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Wal-Mart to expand its financial services

Senior Contributor

Wal-Mart to expand its financial services

By Abigail Goldman, Los Angeles Times
Article Last Updated: 06/22/2007 03:44:27 AM PDT

Wal-Mart Stores Inc. said it will dramatically expand low-cost financial services such as check-cashing and money transfers for its millions of customers who don't have bank accounts.

The giant retailer, which dropped efforts to enter banking formally earlier this year amid opposition from Congress and regulators, said that it will open 1,000 Wal-Mart MoneyCenters by the end of next year, up from about 225 in stores now.

Fair-lending advocates and rivals questioned Wal-Mart's intentions, saying the company may be trying to pursue a back-door into banking because the front door was blocked.

"Do you really want to concentrate all that economic power if they make that transition into full banking?" asked Stephen Andrews, chief executive of the Bank of Alameda, which has three branches in Alameda and commercial banking centers in Emeryville and Oakland. "The Senate and the House throughout time has said no."

Wal-Mart executives, however, said the company would be providing a much-needed service, and at a significant savings for its customers.

"It is right at the heart of a need of our customers — we have so many customers who are outside the mainstream banking system," said Jane Thompson, president of Wal-Mart financial services. "We know we can add value to their lives and also save them money."

In California, check cashing can cost up to 3 percent of the amount of a check. That means that a worker whose take-home pay is $25,000 a year could pay $750 annually to cash weekly pay checks — which doesn't cost anything for someone with a free checking account.

Wal-Mart charges 1 percent for check cashing, with a maximum fee of $3 a check, so the same worker would pay about $150 annually to cash weekly pay checks, based on the $3 maximum fee.

Money orders, meanwhile, typically cost from 75 cents to $5 in California, said Alan Fisher, executive director of the California Reinvestment Coalition. At Wal-Mart, a money order costs 46 cents, the company said.

Wal-Mart, which processes more than 2 million money services each week, has long eyed expansion in financial services.

Transactions including money transfers, check cashing and bill payment offer a profitable new business for the company that in recent years has suffered from slumping sales and a bruised reputation.

Indeed, the MoneyCenters are the most profitable part of Wal-Mart's stores, Thompson said.

Just as importantly, the services give cash-strapped consumers — a big part of Wal-Mart's customer base — new reasons to come in to Wal-Mart stores. The centers are open 7 a.m. to 9 p.m., seven days a week, an important benefit for workers who can't take care of personal business during banking hours, Wal-Mart said.

"While we believe these initiatives, given their size, will not materially boost earnings in the near-term, we do see them as a positive long term driver of customer loyalty," Goldman Sachs analyst Adrianne Shapira wrote Wednesday in a note to clients.

In the face of strong opposition, Wal-Mart earlier this year withdrew its application for what's known as an Industrial Loan Corp., the company's fourth failed bid to open a bank since 1999.

Although the Bentonville, Ark.-based retailer said it would use the bank to save on credit card processing fees and other back-office transactions, critics including banks, farmers and real estate firms contended that the company was looking to put a toe into retail banking.

Still, some community activists aren't cheering for Wal-Mart's financial services programs.

"Wal-Mart will offer cheaper check cashing, but not the full array of services that any neighborhood needs — mortgages, small business loans, the kind so of things that are going to jump-start the economy in these neighborhoods," said John Taylor, the chief executive of the National Community Reinvestment Coalition.

"What needs to happen is that banks need to be putting payday lenders and pawnshops out of business and making these banking services affordable and available to poor people," Taylor added.
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