GE Helps Wal-Mart Solve Its Banking Problem

Last Updated Aug 20, 2007 6:51 PM EDT

Wal-Mart Takes Action for Katrina VictimsWal-Mart has tried several times over its 45-year history to get federal approval for an Industrial Loan Company charter (a banking license), and each time it's been unsuccessful. The retail king withdrew its latest application last March, a move Sheila Bair, the FDIC chairman, called "a wise choice." Wal-Mart says it can lower the cost of banking for the benefit of consumers, while reducing its own costs from credit and debit card transactions. But the FDIC predicts a Wal-Mart bank would obliterate smaller institutions and create a serious conflict of interest between its banking and retailing operations (check out this FDIC article for more on that problem). But in spite of the federal obstacle, Wal-Mart announced today plans for a major expansion of its financial services offering, including a new pre-paid money card and 1,000 new money centers by the end of next year. A New York Times article by Michael Barbar and Eric Dash reports:
Much of what Wal-Mart announced today [pre-paid money cards and new money centers] will be directed at consumers who do not use banks. Wal-Mart says, for example, that 20 percent of its customers -- about 36 million people -- do not have checking accounts. The stored-value cards, which can be reloaded, will cater to such consumers, giving Wal-Mart a foothold on turf long desired by the big banks. The so-called Wal-Mart Money Card, to be issued with GE Money, a division of General Electric, would allow customers to transfer their paychecks directly onto their cards, make purchases through the Visa network, pay bills, or withdraw cash from A.T.M.'s.
Customers who use the cards can avoid carrying cash and do not need the legal documentation required for opening traditional bank accounts. There are no overdraft fees because card holders cannot spend more than the value stored on the card. With such a card, Wal-Mart shoppers without bank accounts can "finally take advantage of more mainstream financial services," Ms. Thompson said. Analysts said there was ample evidence that Wal-Mart would lower the costs of banking in the United States. Company executives said the chain had already cut the cost of cashing checks by 50 percent, and its financial services had saved customers $245 million last year.
With the GE partnership and this new line-up of financial services, it seems that Bair was right when she said "They don't need an ILC to play an important role in expanding access to financial services, they can do so by partnering with banks and others." And by forcing Wal-Mart to partner with a lending institution instead of owning one, the FDIC has ensured that the monolith doesn't have the chance to wield supply chain and financial power over its business partners. (For more on the supply chain-finance conflict of interest, see this FDIC transcript.)

(Image of Wal-Mart Helping Katrina Victims by Brave New Films, CC 2.0)