What exactly is Walmart up to? For the banking industry, the question has become pressing. This follows news that the big retailer poached Omer Ismail, the leader of Goldman Sachs’ consumer banking business. They also took one of his top lieutenants and dealmakers into their ranks, David Stark. Ismail will lead a fintech partnership created by Walmart and venture capital firm Ribbit Capital. Neither group is saying yet what the company will do.
The statement announcing it was in code: “a fintech startup designed to develop and deliver modern, innovative and affordable financial solutions.” But one thing is almost certain: Walmart is betting that the regulatory environment changed in the United States.
The company had tried to enter banking before, applying for an industrial loan company (ILC) charter, one of the only exceptions to the long-standing separation between banking and commerce under U.S. law. Automotive groups, health care companies and large industrial companies have ILCs.
However, in 2007, amid a lobbying frenzy by banks, U.S. regulators made it clear that Walmart would not be allowed to slip through this loophole. At the moment, however, politicians prefer to paint the big tech companies as the main threat to competition. There are a variety of fintech companies shaking things up, so banks now perhaps consider Walmart as one threat among many. “Walmart was the Boogieman (the Boogieman), now it’s Amazon,” said Neil Saunders of research firm GlobalData Retail.
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Some argue that the whole question of regulatory approval is now obsolete: there are many fintech companies operating without banking licenses
That’s because they are not involved in core deposit-taking and lending banking activities. I think Walmart will go big. They won’t offer services as a way to encourage loyalty to their core retail business. They want to make a profit, and that means raising capital and lending it.
Walmart offers financial services with little capital through partnerships: a prepaid debit card with Green Dot, a store credit card with Capital One and several others. They don’t need to be the majority backer of a startup to do more of this. Walmart needs money. The profitability of its core business is declining. The company emphasized the need to add new business. The CFO mentioned at a recent conference that the company sees profits, not just customer loyalty, in financial services. And the way to make money in banking is to own the capital, not to leave that part to a partner.
To further confirm this point, just look at the people they just hired. Ismail and Stark are not software specialists. They are bankers, who earned a reputation by taking low-cost deposit capital ($97 billion) and turning it into earning assets.
Finally, what is Walmart’s competitive advantage in financial services?
Its huge customer base, many of whom are rural and have modest incomes. Many of them are unbanked or have restricted access to U.S. financial services.
These people don’t need especially nifty technology. They need deposit and credit services. So what makes sense is for Walmart to offer basic banking services, even if they do it through its app rather than with in-store bank branches. A low-cost debit card that allows customers to receive advances on their next paycheck, a wholly-owned credit card, and unsecured personal loans would all make sense.
No doubt Walmart would like to keep the fees charged when customers use credit cards to make purchases instead of turning them over to partner banks. All of this will, sooner or later, put Walmart in the orbit of U.S. banking regulators. But if it gets the go-ahead from regulators, something that even now cannot be taken for granted, the question remains whether it can make the business work. Banking is a cyclical business in which it is tempting to overextend and give up entirely at the bottom. Profits may be good, but it’s never easy money.
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