Big-box banking enjoys little regulation

The world’s largest retailer is also one of the fastest growing big-box bankers in America offering an “a la carte menu of financial services” from check cashing to direct deposit downloads on prepaid debit cards. With roughly 1,500 financial centers dispersed across Walmart’s network of U.S. stores, the company’s infrastructure is on par with Citibank.

But critics say this growing financial service segment has encountered little regulation like their traditional banking competitors with regard to transparency and usage fees charged to consumers.

Walmart faced stiff opposition from the banking sector when it sought out a federal bank charter in 2007. But that didn’t’ stop the retailer from finding a backdoor into what is now a $57.2 billion prepaid debit card market, according to Ben Jackson, senior analyst with Mercator Advisory Group. He said federal regulation is likely another year or so away and by then the market could swell to $116.9 billion.

Mercator estimates debit cards will be downloaded with $81.8 billion this year, a hefty 42.4% gain over 2011 as more retailers get into the game. Jackson said most of the major big-box dealers are already playing in hopes of attracting the ranks of consumers looking for banking alternatives.

The federal government estimates roughly one in four Americans are underbanked, with little or no dealings with local financial institutions. That’s about 30 million consumers who rely on money orders, non-bank check-cashing services, payday loans, rent-to-own agreements or pawn shops at least once or twice a year, according to the study conducted by the Federal Deposit Insurance Corp.

JANE’S TOP PRODUCT
Walmart would not discuss any of its financial services results. But the company’s reloadable Walmart Moneycard is among the cards drawing concern from consumer advocacy groups.

The product is not new, it’s been around since the summer of 2007, and has been touted as Jane Thompson’s favorite product. Thompson oversaw Walmart Stores Inc.’s financial services unit for the past eight years until retiring in June. She was recently named “Banking Innovator of the Year for 2011” by American Banker Magazine. The publication recently quoted Thompson saying the division she ran brought in “many hundreds of millions of dollars” in profit annually for providing important financial services for the underbanked.

Last month Walmart unveiled a plan to draw more consumers to its prepaid debit card. Walmart is temporarily offering a $10 bonus to its customers who set up direct deposits to the Moneycard. The promotion is outlined on the company’s website and its card partner — Green Dot Corporation — mentioned the effort in its recent earnings call.

The Walmart Moneycard is serviced by Green Dot, one of five major debit card service companies — who does similar work for Walgreen’s, K-Mart and AT&T. Monrovia, Calif.-based Green Dot recently reported its fourth quarter revenue rose 26% to $123 million from the prior year. In 2011, Green Dot recorded $485 million in total revenue during 2011, saying its Walmart business comprised 63% of the total — or roughly $306 million.

Green Dot also said direct deposit business is growing at a healthy clip thanks to lower fees and the incentives offered by the Walmart product.

“We believe Americans shouldn’t have to pay exorbitant prices on their everyday financial needs,” Daniel Eckert, vice president of Walmart Financial Services, noted in a Jan. 9 release. Walmart recently announced it would waive its $3 downloadable fee for customers who sign up for direct deposit.

CONSUMER CHARGES
While that does provide some instant savings, some critics say there are still lots of user fees packed into a product touted as an easy alternative to traditional debit cards linked to checking accounts.

For instance Walmart’s MoneyCard, issued by Green Dot carries a $3 monthly maintenance fee, a $2 charge for ATM withdrawals and $1 to check the card balance. While these fees are less than other card issuers, critics say users don’t always fully understand the terms when they sign up.

William Bailey, professor of family finance at the University of Arkansas, says consumers may end up owing the card issuers money because the complex fee structure is anything but easy to comprehend. He said people also will associate the card with the store where it’s purchased when in fact the store relies on a third-party processor to service the card. He said that third party also controls the fees in most cases.

“Here’s a birthday card for $30 with a typical prepaid Visa debit card purchased at a big-box store. The recipient doesn’t realize when he swipes the card to buy a pack of gum, he could incur between $3 to $6 in charges for an initial use fee.There is an up to $6 a month charged for maintenance and if he decides to withdraw the cash from a non-network ATM there is a $2.50 charge. You can see his gift isn’t all that it seemed,” Bailey said.

“A $30 gift card with one particular venue is a much better value,” he added.

The Consumers Union, publisher of Consumer Reports, conducted a study in September 2010 that found the Walmart Moneycard has lower overall fees than others. The Moneycard cost a typical user $38.13 in charges during a 60-day period. The two other cards compared as follows: $40.80 for the Rush Card and $50.10 for the Account Now prepaid card.

Bailey said prepaid debit cards are expensive to use when trying to substitute for a traditional bank account. But others have found the cards useful when ordering one-time purchases online from suppliers based outside the U.S.

Alex Abrams of Fayetteville said he’s used the card for online purchases to avoid using his checking account or credit card information online. The one-time fee is worth the peace of mind, he said.

SEEKING REGULATION
The Consumer Union, in concert with the Consumer Federation of America is advocating for needed improvements and more oversight in the prepaid debit card industry. One area of concern is more protection to prepaid users when cards are lost or stolen or when funds go missing. The group has also asked that fees be simplified and clearly disclosed upfront when a card is purchased.

To date, federal regulation has been scarce in this industry. But Florida’s Attorney General did launch an investigation in May among the five largest prepaid debit card issuers, including Green Dot, Account Now and Unirush Financial.

The nature of the ongoing investigation centers on hidden fees and possible misrepresentations promising to improve consumer’s credit scores. (Walmart’s Moneycard and several other issues have never claimed to improve credit scores.)

Green Dot management noted in the company’s recent earnings call that its contract with Walmart requires the issuer to begin providing a network of ATM’s that allow free withdrawals by this summer. Walmart is under contract with Green Dot until 2015 and receives a 22% monthly commission for the cards it sells. That contract was negotiated in May 2010.

Green Dot also issued 2.2 million shares of company stock to Walmart as a bonus incentive, in addition to raising the commission rate from 8%, according to Green Dot’s annual filing with the Securities and Exchange Commission. Green Dot said the MoneyCard represents 90% of the total operating revenues it derives from products sold at Walmart.

To blur the lines further, Green Dot is in the process of acquiring Utah-based Bonneville Bancorp, a bank holding company, and its commercial subsidiary Bonneville Bank. Once the deal is approved by federal and state regulators, Green Dot will become a bank holding company regulated by the Federal Reserve Board. The proposed bank acquisition is subject to regulatory approval and other customary closing conditions. Green Dot now uses G.E. Retail Commercial Bank as its FDIC-backed partner for the Walmart account.