Special Reports - 2011 Best in Banking

Innovator of the Year

Banking the Unbanked, Looking for Company

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Jane Thompson is not a banker. But during her nine years running Wal-Mart Stores Inc.'s financial services unit she did more than any single bank or banker in the country to develop and sell affordable financial products to low-income customers.

She did so while lowering the often predatory prices that consumers pay for cashing their paychecks, sending money to relatives and buying debit cards that can be used without checking accounts. Wal-Mart managed to make a significant profit on these services, despite the conventional banking wisdom that there is little money to be made from low-income customers.

Now Thompson, who retired from Wal-Mart in June, is encouraging traditional bankers to follow her lead. An uncertain economy and the effects of regulations are pushing more customers out of traditional checking accounts, and Thompson said that banks can and should do more than let Wal-Mart pick up their cast-offs.

For these reasons, American Banker has named Thompson its Innovator of the Year for 2011.

"Jane made it cool to serve the underserved and she proved to everyone that you could make money doing it," said Jennifer Tescher, the chief executive of the Center for Financial Services Innovation. Thompson informally advises the nonprofit organization, which helps develop financial services for underserved customers.

Wal-Mart has always declined to discuss the profit or other details of its financial services unit. But Thompson, speaking recently by phone from her Chicago home, said the business she ran brought in "many hundred of millions of dollars" in profit annually.

Those profits, she said, should make so-called underbanked consumers more desirable to financial services executives. Traditional bankers have been generally uninterested in courting people who do not have or regularly use bank accounts: Because these customers generally do not have much money, the thinking goes, they are unlikely to be very profitable.

"The people in the traditional institutions need to open their eyes to the wider world out there," Thompson, 60, said. "I believe that financial institutions can and should find a way to serve these customers, and they can do so and make money."

Many of the consumers Thompson is referring to live paycheck to paycheck. They might have bank accounts, but will often turn to Wal-Mart or other nonbanks such as Western Union Co. or MoneyGram International for basic services such as check-cashing or money transfers because they are turned off by banks' fees or work at blue-collar jobs that don't allow them to visit branches during traditional bankers' hours. Wal-Mart stores are open late at night and weekends, and often its employees speak languages other than English.

Wal-Mart alone cashes between $30 billion and $40 billion of checks annually, Thompson said. It charges a flat fee of $3 for checks up to $1,000, or $6 for checks between $1,000 and $5,000. That is generally cheaper than the prices charged at most check-cashers, which tend to charge a percentage of the total check amount.

A handful of banks, including U.S. Bancorp, Regions Financial Corp. and KeyCorp, are dabbling in check-cashing, remittances and other so-called alternative financial services. But Thompson is exhorting more banks to put aside their prejudices against the underbanked.

"They don't know the customer, they're reluctant to cash their checks, they're afraid to have them in their branches," she said. "Bankers' minds go to, 'They don't have documentation, they don't have any money' … but there are lots of different segments among the underserved."

Thompson, who is tall and self-assured with what friends call an "outsize personality," joined Wal-Mart in 2002 after running the credit card operations at Sears Holdings Corp. She retired after nine years of commuting every weekend between Wal-Mart's Bentonville, Ark., headquarters and Chicago, where her husband works in cancer research.

She leaves Wal-Mart as its ranks of potential financial customers are swelling.

In the wake of new regulations, banks are adding or raising fees on their checking accounts and related products, causing many people to walk away from their bank accounts.

The CFSI estimates that about 60 million Americans were underbanked as of 2010, even before banks started charging their customers more for services that once were low cost or free. Bankers are expecting to lose customers as a result of these higher prices: for example, JPMorgan Chase & Co.'s chief executive, Jamie Dimon, said this year that he expected about 5% of banks' customers to be "pushed out of the banking system."

Some customers cannot afford to pay the higher prices, but some are also deliberately turning their backs on big banks. The industry's failed attempts this fall to start charging customers for using their debit cards angered many people into closing their bank accounts and moving their money elsewhere.

"There is a broader set of underserved consumers now that need a vehicle to do their day-to-day banking," said Margaret Keane, the CEO of General Electric Co.'s GE Capital retail finance unit, which helps run Wal-Mart's prepaid debit card. "This market of underserved consumers existed before all this regulation, but now you've got unemployment and other challenges. The days of free checking are gone."

Bankers may not want less profitable customers, but for many, the thought of ceding any ground to Wal-Mart is a nightmare. The world's largest retailer has been a longtime opponent to banks not only in customers' wallets, but also in courts and in Washington.

Wal-Mart repeatedly tried to get a bank charter, before finally walking away from that fight in 2007. It led an antitrust class action against banks and their network partners Visa Inc. and MasterCard Inc., eventually winning a $3 billion settlement in 2003. And since then, Wal-Mart has been one of the loudest and most powerful advocates for regulation of the banking industry and the fees it charges merchants when customers pay with credit and debit cards.

