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November 14, 2012

Banks Face Competition From Retailers on Financial Transactions

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After consolidating the financial sector rather than seeing it broken up over the last few years, Wall Street actually faces competition, in the form of big box retailers.

On a recent shopping trip to Costco, Lilly Neubauer picked up paper towels, lentils, carrots — and a home mortgage.

While Ms. Neubauer, 27, said she was surprised to find the warehouse club selling financial products, she and her husband saved about $200 a month by refinancing there this year. She also bought home insurance from Costco, she said, again because it was cheaper there [...]

As the nation’s largest banks stay stingy with credit and a growing portion of the population has no bank at all, major retailers are stepping into the void. Customers can now withdraw cash at an A.T.M. with a prepaid card from Walmart, take out a loan at Home Depot for a kitchen renovation or kick-start a new venture with a small-business loan from Sam’s Club. This year, Walmart even started to test selling a life insurance policy.

I cannot tell a lie – I found a mortgage lender for refinancing through Costco, too. However, that’s a bit different from retailers actually getting into the banking space, though that is happening as well. Costco just recommends a series of lenders to handle the refi. And they apparently don’t even take a cut on the mortgages.

If you’re just talking about a recommending service, I don’t see the danger here. If this sector grows, however, you may be talking about financial products sold by non-accredited organizations with a profit motive. Complaints about fee pyramiding and other types of fraud upon vulnerable consumers are sure to follow. The Consumer Financial Protection Bureau does now have nominal oversight over certain non-bank financial institutions, and they ought to exercise it. They have already investigated prepaid debit cards, which have become more ubiquitous lately.

The real story here is a shocking lack of attention toward the unbanked. The target audience for these products at Walmart or Target don’t have actual bank accounts. They would otherwise use an even more unscrupulous payday lender or check-cashing entity. Big box stores represent a step up in this regard. And they do provide nominal competition to the big banks, which is healthy to a certain degree. I would rather that competition come from other regulated firms, and the self-awareness that the additional complexity and regulatory compliance aren’t worth the benefit to greater size.

It also shows you just how much trust banks have lost when people would rather do financial lending business with Home Depot or Sam’s Club.

On a somewhat related item, an example of what can happen when companies that rely on retail sales end up screwing over their customers: Here’s a follow-up on the eviction crisis in Spain.

Spain’s banking association announced on Monday it would freeze eviction orders for the next two years in cases of “extreme hardship”, following widespread alarm and protests after a woman killed herself on Friday moments before she was due to be evicted, the second such death in less than a month [...]

Within hours of Egaña’s death noisy protesters had gathered on the streets of Bilbao. Stickers saying “murderers” were fixed to cash machines, while the governing People’s party and opposition Socialists pledged to hold an emergency meeting on Monday to agree on reforming mortgage laws [...]

The United Police Union said it would back any of its members who conscientiously objected to enforcing eviction orders.

“We’re not robots, we’re human beings and this is like the soldier in a firing squad who refuses to shoot, even knowing he will take the place of the one to be shot,” said Jose Manuel Sanchez, the union’s secretary general.

So go ahead, Walmart, just try to profit from fraud and abuse. You may get away with it in the short-term, or you may see graffiti affixed to all your stores, protests outside them, law enforcement refusing to carry out orders on your behalf, and so on. But I’m a dreamer…

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