Wal-Mart wants to get into the banking business. So what?

Wal-Mart makes its money selling underwear and groceries three ways. First, they pay their help less than anyone else. Second, they buy the goods cheaper than anyone else. Third, believe it or not, they are more efficient than anyone else, in terms of inventory and ordering policies, and even extending to their central computer system for controlling the heat and air conditioning in each of their stores.

If they are going to offer banking services that cost less than their competitors, it naturally follows that they will have to have lower costs than their competitors. Because it isn't going to come out of their profit margins, which are in fact higher than most retailers and supermarket chains.

And here, you see, is where the analogy completely falls apart. Wal-Mart offers cheap clothing and housewares because they scour the globe for the cheapest sources. Some people think they shouldn't exploit little boys and girls, but that's not my point here. In international capital markets, money costs the same no matter where you borrow it. Wal-Mart executives are far too intelligent to imagine they can get deposits by offering a lower interest rate than other banks. They will pay precisely the same amount for money as any other lending institution.

Wal-Mart has pioneered many of the advances in inventory management and control, and we are all better off for it. But that has nothing to do with money. I mean, maybe the delivery trucks will bring cash on a more timely and efficient schedule, but for all practical purposes, inventory control is not why financial institutions make or lose money. It's because they make good or bad loans.

Which brings me to my third point, which is how much they pay people. I don't want to insult the hard-working friendly people one meets every day at Wal-Mart but let's face it, many of them simply aren't that bright. And many of them couldn't make change if their life depended on it if the power went down and they couldn't rely on reading the printout to tell them how much change to give you from a $20 when the purchase is $16.43.

If you are working in a bank, handling money, and making decisions about how much to loan people -- including on-the-spot decisions about whether to remove an overdrawn charge for an otherwise good customer -- you are simply not going to attract the right caliber of people by paying them the minimum wage. Wal-Mart will find out they are going to have to pay competitive salaries to attract competent banking people.

So -- POOF -- there goes their cost advantage. They can't buy the product more cheaply. They can't manage inventories better. And eventually if not sooner, they will find out they can't get away by underpaying people. Their costs -- and hence their prices -- will turn out to be about the same as every other bank.

In that case, why are some of the more rural state banking associations (such as North Dakota) up in arms about the possibility of Wal-Mart entering the banking business. Well, I suppose no one likes competition. In my own business, I wouldn't mind it if I had a monopoly and anyone wanting economic consulting services had to come to me and pay whatever I asked. But come on, the world doesn't work like that. In a dynamic capitalist society, there will always be new competitors with a better idea. Even in North Dakota.

So get with it, bankers. If Wal-Mart forces you to shape up and become more efficient, so much the better for everyone. But in terms of banking, its strictly a level playing field. If you can't compete in that arena, you might try something else. Maybe you could even start your own Weblog. But stop complaining.

Perhaps Wal-Mart's advantage in banking is the proximity of things. So many people go to Wal-Mart today because of the efficiency of getting so many things done in one place -- groceries, household goods, oil changes, you name it -- why not banking?

Agreed that Wal-Mart doesn't have a competitive edge over other banks in the operations of banking, but perhaps the convenience is what gets everyone to stow their money there. Perhaps this is why the others are complaining.

But yes, they should stop because competition is everywhere, even in North Dakota.

This is classic demand pull technique. My sense is that in order to feed the beast, they'll do this so that they can entice consumers to take out home equity loans to fund their shopping addictions. Then they can collect on late payment fees and then rather than just bringing plant foreclosures to town, they can bring home foreclosures too!

Wal-Mart wants to get into the banking business. So what?

Wal-Mart makes its money selling underwear and groceries three ways. First, they pay their help less than anyone else. Second, they buy the goods cheaper than anyone else. Third, believe it or not, they are more efficient than anyone else, in terms of inventory and ordering policies, and even extending to their central computer system for controlling the heat and air conditioning in each of their stores.

If they are going to offer banking services that cost less than their competitors, it naturally follows that they will have to have lower costs than their competitors. Because it isn't going to come out of their profit margins, which are in fact higher than most retailers and supermarket chains.

And here, you see, is where the analogy completely falls apart. Wal-Mart offers cheap clothing and housewares because they scour the globe for the cheapest sources. Some people think they shouldn't exploit little boys and girls, but that's not my point here. In international capital markets, money costs the same no matter where you borrow it. Wal-Mart executives are far too intelligent to imagine they can get deposits by offering a lower interest rate than other banks. They will pay precisely the same amount for money as any other lending institution.

Wal-Mart has pioneered many of the advances in inventory management and control, and we are all better off for it. But that has nothing to do with money. I mean, maybe the delivery trucks will bring cash on a more timely and efficient schedule, but for all practical purposes, inventory control is not why financial institutions make or lose money. It's because they make good or bad loans.

Which brings me to my third point, which is how much they pay people. I don't want to insult the hard-working friendly people one meets every day at Wal-Mart but let's face it, many of them simply aren't that bright. And many of them couldn't make change if their life depended on it if the power went down and they couldn't rely on reading the printout to tell them how much change to give you from a $20 when the purchase is $16.43.

