Walmart: How Deep Into Financial Services Will It Go?

After abandoning an earlier attempt, is Walmart planning another run at a bank charter?

May 1, 2012

There has been an uneasy quiet for about five years since Walmart retreated from its plans to obtain a federal bank charter in the face of intense opposition from the financial services industry and lawmakers.

Since then, however, Walmart has been busy obtaining bank charters in Canada and Mexico. Walmart offers savings accounts and credit cards through its Banco Walmart de México Adelante franchise in Mexico. Those branches accept deposits and originate auto loans and mortgages.

A couple of years ago, it opened Walmart Canada Bank, which offers credit cards and might be rolling out other financial services in the future.

In the U.S., Walmart has opened MoneyCenters in about half of its 3,000 SuperCenters, which offer wire transfers, check-cashing, and bill pay. It continues to open them at a brisk pace. And if a store isn’t big enough for a MoneyCenter, Walmart is installing automated kiosks, which provide a range of financial services.
Sam’s Club, which is owned by Walmart, announced several years ago that it would offer small-business loans from $5,000 to $25,000 through a partnership with Superior Financial Group.

Walmart has gone on record as saying it’s no longer interested in obtaining a bank charter. But with all the banking expertise Walmart is gaining in other countries, some industry observers say the arrival of the U.S. Bank of Walmart is less a matter of “if” than “when.”

Walmart’s entry into the U.S. retail banking market is “inevitable,” says Robert Manning, a finance professor at the Rochester Institute of Technology and CEO of the Responsible Debt Relief Institute. Manning teamed up with the Filene Research Institute to produce a report on the implications for credit unions of Walmart obtaining a bank charter.

“Walmart will enter with high levels of capitalization, a clean slate of performing loans, and a carefully coordi-nated and well-funded marketing campaign that will appeal to the populist, anti-Wall Street sentiments of work-ing and middle-income households,” Manning says in the American Banker. “If you’re a financial institution and you’re not preparing for Walmart now, it could be too late.”


♦ CU branches in Walmart stores offer high foot traffic, a quick way to enter new markets, and lower start-up costs than stand-alone branches.
♦ Develop a retail mindset and a strong branch strategy to make a Walmart branch location successful.
♦ Board focus: Walmart’s bank charter ambitions could disrupt CUs’ Walmart branches.

“The long-term risk is that maybe—not tomorrow, but eventually—Walmart is going to win this battle and get the bank charter it has wanted for a long time,” says Filene Research Director Ben Rogers.

And just like so many small retailers who disappeared once the super stores opened in towns across the country, Walmart “could then begin the process of replacing every branch in its stores with its own bank branches,” Rogers says.

Walmart’s CU branches

Not everyone, however, sees Walmart as a threat. Some credit unions see Walmart as an opportunity and enjoy a healthy business relationship with the retailer. These credit unions have branches in Walmart stores and—for the most part—have been able to compete effectively in a retail setting.

“Walmart is an environment where people are used to seeing things on sale, getting deals, and moving quickly,” Rogers says. “If your credit union can do all those things, you’re set up well. But most credit unions are used to working in a branch environment where things don’t move as quickly and are not quite as convenient.”

For credit unions willing to adopt a retail mindset, Rogers says Walmart stores offer high foot traffic that can boost brand recognition, help with new-member acquisition, and expand wallet share with existing members. Emphasizing products that Walmart currently doesn’t offer, such as savings accounts and consumer loans, is likely to pay off.

“Walmart is a big organization and if it sees a market opportunity it will exploit it,” Rogers says. “But in the near term, there are a lot of advantages to be had by partnering with Walmart.”

Credit unions with Walmart branches praise their relatively low start-up costs, the opportunity to reach thousands of current and prospective members every day, and the cooperation of Walmart store managers and employees. But not all Walmart branches are equally successful, they admit, with return on investment varying by location and local demographics. 

NEXT: New territory

New territory

CEO Mark Davey believed a branch inside a Walmart store could help $95 million asset All Valley Federal Credit Union, Lancaster, Calif., reach new territory. The opportunity appeared unlikely to arise, as national banks and other large financial institutions typically snapped up branch sites at nearby Walmarts.

