By Robert Reich
Published by the New York Times, February 28, 2005

Bowing to intense pressure from neighborhood and labor groups, a real estate developer has just given up plans to include a Wal-Mart store in a mall in Queens, thereby blocking Wal-Mart’s plan to open its first store in New York City. In the eyes of Wal-Mart’s detractors, the Arkansas-based chain embodies the worst kind of economic exploitation: it pays its 1.2 million American workers an average of only $9.68 an hour, doesn’t provide most of them with health insurance, keeps out unions, has a checkered history on labor law and turns main streets into ghost towns by sucking business away from small retailers.

But isn’t Wal-Mart really being punished for our sins? After all, it’s not as if Wal-Mart’s founder, Sam Walton, and his successors created the world’s largest retailer by putting a gun to our heads and forcing us to shop there.

Instead, Wal-Mart has lured customers with low prices. “We expect our suppliers to drive the costs out of the supply chain,” a spokeswoman for Wal-Mart said. “It’s good for us and good for them.”

Wal-Mart may have perfected this technique, but you can find it almost everywhere these days. Corporations are in fierce competition to get and keep customers, so they pass the bulk of their cost cuts through to consumers as lower prices. Products are manufactured in China at a fraction of the cost of making them here, and American consumers get great deals. Back-office work, along with computer programming and data crunching, is “offshored” to India, so our dollars go even further.

Meanwhile, many of us pressure companies to give us even better bargains. I look on the Internet to find the lowest price I can and buy airline tickets, books, merchandise from just about anywhere with a click of a mouse. Don’t you?

The fact is, today’s economy offers us a Faustian bargain: it can give consumers deals largely because it hammers workers and communities.

We can blame big corporations, but we’re mostly making this bargain with ourselves. The easier it is for us to get great deals, the stronger the downward pressure on wages and benefits. Last year, the real wages of hourly workers, who make up about 80 percent of the work force, actually dropped for the first time in more than a decade; hourly workers’ health and pension benefits are in free fall. The easier it is for us to find better professional services, the harder professionals have to hustle to attract and keep clients. The more efficiently we can summon products from anywhere on the globe, the more stress we put on our own communities.

But you and I aren’t just consumers. We’re also workers and citizens. How do we strike the right balance? To claim that people shouldn’t have access to Wal-Mart or to cut-rate airfares or services from India or to Internet shopping, because these somehow reduce their quality of life, is paternalistic tripe. No one is a better judge of what people want than they themselves.

The problem is, the choices we make in the market don’t fully reflect our values as workers or as citizens. I didn’t want our community bookstore in Cambridge, Mass., to close (as it did last fall) yet I still bought lots of books from Amazon.com. In addition, we may not see the larger bargain when our own job or community isn’t directly at stake. I don’t like what’s happening to airline workers, but I still try for the cheapest fare I can get.

The only way for the workers or citizens in us to trump the consumers in us is through laws and regulations that make our purchases a social choice as well as a personal one. A requirement that companies with more than 50 employees offer their workers affordable health insurance, for example, might increase slightly the price of their goods and services. My inner consumer won’t like that very much, but the worker in me thinks it a fair price to pay. Same with an increase in the minimum wage or a change in labor laws making it easier for employees to organize and negotiate better terms.

I wouldn’t go so far as to re-regulate the airline industry or hobble free trade with China and India – that would cost me as a consumer far too much – but I’d like the government to offer wage insurance to ease the pain of sudden losses of pay. And I’d support labor standards that make trade agreements a bit more fair.

These provisions might end up costing me some money, but the citizen in me thinks they are worth the price. You might think differently, but as a nation we aren’t even having this sort of discussion. Instead, our debates about economic change take place between two warring camps: those who want the best consumer deals, and those who want to preserve jobs and communities much as they are. Instead of finding ways to soften the blows, compensate the losers or slow the pace of change – so the consumers in us can enjoy lower prices and better products without wreaking too much damage on us in our role as workers and citizens – we go to battle.