If you are working in a bank, handling money, and making decisions about how much to loan people -- including on-the-spot decisions about whether to remove an overdrawn charge for an otherwise good customer -- you are simply not going to attract the right caliber of people by paying them the minimum wage. Wal-Mart will find out they are going to have to pay competitive salaries to attract competent banking people.

So -- POOF -- there goes their cost advantage. They can't buy the product more cheaply. They can't manage inventories better. And eventually if not sooner, they will find out they can't get away by underpaying people. Their costs -- and hence their prices -- will turn out to be about the same as every other bank.

In that case, why are some of the more rural state banking associations (such as North Dakota) up in arms about the possibility of Wal-Mart entering the banking business. Well, I suppose no one likes competition. In my own business, I wouldn't mind it if I had a monopoly and anyone wanting economic consulting services had to come to me and pay whatever I asked. But come on, the world doesn't work like that. In a dynamic capitalist society, there will always be new competitors with a better idea. Even in North Dakota.

So get with it, bankers. If Wal-Mart forces you to shape up and become more efficient, so much the better for everyone. But in terms of banking, its strictly a level playing field. If you can't compete in that arena, you might try something else. Maybe you could even start your own Weblog. But stop complaining.


Wally does have facillities where they can put their bank, the bank manager will probably be a manager of another department & wages are not the only compensation that they skimp on. My guess is that they will be very competative.

Without knowing anything else about Wal-Mart's banking plans other than what I just read here, my guess is that they're planning to go after a new psychographic of potential banking customers: people who don't currently use banks.

We often forget about this fact, but there are millions of Americans who don't have something middle- and upper-class folks take for granted -- checking accounts. Maybe Wal-Mart is planning to go after this untapped group.

They'll need to make it up in volume though, because they shouldn't expect to make a lot on each individual.

I'm sure a lot of it has to do with intimidation. In lower-income areas, banks can be perceived as stuffy and unfriendly to people without a lot of money. Those people may not open a bank account at a traditional financial institution because of mistrust, fear, embarrassment at their lack of assets, or a simple lack of knowledge about how the banking system works.

If Wal-Mart is able to simplify banking and remove the aura of intimidation that scares away people without a lot of money, I think they'll probably enjoy some success with this venture. Although Wal-Mart usually pursues a low price strategy, I don't think they'll need to with this group of new banking customers. They won't be competing with other banks as much as they'll compete with mattresses and check-cashing businesses.

So even if the "price" of banking at Wal-Mart is equal to other banks, I think they'll win the hearts of low-income America because of their brand name, and because they already have these customers in their store. Plus it's a lot harder to compare the costs of doing business at one bank versus another, especially for less-educated people. Pepsi is $6.99 a case at the local grocery store and $5.88 at Wal-Mart -- an easy price comparison for just about anyone. But with banking, when you start throwing around transaction fees, APYs, and other financial lingo, I don't think Wal-Mart will have a problem with pricing. Wal-Mart is already perceived as being the seller of the cheapest goods, so consumers will come to them because it's so hard to tell if they're really the cheapest bank.

Maybe if Wal-Mart can get lower-class America to open bank accounts, it'll help the anemic savings rate this country has...

Real estate. Wall-Mart has the real estate that is where millions of americans are shopping daily. Michael sees value in their systems and pay practices. Like MacDonalds, one of their main assets/advantages is their real estate.

I don't believe that WalMart is trying to be more efficient than banks, or that they believe they can be cheaper through pure efficiency. Their tactic is to gain greater access to their customers money.

For example, the WalMart company bank would be able to issue a credit card. Customers of WalMart could use their credit cards at WalMart and WalMart would not have to pay the 1-2% bank fee, plus it would collect the payment interest and fees. If they could convert a considerable percentage of their customers to a WalMart credit card, this could cut into MBNA, Bank America, and Citibank's current revenue from the world's largest retailer.

In addition, as a previous response stated, there are many customers of WalMart that do not have bank accounts. If they were a steady shopper at WalMart, they might use a bank where they could also make purchases and draw directly from their accounts at the register. This would end up being like a company store, where the money is deposited and then the person takes their pay in goods and services provided by WalMart.

This is yet another brilliant move by WalMart. Like them or hate them, they certainly understand marketing, economics, and human behavior. And since Target has already been approved for a company bank, it will be hard for all those dissenters to justify why WalMart can't have one too.

It seems reduculous to do business with someone who is so dependent on overseas products. one minor interuptiion in operation at a seaport (like the gulf state's ones during Katrina) or God Forbid: some terrorist activity. All of a sudden the low pricwe is not so low!

I recently ran across this article pulled from a source at Ernst & Young about why Wal-Mart would want to open banks at their locations:

Opportunities in an underserved population In a retail banking market that is in some ways nearing saturation, demographic segments such as minorities, recent immigrants, and people with lower-than-average incomes present an unparalleled growth market for banks. Groups such as these are underserved when it comes to financial services, relying more frequently on check-cashing services and credit cards than the US population as a whole. A recent study estimates that financial services spending, such as on home mortgages, by immigrants and minorities will increase by 94% between 2006 and 2010. As credit tools such as FICO scores adapt to the needs of these groups and allow banks to assess credit risks more accurately, the ā€œunbankedā€ market is expected to bring one of the largest opportunities for growth in the industry.

Whether or not these demographic groups overlap with Wal-Mart's constituency, I'll leave to others to assert, but my guess is it does.

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