Then the economic downturn slowed these larger financial institutions’ branch expansion plans even as Walmart began phasing out kids’ game rooms in some California stores. Davey got a call from Financial Supermarkets Inc. (FSI), Cornelia, Ga., about a Walmart in Palmdale, Calif., that wanted to replace its game room with an in-store branch. And All Valley Federal jumped at the opportunity, opening its first Walmart branch in Palmdale in 2009.

“We were excited because it gave us more exposure in different areas,” Davey says. “When you’re in Walmart, you have a whole traffic flow of potential members. Everybody shops there, even the people who say they never shop there.”

All Valley Federal built its branch based on a blueprint developed by $2.9 billion asset Desert Schools Federal Credit Union, Phoenix. Training and advice from FSI helped All Valley Federal operate in a retail environment where sending employees into the aisles is essential. Making connections with the Walmart store manager and staff led to a cooperative relationship.

Davey and the branch manager joined community organizations and events to help the branch prosper. It’s important to present a good image and get out there and shake hands, Davey says.

The business case for Walmart Bank

Setbacks to Walmart’s bank-charter plans haven’t caused it to abandon its financial services goals. Instead, it has retuned its approach by offering financial products through partnerships in the U.S. and through an independent charter in Mexico and Canada.

The Filene Research Institute published a report, “The Blended Walmart Business Model: MoneyCenters, Banco Walmart de México, and the Formidable Challenge Facing Credit Unions,” prepared by Robert Manning, Ph.D., president of the Responsible Debt Relief Institute.

Highlights of the report include:

♦ Together with finance and penalty fees from the outstanding balances on Walmart-issued credit cards, Walmart could easily earn more than $1.3 billion annually from its payment card system and portfolio of customer credit card balances. It could save billions more owning the bank on the issuing end of its interchange fees, and even more by setting up a proprietary system to compete against Visa and MasterCard.

♦ Walmart already offers a compelling range of benefits to potential banking customers. The retailer’s ability to
lure customers from credit unions while attracting unbanked consumers has to do with location, hours of operation, welcoming atmosphere, familiar customer service, reasonable and clearly explained fees, and fast transactions.

♦ The profit margins of Walmart’s traditional retail sales average 23.7% gross and 3.5% net, whereas the averages for comparable financial services companies range from 14% to 38% gross and 6% to 9% net.

Two years later, Davey stopped by a Walmart in Santa Clarita, Calif. and saw it still had a game room. Although All Valley Federal had closed an unsuccessful Santa Clarita branch in the 1990s, the credit union asked FSI to approach Walmart to see if one of its branches could again replace a game room. The Santa Clarita Walmart branch opened in 2011 and has provided a successful introduction into a community that ranks in the top 50 of U.S. cities for earnings per capita.

Davey says the tech-savvy members who live and shop in Santa Clarita want to confirm that All Valley Federal offers an iPhone app and online banking before they choose to join or to expand an existing relationship, which was typically established with indirect lending. That reinforces the importance of matching a Walmart strategy to overall operations, Davey says.

“We punch out dollars with indirect lending; we pull in dollars at Walmart branches,” Davey says. “It’s a way of capturing a low-cost source of funds, which will be crucial when interest rates rise.”

Rapid growth

Credit unions say Walmart branches typically cost $450,000 to $500,000 to launch, which is about half the cost of launching a free-standing branch. Walmart branches are smaller, usually 500 to 750 square feet, but are open longer hours to take advantage of the stores’ hours and high foot traffic.

AllSouth Federal Credit Union, Columbia, S.C., $647 million in assets, worked with FSI to obtain contracts to open six Walmart branches from 2007 through 2009, including four in new Walmart stores.

“We’re a conservative organization, which has helped us weather many financial storms,” says Audrey Brown, vice president of marketing. This is something that was very much out of our comfort zone, but we saw an opportunity to quickly add branches and fill some of the gaps in our service area, she adds.

Some Walmart branches are near AllSouth Federal’s free-standing branches. And those Walmart branches increased member convenience without decreasing traffic elsewhere, Brown says. 

