Wal-Mart Move Further Tests Banks' Defenses Against Disruption

It's tempting to say that an earthquake hit the banking industry this week when Wal-Mart Stores said that it would begin offering a basic checking account to consumers in partnership with upstart Green Dot.

But the fact is that, while some community bankers admit they are worried about Wal-Mart's latest push into financial services, the banking world has been dealing with such disruption for years.

From Apple to Square to online lender Kabbage, firms large and small are threatening banks' dominance in payments, lending and other areas of financial services.

The decision they face is whether to fight Wal-Mart and other disruptors, or try to partner with them, said Falk Rieker, head of the global industry business unit for banking at SAP, a financial technology consulting firm. He pointed to their recently announced partnership with Apple as an example of banks opting to join potential disruptors rather than try to beat them.

"If you're a bank, you can say Wal-Mart is competitor and if we help them, we're just making them stronger," Rieker said. "Or you can say that they're not going away and I should try to get something out of it."

Wal-Mart will offer checking accounts through Green Dot's regulated bank unit. The accounts, to be rolled out next month, will be linked to MasterCard debit cards and won't require customers to maintain minimum monthly balances if they use direct deposit. A user also will be never be hit with overdraft fees because a transaction will simply be blocked if there's not enough money in the account to cover it.

The accounts will be marketed largely to low- and moderate-income consumers who don't have bank or credit union accounts or those who are simply frustrated with bank fees. Advocacy groups like the Center for Financial Services Innovation and the Pew Charitable Trusts have prodded regulators to require banks to take into consideration underbanked and unbanked groups. Pew, in particular, has pushed for banks to eliminate overdrafts, and be more transparent about fee schedules.

Advocates for the underbanked applauded Wal-Mart's move, saying it should help expand access to financial services. Many unbanked consumers primarily use prepaid cards or cash to pay bills or handle everyday transactions.

"This is just going to be a fascinating experiment in whether consumers choose a checking account or a debit card," said Jennifer Tescher, president and CEO at the Center for Financial Services Innovation in Chicago.

Tescher noted that Wal-Mart has been pushing the envelope in financial services for years, and has picked up the pace under Daniel Eckert, senior vice president of services. In addition to the prepaid cards it already offers through Green Dot, Wal-Mart has partnered with American Express to sell the Bluebird prepaid card.

The elimination of overdrafts is also a positive sign, said Susan Weinstock, director of consumer banking at the Pew Charitable Trusts. "Overdrafts is really something that pushes consumers out of the banking system," Weinstock said. "This is a completely safe product with no hidden fees. You know what you are going to pay."

Community bankers expressed concern about Wal-Mart's move, saying the retailer should stick to what it does best and let banks handle banking.

"Wal-Mart should not offer financial services," said Viveca Ware, executive vice president of regulatory policy at the Independent Community Bankers of America. "Wal-Mart is a retailer, not a bank."

Ware added that she would hope that the retailer is held to the same regulatory standards as banks.

"As they proceed to offer financial services, they need to be held to the same standards as federally insured banks, in terms of making sure they are in compliance with all disclosure and consumer protection laws, and [Bank Secrecy Act and anti-money-laudering] requirements," she said.

Still, small banks can draw some confidence as they gird for battle with Wal-Mart in the fact that they survived the Great Recession and countless outside threats to their business — megabanks, credit unions, online peer-to-peer lenders, and more.

Wal-Mart "will be a low-cost provider. That's what they're known for," said Pat Hickman, chairman and chief executive at Happy State Bank in Texas. "But if I get upset every time a new player comes into the market, then I chose the wrong business. Bring it."

"This will be a fad. Walmart will advertise and market," said Paul Goodpaster, the chief operating officer at Citizens Bank in Morehead, Ky. "But if I'm doing my job, our customers may stick their toe in the water but they'll be back."

Tescher said any fears about Wal-Mart stealing significant market share are unfounded. After all, the giant retailer is going after a consumer group — the underbanked and unbanked — that community banks have virtually ignored, she said.

"People say Wal-Mart is making an end-run around its inability to get a bank charter, but that's a misreading of the story," Tescher said. "Wal-Mart sees itself as being in the distribution business, either diapers or a car battery or a bank account. We're going to watch the future of banking play out at Wal-Mart."

Paul Davis contributed to this story.