Walmart – Banking and FinTech

Imagine a world where bank accounts don’t matter. You select services that solve your problems when you have them. Walmart (and Amazon) are unbundling banking.

As always pardon the typos

It seems like only yesterday that 30 members of Congress wrote the acting chairman of the FDIC to stop Walmart Bank.

“Wal-Mart’s plan, to have its bank process hundreds of billions in transactions for its own stores, could threaten the stability of the nation’s payments system,”

30 Members of US Congress, March 2006

Of course, we all know that Walmart pursued a different course to deliver services. Partnerships (MGI, Moneygram, Paypal, …) and banking in a box (literally an isle with prepaid cards). Most analysts discount or “write off” Walmart’s achievements in financial services.  Given Walmart doesn’t break out financial performance of Money Center, analysts are left with the tea leaves of MGI and GDOT reports. There is little doubt that comparing Money Center financial metrics to tier 1 banks would leave most unimpressed. However, Walmart has created a portfolio of banking services that supports their overall retail strategy and creates overwhelming loyalty amongst their core customer base.  

In fact, my view is that Walmart has redefined “open banking” within their segment. A segment that is underserved and unprofitable to traditional banking. While the impact to banks is minimal (ie segment profitability), within their consumer base Walmart is best placed to change:

    1. HOW financial services are delivered (ex a Bill Payment, New Robinhood?)
    2. How financial services are bundled (or “unbundled” ex BNPL)
    3. How payments operate to solve consumer problems (online and instore)

Key Items Today

    • Walmart Financial Services Opportunity – Redefine OPEN Banking
    • Walmart’s Fin Tech Start Up
    • Walmart Payments Future

Walmart Financial Services Opportunity

Walmart is a global giant. The largest US Employer (2.2M globally), the largest in Retail Sales ($520B), #2 in US eCom (80% growth in 3Q20),  and the leading bank services provider to lower mass households. Walmart has done all of this through partnerships (without a banking license). In this regard, Walmart has defined a “open banking” model in the physical world without a regulatory mandate (ie PSD2).

As I outlined in my 2014 blog Banks, Non Banks and Commerce Networks, a bank license brings on enormous compliance cost and restricts: what business you can do? how you manage consumers and their data? and what risks you can take? The upside for being a bank? You get to take risk with other people’s money. Simply put, any company contemplating a bank license must have a business plan MORE dependent on managing risk than on orchestrating commerce value.

Walmart’s focus is NOT to take risk with other people’s money. It is rather to SOLVE FINANCIAL PROBLEMS for consumers entering their store. Lower mass market and unbanked consumers know what banks think of them. Banks want to sell in their branches… not cash covid relief checks, help a consumer send money home, or pay a bill.  Durbin and other fee restrictions have made the bottom 4 deciles of retail banking unprofitable for the large banks. This is part of the “underserved” dynamic in banking (see research article Walmart Money Center – Unbanked or Banked Differently? )

Walmart wants these consumers! Physical distribution (4800 US stores) is a tremendous asset, particularly where there is weekly interaction (ie Grocery, gas and transit). Low cost, focused, financial services supports Walmart’s underlying business. It drives consumers to their store and keeps them more loyal. While Money Center is not a traditional “loss leader”, Walmart is not pricing their Money Center services at a premium. This is a tremendous competitive advantage (ie banks have no other way to make margin from a relationship).  

Measuring the financial success of Money Center is difficult as Walmart no longer manages it as a separate division driven by margin. Greendot, Moneygram, First Data and most suppliers have struggled to create margin from Walmart’s distribution advantage. Clearly Money Center’s lack of PRODUCT margin motivation exacerbates vendor profitability issues. Financial partners are not alone Walmart is widely known as the toughest supply chain partner on the planet.

The lack product, pricing and organizational focus, makes the current Money Center service portfolio seem disjointed.  However, Walmart’s services are NOT built like a bank ( selling NEW customers), it is built on servicing a consumer with a KNOWN need. In other words a consumer enters the Money Center with a problem (ex I need to cash a check) and Walmart solves it. While traditional banks may intimidate lower mass consumers, this segment feels comfortable going into a Money Center with a need or question. While analysts see a hodgepodge of disconnected low margin services, consumers see a full service financial store (with multiple options). For further reading see Banking and Commerce what is the Difference.