“What we’ve found is that Walmart branches have one set of members and the free-standing branches have their own set of members,” Brown says, comparing it to the retail maxim that shoppers have a strong preference for either Walmart or Target, but rarely both.

A significant portion of Walmart branch business occurs from 5 p.m. to 7 p.m. on weekdays and 9 a.m. to 2 p.m. on Saturdays, when free-standing branches are closed. And AllSouth Federal’s free checking accounts and debit cards appeal to cost-conscious Walmart shoppers, she adds.

“We tell shoppers they can get a good deal on their financial services while they get a good deal on their groceries—and they can do it all in one place,” Brown says. Walmart branches also attract members who might otherwise be “unbanked.”

“There are still a lot of blue-collar workers in our area, and many of them don’t have access to direct deposit,” Brown says. “It’s a big deal for these members to be able to get to their financial institution to deposit their checks.”

NEXT: Examining performance

Destination issues

Dane County Credit Union, Madison, Wis., opened its Walmart branch in 2008. The 623-square-foot branch was originally open seven days a week, but scaled down to six days a week based on usage patterns. The location is now staffed with two employees at a time.

The $120 million asset credit union sought a Walmart location to gain access to new members and expand loans and deposits with existing members, says CEO Jon Lowrey. The branch’s below-expectations performance is attributed to both demographics and “destination shoppers” from outlying communities. Some Walmarts draw shoppers from a very wide geographic area, and these shoppers don’t always see the credit union location as one that would be frequently accessible to them, Lowrey says.

Some Walmart shoppers’ lower incomes mean they can’t qualify for some products, while others with poor credit histories fail to qualify for membership, Lowrey points out. But he adds that the Walmart location helped Dane County add members who were previously “unbanked.”

“Although our numbers haven’t been tremendous, we have had numerous success stories with new members where we have started them on the track to future financial success,” Lowrey says. 

Walmart Timeline

The Walmart branch has lower occupancy costs than the credit union’s two full-service branches based on maintenance, property taxes, and utilities, but higher costs than two “plant branches” at select employee group sites. Dane County has excluded Walmart sites from plans for its next branch.

Filling the gaps

First Community Credit Union, Chesterfield, Mo., $1.8 billion in assets, has filled the gaps in its 37-branch network by opening 13 Walmart branches since 2004.

“They’re very important to our branch strategy
because many are placed between
stand-alone offices,” which give members more convenient places to conduct transactions, says Sharon
Hudson, senior vice president of operations.

Walmart branches contribute a fair share of transactions and new members, Hudson says. The branches completed approximately 900,000 of First Community’s 3.3 million financial transactions in 2011.

Hudson says branch sites between 700 square feet and 1,000 square feet are the most efficient. These branches offer the same products and services as stand-alone branches with the exception of drive-up lanes. All Walmart branches are open seven days a week and close at 7 p.m. on weekdays.

Nonmembers can sign up for membership at Walmart branches with a $1 deposit, which makes these branches a good source of new members.

“There are probably at least a thousand people who go to a Walmart store daily and most of them would walk past our office,” Hudson says. “This exposure to potential new members is much greater than at a traditional branch.”

NEXT:  Aisle action


Aisle action

Hudson joins other credit unions with Walmart branches in emphasizing the importance of drawing shoppers from store aisles into the branch. An employee might offer a game of “The Price is Right” in a store aisle, for example, with participants rewarded with a coupon that can be redeemed for a giveaway item at the branch.

“It might mean helping them find the cinnamon and then identifying ourselves and letting them know the credit union branch is right here if they need financial services,” Hudson adds.

Focusing on member needs is the key to successfully promoting a Walmart branch, Hudson says. Whether Walmart branches are highlighted in advertisements, branch displays, or during face-to-face interactions, “it’s all about the convenience,” says Hudson.


*CUNA’s 2012-2013 Credit Union Environmental Scan

* “The Blended Walmart Business Model: MoneyCenters, Banco Walmart de México, and the Formidable Challenge Facing Credit Unions,” a Filene Research Institute report.