Walmart's Checking Account Deal Will Further Pressure Banks

Welcome to Walmart. Would you like to open a checking account? The offer is the latest addition to the neighborhood retailer’s budding financial services menu, which bankers have fought to constrain over the past decade as small depositors leave banks for alternatives.

Though banks profit much more on customers who charge credit cards, take out mortgages and invest savings, a rise in the number of Americans using prepaid cards and saving with cash—as well as a rise in the number of non-traditional banking options available—is pressuring banks to find ways to keep themselves at the center of the average person’s finances.

“They’re going to have to work fast to become the trusted adviser of the average consumer and of the lower end consumer,” said Ben Jackson, director of Mercator Advisory Group’s prepaid advisory service. “People don’t stay poor forever, and as they get more money, they have more needs. If Walmart gets credit services enabled over time… the local banks and the larger banks are going to be left behind a little bit.”

Walmart and prepaid card provider Green Dot, which Visa Inc. and Mastercard Inc. issue cards for, are launching a mobile-first checking account called GoBank that targets Americans frustrated with high fees from traditional banks. By the end of October, the accounts will require no minimum balance, charge no overdraft fees and give users access to 42,000 free ATMs. Opening an account will cost $2.95, the price of a starter kit at Walmart, and a few minutes on a cell phone. A monthly fee of $8.95 will be waived for customers who set up a direct deposit of $500 a month or more. Customers can even send money to friends via email or text message.

“The appeal is going to be to consumers who can’t get or don’t want an account at traditional banks,” said Greg McBride, chief financial analyst for Bankrate.com.

The primary appeal of the checking account is the promise of no overdraft fees, but only about one out of seven checking account users incur multiple overdraft charges, according to McBride.

Consumers that use basic checking accounts pay $263-$473 annually, according to a Bretton Woods analysis. That means GoBank’s mobile-based checking account, even paying $107.40 for meeting the direct deposit threshold, would be more than half the cost of the average, traditional checking account.

According to a survey by the Federal Deposit Insurance Corporation, one-quarter of U.S. households conduct some or all of their financial transactions outside the mainstream banking system, including check cashing, bill payments, money transfers and using prepaid debit cards without a bank—all services Walmart already offers. And 90 percent of the underbanked population has access to a mobile phone, according to the FDIC.

Banks have lost interest in keeping lifetime customers as federal regulations like the Derbin Amendment in the Dodd Frank Act in 2010 eroded the revenue streams banks used to earn from overdraft and debit card fees from low balance customers. But now they’re rethinking traditional checking accounts and discussing ways to take a long-term view of low balance customers, Jackson said.

“If they do that, they have the opportunity to become more profitable,” he said.

It’s unclear how much Walmart will directly profit from its checking account offerings, but that’s not exactly the point.

"This is all about getting customers into the store," McBride said.