Walmart in Banking ?

Posted in Finance Articles, Total Reads: 4977 , Published on 11 February 2011
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For those who take interest, world of business is very interesting. It is more pleasurable than playing a sport and more entertaining than watching a movie, though it contains elements of truth from both of these. What’s your first reaction when you hear the word “Wal-Mart”? Retail chain? Big format retail? Discount stores? If you think anything on these lines then you are ready to get a shake when you hear about Wal-Mart’s plans for banking and financial sectors. Would Wal-Mart run a bank? It is not impossible!

 

Walmart Bank ?

Background

“Low price – high volume” is the Wal-Mart Formula. It has allowed the company to become a giant like no other corporation. Started by now legendary Sam Walton in 1962, the company stood as world’s largest company by revenues in 2010. It majorly focused on large discount department stores and grocery retail, and has around 8500 stores in 15 countries. Now it is possible to apply the same formula in different business segments than retail too. It is logically possible. And if there is a business sense in that, why not do it?

To be specific, Wal-Mart has been trying to buy a bank. But its serious efforts have been denied by the US lawmakers, at least four times. So somewhere down the line it seems Wal-Mart decided to take another route to reach the same destination: entering via financial services. And it kept adding features and value-added services for its customers. Story of Wal-Mart’s endeavor in financial-sector is a success stories from which many others can learn.

Wal-Mart’s Vision

The traditional Wal-Mart slogan was "Always Low Prices, Always". This was replaced with a new slogan "Save Money. Live Better." and accompanying advertising campaign in 2007. The new slogan is not only catchy, but also is also business sector independent. More important for this article, it indicates towards Wal-Mart’s mission in helping customers manage their finances better. This still remains the Wal-Mart slogan.

Let us now check the Wal-Mart vision if it allows it to conduct business in finance and banking without eyebrows being raised from any of its stakeholders. Wal-Mart’s corporate Purpose stands for this:

“Saving People Money So They Can Live Better”

As we notice, this vision is not specific about any business segment and in fact it is very much connected to money and finances! So banking and financial services is never an out-of-place proposition for Wal-Mart until it benefits its stakeholders.

Entering via Win-Win Collaborations

It is interesting to see how Wal-Mart kept building up an array of value-added financial services in its fold, collaborating with niche players:

 

Offering bargain-priced money orders and wire transfers along with MoneyGram (at half the prices charged by competitors)

Offering services like check-cashing and bill payments at very low margins

Allowing bank branches operated by partners in massive Wal-Mart supercenters

Offering refillable prepaid debit card to customers

Offering small business loans (via Sam’s Club division)

 

The major strengths which come to help Wal-Mart in this business are:

 

Sheer scale of operation

Trusted brand with which others are interested to collaborate

Technological and IT edge

Cheap capital availability

Instant global reach

 

For record, the company already enjoys retail banking license in Mexico!

Walmart Mexico

 

Picture: Bottom of www.walmart.com (accessed on 3 Feb 2011) highlights its financial services offerings.

 

Why Customers are Loving it!

 

There are segments of customers who are benefitting from Wal-Mart’s financial services like life savior facilities. These are mostly:

 

The poor and people in low income bracket

The immigrants

Persons with no bank accounts

 

These customers so far were dependent on the mercy of unscrupulous operators. The people in very low income bracket and the immigrants are often denied services by big financial institutions because of risk. Many of these people don’t even have a bank account. These people are enjoying Wal-Mart’s services like never before.

 

Apart from these, the existing customers of Wal-Mart love these financial services because of low margins and easy reach. There is no stop for such services, which is making competitors wake up and beware!

 

A Perfect Recipe?

 

Wal-Mart’s financial interests seem like a win-win proposition due to the following reasons:

 

The financial services business is much more profitable than retail even for Wal-Mart

Through these services, Wal-Mart can serve its same set of customers better; getting a bigger share of their wallet as well as building more trusted relationships

Such strategy would allow new customers to seek Wal-Mart and hence Wal-Mart gets a larger customer base

These services increase the customers’ frequency of visits which help its retail business too

Entering into financial services enhances the Wal-Mart brand value

 

On the other side, the challenges for Wal-Mart are also like:

 

Increasing anti-Walmart lobbying by existing banks and hence negative PR

A price-war by competitors may reduce profitability in these services

Possible brand dilution as customers may consider these services as non-core

Exposure to higher financial risks

Legal troubles

 

The Road Ahead

 

So far Wal-Mart has been extending its interests in the banking and financial sectors. It already owns a retail banking license in Mexico; has got a go-ahead in Canada and in June last year (2010) Wal-Mart took equity stake in Green Dot, a rapidly expanding US financial company. So what is the road ahead?

 

Many people believe that Wal-Mart would not stop until it owns a full-fledged banking license in the US and in other parts of the world as well. Many people think that Wal-Mart is only interested in niche financial services and would never stretch itself to become a bank. So what can we see the future holding it for the company’s interests in the banking domain? In my opinion, it won’t be beneficial either for the company or the customers that Wal-Mart becomes “just another bank”. That is neither its core competency nor a very bright proposition especially in the post 2008-09 world (post global financial crisis) which realized us of the associated risks. I think it would be a very good strategic move to keep extending the range of financial services on offer, from credit cards to personal loans to other niche financial services, and become a one touch service provider for its customers for these needs. It can leave the core-banking services for the traditional banks to manage. That would be an ideal value add to the customers and at the same time it allows the Wal-Mart to retain and maintain a loyal set of customers and garner higher profitability too!

 

About the Author : Kumar Rahul, B.E. (NIT, Durgapur), MBA (NMIMS, Mumbai), is a consultant with a leading IT firm. Views are personal. He can be reached on  This e-mail address is being protected from spambots. You need JavaScript enabled to view it . He also has a blog http://rahulbemba.blogspot.com/

 

 

 


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