much easier than to have to leave the store, get in the car in the parking lot, drive another 10 or 12 blocks to another bank."
Equally true, Urban Trust benefits from Wal-Mart's "retail center of gravity" as Johnson put it. "We get the access to the huge foot traffic that comes to Wal-Mart," he said. "We get the core customer group that we're targeting. And we get the alignment of our brand with Wal-Mart."
All agree that it is still early days for the prepaid sector of the payments industry, with players in fierce competition for market share. And yet Bezard believes that competition is secondary to education. "To me that's a bigger challenge for those companies," he said. "I think most of them recognize that."
They also realize that Wal-Mart can be a key driver of that learning curve because it can reach so many people with its financial products. "I think we're seeing the awareness and the understanding of prepaid as a type of payment system has been enhanced by the number of cards and the exposure that Wal-Mart's been able to give it," Grabow said.
And by raising the awareness of prepaid cards, Johnson hopes the level of financial literacy will rise as well. "Any time you can get customers in a prepaid debit card program and they become more financially literate, more capable in managing their own financial services, they move higher up the ladder in terms of getting access to more credit at a lower cost," he said.
As the payments industry continues to evolve, it is difficult to predict how Wal-Mart will evolve with it. In the prepaid card industry, Bezard sees a bifurcation of products and services taking place.
He believes a decade from now prepaid businesses will either provide only prepaid services or offer prepaid along with credit lending, such as a cash advance or payday loan capability.
Bezard does not think Wal-Mart will become one of the latter providers because it will want to protect itself from the credit risk inherent in lending. But Grabow disagrees. "I think Wal-Mart will do what the customer wants and needs," he said. "As long as it's physically and socially responsible, Wal-Mart will be in the business, period."
A hint at Wal-Mart's possible future comes from an online edition of The Wall Street Journal where Wal-Mart's Thompson is quoted as saying, "We would like to find a way to add deposits."
In fact, check cashers and payday lenders already carry such a product. Through a partnership with FiSCA, NetSpend Corp. rolled out the National Savings Program in October 2008. The program involves no-fee savings accounts linked to NetSpend prepaid cards. As of February 2009, NetSpend reported that 104,000 customers had opened savings accounts using the cards.
It is a prime example of how competing industries learn from each other. As prepaid card companies may be poised to jump into lending, check cashers and payday lenders have branched out with prepaid cards.
At the 21st Annual FiSCA National Conference and Exposition held October 2009 in Colorado Springs, Colo., a workshop was devoted to Wal-Mart. "The panelists were all pretty much unanimous - Wal-Mart's a great company as far as what they do," D'Alessio said. "And some things that they do we can learn from. And that's the way of the world."
Oh, and another thing D'Alessio mentioned: Wal-Mart representatives attended the conference.
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