What, exactly, is Walmart up to? For the banking industry, the question has become pressing.
This follows news that the vast retailer has poached Omer Ismail, the leader of Goldman Sachs’ start-up consumer banking business, Marcus. They grabbed one of his top lieutenants and dealmakers, David Stark, too.
Ismail will lead a fintech partnership set up by Walmart and venture firm Ribbit Capital. Neither group has said what the venture will do. The press release announcing it was a cipher — “a new fintech start-up designed to develop and offer modern, innovative and affordable financial solutions”.
But one thing is almost certain: Walmart is betting that the regulatory environment has changed. The company has tried to get into banking before, by applying for an industrial loan company charter, one of the only exceptions to the longstanding separation of banking and commerce under US law.
Automakers, healthcare companies and big industrial firms own ILC’s. But in 2007, amid a frenzy of lobbying from banks, US regulators made it clear that the world’s largest retailer would not be allowed to slip through this loophole, and Walmart withdrew its application.
Today, though, politicians prefer to paint big tech companies as the key threat to competition. And the banking world has changed, too. There is an array of fintechs shaking things up, so the banks may now see Walmart as one threat among many. “Walmart was the boogie man — now it’s Amazon,” says Neil Saunders of research firm GlobalData Retail.
Some will argue that the whole question of regulatory approval is now obsolete: there are plenty of fintechs out there that function without banking licenses. That is either because they don’t engage in core banking activities of deposit taking and lending or because they use partner banks to fulfil those core functions.
This strikes me as wrong. I think Walmart means to go big. They are not going to offer services as a way to encourage loyalty to their core retail business. They mean to make profits here, and that means gathering capital and lending it.
Walmart already offers capital-light financial services though partnerships — a prepaid debit card with Green Dot, a store credit card with Capital One, and assorted others. They don’t need to be the majority funder of a new start up to do more of this.
More to the point, Walmart needs the money. Its core business is declining in profitability. The company has emphasised the need to add new businesses. The chief financial officer said at a recent conference that the company sees profits, not just customer loyalty, in financial services. And the way you make money in banking is by owning the capital — not by leaving that bit to a partner.
For more confirmation, look at the people they just hired. Ismail and Stark are not software guys. These are bankers, who earned their stripes by bringing low-cost deposit capital ($97bn of it) and converting it into earnings assets (including $8bn in loans).
Finally, what is Walmart’s competitive advantage in financial services? Its huge customer base, many of whom are rural and on modest incomes. Many of them will be unbanked or underbanked. These people don’t need particularly whizzy tech. They need deposit services and credit.
So what makes sense is for Walmart to offer core banking services, even if they do it through their web app rather than with bank branches within box stores. A low-cost debit card which allowed customers to take advances on their next pay cheque, a wholly-owned credit card and unsecured personal loans would all make sense.
Walmart would certainly be keen to keep fees it is charged when customers use cards for purchases rather than hand them over to the banks (Walmart was part of a group of merchants that tried to develop their own payments network, the Merchant Customer Exchange; it failed).
All of this will, sooner or later, bring Walmart into the orbit of US banking regulators. But if it gets a pass from regulators — not a forgone conclusion even now — the question remains whether it can make the business work. Rahul Sharma of Neev capital points out that big UK retailers such as Tesco and Sainsbury’s have gone into banking, with only mixed results. Sainsbury’s is considering getting out of the business.
Walmart should take note. Banking is a cyclical business where it is tempting to overextend at the top and to quit altogether at the bottom. The profits can be good, but it is never easy money.
robert.armstrong@ft.com
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