NextBillion - An Initiative of the William Davidson Institute at the University of Michigan

In one of his most famous and eloquent passages, Karl Marx expresses awe at the transformative power of capitalism, writing that, ?All that is solid melts into air, all that is sacred is profaned.?? In the last two decades, Wal-Mart, the embodiment of global capital, has almost single handedly transformed the world’s retail industry, and with it, the American cityscape.? As Wal-Mart and other corporations embrace economies of scale, those Mom-and-Pop stores on Main Street have, in Marx’s words, melted into air.? Now, Wal-Mart is poised to make another large social transformation, this time threatening to “desecrate,” what for many, is the sacred ground of financial services.? In an article published in last week’s Wall Street Journal, Can Wal-Mart Cash In on Financial Services? Robin Sidel and Ann Zimmerman describe Wal-Mart’s foray into the world of check cashing, bill payment, money orders, and?our very favorite?remittances.

By employing the same strategy that is uses with retail items?Always Low Prices!?Wal-Mart has already made its presence felt in the world of financial services.? As the Journal notes, ?Wal-Mart’s prices for the financial services are lower than many competitors.? Wal-Mart charges 46 cents for a money order, compared with as much as $1.30 at the post office.? The company also charges a maximum of $3 to cash a payroll check; check cashing firms usually charge 2% to 3% of the check’s face value.?? And according to Business Week, customers at Wal-Mart can transfer money to Mexico for just $9.46.? Some competitors charge two-times as much.Strictly in terms of prices, I?m inclined to believe that these services are actually a good thing for low-income consumers.? But small check cashers, who are now feeling the heat from Wal-Mart, vehemently disagree.? Bruce Spitzer, spokesman for the Massachusetts Bankers Association, told the Journal that, ?Wal-Mart wants people to cash their checks in their stores so they can then make impulse purchases in the store.? We don?t think this is a good service for consumers.?? Mr. Spitzer might be right about Wal-Mart’s intentions, but I?m not entirely convinced that the check cashing industry ever had the interests of low-income consumers in its heart.? When Wal-Mart wrecked havoc on Main Streets across the country, there was an outpouring of nostalgia for the Mom-and-Pop stores of yesterday.? Frankly, if Wal-Mart forces the closure of grungy check cashing establishments, I think most Americans would care less.

The bigger problem I see is that Wal-Mart is hungry for a larger chunk of the market.? As Business Week notes, ?The retailing giant’s relentless push into financial services is starting to send shivers through the banking industry.? Few believe Wal-Mart will stop with basic services as it applies its low-price, high-volume formula to yet another business category. And while other companies, from Nordstrom to General Motors, have bank and thrift charters or hybrid Federal Deposit Insurance Corp.-insured industrial loan companies (ILCS) in tow, no one trips alarms like Wal-Mart. Many community bankers are convinced the behemoth won’t rest until it has obtained full banking powers.?

Why is it a bad idea for Wal-Mart to obtain full banking powers?? Currently Federal law prevents a large retailer like Wal-Mart from acting as a formal bank.? The justification for this law, which I find compelling, is that a retailer/bank could deny credit to competitors or move retail losses to its own insured bank.? Although Wal-Mart has denied it, Ronald K. Ence, vice-president of Independent Community Bankers of America, told Business Week that Wal-Mart has lobbied for less restrictive banking laws.? Many agree that that such legislation will soon be passed.? As D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte, argues, “It’s not a question of if Wal-Mart’s going to be a bank, it’s a question of when.”

The times they are a-changin.? Wal-Mart, the world’s biggest corporation, has become, for better or worse, one of the primary engines powering global transformation.? So as economists, labor rights groups, and neighborhood activists continue to debate the consequences of Wal-Mart, hidden from site, millions of consumers like Juan Pedroza, a school maintenance worker in Farmers Branch, Texas, are using this retailer’s financial services to cash checks, make monthly payments, and send money to family and friends overseas.? In all likelihood, many more consumers around the world will begin to do the same.