Yesterday, Walmart, under the brand “GoBank” announced that they will offer checking accounts to anyone over 18 that can pass an identification check. The giant retailer will leverage its partnership with Green Dot Bank and offer a debit card-linked, mobile checking account starting in late October that will cost $8.95 per month for accounts under $500 with a direct deposit (free if over) and $2.95 to set up. The move strikes right at the heart of bank’s most profitable products taking away future needed balances. So what shall we do about it? We have discussed and here are three things we recommend, most of which will surprise you:
Be Thankful – While there will be lots of social media play, headlines and pundits calling this move the death of banks just how Walmart has terminated many local merchants, don’t believe any of it. The reality is the person that a GoBank checking account appeals to is likely not your target customer. There are 10 million households that don’t have a relationship with a bank and our industry has done little about it. We, as an industry, have had amble chances to target these customers, but we chose not to. This is for good reason. We estimate that 85%+ of these accounts are unprofitable with more than 50% of these customers are a material drain to capital. We used overdraft fees and protection programs to turn some of these accounts profitable, but as we all know those economics have changed. These accounts are not getting any overdraft protection from WalMart, so if the service is really as valuable as we all think, we shouldn’t fear losing this segment of customers.
Walmart has a less expensive channel delivery system in their stores and can now offer a cheaper product. These households, instead of going to checking cashing establishments, or just using prepaid cards and carrying high cash balances can now save money and have a safer financial relationship. Walmart/Green Dot can now handle the regulation. Hopefully, this means cheaper banking costs for these households and the saved money can be used to increase their standard of living slightly – a net plus for society.
Get Competitive – This isn’t to say we should ignore Walmart’s major entry into banking; on the contrary. We should welcome the competition as this should make us better and force us to make much needed investments in our process and infrastructure. For starters, all of us should review our account opening process. Banks that still require customers to fill out four different sets of paper forms with multiple address lines and signatures need to relook at their process. GoBank, like many other banks, has designed a mobile system so that information is collected digitally, signatures are via mobile and the necessary compliance information is collected automatically. Walmart can process checking accounts and a half to a third of the cost that a community bank can and we need to follow suit. While we may not want the unbanked household, we don’t want Walmart creeping up the value chain.
Mind Your Business Model – Understand the profitability equation at your bank and plan to change it for the future. Banks need to know where to draw the defensive line. While letting a $300 balanced checking account go will likely save you money, what about an $800 or $1,400 dollar one. Most banks have a breakeven for between $220 and $1,400 depending on their cost structure, number of processed items, overdrafts, fees and monthly charges. Understand where that number is and know that it will come down as fewer checks and items will be processed for the future.
Walmart profits from these customers through the cross-sell margins. As customers come in to cash checks or make changes to their account, they will shop. While we are not suggesting banks start selling pajama sets over in new accounts, banks do need to figure out what other value added services can be pared with basic checking to make these accounts profitable. Payroll cards, insurance, retirement planning, consumer loans, international services, custodial services and a hundred of other lines of business can and should be pared with basic accounts to increase profitability.
Walmart’s move into financial services has been telegraphed for a while ever since they applied to get a bank charter back in 2007 so none of this should be a surprise. It is debatable if Walmart wants to or offer other banking products and go after higher value customers. We doubt it, but it is possible. Regardless, all banks should use this as a wakeup call to find ways to drop processing costs, increase targeted marketing and beef up their profitable product offerings so that we can retain the customers we really want.
Submitted by Chris Nichols on September 24, 2014