Big-box retailers add financial services
WASHINGTON — Need to refinance your mortgage? Just put it on your shopping list next time you visit Costco, alongside the jumbo paper towels and the 6-gallon bucket of cat kibble.
Big-box retail stores today offer a growing number of financial services, from check cashing and reloadable pre-paid cards to small business loans and life insurance.
The products appeal to consumers attracted to the convenience of one-stop shopping and fed up with the overdraft fees, tight credit and minimum balances at banks. But retailers aren't subject to the same federal oversight as banks, and they might not always provide the same consumer protections.
Ten million American households — 1 in 12 — don't have any checking or savings accounts, according to a 2011 survey by the Federal Deposit Insurance Corp. Twenty-four million households — 1 in 5 — have accounts but also rely on alternative financial services such as non-bank money orders, check cashing, payday loans, tax refund loans and pawnshops.
Major retailers are developing an ever-expanding menu of financial products aimed at this underserved population, a market that generates more than $78 billion annually in fee and interest revenue.
In addition to mortgages, for example, Costco advertises identity protection, boat and RV loans, as well as auto, home and health insurance.
At Home Depot, customers may get home improvement loans for up to $40,000.
Wal-Mart, the nation's largest retailer, offers tax preparation, check cashing, in-store bill paying, money transfers, and prepaid cards that function as debit and checking alternatives.
Through a partnership with American Express, Wal-Mart's reloadable Bluebird card allows direct deposits and pre-authorized check writing; has no monthly, annual or overdraft fees; and may carry a balance of up to $100,000. Last month, Wal-Mart announced that Bluebird accounts would be eligible for FDIC insurance, enabling deposits of government payments such as Social Security, military pay and tax refunds.
“We know many of our customers either don't have a bank account or are poorly served by banks given the costs and service issues they find with them,” Wal-Mart spokeswoman Sarah Spencer said in an email.
Wal-Mart's latest experiment is insurance. About 200 Wal-Mart stores in Georgia and South Carolina are testing sales of life insurance policies. Customers at participating stores may purchase prepaid cards at the stores that may be used to pay for one-year terms. The customers then activate the policies by calling a toll-free number and speaking with licensed MetLife agents.
Retailers' interest in financial products isn't new, dating to store credit and, later, branded credit cards. Wal-Mart even sought a special charter to establish its own bank, but the company withdrew its application in 2007 after facing resistance from the banking industry and lawmakers.
Spencer told McClatchy that Wal-Mart no longer wants to become a bank, and it doesn't have plans to provide mortgages, although Sam's Club, a division of Wal-Mart, does offer small business loans up to $25,000.
Clearly, the lack of charters isn't stopping Wal-Mart or other retailers from providing many of the same services traditionally found at neighborhood bank branches. Often, they simply partner with third-party credit card companies, lenders or insurance agents to make the products available to shoppers in stores or online.
Home Depot's loans, for example, are backed by a consortium of mid-tier banks. The customer applies in the store, then the application goes to a financial provider that “operates a little like a LendingTree,” said Brandon Hayes, the director of financial services at Home Depot. “They have a series of banks behind them that set up the loans. It's still a Home Depot product, but we're not the one doing the direct lending. The risks sit with the banks behind us.”
Bankers consider big-box stores competitors and they want retailers that offer financial services to be supervised and examined by the same federal regulators that oversee banks.
“If they want to play the game let's play it, but let's play it fairly,” said Richard Hunt, the president and CEO of the Consumer Bankers Association, the trade association for retail banking.
Retailers see little need for further regulation.
“We have a positive ongoing dialogue with relevant regulators and believe that our products are properly and adequately regulated,” said Spencer, the Wal-Mart spokeswoman.
Consumer advocates say expanding financial services to people who might not otherwise have access to bank accounts or credit might be a positive trend, although they're concerned about the lack of legal safeguards.
Of special concern are prepaid cards. Consumers are expected to load $200 billion on such cards this year, according to the Mercator Advisory Group, a Massachusetts-based research firm.
Prepaid card issuers don't have to disclose fees, and if cards are stolen or lost, federal regulations don't guarantee that cardholders will get their money back. Some issuers provide fraud protection, fee disclosures, dispute-resolution rights and FDIC insurance even though they aren't required by law.
That might change soon. Last May, the Consumer Financial Protection Bureau, a government watchdog agency, published notice of proposed rulemaking about prepaid cards.
For now, people should make sure they read and understand the terms of whatever financial products they're considering, advised Jeanne Hogarth, the vice president of policy at the Center for Financial Services Innovation, a Chicago-based nonprofit group that focuses on helping underserved consumers get access to quality financial products.