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In retrospect, not getting a bank charter two years ago may have been one of the best things to happen to Wal-Mart Stores Inc.'s financial services agenda.
At the very least, the nation's largest retailer has been spared much of the reputational damage — and increasing regulatory scrutiny — buffeting most banks and nonbank financial companies this year.
Financial products and services are a relatively small part of Wal-Mart's offerings. But even without a bank charter, Wal-Mart has spent the past few years building itself into a significant competitor to traditional financial services institutions, especially with products aimed at the growing market of underbanked and low-income consumers who are largely underserved by the banking industry.
Demand for those offerings is growing, as more and more consumers look for alternatives to traditional financial services amid the recession and industrywide cutbacks on consumer credit. And Wal-Mart's brand, burnished by its ubiquitous marketing campaign ("Save Money. Live Better."), compares rather favorably right now to the general public perception of the banking industry, which has come under fire for all sorts of practices, including the checking overdraft fees that can make prepaid cards seem like a bargain.
Wal-Mart executives are quick to point out the comparison.
"Our expectation is that they will continue to drop the banks, and buy [Wal-Mart's prepaid] cards," Eduardo Castro-Wright, Wal-Mart's vice chairman and head of its U.S. division, said in response to a question from an analyst during the Bentonville, Ark., company's annual meeting last month.
He referred to Wal-Mart's decision in February to cut the pricing on its prepaid cards and said, "The timeliness of that was very good, because it came at a time when the Wal-Mart brand was trusted, when I think that the banks were not as much."
By not having a bank charter, Wal-Mart has also avoided much of the discussion in Washington around nonbank banks, the separation of banking and commerce, and what the fate of industrial loan companies should be under proposed regulatory reforms.
The retailer, which repeatedly tried to enter the banking business in what it said was a bid to reduce the card processing fees it paid other banks, made its last effort in July 2005, with an application to charter an ILC in Utah. It withdrew that application in March 2007 — two years before the Obama administration unveiled regulatory reform proposals that, as originally drafted, would have effectively eliminated specialty charters.
"Maybe they dodged a bullet," said Joseph Mason, a professor at Louisiana State University.
To be sure, Mason and analysts who follow the company said Wal-Mart would likely have a much larger and more profitable financial services arm right now had its charter application been approved. The retailer does not break out results for the unit and would not provide any detail for this article.
All the same, "Wal-Mart's coming to the realization, 'You may not get the charter, but that doesn't prevent you from getting the consistency reputation in financial services,' " Mason said. As for competition from traditional banks, he said, "Right now, I don't see that pushback, and of course the crisis is aging, so I don't think we're going to see anything hinder Wal-Mart from amassing a financial superstore even if they don't do it with a charter."
Jennifer Tescher, the director of the Center for Financial Services Innovation, a nonprofit affiliate of Chicago's ShoreBank Corp., took an even brighter view of the retailer's failure to get a bank charter. "Given what's happened in the banking sector, this could be the best thing that's ever happened to Wal-Mart, particularly at a time when Washington is looking into ILC charters and OTS charters," she said. "Everyone else is focusing on structural issues and capital issues and the rest, while they're really able to focus on the consumer offering."
