Here's Why Banks Are Afraid of Walmart
May 8th 2013 11:27AM
Updated May 8th 2013 2:05PM
Despite Walmart's success with prepaid debit cards through partnerships with Green Dot and American Express , the retail giant has never quite been able to break into the ranks of the big boys through the launch of its own retail bank. Now, an article on Bloomberg makes this conundrum crystal clear: Banks advising the Federal Reserve have lobbied against making such a plan a reality.
Concerns about regulation
According to meeting minutes of the Federal Advisory Council unveiled through a Freedom of Information Act inquiry, the group of 12 banking representatives expressed concern over Walmart's banking ambitions and endorsed more oversight over the retailer's debit card programs.
It's not hard to understand why banks such as BB&T , PNC Financial , and Discover Financial Services might fear Walmart's entry into full-blown banking. As it turns out, this trepidation is long-lived, and the industry has worked tirelessly over the years to keep the giant retailer out of its neck of the woods.
When Walmart tried to obtain a bank charter in 2006 in order to process its own credit card transactions, groups including banks, labor groups, and conservative politicians sent up a hue and cry. Even the Independent Community Bankers of America came out against it, citing risks to the financial system. In the January, 2008 issue of the fedgazette, the Federal Reserve Bank of Minneapolis noted that fear of Walmart prompted intense lobbying of Congress by banks nervous about the store offering products similar to their own.
Going after the unbanked
One issue that may rankle banks the most is Walmart's access to a population that often does not participate much in traditional banking -- the unbanked and underbanked -- which gives their financial products a kind of captive audience.
Indeed, as Walmart has been foiled time and again regarding its banking aspirations, it has continued to fine-tune its financial services offerings to appeal to its specific market.
The retailer has had much success with the prepaid debit card business, and American Express' newest offering, the Bluebird debit card, is being marketed specifically as a substitute for checking accounts. The attraction is obvious: The card has essentially no fees. Except for PNC, most large banks charge a monthly fee, waivable only by maintaining large balances -- not something that many underbanked individuals are able to do.
Walmart can't be held back forever
The popularity of debit cards isn't lost on banks, which have begun a new drive to increase their use among customers, in an effort to make up for lost revenue brought about by stricter regulations.
Though Walmart should certainly be regulated regarding the products it offers, much as banks are, there seems no reason to limit financial services simply because banks are fearful of the consequences of competing with the retail giant. After all, prepaid debit cards aren't regulated any more tightly for banks than they are for Walmart, so why would retail banking be any different?
As Walmart continues to offer financial products that entice customers, it will only be a matter of time until the arguments against its entry into retail banking lose steam. Of course, banks could blunt the blow by offering their own free banking products. Come to think of it, that may be exactly what they are afraid of.
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The article Here's Why Banks Are Afraid of Walmart originally appeared on Fool.com.Fool contributor Amanda Alix has no position in any stocks mentioned. The Motley Fool recommends American Express. The Motley Fool owns shares of PNC Financial Services. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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