Wal-Mart and the “Fringe Banking” Sector

Yesterday, NPR’s “Planet Money” blog ran a post about Wal-Mart’s plans to expand their network of “MoneyCenters.” These are locations in Wal-Mart stores that offer check cashing and other transactional financial services (bill paying, remittances) that most “banked” Americans perform at banks, however the “fringe banking” sector serves the “underbanked,” and that is a huge slice of the country.

The blog post quotes our own Alejandra Lopez-Fernandini: 

Lots of those people go to local check-cashing outfits that often charge high fees. So Wal-Mart, which charges $3 to $6 cash a check, can be a good alternative, said Alejandra Lopez-Fernandini, who works for a New America Foundation program that aims to help low- and middle-income people build wealth.

At the same time, she said, using Wal-Mart to cash checks is “a band-aid” — what people really need to do to start moving up the economic ladder is establish a relationship with a bank or credit union.

Matt Yglesias picked up on this and uses the first paragraph above and makes the point that:

If you’re cashing, for example, a $1,000 biweekly paycheck then $6 is almost one third the price MoneyGram is asking. Nothing too earth-shattering about this, but it underscores the point that a lot of the time the best solution to abusive business practices is to find ways to get competing firms into the business.

Matt makes a great point, competition is a powerful force and more competition would help consumers to avoid the extreme fees that folks in the “fringe” sector often face. Now, what would be better than competition from Wal-Mart would be competition from more banks and credit unions, institutions that have the capacity to deliver high-value, low-cost financial services and can provide the opportunity to build savings and wealth over time (and are currently having their lunch eaten by check cashers who are generally high-fee and low-value.) Wal-Mart and the check cashing joint on the corner can’t take deposits and they don’t have an interest in helping people build a nest-egg that can be turned into a house, a college education, or a small business. That’s why we’d like to see a universal system of accounts opened at birth, and for more immediate results why we’re helping to operate a pilot project that encourages employers to open up savings accounts and set up direct deposit into those accounts for their employees.

Competition can help bring down costs for consumers, but better still would be changes to the financial architecture in which we work that would help to build a secure economic foundation for families and reduce the need for these kind of band-aid services.