The Washington Post recently reported that nearly 30 million households do not have bank accounts. These “unbanked” customers are looking to their local big-box retailer for basic banking services, such as check cashing, money transfers, and prepaid cards. In addition to Wal-Mart, which is already expanding into retail banking, the Chicago Tribune details how K-Mart is now testing new financial centers in 23 stores “where shoppers can cash checks, pay bills, place money orders, and transfer money.”
Banks should have two key takeaways from retailers’ moves into the financial services space. First, additional competitors will put pressure on fees. Many banks have significantly increased fees in response to regulation, resulting in attrition and lower account generation. Additional competition will only exacerbate this problem, and banks will need to decide if and how they want to compete for accounts.
However, retailers are actually providing banks with a unique learning opportunity. Banks should determine the impact of competitor actions by measuring the number of accounts lost at nearby branches, as compared to other similar branches where retailers have not opened a financial center.
The number of accounts lost should be looked at in comparison with the profitability of those accounts to determine how to best respond to competitor actions. If the accounts lost were not profitable to begin with, then no action is required. However, if profitable accounts are being lost, banks may need to consider new fee structures or other incentives to keep those accounts.
A second key takeaway is to learn from how retailers rigorously test new ideas before rolling them out. K-mart is testing these new financial centers in 23 locations before rolling the idea out more broadly. Wal-Mart has been slowly expanding its own financial center program, and as of a September article in US Banker, money centers were still only in 40% of stores. (more…)