When Wal-Mart enters a new market, it’s smart to pay attention. Small towns have learned this lesson, as have grocers and merchandise suppliers. Now it may be time to add banks and check-cashing stores to that list. In the past few years, Wal-Mart has opened over 1,000 of their Money Centers in locations across the U.S., with plans for hundreds more along with ATM-like automated kiosks for stores without a full department. The massive retailer isn’t a fully fledged bank—yet—but it does offer check cashing and prepaid debit cards, services that appeal to Wal-Mart customers who have been bilked by bank or check-cashing fees.
People without bank accounts often cash their paychecks at check-cashing or payday loan stores, which tend to charge 1.5 to 3.5 percent for the service, according to Brian Melzer, an assistant professor of finance. Wal-Mart, on the other hand, charges only 1 percent up to $300 and a flat fee thereafter. Its prepaid debit cards are similarly less expensive. “Cashing a $300 check at Walmart saves customers $1.50 to $3.00—not a whole lot for a single transaction, but the savings add up for a year’s worth of weekly visits and for larger checks,” Melzer said.
Wal-Mart claims it can offer these services at a discount because of its size, but offering less expensive check-cashing and prepaid debit cards may serve as a loss leader to get people into stores. “Wal-Mart benefits in other ways from offering financial services, so it can be profit maximizing and sustainable for them to charge less than what stand-alone check-cashers charge,” Melzer said.
“Wal-Mart’s retail operations benefit because customers that used to shop elsewhere may now visit Walmart to use the financial services, and because customers who already shop at Wal-Mart are likely to increase their spending on the other goods and services once they have cash in hand from Wal-Mart’s Money Center,” he added. “This is an example of cross-subsidization that we see again and again in retail and banking. Firms can compete aggressively on prices—perhaps pricing below cost—in one product to attract customers and then make a profit because they sell other goods at higher mark ups.”
Wal-Mart’s financial services—which are provided by other financial firms—are not a complete offering, Melzer noted. They do not accept deposits, nor do they offer payday loans. And compared with normal checking accounts, prepaid debit cards are an expensive alternative, especially if people can avoid overdrawing their accounts.
Still, business appears brisk, indicating there is some pent up demand for the services. “While not a welcome development for competitors in financial services, it is a good thing for customers, especially those with low to moderate income that represent Wal-Mart’s target market,” Melzer said.
The Real Costs of Credit Access: Evidence from the payday lending market – Kellogg Insight
Wal-Mart Benefits From Anger Over Banking Fees – New York Times
Photo by Wal-Mart.