How Wal-Mart Got Its Banks

Sighs of relief were heard through the financial world earlier this year when Wal-Mart withdrew its application to the FDIC for an Industrial Loan Company charter. Banks, credit unions, and other financial institutions were understandably concerned that Wal-Mart would apply their immense scale and "Always Low Prices" model to the financial industry.

After all, you need three things to be in financial services: 1) Capital -- Wal-Mart, with over $350 billion in annual revenues has that covered, 2) Information Technology -- the company allegedly has more computing power than the Department of Defense, and, 3) Distribution -- 130 million people walk through Wal-Mart's 3,700 U.S. stores every week. No one else has that kind of footprint. So Wal-Mart already has the assets in place to enter the business quickly.

I give quite a few talks to financial services associations, and this is the statistic that usually raises eyebrows -- If only 10% of the people that walk into a Wal-Mart in just one week had $5,000 deposited in some sort of Wal-Mart financial institution, that in itself would equate to $65 billion in deposits, or nearly 10% of the total deposits at all U.S. credit unions.

Why does Wal-Mart want a bank so badly? They have to enter a higher margin business than simply selling cheap stuff in order to raise their share price, which has stagnated for 7 years.

Wal-Mart's net margin on its existing retail business is 3.6%. That's pretty skinny (Target's is 5.8%) and explains their obsession with controlling costs. If every employee at Wal-Mart were given a $1 per hour raise, that margin would be wiped out.

Financial services margins are much healthier, averaging in the 12-15% range. In Mexico, where Wal-Mart is now able to offer checking in stores, they will garner 15% margins, with estimates that the profit from their 500-plus Mexican "branches" will be $400 million in 3 years. Applied to their current P/E multiple of 16, that adds $6.4 billion of market cap to the enterprise. Just from Mexico.

Wal-Mart has announced plans to slow new store growth, so they have to maximize their return on existing stores. Which is where the new Wal-Mart Money Card comes in. This is a pre-paid Visa with a reloadable limit of $3,000. Customers will be able to cash their paychecks at Wal-Mart and have the value transferred immediately to their Money Card.

Wal-Mart claims up to 20% of its customers are "unbanked." These customers have a median income of around $35,000 and typically save 2% of that ($700) for the future. Accordingly, the Wal-Mart Money card, with a $3,000 limit, could house over 4 years worth of savings of its typical customer.

The Wal-Mart Money Card is simply a deposit account by another name. It can house savings, pay bills, and purchase goods and services any where a VISA card can.

Management at Wal-Mart may sometimes be hamfisted in their PR, but they are far from stupid. In the end, after 8 years of trying, Wal-Mart got its bank.

Next stop? Insurance services, mortgages, and healthcare. Stay tuned.