The ongoing battle between bankers and Wal-Mart recently was reignited over the retail giant offering a prepaid card product marketed as an alternative to traditional checking accounts. The banks once again argue payment-related services should be limited to regulated financial institutions.
The bankers also portrayed Wal-Mart as part of an emerging “shadow banking” system in which financial services are provided outside the system of traditional depositories. Companies that provide check cashing, bill payment, money transfers and prepaid cards are effectively competing with banks, the council argued.
The fact that organizations such as Wal-Mart are effectively competing against banks may not be the strongest argument since these service providers have existed in the United States for many years. In addition, Wal-Mart and other such companies have advanced these products into the market in a more cost-effective, convenient, and consumer-friendly way than the traditional or the shadow market has been able to accomplish.
The alternative checking account market is growing rapidly. There are many non-traditional companies besides Wal-Mart offering checking account alternatives to consumers that are built on prepaid card programs. A regulated financial institution, however, backs the program. This mixture is problematic since it blurs the roles and responsibilities of previously contained entities.
Regulators do need to catch up with the market in this regard by defining new stakeholders in the payments value chain and considering how best to incorporate them into new and existing regulatory constructs. But in a rapidly evolving market, weaker participants will fall back and the strongest competitors will survive. The financial services industry is now made up of a wider and more varied set of participants. Outside the U.S., regulators have begun to address these changes, and it’s time we did as well.
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