Walmart Banks on Cash

Walmart got the entire financial services industry buzzing last week with its Walmart-2-Walmart domestic money transfer announcement. Within seconds, breaking news stories were posted all over the web describing the blow to MoneyGram’s and Western Union’s businesses as well as speculation about Walmart’s real motives for getting into the P2P business.

But what everyone forgot to focus on is the real story: the value of this service to the consumer.

Walmart makes no bones about its mission – saving people money so that they can live better. A company executive at a recent industry conference was reported to have said that 75 percent of Walmart shoppers said they chose Walmart because of its low prices, up from 50 percent just ten years prior. According to the Walmart web site, they’ve attracted a lot of consumers to this proposition. More than 245 million customers walk thru one of its 11,000 stores across 27 countries and/or visit one of its e-commerce sites in any given week. It’s been said that 80 percent of US consumers shop at Walmart at some point during the year.

From the US perspective, financial analysts say that the typical Walmart customer’s national income is below the national average and that 20 percent of them lack a bank account. That’s about two times the national average. This isn’t hard to believe. Walmart cited in its 2013 annual report that one of its biggest risks to revenue and profit was the changes the government made to the food stamp program (aka SNAP). Some $4 billion in benefits were cut from the ~47 million people who receive them. Since more than half of Walmart’s $246 billion revenue comes from grocery sales, that $4 billion whack hit them pretty hard.

Over the years, Walmart has been very focused on creating a set of services that both support its core mission and meet the needs of this financially-challenged consumer. It’s expanded its offerings beyond everyday low prices on products to financial services. Walmart’s financial services portfolio cater to this customer demographic and includes everything from low cost check cashing and bill payment services to its Bluebird prepaid product for the “unhappily banked” which looks and acts like a DDA product, complete with paper checks and a mobile app to track transactions. Now, its P2P solution allows consumers to send up to $900 in cash to anyone in the US via its network of 4,000 stores. By doing this, Walmart has created its own branded cash in/cash out network, an asset that most pooh-pooh as lunacy in a digital age where the war on cash is in full swing.

Except that Walmart’s customers like cash and use it. In fact, Walmart says that a lot of them use a lot of it in their stores. That’s consistent with the research that me and my colleagues did at Market Platform Dynamics last year. We found that the total demand for cash in the US and elsewhere isn’t going down—in fact it’s going up. In fact, one of the greatest needs globally is for more cash-in/cash-out networks because more people want to use mobile to put cash in and take it out of accounts, especially in developing markets where cards are not at all practical. By running toward cash instead of away from it Walmart is making the smart play

Walmart-2-Walmart, then, is what any good customer-driven company would create – an easily affordable new service that responds to a customer need. It’s also a pretty smart way to recycle the cash that it has on hand in its stores. Rather than paying armored cars to haul it away, with Walmart-2-Walmart, it has created and now monetized a cash-based P2P service. It’s also worth noting that this isn’t the first service that Walmart has launched that’s focused on cash. Its “Pay with Cash” service introduced in April of 2012 allows customers to shop on Walmart.com and settle that digital transaction in cash at its stores.

Perhaps most interesting of all about this new service is that while everyone else is trying to force this cash-centric US customer segment to go digital for money transfer and other services, Walmart has decided that if its customers like using cash for whatever reason, then they’re very happy to abide by their wishes.

It does make you wonder whether some of the “innovations” that the industry has been pushing to these consumers are ultimately just trying to fit round pegs into square holes.

Take general purpose reloadable prepaid cards, for instance. They’ve been around for about a dozen years and are positioned as the innovation that will bring financial inclusion to the unbanked. Except that, at least so far, it hasn’t been all that effective in doing that.

Analysts tout the “explosive” growth of prepaid but the~ $70 billion or so that was loaded on those products in 2012 (the last year that data is available publicly) is but a pimple of a pin dot of the $2.2 trillion and $1.5 trillion in volume that was driven by credit and debit cards respectively. The very un- or underbanked consumers who might well benefit from the utility and safety of general purpose reload-able products seem to find the fee structure onerous given their income level and the product too opaque for them to understand and feel comfortable using.

For the single mother making $25,000 a year, paying $10.00 a month in a variety of fees (which for most cards is roughly 2 or 3 ATM withdrawals and a couple transaction alerts) to use a prepaid card product is $120 a year that she otherwise doesn’t have to spend on kids clothes, food or other essentials. Cash for this single mother and others like her, is also a whole lot more tangible – what she sees is what she has to spend and there’s no mystery associated with what fees get charged when. Sure, there are risks associated with carrying around cash, but the tradeoff that she makes is the $120 a year in fees that she can’t afford to spend on a product that just makes her financial life more complicated.

(The really sad thing is that even at the fees that are assessed now, the prepaid ecosystem isn’t exactly raking in the big bucks given the challenging economics of offering a product that has a lot of customer churn and limited ways to make money – it’s looking more and more like a lose-lose proposition. Prepaid products seem to have really only taken off in situations where there are other subsidies available to offset the fees to the consumer like direct deposit where employers may be underwriting some or all of the costs or in the case of Walmart Bluebird where there are subsidies coming from AmEx and the spend on those cards in Walmart stores. At the moment, the prepaid activities that seem to be getting the greatest amount of traction are gift card products and those that are banking substitutes for already banked customers who want to dump their existing banking relationships.

So, Walmart-2-Walmart is targeting consumers like the aforementioned single mother – the cash consumer who is probably unbanked because both banking and prepaid products are unappealing to them, at least right now.

Most of the chatter about the Walmart-2-Walmart story also focused on the service as a ploy to get customers to pick up their cash and spend it in the store. But the bigger play for Walmart is to use this service as the onramp to securing a digital network of customers for whom they can deliver a variety of services, drive to cheaper digital channels and ultimately turn 245 million consumers into a captive audience for Walmart’s payments and financial services. If that’s indeed part of the plan, Walmart could do something that others who have targeted this un/underbanked population in the US have been unable to do – turn a cash customer into a digital asset.

So, it wouldn’t surprise me if Walmart-2-Walmart becomes another channel to get these cash-preferred customers onto the Bluebird platform, which, as prepaid products go is the cheapest game in town since it’s pretty much free if you use it within the Walmart ecosystem. Or since most Walmart customers also own mobile phones and a growing number of them own smartphones, it could be that this P2P service becomes an onramp for building a mobile P2P network. Walmart-2-Walmart may evolve to become the next generation mPesa on steroids right before our eyes – customers send money to each other via mobile devices, pick up cash at Walmart stores to use there to buy groceries, pay bills, and shop online, starting in the US.

The CFPB, which gets to regulate non-financial institutions like Walmart in addition to financial ones, hasn’t yet commented on Walmart-2-Walmart. The funny thing about all of the fuss some years back about not wanting Walmart to be a bank (guess who didn’t want Walmart to be a bank. Well, it begins with b and ends with k.) is that it’s doing what it needs to do to fill a huge gap in the financial services landscape for a consumer that needs and wants financial services but can’t afford to pay for them as they are currently being offered. I wonder how those who objected the strongest feel now. It seems awfully difficult to, on the one hand, talk about the importance of financial inclusion and on the other, object when a player that is doing that and doing that at a price point that those who need financial inclusion can afford.

It will be interesting to watch how this plays out, not only for Walmart but for the broader set of financial services activities that are often directed to just the sort of people that shop at Walmart.