Walmart’s Financial Services Expansion Hits Hazy Regulatory Space

January 15, 2021

Walmart’s newly announced venture with Ribbit Capital highlights another dimension to the big-box retailer’s growth as it competes with Amazon.

Walmart, which has steadily invested in its digital platform by investing in other online retailers and mobile payments technology, and by expanding customer services, is now building a fintech start-up with investment firm Ribbit. The move would also add to its current roster of financial services through Walmart money center, which offers products and services including credit and debit cards, money transfers and tax preparation services.

But the notion of retailers entering into more traditional financial services, including loans, has prompted wariness from regulators flagging consumer protection concerns. Banks, unlike other commercial businesses, are subject to a higher bar of oversight from agencies including the Federal Deposit Insurance Corporation. In addition, bankers have themselves also been wary of competition from retail entities who are able to track their customers’ spending and buying patterns, experts said.

“There’s this idea that some businesses would be too powerful if they dominated banking and non-banking,” David Zaring, professor at the Wharton School’s department of legal studies and business ethics.

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Walmart has not yet indicated details of projects it will be developing through the venture, but a representative said that the retailer would prioritize customers’ “trust” in Walmart.

“For years, millions of customers have put their trust in Walmart to not only save them money when they shop with us but help them manage their financial needs,” the Walmart representative said in a statement.

“The new company is being developed to create a suite of digitally enabled financial products that are tailored to our customers’ and associates’ unique needs,” the representative said. “As with anything Walmart is involved in, building trust is critical and will be at the center of all of the innovation.”

Retailers have sought in recent decades to operate like banks, trying to get qualified as what’s known as “industrial loan companies.” Legislation such as the Bank Holding Act has tended to exclude such industrial loan companies from its definition of what a bank is, setting these companies up for less stringent oversight, experts said.

The FDIC has of late shown an inclination to permit this — last month, the agency approved a rule to pave the way for non-financial companies to seek banking charters. The shift could encourage more retailers to venture into financial services, said Harsh Arora, partner at Kelley Kronenberg.

“Regulators are [typically] conservative and they want to protect the public,” Arora said. “It’s kind of similar to the Securities and Exchange Commission — any time you’re handling someone’s money, they’re going to want to protect those that are putting their money in the hands of others.”

“Under the Trump administration, the regulators have been pretty receptive to breaking down this barrier that they’ve had between banking and commerce,” he said.

The Walmart-Ribbit venture also harks back to the era of department stores proliferating in-house credit cards, a major revenue-generating function for a lot of retailers in the 1990s, said Lauren Beitelspacher, associate professor at the Babson College marketing division.

Beitelspacher, who two decades ago had herself worked at Saks Inc., said stores at the time saw it as a way to both generate interest revenue, and to track sales in the pre-e-commerce era.

“[For] a lot of retailers, for a long time, that was a major revenue stream for them: the interest rate on in-house proprietary credit cards,” Beitelspacher said.

“Obviously, Walmart has had that expertise for a long time, having different tender types and their own proprietary cards,” she said. “To me, this seems almost like a 21st century, more innovative version of that.”