From a New York Times article:
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.
“It opened us up to the fact that Costco is more than toilet paper,” said Ms. Neubauer, who lives in Dallas.
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.
Consumer advocates are torn about the growth of this shadow banking industry. Financial products are making it into the hands of people who otherwise might not qualify for them, but these products are not always subject to the same regulations as bank products are. And to turn a profit, retailers generally have to charge more to people with poor credit or none at all.
“These products can come with high fees and few real protections,” said Norma P. Garcia, a senior lawyer with Consumers Union.
For the retailers, banking products are not huge profit centers but a business strategy, meant to put money into customers’ hands and get them buying more.
“You’ve got to remember, Walmart is intended to be a one-stop shop,” said Charles M. Holley Jr., the company’s chief financial officer.
As competition for banking services from retailers and other non-traditional financial services organizations increases, financial institutions will need to be creative in order to defend their core banking clients.
While it’s true that some of the retailers’ customers may include the less- or non-profitable unbanked and underbanked population, some will be desirable prospects in the future. These include recent students, temporarily unemployed individuals, and those clawing back from recent financial struggles.
As some of the financial instititions’ core customers may be tempted to try some of these new products and services, there is a risk that they may not return to their traditional bank or credit union if they are satisfied with the retailers’ offerings.
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