How Obama’s Immigration Plan Could Benefit Wal-Mart
This article originally appeared in MarketWatch.
How large is the potential market for Wal-Mart’s new foray into banking? The company’s GoBank is especially helpful to those without bank accounts or with only basic accounts who can benefit from additional banking services, potentially numbering 35 million in the U.S. If President Obama moves ahead with his anticipated executive order to defer the deportations of up to 5 million undocumented workers, the potential market might grow even larger.
Wal-Mart Stores Inc. WMT, -0.11% has its foot in the banking door, thanks to a recent partnership in September with Green Dot Corp., an FDIC-insured financial-services company. It seems that Wal-Mart has found a loophole around obtaining a bank charter.
Columbia University professor Charles Calomiris told me: “I have always been in favor of Wal-Mart’s entry into banking. The obstacles put in place by a captured regulatory system are a disgrace.” Calomiris is referring to established commercial banks’ efforts to keep new competition and innovation out of the market.
Backlash from public opinion forced the company to give up its bid to obtain an official bank charter in 2007, its fourth failed attempt since 1998.
But the quarter-trillion dollar multinational retail company did not give up. Operating on the edges of the banking world, the company has made investments in alternative financial services, a gray area colloquially referred to as fringe banking. Fringe banking is a stepping stone into the financial sector that allows the company to offer various services such as check cashing, money orders and bill pay. These would be especially useful to new immigrants who have not been able to sign up for bank accounts due to lack of documentation.
Whatever the constitutionality of President Obama’s potential executive order on immigration, bringing undocumented workers out of the shadows and allowing them to obtain government identification will further expand GoBank’s customer base. Since many undocumented workers have low incomes, the transparent structure of GoBank will likely be appealing.
Fringe banking services are aimed at those who cannot get traditional bank accounts, either because accounts are too costly or because customers are worried about getting reported to authorities. Unbanked individuals do not use banking institutions at all, meaning they do not even have bank accounts. Underbanked individuals are those who have bank accounts, but also use alternative financial services.
The partnership with Green Dot will allow Wal-Mart to further expand its financial offerings.
Wal-Mart’s partnership with Green Dot includes the rollout of GoBank — a branchless mobile checking-account service targeted primarily toward lower-income, unbanked and underbanked clients. GoBank is expected to continue opening across Wal-Mart locations nationwide. Wal-Mart and Green Dot will take a small fee from merchants on all transactions.
Historically, lower-income individuals such as immigrants have been underserved by traditional banking lenders, succumbing to costly overdraft and minimum balance fees. For many lower-income individuals, especially those living paycheck to paycheck, the costs associated with setting up a basic checking account with a branch bank create an insurmountable barrier to entry. As a result, branchless banks such as GoBank offer an opportunity to meet a market need ignored by bigger banks.
To get an idea of the size of the potential marketplace, 7.7% (9.6 million) of households in the United States are currently unbanked, according to a 2013 FDIC survey. An additional 20% (24.8 million) are underbanked. Newly legalized immigrants can be added to this number.
Wal-Mart’s offerings could be a real winner for this group. The branchless-banking model is gaining popularity in the U.S., with the growing ease of online banking and the use of mobile phones to check balances, deposit checks and transfer money. With GoBank, customers pay a $2.95 upfront fee to validate their account and receive a MasterCard MA, +0.45% or Visa V, +0.05% debit card.
If customers deposit a minimum of $500 per month, the monthly $8.95 fee — admittedly, on the high side — is waived. Different from most traditional banks, no overdraft fees are ever instituted, since GoBank customers cannot accidently spend funds they do not have. Wal-Mart is branching out its service with a nationwide network of over 42,000 free ATMs. A fee of $2.50 is charged for any withdrawal at an ATM outside of this network, as well as a 3% fee on all foreign transactions — standard policy at most banks.
One of the biggest reasons that lower-income individuals such as immigrants are unbanked and underbanked is that their previous unstable credit history makes it nearly impossible for them to pass third-party credit checks instituted by traditional banks. GoBank, on the other hand, has a much more forgiving process that internally approves clients at a much higher rate, making it more accessible. Nearly everyone who can pass an identification check is approved.
Whether GoBank turns into a major source of revenue for Wal-Mart is yet to be seen. But it is certainly going to be another item in a long list of services Wal-Mart provides in an attempt to make the company into our nation’s one-stop shop. Wal-Mart hopes that adding to its already impressive collection of services will increase foot traffic, after seeing decreasing numbers for two years.
Additional legal immigrants will bolster GoBank. If this partial foray into banking works out, Wal-Mart may yet again attempt for a bank charter of its own. And to the dismay of the financial-services industry, it might succeed.
Diana Furchtgott-Roth, former chief economist of the U.S. Department of Labor, directs Economics21 at the Manhattan Institute. You can follow her on Twitter here.
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