In Mexico, Wal-Mart Is Counting on Banking
In Mexico, Wal-Mart Is Counting on Banking
Kept out of financial services in the U.S., the retailer sees an opening for serving its customers south of the border.
By Marla Dickerson, Times Staff Writer
August 27, 2006
MEXICO CITY — Wal-Mart Stores Inc.'s Mexican unit has won loyal customers with low prices on such merchandise as tennis shoes, refried beans and toilet paper. Now Mexico's largest retailer is looking to slash the price of another consumer staple: banking.
The unit, Wal-Mart de Mexico, confirmed this month that it had applied for a banking license, raising the possibility that Wal-Mart shoppers south of the border soon may be opening checking accounts and taking out auto loans while filling up their grocery carts.
Wal-Mart executives aren't disclosing details of the company's strategy or even the proposed bank's name pending a regulatory review of the application. That process could take months. But a company spokesman confirmed that the retailer known for squeezing suppliers for low prices aimed to bring the same peso-pinching mentality to financial services.
"We believe that this efficiency that we learned in developing the retail sector we'll be able to transfer to the banking business," Raul Arguelles, vice president of corporate affairs, said in an interview at Wal-Mart de Mexico's headquarters here.
Mexican customers can already get store-branded credit cards that Wal-Mart offers through third-party providers. They can wire money, make deposits, cash checks and perform other transactions thanks to agreements the retailer has made with institutions including BBVA Bancomer and MoneyGram International to operate branches and ATMs inside some stores.
But setting up its own bank in Mexico would be a first for the global giant, which has run into a buzz saw of opposition in the United States to its bid for a banking charter there.
The Mexican unit of Bentonville, Ark.-based Wal-Mart operates 833 restaurants, supermarkets and retail stores under the names Wal-Mart Supercenter, Sam's Club, Suburbia, Bodega Aurerra, Superama and Vips.
Arguelles said the company probably would start out offering basic savings accounts and credit cards in branches at some locations, eventually moving into checking, car loans, mortgages and even business credit.
That's welcome news for Wal-Mart customers such as Ernesto Contreras Ramirez, who is fed up with traditional financial institutions. The 44-year-old taxi driver said he was grateful to Wal-Mart for granting him a credit card when his bank turned him down, even though he has nearly $7,500 on deposit there. The meager rate of interest he earns and the maintenance fees that eat into his nest egg irk him as well.
"If Wal-Mart opens a bank that gives me more benefits, well, for sure I'm going to switch," said Contreras, who had stopped by a Wal-Mart Supercenter on the capital's south side with his wife and two daughters to pick up milk, eggs and soft drinks.
Wal-Mart is just the latest hopeful among a slew of companies entering the banking business in Mexico. The country's authorities are eager to bring more competition to the industry, 90% of which is controlled by half a dozen players that cater largely to big business and well-heeled individuals.
The Treasury Ministry has granted licenses to six new banks in the last eight months. Half went to nontraditional lenders that plan to target lower-income Mexicans. Those were Banco Ahorro Famsa, owned by Monterrey-based appliance retailer Grupo Famsa; Banco Autofin Mexico, a unit of car and home financer Grupo Autofin; and Banco Compartamos, a venture of Compartamos, Mexico's largest micro-credit institution, which makes tiny business loans to the poor.
The movement stands in sharp contrast to the situation in the United States, where commercial enterprises are prevented by law from owning full-service banks. U.S. companies can obtain more restrictive charters to operate "industrial loan corporations" to process financial transactions or offer loans to their customers.
Wal-Mart's pending application to open one of these specialized institutions in the U.S. has provoked an outcry from many community banks. The retailer said it intended to use the operation to process credit card and other electronic payments.
But small banks fear that the behemoth will use its charter as a backdoor route to opening branches in its 3,900 U.S. stores, threatening their business. The Federal Deposit Insurance Corp., trying to defuse the uproar, recently announced a six-month ban on granting charters for industrial loan corporations.
But Mexican regulators are encouraging new players in Latin America's second-largest economy, which is woefully underbanked for its size. The financial sector was slammed by the nation's peso devaluation in 1994, which led to a massive wave of loan defaults and a costly government bailout.
The vast majority of Mexico's 106 million citizens don't have a bank account or credit card, much less car or home loans. Annual interest rates on some bank credit cards top 70%. Mexico ranks lower than most of Latin America's other major economies in credit granted to the private sector as a percentage of GDP, data gathered by Morgan Stanley show.
