10/11/12 – Not Much Today, but a Big Banking Story Yesterday

Posted by Brad McMillan, CFA, CAIA, MAI

This entry was posted on Oct 11, 2012 7:47:38 AM

and tagged Europe, Yesterday's News

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Looking at today’s news, there really isn’t a lot that’s new. Election. China/Japan. Europe, Europe, Europe. Nothing we have not already talked about—a lot. So I am going to go back to yesterday to look at what I think may be a big story going forward.

When a major financial paper has not one, not two, but three stories on a particular topic, you have to assume it’s probably a big deal. The Financial Times had three stories on Walmart and American Express’s launch of a new product intended to take on the banks. The product is a separately branded, prepaid card that can be used as a debit card wherever AmEx is accepted. According to the stories, the card is aimed at lower-income households that are tired of or unwilling to pay the fees charged by most banks. Walmart wants to replace the bank for its customers.

The story also hit the Wall Street Journal with “Prepaid Enters Mainstream” (p. C1) and the New York Times with “Wal-Mart and AmEx in Prepaid Card Deal” (p. B1). This is not front-page news, though it’s making the leading page of business section at this early stage. It should be front-page news.

Walmart has been trying to start a bank or something like one for years, but it has been stymied by banks’ political heft. By teaming up with a major financial institution, and doing it in a prepaid card format, Walmart appears to have finally come up with a winning solution. I suspect that this will be the thin edge of the wedge if it succeeds, and it may end up transforming retail financial services.

Walmart is (in)famous for driving down prices and costs in any industry in which it participates. Retail products for lower-income customers were one of the remaining profit centers available to major banks prior to Dodd-Frank. Perhaps the banks will let those customers go without much regret now that many of those charges are prohibited by the legislation. They shouldn’t.

First, you can make a lot of money from a large number of smaller and less profitable customers—if your cost structure is right. That is how Walmart has succeeded. Second, once you have the bottom of the market, you can leverage that position to move upward. Nissan/Infiniti and Toyota/Lexus are case studies for this. GM and Ford have regretted ceding the bottom of the market.

American banks are under attack on a number of fronts, but this is the first serious attack on their retail base. If Walmart succeeds, others will move in as well. The only beneficiary will be the customers.

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