In Mexico, Banco Wal-Mart

Wednesday, November 15, 2006

For years, Wal-Mart has tried to get into banking in the U.S. But so far it has come up empty-handed as everyone from rival banks to unions rose up in opposition. South of the border, though, the world’s biggest retailer may soon receive a banking license, paving the way for Wal-Mart Stores Inc. to offer checking and savings accounts, loans, credit cards, and more across its network of 863 outlets in 130 Mexican cities.

Why is Mexico willing to give the green light while the U.S. drags its feet? From Central Bank Governor Guillermo Ortiz on down, Mexican officials want to boost competition in financial services and cut the sky-high fees and interest rates charged by Mexico’s big banks. They also want to spread banking services to the 80% of Mexicans who have never had a bank account. Allowing Wal-Mart and several smaller retailers to compete in banking “will make a difference in economic well-being and growth,” Ortiz says.

Mexican banking is ripe for change. Over the past year, consumer credit has jumped by 43%, and mortgage lending is up 80%, thanks largely to a decade of economic stability. Big banks, though, continue to charge interest rates well above those in the U.S. Mortgages run about eight percentage points higher than Mexican Treasury bills, while the spread in the U.S. runs one to two points over the U.S. Treasury 10-year note. Interest on credit-card balances is typically 35% in Mexico, far more than in the U.S. “The market is growing so fast that [banks] haven’t had to compete on price,” Ortiz says. “What they’re really doing is prolonging their extraordinary profits.”

It’s unclear how quickly Wal-Mart’s entry might eat into those profits. The retailer says it is preparing to offer savings accounts and consumer loans at in-store branches first, with mortgages and car loans likely to follow. Locals are hoping for rapid change. “It’s good that Wal-Mart is going into banking,” says Estela Villalobos, a Mexico City homemaker who shops at a Wal-Mart Supercenter in her middle-class neighborhood.

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Source: BusinessWeek (link opens in a new window)