Next Up: A Wal-Mart Credit Card?

Christopher Palmeri

With banks hiking rates and fees, the time may be right for Wal-Mart to bring its cost-cutting ways to the credit-card industry

Is Wal-Mart Stores going to bring its price-chopping ways to the credit-card industry? BusinessWeek has learned that the retail behemoth has held talks with Herbert and Marion Sandler, founders of Golden West Financial Group, about a new credit card that would offer lower interest rates and few of the onerous fees associated with traditional credit cards.

Given Wal-Mart's massive customer base and the current turmoil in the banking industry, the move could have a big impact on lending in the U.S. Just the idea of it is winning praise from consumer advocates, some of whom have battled the controversial retailer in the past. "We always welcome any new credit cards if they offer a solid, low-cost product that doesn't have trips and traps," says Travis Plunkett, legislative director of the Consumer Federation of America, which opposed Wal-Mart's 2006 effort to get a bank charter in the U.S.

Wal-Mart says it has talked to people about what some in the financial-services industry call a "clean card," but the company has no immediate plans to introduce one. "We are not pursuing these ideas at this time," says Wal-Mart spokeswoman Linda Blakey. The Sandlers sold Golden West, a big mortgage lender, to Wachovia just before the housing bubble burst. Wachovia is now being acquired by Wells Fargo.

The timing for a Wal-Mart entry seems right. Banks nationwide have been cutting credit lines, hiking interest rates, and raising fees for credit-card customers they deem high-risk. Those moves come amid a surge in credit-card borrowers running late in their payments because of the slowing economy and the easy lending terms of years past.

Wal-Mart Feels the Credit Squeeze

Wal-Mart has been seeing the impact of that credit tightening in its 4,200 U.S. stores. The company said at its annual analysts meeting on Oct. 27 that credit-card use at its stores fell 7.5% in the past year. "Customers have maxed out on their credit limits," said the company's U.S. president, Eduardo Castro-Wright. "That has dramatic consequences for a lot of retailers. With credit maxed out, the ability to buy discretionary items get curtailed."

Wal-Mart has long coveted a larger role in financial services. It recently opened its 700th MoneyCenter. Among their product offerings, the centers offer check cashing for a $3 fee, the ability to pay utility bills electronically for 66¢, and money transfers for $11.50. The company claims its financial services are priced as much as half that of competitors. In addition, 1,500 Wal-Mart locations have space leased to local banks, among them Arvest Bank, a privately held, $9.5 billion institution based in Bentonville, Ark., that counts Walton family members among its investors.

In September, Wal-Mart filed notice with Canadian finance authorities that it intends to seek a bank charter in that country. Major Canadian retailers such as grocery chain Loblaw and general merchandise store Canadian Tire already operate banks that offer checking accounts, credit cards, and home loans. Loblaw, for example, operates President's Choice Financial Services, named after its well-known brand of private-label products. Wal-Mart says it may offer a range of financial services -- even mortgages -- in Canada if its bank application is successful.

Wal-Mart has also been expanding its lending efforts in Mexico. The company opened a bank there it calls Walmex in November 2007 and now has 16 branches in five states. "Mexican banks have been notoriously absent in credit-granting services to the middle and lower classes," says Thomas Mobille, an analyst who follows Wal-Mart's Mexican operations for Banif Securities. "The recent global financial crisis should only increase their reluctance to lend to these groups, so Walmex has a natural advantage in capturing them as banking customers."

Cash Your Stimulus Check Here

Wal-Mart has used financial services as a promotional tool in the U.S. This summer, for example, the company offered to cash federal economic stimulus checks for free. Wal-Mart says "millions" of customers took it up on the offer. "They've really made inroads into check cashing," says Leslie Parrish, a researcher at the nonprofit Center for Responsible Lending. "It's their target audience."

Some of the retailing giant's other efforts to break into financial services have been less successful. Last year, Wal-Mart withdrew its application to acquire an industrial bank charter in the U.S. The company argued that owning its own bank in the U.S. would lower its credit-card processing fees, but a large outcry from other banks, consumer advocates, and union activists squashed that hope. Wal-Mart can expect continued opposition if it again tries to seek a U.S. bank charter, although the company says it has no plans to do so. It's possible the retailer could find another way to issue its own credit card. "If you're going to bring a company whose business model is volume at the lowest price, what does that mean, say, for mortgages?" asks David Nasser, executive director of the union-funded Wal-Mart Watch campaign. "Are you going to put out as many mortgages as possible and get people into homes they can't afford? I think that's dangerous."

A low-cost Wal-Mart credit card could expand business for the nation's largest retailer. Presently the company generates only about 15% of its sales from customers using credit cards. According to a national study from consulting firm Hitachi Consulting, credit cards account for 22% of the transactions at merchants nationwide. The flip side, though, is that Wal-Mart's lower-income customers could pose a big credit risk if the company begins extending credit directly. "If Wal-Mart can figure out who to extend credit to and not lose their shirt, that would be a home run," says Philip Phillou, a financial-services industry consultant who helped H&R Block launch its own in-house bank.

Wal-Mart already offers credit cards in a partnership with General Electric, an enormous consumer lender. There are no annual fees for opening a card, and Wal-Mart waives interest payments for as long as 12 months on some purchases made at its stores. But interest rates on the cards can run as high as 25% for some borrowers. If Wal-Mart financed credit-card customers on its own, it could offer better terms. It's not clear exactly what role GE would play if Wal-Mart decided to offer a new, lower-cost card. "We work with our retail partners to meet [their] requirements," says Dori Able, a GE spokeswoman.

Palmeri is a senior correspondent in BusinessWeek's Los Angeles bureau.