June 8, 2010

Low-cost credit cards could be part of Wal-Mart bank strategy

By Robin Arnfield, News Editor

Wal-Mart has announced plans to launch a bank in Canada on June 15, 2010, after the U.S.-based retailer received a banking license from Canadian financial regulators. The bank is expected to be known as Wal-Mart Canada Bank and La Banque Wal-Mart du Canada.

In September 2008, Wal-Mart applied to the Office of the Superintendent of Financial Institutions (OSFI) for permission to offer a range of financial services in Canada. It already offers money transfer services and ATMs at its Canadian stores. Press reports have speculated that Wal-Mart will offer low-cost credit cards as part of its banking offering.

A move by Wal-Mart into the Canadian banking market makes logical sense given the fact that the retail giant has so far been unsuccessful in gaining a U.S. banking license. U.S. banks felt threatened by Wal-Mart’s strategy of competing on price by offering low-cost products and services, and managed to block its application for a license.

However, Wal-Mart gained a banking license in Mexico in 2006 and opened its first branches in that country in 2007. Because the Mexican credit card industry was hit by a wave of massive defaults in 2008-2009, Wal-Mart had to delay launching its Mexican credit cards until early 2010.

“Wal-Mart has been trying to enter banking in a number of markets,” Rob Burbach, Senior Analyst at IDC Financial Insights, tells Payments Business. “It has been successful in Mexico, but the U.S. banking lobby has effectively blocked Wal-Mart's attempts to enter the U.S. market.”

Burbach says it is not a surprise that Wal-Mart has been approved in Canada, given the prior approvals of the retailer bank brands of Canadian Tire Financial and PC Financial, and the concentration of the banking industry in Canada.

The top five Canadian banks – RBC Royal Bank of Canada, BMO Bank of Montreal, TD Canada Trust, Scotiabank, and CIBC – dominate the domestic banking industry. Consumer groups complain that, because of their dominance, the sixbanks collude to keep banking and credit card fees high.

“Given its target market, it is logical that Wal-Mart would enter the banking space through credit cards,” says Burbach. “The credit card sector is an area of high returns, as long as Wal-Mart manages its portfolio well, not withstanding the payment card voluntary code of conduct recently announced by Finance Minister Jim Flaherty.”

IDC Financial Insights has tracked the growth of PC Financial as a self-service option that has resulted in high levels of customer satisfaction, Burbach says. “There is no reason why Wal-Mart can't replicate this approach and improve on it,” he says. “The experience in the U.S. suggests that the community banks down there really feared the entry of Wal-Mart. Our sense is that Canadian credit unions and PC Financial will be the first to feel the effects of Wal-Mart’s banking activities. However, in time even the Big 5 Canadian banks should be wary of the threat posed by Wal-Mart Bank."



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