When people think about Wal-Mart, they often think of the entrenched real estate empire associated with occupying an enormous square footage and might spare a passing thought towards its lagging efforts to compete with Amazon in the growth of online sales. As a result, it is easy to completely neglect the rise of Walmart’s Money Center as a powerful source of fee profits and information-gathering.
I suspect that the online financial media, which generally caters to an upper and middle class audience, completes misses the number of individuals who are unbanked, either by choice or by necessity. In most parts of the country, the Wal-Mart Money Center is, by proxy, their personal bank that charges $3 to $6 for the processing of each check transaction. It provides other “instrument to cash” and “cash to instrument” type services, and this is an extraordinarily easy way for the bank to make money. Outside of intellectual property, it is as close to pure profit as you can find.
Aside from the ease in which Wal-Mart Money Center makes money is the riskless nature of these cash conversions. From the investor’s perspective, this is not the same as investing in a financial institution that carries a meaningful capital requirement.
The motorcycle company Harley-Davidson almost collapsed during the 2008-2009 financial crisis because it fronted cash to motorcycles for a lot of money, and then didn’t receive payment when 18% of motorcycle owners fell more than 90 days behind on their payments or stopped paying altogether. It’s different from when General Electric decided to use aggressive accounting to define adequate capital reserves to mean “the minimum required by law” because GE found itself spending hundreds of millions on Australian real estate at an inflated rate for promissory notes that would never be repaid when the market conditions shifted.
Here, Wal-Mart is merely a processor of transactions. It may provide some cash up-front for three to seven business days, but after that, it no longer has capital tied up since it connects its customers to and from banks rather than serving as one.
Unfortunately, it is difficult to tell the extent to which Wal-Mart Money Centers contribute to the overall profit pie because they are not segregated in Wal-Mart’s reports. This could also be strategic, as it could invite competitive and regulatory scrutiny if it became part of the national dialogue exactly how much Wal-Mart by processing these transactions.
But the FDIC does have maintain the following, slightly outdated, information: “Estimates from the 2015 survey indicate that 7.0 percent of households in the United States were unbanked in 2015. This proportion represents approximately 9.0 million households. An additional 19.9 percent of U.S. households (24.5 million) were underbanked, meaning that the household had a checking or savings account but also obtained financial products and services outside of the banking system.”
That indicates that merely cashing paychecks alone is a $2 billion industry that exists outside of banks. That may not seem like much, considering that Wal-Mart processes almost half-a-trillion dollars in merchandise per year. But Wal-Mart only earns a 3% profit on its in-store sales. When it comes to the $2 billion non-bank check processing industry, the profit margins can range between 30% and 60%. It’s just another world. Coca-Cola, which earns 28% profits on its syrup, can’t compare to the profit rates that are earned by the simple service of processing a check for a fee that doesn’t seem that bad in the moment, but is higher when evaluated cumulative—i.e. paying $6 to get a check processed may not seem that bad, but paying a thousand dollars over a decade just to obtain your payment does.
The benefits of the Wal-Mart Money Center also reinforce the strength of Wal-Mart’s core business of being a super grocery-retail store. If you process a check inside of a Wal-Mart, you are already there and likely to be something. You are also giving Wal-Mart the data about when, where, and what you are doing, which they can use as part of their programming analytics (especially true if your transaction at Wal-Mart isn’t exchange for cash and is further trackable).
So many of these legacy businesses in the world have little gems sitting within them. Most people have no idea that the old Kansas City Railroad owned the Janus mutual fund family. Most people who buy Kroger stock have no idea that, for most of the 21st century, that has included a jewelry operator as well. Many people who own Wal-Mart have no idea they own a money processor that almost literally mints money.