Issue: Wal-Mart Expands Financial Services to Low-Income Consumers
Commentary by: David

The Wall Street Journal’s Robin Sidel and Ann Zimmerman report today that Wal-Mart is aggressively expanding services for low-income consumers including check cashing, bill payment, money orders and remittances.

To some this may sound like a turn in the wrong direction - and conflicts with Wal-Mart’s prettified, glamour turn under ex-Target employee, Chief Marketing Officer John Fleming. It’s not. It is the first sign of a shrewd marketing strategy from the Bentonville giant in months. And it comes from the operations department (the project falls under Jane Thompson, President of Wal-Mart’s financial services operations).

Why are we so bullish on this race to serve the bottom of the market by Wal-Mart? First a bit of background.

The Dreadful State of Financial Services for Low Income Consumers
Offering financial services to low income earners is an unhip business. On the one side we have check cashing operations who typically charge low income earners without traditional bank accounts 2.5% to 3.0% of face value to cash a check. Yes, you did read that correctly. It doesn’t matter if it is a personal check or a business check, these folks have to pay $25 to $30 to cash a $1000 paycheck. That’s not the worst side of these establishments, either. The real game here is loans. These operations will lend against a future ‘payday’ to consumers who have little income and almost no credit. But thanks to current banking laws they charge enormous fees to do so. From the website of Payday Today - part of ACE Cash Express, Inc. the largest check-cashing store concern:

Payday loan fees are very expensive, particularly if a loan is extended over time. The fee charged for a payday loan is equivalent to a 250-650% Annual Percentage Rate (APR), which is by far one of the most expensive loan options on the market.

That may sound like usury to normal income earners, but it is legal in this industry. It is no surprise, then that banking industry reps are opposed to the move. The Wall Street Journal quotes Bruce Spitzer, spokesman for the Massachusetts Bankers Association saying “We don’t think this is a good service for consumers.” Apparently providing loans with a 650% APR is a good service, however.

The other side of the business is remittances. This is the practice of sending money to foreign countries which is usually done by legal or illegal immigrants who are supporting families for their home country. This is a much more competitive and respectable business which started with foreign operations such as the Dominican financial services company Quisqueyana. But the services offered by these organizations are limited as they do not have bank charters.

Why ‘Always Low Prices’ Positioning Helps Low Income Consumers Cashing Checks
What Wal-Mart does is to put a lot of money back into the hands of these low-income consumers. For instance, Wal-Mart charges 46 cents for a money order versus as much as $1.30 at the U.S. Post Office. Instead of paying up to $30 to cash a $1000 check, Wal-Mart charges a maximum of $3.

The beef against Wal-Mart from Bruce Spitzer and his ilk is that it’s just trying to get people to make impulse purchases when they have money in their hands. Mr. Spitzer obviously doesn’t understand Wal-Mart’s relationship to the low-income consumer, however. These people come to buy necessities in bulk at low prices. They are in no sense less responsible than more affluent consumers. In fact, Wal-Mart confirms that only 14% of check cashers make a purchase in the same visit.

Why this is good strategy for Wal-Mart:
Wal-Mart’s average consumer earns $38,000 which is below the U.S. Median Family income of $42,000. Target, on the other hand caters to a tonier consumer, earning an average of $58,000. This advertising blog has long argued that trying to compete with Target for these affluent consumers is a fools errand for Wal-Mart. Target has tapped into a vein of unserved desires with its ‘Design for All’ mission and Wal-Mart is confusing its ‘Always Low Prices’ image when it advertises in Vogue or makes a big show of offering organic food or upscale merchandies in the stores.

Wal-Mart grew into the most valuable company in the world by offering a better deal to the average Joe and Jane - those lower and middle income wage earners in rural areas who were paying high margins to small retailers a generation ago.

The best opportunity for Wal-Mart is not to expand its target to upper-income consumers but to find more ways to better serve its core consumer. There will be no shortage of low income consumers in years to come even if the ranks of the mass affluent continue to grow.

Wal-Mart which so often seems to find itself as the source of social evils finally has a significant chance to do some good. By demolishing the abusive and demeaning check cashing industry, Wal-Mart can offer low-income consumers some of the same basic economic rights that affluent earners enjoy. By innovating and perhaps even joining forces with other companies like G.E. who are making a push into this sector, they can provide a jump-start for the lower end of the U.S. economy.

This entry was posted on Thursday, July 6th, 2006 at 10:12 am and is filed under commentary, Wal-Mart. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.