I saw a story recently about a couple that had refinanced their home at a warehouse club store. This couple also purchased their home insurance home from, of all places, Costco. What’s clear is that banks have become stringier with credit and that there are a growing number of people who are unbanked. The big retailers see this as a void and are moving to fill it.
Prepaid cards from Walmart
As an example of this, you can now get cash from an ATM with Walmart’s prepaid card. Home Depot offers loans for kitchen renovations or you can start a new business with a small business loan from Sam’s Club. For that matter, you can now even get a life insurance policy from Walmart.
Consumer advocates worry
Consumer advocates are having a hard time dealing with this change. They are concerned that financial products are getting into the hands of people who might not otherwise qualify for them. These products are not always subject to the same regulations as are those from a bank. Plus, the retailers who offer them generally have to charge more to people who have no credit or poor credit.
Not huge profit makers
Retailers such as Walmart admit that they don’t make a huge profit with these products but the strategy is to put more money into the hands of their customers so they can buy more. There was actually a time when retailers such as Sears were interested in becoming banks. Sears tried this strategy in the 1980s where it acquired companies such as the Dean Witter brokerage firm. Walmart has tried to obtain a banking charter for almost 10 years before finally giving up in 2007.
An end around
The supermarket chains such as Kroger’s have leased space to banks for many years. Now, they are either offering their own services or teaming up with smaller financial firms to do an end run around the big banks. People who support this idea say that the stores are just stepping into areas where the banks have given up. This is also due to what’s called the unbanked population. The FDIC (Federal Deposit Insurance Corporation) has estimated that about 10 million households in the US do not have a bank. This is up from 9 million in 2009. The agency has also reported that 24 million other households do have a bank account but use non-bank services such as prepaid cards. Walmart itself has said that about 20% to 25% of its customers are unbanked. It has teamed up with American Express to offer a prepaid card. This new card works much like a debit card except, of course, it is not linked to a bank account. The card includes customer service telephone support and comes with relatively low fees.
Life Insurance, too
Walmart is now test selling a one-year insurance policy from MetLife and its customers can pay bills or wire money at any Walmart store. Costco is also working to attract customers who have had it with banks. They’ve learned that many of their members feel that the fees they pay banks are too high, their trust level in banks has gone down or they have had issues with credit and debit cards. As a result, the company now sells homeowner’s and auto insurance, offers credit card processing for small businesses and started making mortgages in late 2010. A spokesman for the company reported that Costco does not make money on the mortgages. It’s to get people in to come in and renew their store memberships, which is where Costco makes a big piece of its profit.
Loans up to $40,000
Home Depot has also joined this movement by offering credit to people who might have a problem getting it otherwise. It will loan up to $40,000 for people who want to do home renovation products but are unable to get home equity lines of credit. Office Depot and Sam’s Club now offer SBA (Small Business Administration)-backed loans that have simple one-page initial applications. Sam’s Club reports that more than 1,000 of its members have used this program since the company introduced it two years ago.
More to come
It’s likely we will see the big retailers moving more and more into the financial products arena. It is just very difficult for a large retail organization to look at its customer base and not ask the question, “who are they and what else could we be selling them?”