It won a victory this year when the Federal Reserve capped the fees that merchants pay on debit card payments as part of a regulation that is expected to cost the banking industry more than $5 billion in annual revenue.

Now, as banks struggle to adapt to a slew of new regulations, the retailer can sidestep all of those burdens and compete on what some bankers call unequal footing.

"We're pretty heavily regulated. For a small community bank right now, the regulatory burden is probably our biggest hurdle for [serving] the un- and underbanked populations," said James Maloney, chairman of the $60 million-asset Mitchell Bank.

Mitchell, of Milwaukee, also offers its customers check-cashing, remittances, prepaid cards and other alternative financial services. But despite competing with the retail behemoth, Maloney acknowledges Thompson's accomplishments at Wal-Mart.

"I can't be critical of them, because there are a lot of unbanked and underbanked people in the country most banks aren't interested" in them he said.

Thompson calls the failed bank charter quest "something I inherited" and said that losing that protracted battle turned into a silver lining for Wal-Mart's financial services ambitions. (The retailer would not make an executive available for this story and declined to comment further.)

"Not getting the bank probably helped us be even more convinced we could do this," she said. "We probably grew faster because of that."

Some larger banks are now trying to follow Thompson's lead — ever so carefully. Nowhere is this more apparent than in the area of prepaid debit cards.

In 2007, Wal-Mart introduced the MoneyCard, a prepaid card that customers can fund with their paychecks or cash and use like a traditional debit card, without having an existing checking account. Thompson calls it her favorite product.

Some corners of the prepaid industry are still known for gouging customers every time they pull out their cards — but the fees used to be much higher everywhere. In 2009, Wal-Mart announced that it would lower the fees it charged customers to buy and use the card to $3 each. Other prepaid companies swiftly followed suit.

"Today it's taken for granted that there's a prepaid industry, but without Jane's belief it's less certain," said Steve Streit, CEO of Green Dot Corp., which helps Wal-Mart run its prepaid card.

Green Dot, the largest independent prepaid marketer, went public last year, as did rival NetSpend Corp. Green Dot's initial public offering raised $164 million and in October it reported quarterly net income of $13.3 million, proving to banks that there is money to be made in the prepaid business.

Some of those traditional financial services companies are getting into the act. The Fed's new rules have capped the fees that banks can earn from most debit cards, but prepaid cards are largely exempt. In recent months American Express Co. and U.S. Bancorp have introduced prepaid cards with low fees for their customers, and other banks are circling the market.

Critics point out that Wal-Mart has advantages over most banks in serving the financially underserved. The world's largest retailer sells its financial products to customers who were already shopping for cereal and laundry detergent, in stores it already had, which keeps overhead costs low. By creating its financial "MoneyCenters" inside the main stores, Wal-Mart encourages its customers to cash their checks on-site — and then go shopping, giving the money right back to Wal-Mart.

"Banks have a very different business model relative to Wal-Mart. Wal-Mart's a retailer — all it's doing is expanding its product offering to its very same customer base," said Rajesh Narayanan, a Louisiana State University finance professor.

Wal-Mart had about 1,500 MoneyCenters when Thompson retired. She created the stand-alone kiosks within the stores once it became apparent how popular Wal-Mart's financial products were to its customers. (Thompson said she was inspired by the branches of banks that were known for being customer-friendly, including the now-defunct Washington Mutual Inc.)

"We invented the Wal-Mart MoneyCenter because we thought they would kick us out of the stores because the lines [at the main cash registers] were too long," she recalls. "They became one of the most profitable spots in the whole store."

Bankers still view Wal-Mart's financial services efforts with mistrust, though some are willing to acknowledge the benefits of Thompson's work for the broader industry.

"I respect her a lot … I like what they've done and how they went about it, by being very up front about the products and how they work," said an executive at a large bank, who nevertheless expresses reservations about how Wal-Mart uses its financial products to target certain types of customers.

Now Thompson is trying to make more friends in the banking industry. During a phone interview in October, she sounded almost giddy to be out of what she calls the isolation of Wal-Mart. "My identity became so closely aligned with Wal-Mart … I'm feeling much more popular these days," she said.

At a banking industry conference two years ago, Thompson and a colleague wandered the room quietly, hardly as mobbed as bank executives tend to be at such events. But now that she has left Wal-Mart, she calls herself "unbelievably surprised at the outreach of people who say, 'Oh she'd be good at this bank' — I didn't really get those calls much when I was" in Arkansas.

At times Thompson sounds ready to take the reins at a big bank's consumer unit. "Banks should figure out how to welcome back customers" after the financial crisis, she said. "I wish I had control somewhere where I was running a group and could say, 'Let's go do this, this is so easy.' It's sitting under their noses."

But for now, Thompson is planning to maintain more of an advisory role. She is in the process of joining some corporate boards, and said she may start a consumer financial services advisory firm.

"If I went to one bank, that would only help one bank. I'm trying to help many," she said. "I'd almost rather be Switzerland and see what I can do to help."

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