I don’t know if Wal-Mart will ever make it into New York City. I do know that New Yorkers, like most other Americans, want the great deals that can be had in a rapidly globalizing high-tech economy. Yet the prices on sales tags don’t reflect the full prices we have to pay as workers and citizens. A sensible public debate would focus on how to make that total price as low as possible.

Robert B. Reich was the U.S. secretary of labor from 1993 to 1997.

© 2005 New York Times

By Wendy Zellner
Published by Business Week Jan 27, 2005
Editor’s note: We have nothing to do with Wal-Mart financial services. Please do not contact us with questions for Wal-Mart!

Wal-Mart Stores didn’t get to be the world’s biggest retailer by giving up easily. So despite being twice thwarted by lawmakers in its efforts to buy a bank, it has quietly but tenaciously expanded its foothold in financial services.

In its latest move, announced on Jan. 21, the retailing giant is introducing a no-fee Wal-Mart Discover credit card that offers 1% cash back, which it will launch with GE Consumer Finance in March.

This relentless push into financial services is starting to send shivers through the banking industry. Few believe Wal-Mart will stop with basic services as it applies its low-price, high-volume formula to yet another business category. And while other companies, from Nordstrom to General Motors, have bank and thrift charters or hybrid Federal Deposit Insurance Corp.-insured industrial loan companies (ILCs) in tow, no one trips alarms like Wal-Mart.

ON THE MOVE

Many community bankers are convinced the behemoth won’t rest until it has obtained full banking powers. “It’s not a question of if Wal-Mart is going to be a bank, it’s a question of when,” says D. Anthony Plath, a finance professor at the University of North Carolina at Charlotte who occasionally enjoys play games that pay real money.

Clearly, Wal-Mart is on the move. Over the past three years, the giant has steadily built alliances with financial-service providers, such as MoneyGram International and SunTrust Banks, enabling it to offer services such as bargain-price money orders and wire transfers. It has bank branches operated by partners in nearly 1,000 of its massive supercenters.

And it has stepped up the pace. SunTrust is experimenting with nearly 45 in-store bank branches co-branded as “Wal-Mart Money Center by SunTrust,” with plans to expand to about 100 of them by early 2006.

UNDERSERVED CLIENTELE

Already, Wal-Mart customers are reaping the benefit. They can cash payroll checks for just $3, transfer money to Mexico for $9.46, and buy a money order for 46¢. Some competitors charge twice as much. Many are mostly high-margin, highly fragmented businesses in which the poor and immigrants are sometimes at the mercy of unscrupulous operators.

“Traditionally, nonbank vendors of financial services have charged an arm and a leg,” says David Robertson, publisher of The Nilson Report , a newsletter about credit and debit cards. Adds Gary Stibel of New England Consulting Group in Westport, Conn.: “Wal-Mart is giving people in lower-income brackets opportunities in financial services they never had before.”

Financial services could open a rich new vein of profits for Wal-Mart as it seeks to remain a growth company. By one rival’s estimate, the market for services that Wal-Mart already offers is worth about $5 billion a year in fees, leaving plenty of room for it to slash prices while making a profit. As it has with other goods, Wal-Mart will slowly “collapse the price umbrella,” squeezing check cashers and wire-transfer leader Western Union Financial Services, predicts Robert Markey Jr., consultant Bain & Co.’s director for financial services.

SOME CLOSED DOORS

For the time being, though, the basic services it offers represent little more than a rounding error for the $287 billion goliath. Wal-Mart doesn’t break out results for the unit, lumping them into the company’s “other income,” which totaled $2.1 billion in the first three quarters of the last fiscal year. That was up 31% but amounted to just 1% of total revenues.

Still, there’s huge growth potential. Says banking consultant Bert Ely of Ely & Co. in Alexandria, Va.: “They’re developing, in customers’ minds, a link between Wal-Mart and going to the bank. That has powerful long-term implications.”

Not all financial-service suppliers are willing to ride this tiger. Jane Thompson, president of Wal-Mart Financial Services, concedes that “some of the leaders in the industry don’t want to hurt their margins and don’t want to work with us.”