Could Money Center improve the cohesion of services into an integrated offering? Sure it could.. but the integrated offering is not what their consumers want. Consumers want to solve a problem and are willing to consider spot services – on demand. They don’t want a long term financial relationship, they want value (and pricing) at each interaction. Within Walmart “banking” has become a set of commodity services that must compete with both the market AND with one another. The bundle that Walmart has created is actually an unbundling of banking “Jobs to be Done”. In other words, Walmart looks at services the way consumers do.

Clayton Christensen coined the Jobs to be Done term in Innovators Dilemma and his 2016 book Competing Against Luck.

The problem is that consumers usually don’t go about their shopping by conforming to particular segments. Rather, they take life as it comes. And when faced with a job that needs doing, they essentially “hire” a product to do that job. To that end, Christensen suggests that companies start segmenting their markets according to “jobs-to-be-done.”

HBS Press, Clay Christensen’s Milkshake Marketing, Feb 2011

What Problem Are you SOLVING

What is Open Banking? Most of us think of Plaid, or Mint and how Banks would integrate into new “value add” services. What if “open banking” became a deconstruction of core banking services? By focusing on what consumers want to “solve” Walmart Money Center has made the concept of “account” fungible, and services generic.   The market where this has already taken hold is India. Take a look at Amazon India below (I don’t have the WMT screen)

– to Citi friends. Sriram Jaganathan led Amazon Payments India for early days of this.

Where is my transaction account? It doesn’t matter!! (or you don’t need one), I can use Walmart to pay a bill against any of them, or to load money into anything. In India, Walmart has an ASTONISHING 42.5% of volume (they have become Alipay). In the US, the Fed’s digital dollar will play a role here (more to come on this in following blog). BTW, this is what Visa was hoping to build with PLAID.

The challenge with this model? Margin is very tight. It would be hard for any Neobank or start up to replicate. Margin must be made within another service. The Leaders so far? Amazon, Walmart and Alipay.

Walmart Fintech Start Up

For those that haven’t read already, WMT added 2 Goldman Execs to lead its new fintech start up.  This aligns with their strengths above (globally). The “always on” unbundling of financial services, has tremendous potential to disintermediate banks and payment networks (and has in India and China). Walmart’s global position to influence financial services is similar to Alipay (in many markets). Yes that is a big statement.

I see their new ventures effort as a way to build financial services with a different strategic assumptions. Assumptions that are aligned to what I’ve outlined above. For example, what if the Fed’s digital dollar, or Facebook’s Diem are successful. Where will balances be stored? How do you add to them? How to transfer money (globally)?, Pay a bill? Change how you checkout at the POS (see Walmart Scan and Go)?

US financial services will not change without an established (large) retailer involved. I believe both Amazon and Walmart see the opportunity as both have had success (in India). This should strike fear in the hearts of banks and payment networks. Walmart should also send a note of thanks to those 30 US congressman that kept them out of banking.

Payment Future

Walmart has worked many times to create a V/MA alternative to no avail. MCX, Walmart Pay, … all have failed TECHNICALLY. However all of them worked as a faint to help Walmart negotiate better rates. For example, Payment analysts know that networks have struck a deal with top 10 merchants on interchange. Other banks like Chase cut one off deals in attempt to get their payment products in Walmart Pay/MCX.  My guess is that Walmart incurs the lowest MDR of any merchant globally (see Tilting Networks).

Walmart, Amazon and Alipay see a future of direct consumer engagement where there is a direct connection to consumer bank accounts. India, China, EU are all moving rapidly to this model. In a 5 yr view this presents the greatest threat to V/MA. Why?  While they are very efficient networks, their costs have become out of band with other options and other markets. Within the US, the Fed’s digital dollar and Facebook’s Diem present near term threats. However volumes are not likely to materialize for 5+ Yrs.

Not everyone agrees with me on timeline. A top 5 retailer told me yesterday..

“Tom look at the pace of change in China as a model. 15 yrs ago they were cash. 7 yrs ago they were China Union Pay, Now they are Alipay/WeChat Pay.. 3 tremendous changes in 10 yrs.  I believe change will happen much faster than anyone could imagine. Just 3 yrs ago I was willing to look at Digital wallets. Countries like India have shown us a new way.”

Top 5 US Retailer

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