At Wal-Mart, a Back Door Into Banking

Wal-Mart failed to get approval for a bank. But the giant discount chain is effectively building one anyway.

Wal-Mart said yesterday that it would rapidly expand the financial services offered in its vast network of stores, extending the reach of its retailing empire into its shoppers’ wallets and the traditional turf of the American banking industry.

Over the next year, the company plans to introduce a prepaid debit card, intended for low-income consumers, and install money centers — which currently offer check cashing, bill paying and money order services — into at least 1,000 stores, up from 225 now.

The moves are seen as a precursor to even wider offerings, like mortgages and home equity loans, which could turn Wal-Mart into a significant force in the banking world. Jane J. Thompson, the president of Wal-Mart financial services, called the prepaid cards and money center services “foundational products” that the retailer would build upon. “Our concept is to go up the credit ladder of financial services,” she said in an interview.

The introduction of such services is something of an end run around the federal government, which was considering Wal-Mart’s application to open a bank last year when the retailer withdrew its bid. The new products, like the prepaid debit card, will be offered through third-party partners, allowing Wal-Mart to sell banklike services without a government license.

Given Wal-Mart’s penchant for squeezing costs out of every business it enters — from changing oil to dispensing prescription drugs — the move is expected to jolt the financial services industry.

With plans for 875 new money centers by the end of 2008, Wal-Mart’s presence would be roughly equivalent to Citibank’s in the United States, and its daily foot traffic would dwarf that of most credit unions, check-cashing outlets and convenience stores. While it may not immediately threaten those businesses, Wal-Mart’s pricing power and proximity may give it an advantage in serving the tens of millions of consumers who do not have a checking account or are unlikely to set foot in a bank.

At the same time, the moves could help bolster the retailer’s sagging sales by giving low-income customers, who represent much of its business, another reason to shop at its stores. “The logic behind a lot of these services is to increase traffic and do it in a way that puts money in people’s hands,” said Andrew Dresner, a payments industry consultant at Oliver Wyman Financial Services. “You give them a couple hundred dollars,” when they cash their paycheck, “and they will buy other things.”

But the services themselves will also aid Wal-Mart’s bottom line. Ms. Thompson said that Wal-Mart’s financial services products provide “healthy margins,” and that she expects the overall business to grow 30 to 40 percent over the next year.

Much of what Wal-Mart announced yesterday will be directed at consumers who do not use banks. Wal-Mart says, for example, that 20 percent of its customers — about 27 million people — do not have checking accounts. The so-called Wal-Mart Money Card, to be issued with GE Money, a division of General Electric, would allow customers to transfer their paychecks directly onto their cards and make purchases at any retailer that accepts Visa cards. It will also allow them to check their balances online or on mobile phone, pay certain bills or withdraw cash from A.T.M.’s.

The prepaid card will initially cost $8.95, and comes with a $4.95 monthly maintenance fee. Cash can be loaded on the card free by cashing a payroll or government check at Wal-Mart or having the money directly deposited; otherwise, cardholders must pay $4.64 to reload it.

Those without a bank account can “finally take advantage of more mainstream financial services,” Ms. Thompson said. It also could position the retailer to offer new services, like an interest-bearing savings feature that Ms. Thompson said Wal-Mart was considering.

Analysts said there was ample evidence that Wal-Mart would lower the costs of banking in the United States. The chain has already cut the cost of cashing checks by 50 percent, and its financial services saved customers $245 million last year, according to company executives.

Wal-Mart has never hidden its banking ambitions, but it has arguably masked them from time to time. In 2005, Wal-Mart said it would seek permission to open a bank in Utah that would process credit and debit card transactions for its 4,000 American stores. At the time, it vowed that it would never use the bank to enter the consumer financial services business.

Nevertheless, opposition to its plans, which required the approval of federal regulators, swelled. Dozens of banking and corporate watchdog groups testified at hearings outside Washington.

In mid-March, Wal-Mart abruptly abandoned those plans. Instead, company executives said they would begin aggressively rolling out new financial products through third-party partners. Wal-Mart already offers a Discover credit card (through a similar partnership with General Electric) and money transfer services (through a partnership with MoneyGram.) Now, many in the financial industry say that mortgages and other types of consumer loans may be next.

Although Wal-Mart would still be barred from collecting customer deposits, the new services would effectively allow the retailer to offer its customers a small suite of financial products — just like a credit union or small local bank.

Of course, opposition may well re-emerge. Ronald K. Ence, vice president for Congressional relations at the Independent Community Bankers of America, a trade group, said Wal-Mart’s intentions suggest that the company misled the public when it said repeatedly that it did not plan to enter the consumer banking business.

“Clearly this was their intention all along,” he said. “The proof is in the pudding.”