There’s been talk, in the recent past about Wal-Mart being allowed to enter the commercial banking sector. Which, eventhough I work on an incentive plan for commercial lenders at a bank with which Wal-Mart would likely directly compete if it did this nationally, I don’t really feel all that worried about.
Why? Well even if, as Professor Cowen expects, Wal-Mart is run much more efficiently than most banking firms (and I have some doubts about that, but it certainly wouldn’t surprise me), I doubt Wal-Mart will actually be any good at lending.
First of all, there are a billion and a half rules that they’d have to follow just to make commercial loans or accept certain kinds of depository relationships.
Secondly, and I think this presents a bigger issue, there’s a bit of a disconnect between low low prices and the sorts of folks who will go to Wal-Mart for a commercial loan instead of a more established bank. Wal-Mart’s customers tend to be, well, poor. Wal-Mart also pays low wages for unskilled labor for the most part. Outside of executive management there’s very little that requires any degree of skill done at any given Wal-Mart on any given day. That is to say, that the person you run into at the photo counter at Wal-Mart pretty much represents the dregs of the labor market: cheap, unskilled, easily replacable.
If, and this is a big if, this sort of model goes into management, it’s safe to assume that Wal-Mart gets the dregs of the management labor market as well, etc. Presuming that, I wonder if Wal-Mart would be able or willing to pay sufficiently high wages to attract extremely good commercial lenders. As frustrating as I find them sometimes, those folks are sharp, well-educated, and well trained. They are also quite well paid. Trust me, I know how many we have and what our incentive comp plan cost last year. And it wasn’t cheap, but the ROI on it was well worth the cost. Of course, we have good lenders and strict lending requirements.
If Wal-Mart cannot or won’t pay the money needed to attract really crack-shot lenders, what role does Wal-Mart’s customer base play? Well, you see, poor people present a significant credit risk. For significant credit risks banks tend to charge higher interest rates and more fees…but that sort of undercuts “low low” prices for Wal-Mart’s target audience. It might be that they’ll prefer a three year C&I at prime+2% or more to not getting a loan at all, but they’ll still pose a significant risk to the bottom line of the company. Sure, they’ll likely be small loans, but enough volume makes a big difference and Wal-Mart is well-known for dealing in volume.
The point is that if you have mediocre lenders making credit decisions out of a pool of applicants most other banks wouldn’t touch with a stolen loan memo it’s going to be hard to make money. Now, maybe Wal-Mart can afford to lose some money until it establishes a foothold and gains some traction in the market. I can also see them doing pretty well on some sort of referal basis specializing in high-risk loans, perhaps. On the depository side, unless they can revolutionize ACH overnight, I doubt ATM fees will come down.
