Another Quieter Challenge from Below

The majority of citizens go to banks for credit cards, loans and other day-to-day financial transactions. Over the last few years, the banks have easily pushed through significant fee increases in all of their services because most people deal only with one bank and are unlikely to want to go to the trouble to change banks to get lower prices. The result is that lower prices aren’t offered, at least not to the average citizen. (See the Symptom & Implication, “The industry has been able to preserve margins by increasing prices” on

There is an exception, though. That exception is Wal-Mart. After carefully dismantling the economics of variety stores, jewelry stores and grocery stores, Wal-Mart is now beginning to stalk the financial industry. They will be successful here because the financial industry is highly unlikely to have the will to compete with Wal-Mart where it chooses to serve customers.

So, where does it choose to serve its customers? At the lower end of the market, of course. Twenty-five percent of U.S. households are unbanked. The bigger banks are not interested in these customers because they will not, or cannot, pay significant fees on financial services. But Wal-Mart wants these customers. Wal-Mart cashes work and government checks, offers prepaid Visa debit cards, and provides money transfer and bill payment services…all services that are highly profitable to the typical bank.

And the business is growing very rapidly. (See the Symptom & Implication, “New entrants are growing much faster than the market” on Recently, Wal-Mart opened its one thousandth money center. Each of these money centers is located inside a regular Wal-Mart. The company has also announced plans to grow the money centers by 50% over the next year. Once those additional 500 money centers are open, there will be an average of one money center for every two Wal-Marts in the U.S. This current group of money centers do an average of four million transactions a week, and are a very profitable part of Wal-Mart.

Wal-Mart has not had an easy time of getting into this business. They have tried several times to obtain a bank charter. Such a charter would allow them to take deposits and lend money. The last effort the company made to obtain a bank charter was in 2007. But the banking establishment pressured the government to block Wal-Mart’s application.

The banking establishment has to watch out for these Wal-Mart guys. (See the Symptom & Implication, “Competitors are changing features of the product” on Their approach to all businesses is to streamline, simplify, eliminate excess and lower prices. The company’s commitment to increase its money centers by 50% on a decent-sized base within a year is an eloquent testimony that Wal-Mart’s approach works in financial services. They will be a major force.

Posted 3/29/10