Could the mega-retailer take over the business of sending money home?
- By Jamila TrindleJamila Trindle is a senior reporter who covers finance, economics and business where they intersect with national security and foreign policy. Her beat spans everything from the economic underpinnings of conflict to sanctions, corruption and terror finance. Before coming to Foreign Policy magazine, Jamila reported for the Wall Street Journal’s Washington bureau, covering financial regulation and economics. She has also worked as a foreign correspondent in China, Indonesia and Turkey as a freelancer for NPR, Marketplace, The Guardian and others. She moved back to the U.S. to cover the post-crisis economy for PBS in 2009.
Starting next week, Walmart customers from Anchorage to Miami will be able to send money across the country when they stop by to pick up groceries or shop for bargain electronics.
The service only works in the United States, at least for now. But that’s virtually certain to change, and for a simple reason: The real money in the money transfer business comes from workers in one country sending funds to relatives in another one. Walmart is keeping quiet about its future financial services plans, but expanding them to include cross-border payments would allow the retail giant to take a piece of the $436 billion in remittances that migrant workers send to their home countries each year.
Walmart’s announcement Thursday that it was getting into the domestic wire transfer business drove shares of that industry’s biggest players, MoneyGram and Western Union, down by 17 percent and 5 percent respectively. But those companies, and their competitors, mostly live on the profits they earn sending money abroad, which means Walmart isn’t yet crowding into their main business. Domestic transfers made up only 8 percent of the Western Union’s revenue last year, a spokesman said in a statement Friday.
For now, Walmart is targeting people in the U.S. who don’t use traditional banks. About ten percent of Americans don’t have a checking account, according to a 2011 Federal Deposit Insurance Corporation study. The transfers Walmart offers will allow people to send up to $900 from any U.S. store to another one for $9.50. Western Union charges $85 to send $900 within the U.S., according to an estimate on the company’s website.
Analyst Thad Peterson said Walmart’s aggressive expansion into other countries could mean international transfers are next.
"If they can do a Walmart-to-Walmart transfer from Cleveland to Los Angeles, why can’t they do one from Cleveland to Delhi, once they have a store there?" said Peterson, who is a senior analyst with financial services consultancy Aite Group.
That wouldn’t be as easy in real life as it might seem on paper. Washington has imposed tough regulations on the wire transfer business to make sure that banks and companies like Western Union aren’t unwittingly allowing money to be sent to drug traffickers, terrorists, and other international criminal networks. Walmart offers check cashing and prepaid cards, but Ben Jackson, a senior analyst with Mercator Advisory Group, said the retail giant might decide that cross-border transactions aren’t worth the hassle.
"The regulations around remittances, at this point, have become so onerous that it’s almost impossible to fully comply with everything and make a profit," he said.
Peter Kelly knows those challenges first hand. In 2008, he helped start a company called Boom Financial that is designed to allow people in the United States to send money to Mexico and other countries. He said the venture-backed private startup had to spend tens of millions of dollars to obtain the licenses and hire the people required to make sure it was meeting regulatory standards as it was getting off the ground.
"The upfront operating cost of doing business discourages innovation," Kelly said.
Still, Walmart would have an array of appealing options if it chose to plunge ahead anyway. Mexico would be the easiest and the most potentially lucrative, at least in the short term. The company opened its first foreign store in Mexico in 1991; it now operates 2,200 stores there under various brand names, according to the company’s website. Mexicans living in other countries sent home $22 billion in 2013, according to the World Bank. Getting even a sliver of that money could represent millions of dollars for the retail giant.
Walmart is already well positioned to expand globally. Its new partner for the wire service venture is Ria Money Transfer, which operates in 135 countries. Walmart itself has stores in 27 countries, including economic powerhouses like Brazil and China. It also has stakes in retail chains with stores in smaller countries ranging from Chile to Botswana. Taken together, Walmart and Ria already have access to dozens of markets.
"Walmart really wants people to come into the stores to spend money and buy products, so this is ancillary to that, but if it allows them to become the source of all the daily needs of immigrants and others then we’ll see expansion," Jackson said.
In a strange bedfellows alliance, Walmart — which has tangled with regulators and lawmakers throughout the United States — could have some powerful supporters if it chose to expand into the cross-border wire transfer business. The World Bank and the United States Agency for International Development have been trying to encourage greater competition in the money transfer business to bring down the costs of wiring money. The fees have dropped slightly, by half a percentage point over the past year, but people still pay an average of 8% of the amount being sent, according to the World Bank. Whether Walmart will eventually try to undercut that price is unclear. The company did not respond to requests for comment.