This dearth of loans to consumers and businesses is a big drag on Mexico's development. Although low inflation and a stable economy have emboldened Mexico's big banks to step up consumer lending in recent years, they still largely ignore the poor and working classes. Millions of self-employed people who toil for cash in the informal economy as taxi driver Contreras does are deemed too risky by traditional banks.
But these consumers represent a potentially lucrative opportunity for Wal-Mart and other retailers, according to Jorge Kuri, a Latin America banking analyst with Morgan Stanley in New York. He said banking was a way to reap handsome lending spreads on deposits while offering one more service to lure shoppers through their doors.
"There is opportunity in the low-income market," Kuri said. "That's what these entities are going after."
Some institutions already have proved that lending to those of modest means can be profitable. Mexico City-based retailer Grupo Elektra helped pioneer the concept of in-store financing by offering working-class Mexicans credit on furniture, appliances and electronics.
That experience helped the company win a banking license in 2002, the first granted by Mexican authorities since the mid-'90s financial crisis. Today, its Banco Azteca has more than 1,500 branches located mainly in its retail outlets in Mexico and Panama. In 2005, the bank's deposits and net income grew nearly 50% over 2004 levels. Grupo Elektra executives have credited the bank with helping drive record sales at its stores.
Retailers such as Wal-Mart would love to emulate that success. But it may not be easy.
Although companies in the U.S can easily check a person's credit history with one of three big agencies, Mexican firms know that only a tiny fraction of the population is listed in a similar registry here.
Instead, Grupo Elektra built its own borrower database over decades, gaining valuable insight into how to lend to people whose work and credit histories are hard to verify and whose incomes can be precarious.
Wal-Mart would be wading into these uncertainties if it launched a bank, analyst Kuri noted.
"You're talking about lending to people that have small salaries and who are very susceptible to changes in macroeconomic conditions. It's not like they have savings to pay their debts for a couple of months if something happens," he said. "So it is a high-risk strategy … with a steep learning curve."
Wal-Mart's Arguelles said the company had recruited a team of veteran bankers to help it develop a business model. Once the license is approved, he said, the company will take a slow, conservative approach to rolling out the operation. But Wal-Mart's bank will be guided by the same low-price strategy that helped it flourish in retailing.
"The humblest, poorest people should stop paying the highest prices," Arguelles said.
Times staff writer Cecilia Sanchez contributed to this report.
Copyright 2006 Los Angeles Times
Kept out of financial services in the U.S., the retailer sees an opening for serving its customers south of the border.
By Marla Dickerson, Times Staff Writer
August 27, 2006
MEXICO CITY — Wal-Mart Stores Inc.'s Mexican unit has won loyal customers with low prices on such merchandise as tennis shoes, refried beans and toilet paper. Now Mexico's largest retailer is looking to slash the price of another consumer staple: banking.
The unit, Wal-Mart de Mexico, confirmed this month that it had applied for a banking license, raising the possibility that Wal-Mart shoppers south of the border soon may be opening checking accounts and taking out auto loans while filling up their grocery carts.
Wal-Mart executives aren't disclosing details of the company's strategy or even the proposed bank's name pending a regulatory review of the application. That process could take months. But a company spokesman confirmed that the retailer known for squeezing suppliers for low prices aimed to bring the same peso-pinching mentality to financial services.
"We believe that this efficiency that we learned in developing the retail sector we'll be able to transfer to the banking business," Raul Arguelles, vice president of corporate affairs, said in an interview at Wal-Mart de Mexico's headquarters here.
Mexican customers can already get store-branded credit cards that Wal-Mart offers through third-party providers. They can wire money, make deposits, cash checks and perform other transactions thanks to agreements the retailer has made with institutions including BBVA Bancomer and MoneyGram International to operate branches and ATMs inside some stores.
But setting up its own bank in Mexico would be a first for the global giant, which has run into a buzz saw of opposition in the United States to its bid for a banking charter there.
The Mexican unit of Bentonville, Ark.-based Wal-Mart operates 833 restaurants, supermarkets and retail stores under the names Wal-Mart Supercenter, Sam's Club, Suburbia, Bodega Aurerra, Superama and Vips.
Arguelles said the company probably would start out offering basic savings accounts and credit cards in branches at some locations, eventually moving into checking, car loans, mortgages and even business credit.
That's welcome news for Wal-Mart customers such as Ernesto Contreras Ramirez, who is fed up with traditional financial institutions. The 44-year-old taxi driver said he was grateful to Wal-Mart for granting him a credit card when his bank turned him down, even though he has nearly $7,500 on deposit there. The meager rate of interest he earns and the maintenance fees that eat into his nest egg irk him as well.
