From the Los Angeles Times comes an article about Wal-Mart’s upcoming creation of a Mexico-domiciled bank. Its initiative may have an important impact on how Mexicans in the United States conduct their financial transactions with their home country. There are several converging stories here. First, improving access to low cost banking in Mexico. Second, broadening of Wal-Mart’s extensive U.S. operations in check cashing and expediting remittances from workers to Mexico. Third, a complement to Wal-Mart’s U.S. plan to open “industrial loan corporations,” or stripped down banks, among its 3,900 domestic stores. All in all, Wal-Mart is becoming the banking intermediary of choice of Mexicans living and working in the U.S.
In a prior posting, I wrote how “the Mexican worker in U.S. remits on average $2000 a year to Mexico. Average individual remittance is $300, with transaction fees of $10 to $20. This is a $3.5 billion business growing to $10 billion. This source estimates that only 25% of Mexican workers have a bank account, which presumably supports its $10 billion forecast.”
Excerpts from the article:
The unit, Wal-Mart de Mexico, confirmed this month that it had applied for a banking license, raising the possibility that Wal-Mart shoppers south of the border soon may be opening checking accounts and taking out auto loans while filling up their grocery carts.
Mexican customers can already get store-branded credit cards that Wal-Mart offers through third-party providers. They can wire money, make deposits, cash checks and perform other transactions thanks to agreements the retailer has made with institutions including BBVA Bancomer and MoneyGram International to operate branches and ATMs inside some stores.
The Mexican unit of Bentonville, Ark.-based Wal-Mart operates 833 restaurants, supermarkets and retail stores under the names Wal-Mart Supercenter, Sam’s Club, Suburbia, Bodega Aurerra, Superama and Vips.
[A Wal-Mart spokesman] said the company probably would start out offering basic savings accounts and credit cards in branches at some locations, eventually moving into checking, car loans, mortgages and even business credit.
The Treasury Ministry has granted licenses to six new banks in the last eight months. Half went to nontraditional lenders that plan to target lower-income Mexicans. Those were Banco Ahorro Famsa, owned by Monterrey-based appliance retailer Grupo Famsa; Banco Autofin Mexico, a unit of car and home financer Grupo Autofin; and Banco Compartamos, a venture of Compartamos, Mexico’s largest micro-credit institution, which makes tiny business loans to the poor.
The movement stands in sharp contrast to the situation in the United States, where commercial enterprises are prevented by law from owning full-service banks. U.S. companies can obtain more restrictive charters to operate “industrial loan corporations” to process financial transactions or offer loans to their customers. Wal-Mart’s pending application to open one of these specialized institutions in the U.S. has provoked an outcry from many community banks. The retailer said it intended to use the operation to process credit card and other electronic payments.
But small banks fear that the behemoth will use its charter as a backdoor route to opening branches in its 3,900 U.S. stores, threatening their business. The Federal Deposit Insurance Corp., trying to defuse the uproar, recently announced a six-month ban on granting charters for industrial loan corporations.
The vast majority of Mexico’s 106 million citizens don’t have a bank account or credit card, much less car or home loans. Annual interest rates on some bank credit cards top 70%. Mexico ranks lower than most of Latin America’s other major economies in credit granted to the private sector as a percentage of GDP, data gathered by Morgan Stanley show.
This dearth of loans to consumers and businesses is a big drag on Mexico’s development. Although low inflation and a stable economy have emboldened Mexico’s big banks to step up consumer lending in recent years, they still largely ignore the poor and working classes. Millions of self-employed people who toil for cash in the informal economy as taxi driver Contreras does are deemed too risky by traditional banks.
But these consumers represent a potentially lucrative opportunity for Wal-Mart and other retailers, according to Jorge Kuri, a Latin America banking analyst with Morgan Stanley in New York. He said banking was a way to reap handsome lending spreads on deposits while offering one more service to lure shoppers through their doors.
“There is opportunity in the low-income market,” Kuri said. “That’s what these entities are going after.”