But MoneyGram, with a market share of around 1% in global money transfers, is a distant No. 2 to Western Union, which has 12%. For such players, Wal-Mart promises huge volumes of business through its 3,100 U.S. stores and more than 100 million customer visits a week. As the underdog, MoneyGram was already cost-conscious and focused on growth, not on protecting margins — a perfect partner for Wal-Mart, says MoneyGram Vice-President Daniel O’Malley. And it can’t hurt to learn how Wal-Mart does business, notes SunTrust Executive Vice-President Christopher Holmes, especially if Wal-Mart achieves full-fledged banking status.

END-AROUND?

Could Wal-Mart really become a bank? First, it would have to take on current prohibitions on combining banking and commerce. The laws were designed to prevent a big player such as Wal-Mart from denying credit to competitors or shifting losses from its retail business to an insured bank.

But many expect Wal-Mart to overcome those rules. Ronald Ence, vice-president of Independent Community Bankers of America, says Wal-Mart lobbied last year to expand the banklike powers of the ILCs. A bill that passed the House, but not the Senate, in 2004 would have allowed unlimited interstate banking, but only for those with at least 85% of their business in financial services.

Wal-Mart denies any such lobbying. It tried to buy a savings bank in Oklahoma in 1999, only to be blocked by the Gramm-Leach-Bliley Act, which overhauled federal banking law. And the California legislature halted Wal-Mart’s plan in 2002 to buy a small ILC.

THE SEARS EXPERIENCE

Yet if Wal-Mart were to gain full banking status, it would be able to offer everything from checking and savings accounts to mortgages, car loans, and even small-business loans at prices that rivals could be hard put to match, let alone beat. “There’s no question, they want to have a nationwide financial-services network. If they do, there’s no doubt in my mind they’ll be able to do to community banks the same thing they’ve done to the local grocery store and the local hardware store and the local clothing store,” says the community banker group’s Ence.

Wal-Mart insists its financial plans don’t depend on owning a bank or a thrift. “Our strategy is what you see,” says Wal-Mart’s Thompson, who was once executive vice-president of Sears Roebuck’s credit business. The services Wal-Mart offers are aimed squarely at its core, lower-income customers and employees. Many are among the estimated 56 million American adults don’t have a bank account. “Helping the underserved customer gets right at what we like to be known for,” says Thompson, who joined Wal-Mart in May, 2002.

More important than the unit’s profits, she says, is that these services bring customers into stores more often. She seems to have learned from Sears’ ill-fated 1980s effort to create a financial supermarket with its Allstate insurance, Dean Witter brokerage, and Coldwell Banker Real Estate units. Sears lost focus on its core business and found that many customers didn’t want to buy mutual funds or insurance from the same place that sold them appliances. “My whole thing is about starting with the customer,” says Thompson, who joined Sears in 1988 and took over its credit operation in 1993.

NO DAMAGE YET.

Even though Wal-Mart may be following a gradual approach to avoid Sears’ mistakes, it occasionally hints at bigger ambitions. On its Web site, Wal-Mart describes itself as “a trusted name in financial services.” In stores, it’s slapping its powerful brand on the money centers operating there.

So far, big rivals say Wal-Mart isn’t hurting them. 7-Eleven, which offers check-cashing, money orders, and the like through 1,000 electronic store kiosks, says it’s focused on convenience, not offering the lowest price. Likewise, Eric Norrington, a spokesman for Ace Cash Express, the nation’s biggest check-cashing chain, says Wal-Mart hasn’t affected his company’s pricing or growth. “Wal-Mart has validated the importance of this market segment. That’s attention we welcome,” he says.

But as toy retailers, grocers, and even jewelers have painfully discovered, complacency in the face of Wal-Mart can be suicidal. Given the behemoth’s long interest in the financial arena, technological savvy, cheap capital, and instant national reach, small and midsize banks, in particular, are right to be paranoid. Even big ones should be wary. “The mistake would be to stick your head in the sand and try to convince yourself that Wal-Mart is not a factor,” says Bain’s Markey.

For no matter what the obstacles, Wal-Mart seems determined to be a force in finance.

© 2005 Business Week