"If Wal-Mart opens a bank that gives me more benefits, well, for sure I'm going to switch," said Contreras, who had stopped by a Wal-Mart Supercenter on the capital's south side with his wife and two daughters to pick up milk, eggs and soft drinks.
Wal-Mart is just the latest hopeful among a slew of companies entering the banking business in Mexico. The country's authorities are eager to bring more competition to the industry, 90% of which is controlled by half a dozen players that cater largely to big business and well-heeled individuals.
The Treasury Ministry has granted licenses to six new banks in the last eight months. Half went to nontraditional lenders that plan to target lower-income Mexicans. Those were Banco Ahorro Famsa, owned by Monterrey-based appliance retailer Grupo Famsa; Banco Autofin Mexico, a unit of car and home financer Grupo Autofin; and Banco Compartamos, a venture of Compartamos, Mexico's largest micro-credit institution, which makes tiny business loans to the poor.
The movement stands in sharp contrast to the situation in the United States, where commercial enterprises are prevented by law from owning full-service banks. U.S. companies can obtain more restrictive charters to operate "industrial loan corporations" to process financial transactions or offer loans to their customers.
Wal-Mart's pending application to open one of these specialized institutions in the U.S. has provoked an outcry from many community banks. The retailer said it intended to use the operation to process credit card and other electronic payments.
But small banks fear that the behemoth will use its charter as a backdoor route to opening branches in its 3,900 U.S. stores, threatening their business. The Federal Deposit Insurance Corp., trying to defuse the uproar, recently announced a six-month ban on granting charters for industrial loan corporations.
But Mexican regulators are encouraging new players in Latin America's second-largest economy, which is woefully underbanked for its size. The financial sector was slammed by the nation's peso devaluation in 1994, which led to a massive wave of loan defaults and a costly government bailout.
The vast majority of Mexico's 106 million citizens don't have a bank account or credit card, much less car or home loans. Annual interest rates on some bank credit cards top 70%. Mexico ranks lower than most of Latin America's other major economies in credit granted to the private sector as a percentage of GDP, data gathered by Morgan Stanley show.
This dearth of loans to consumers and businesses is a big drag on Mexico's development. Although low inflation and a stable economy have emboldened Mexico's big banks to step up consumer lending in recent years, they still largely ignore the poor and working classes. Millions of self-employed people who toil for cash in the informal economy as taxi driver Contreras does are deemed too risky by traditional banks.
But these consumers represent a potentially lucrative opportunity for Wal-Mart and other retailers, according to Jorge Kuri, a Latin America banking analyst with Morgan Stanley in New York. He said banking was a way to reap handsome lending spreads on deposits while offering one more service to lure shoppers through their doors.
"There is opportunity in the low-income market," Kuri said. "That's what these entities are going after."
Some institutions already have proved that lending to those of modest means can be profitable. Mexico City-based retailer Grupo Elektra helped pioneer the concept of in-store financing by offering working-class Mexicans credit on furniture, appliances and electronics.
That experience helped the company win a banking license in 2002, the first granted by Mexican authorities since the mid-'90s financial crisis. Today, its Banco Azteca has more than 1,500 branches located mainly in its retail outlets in Mexico and Panama. In 2005, the bank's deposits and net income grew nearly 50% over 2004 levels. Grupo Elektra executives have credited the bank with helping drive record sales at its stores.
Retailers such as Wal-Mart would love to emulate that success. But it may not be easy.
Although companies in the U.S can easily check a person's credit history with one of three big agencies, Mexican firms know that only a tiny fraction of the population is listed in a similar registry here.
Instead, Grupo Elektra built its own borrower database over decades, gaining valuable insight into how to lend to people whose work and credit histories are hard to verify and whose incomes can be precarious.
Wal-Mart would be wading into these uncertainties if it launched a bank, analyst Kuri noted.
"You're talking about lending to people that have small salaries and who are very susceptible to changes in macroeconomic conditions. It's not like they have savings to pay their debts for a couple of months if something happens," he said. "So it is a high-risk strategy … with a steep learning curve."
Wal-Mart's Arguelles said the company had recruited a team of veteran bankers to help it develop a business model. Once the license is approved, he said, the company will take a slow, conservative approach to rolling out the operation. But Wal-Mart's bank will be guided by the same low-price strategy that helped it flourish in retailing.
"The humblest, poorest people should stop paying the highest prices," Arguelles said.
Times staff writer Cecilia Sanchez contributed to this report.
Copyright 2006 Los Angeles Times
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