Need to refinance your mortgage? Just put it on your shopping list next time you visit Costco, alongside the jumbo paper towels and the 6-gallon bucket of cat kibble.
Big-box retail stores today offer a growing number of financial services, from check cashing and reloadable pre-paid cards to small business loans and life insurance.
The products appeal to consumers attracted to the convenience of one-stop shopping and fed up with the overdraft fees, tight credit and minimum balances at banks. But retailers aren’t subject to the same federal oversight as banks, and they might not always provide the same consumer protections.
Ten million American households – 1 in 12 – don’t have any checking or savings accounts, according to a 2011 survey by the Federal Deposit Insurance Corp. Twenty-four million households – 1 in 5 – have accounts but also rely on alternative financial services such as non-bank money orders, check cashing, payday loans, tax refund loans and pawnshops.
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Major retailers are developing an ever-expanding menu of financial products aimed at this underserved population, a market that generates more than $78 billion annually in fee and interest revenue.
In addition to mortgages, for example, Costco advertises identity protection, boat and RV loans, as well as auto, home and health insurance.
At Home Depot, customers may get home improvement loans for up to $40,000.
Walmart, the nation’s largest retailer, offers tax preparation, check cashing, in-store bill paying, money transfers and prepaid cards that function as debit and checking alternatives.
Through a partnership with American Express, Walmart’s reloadable Bluebird card allows direct deposits and pre-authorized check writing, has no monthly, annual or overdraft fees and may carry a balance of up to $100,000. Last month, Walmart announced that Bluebird accounts would be eligible for FDIC insurance, enabling deposits of government payments such as Social Security, military pay and tax refunds.
“We know many of our customers either don’t have a bank account or are poorly served by banks given the costs and service issues they find with them,” Walmart spokeswoman Sarah Spencer said in an email. “They continue to seek alternatives that improve both the convenience and cost of everyday money services.”
Walmart’s latest experiment is insurance. About 200 Walmart stores in Georgia and South Carolina are testing sales of life insurance policies. Customers at participating stores may purchase prepaid cards at the stores that may be used to pay for one-year terms. The customers then activate the policies by calling a toll-free number and speaking with licensed MetLife agents.
Retailers’ interest in financial products isn’t new, dating back decades to store credit and, later, branded credit cards. Walmart even sought a special charter to establish its own bank, but the company withdrew its application in 2007 after facing resistance from the banking industry and lawmakers.
Spencer told McClatchy that Walmart no longer wants to become a bank, and it doesn’t have plans to provide mortgages, although Sam’s Club, a division of Walmart, does offer small business loans up to $25,000.
Clearly, the lack of charters isn’t stopping Walmart or other retailers from providing many of the same services traditionally found at neighborhood bank branches. Often, they simply partner with third-party credit card companies, lenders or insurance agents to make the products available to shoppers in stores or online.
Home Depot’s loans, for example, are backed by a consortium of mid-tier banks. The customer applies in the store, then the application goes to a financial provider that “operates a little like a LendingTree,” said Brandon Hayes, the director of financial services at Home Depot. “They have a series of banks behind them that set up the loans. . . . It’s still a Home Depot product, but we’re not the one doing the direct lending. The risks sit with the banks behind us.”
Hayes said Home Depot didn’t see itself as a financial services company. “We are a retailer that uses financial services to facilitate a sale,” he said.
Bankers consider big-box stores competitors, however, and they want retailers that offer financial services to be supervised and examined by the same federal regulators that oversee banks.
“If they want to play the game let’s play it, but let’s play it fairly,” said Richard Hunt, the president and CEO of the Consumer Bankers Association, the trade association for retail banking.
Retailers see little need for further regulation.
“We have a positive ongoing dialogue with relevant regulators and believe that our products are properly and adequately regulated,” said Spencer, the Walmart spokeswoman. “In many cases, the regulated entity is the financial services partner that ‘manufactures’ the product.”
Consumer advocates say expanding financial services to people who might not otherwise have access to bank accounts or credit might be a positive trend, although they’re concerned about the lack of legal safeguards.
People who fail to read the fine print might find themselves paying high fees and shelling out extra money for fraud prevention or customer service calls or to check balances, said Pamela Banks, a senior policy counsel for financial services at Consumers Union, a nonprofit advocacy organization in Washington.
“I think Costco and Walmart have done a business assessment and realized that there are a lot of people that don’t go to traditional banks, and they’re trying to fill that void,” Banks said. “Hopefully they’ll do that in a way that’s fair to consumers as well as a business plan that works for them.”
Of special concern are prepaid cards. Consumers are expected to load $200 billion on such cards this year, according to the Mercator Advisory Group, a Massachusetts-based research firm.
Prepaid card issuers don’t have to disclose fees, and if cards are stolen or lost, federal regulations don’t guarantee that cardholders will get their money back. Some issuers provide fraud protection, fee disclosures, dispute-resolution rights and FDIC insurance even though they aren’t required by law.
“They could in theory wake up tomorrow and decide not to do that anymore,” said Tom Feltner, the director of financial services for the Consumer Federation of America, an advocacy group.
That might change soon. Last May, the Consumer Financial Protection Bureau, a government watchdog agency, published notice of proposed rulemaking about prepaid cards. The bureau is reviewing the comments it received before it announces any policy decisions.
“The people who use prepaid cards are, in many instances, the most vulnerable among us,” the bureau’s director, Richard Cordray, said at a field hearing in Durham, N.C., where he announced the potential new rule. “All consumers need, and deserve, products which are safe and whose costs and risks are clear upfront.”
The bureau had no comment on the financial products or services offered by Walmart, Costco or other retailers.
For now, people should make sure they read and understand the terms of whatever financial products they’re considering, advised Jeanne Hogarth, the vice president of policy at the Center for Financial Services Innovation, a Chicago-based nonprofit group that focuses on helping underserved consumers get access to quality financial products.
Don’t assume that because you’re at a discount store you’ll get the cheapest transaction fee or the best deal on a loan, Hogarth said.
“If you’re at the Home Depot and you’re thinking about taking out their loan for this project you’re doing, you’ve got your smartphone in your hand and you can punch up the information from your credit union,” she said, “you can do real-time comparison shopping for your loan as much as you can do for your floor tile.”