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Prepaid debit cards may shift banking to corner stores

Prepaid cards may shift how people manage money

The new Walgreens in the District of Columbia’s glitzy Gallery Place neighborhood is a wonderland.

It’s got frozen yogurt, a juice bar, a manicure station, a decent selection of craft beers, a health care clinic, a “yoga needs” aisle, refrigerated displays of fresh prepared food, plus everything else you’d expect in a drugstore.

Like other convenience chains, Walgreens is becoming a general store for a world in which it’s easy to buy routine items with a click of a mouse, providing as many amenities as possible – including groceries – to keep you walking through the doors.

Soon, it’ll also be a bank. Wait, what?

Walgreen Co. this month announced that it was rolling out a prepaid debit card at all of its 8,541 locations by the end of the year. And it’s not a run-of-the-mill rechargeable piece of plastic: This one will make online bill payments, cash checks and deposit paychecks.

Enrolling in the program costs $2.95. For members, ATM withdrawals will be free at machines inside the store, with a $2.95 fee for those outside.

For people without a bank account – and there were 10 million of them as of 2011 – dropping into a Walgreens could become the easiest way to manage their finances.

That lends a whole new meaning to the term “convenience store.” It also could shift the ways in which people on the economic margins plan for the future.

Banks have offered prepaid debit cards for years as a way to tap into the unbanked market.

According to the Federal Reserve Bank of Boston, prepaid cards are the fastest-growing segment of the payment industry. About a third of U.S. households used some sort of prepaid card in 2009; in 2012, prepaid cards accounted for $77 billion in transactions.

The growth is also fueled by a rule that kicked in this year requiring recipients of some federal benefits to accept them in electronic form.

It’s easy to understand the appeal: Prepaid cards function in most ways like a regular debit card, except you don’t have to go through the hassle of opening a regular bank account and won’t be burned by overdraft fees.

For a retailer, the upside is even greater. If you can provide a form of payment that has built-in rewards for shopping in your stores, you’ve created customers with a strong loyalty toward your products.

Wal-Mart recognized this a while ago and introduced its Bluebird card, to which Consumers Union gave top marks in a review of the industry this year.

Credit conundrum

There’s just one problem. Like all debit cards, prepaid cards don’t help build a credit history.

While you might be satisfied with using one indefinitely – and some of them have enough features that you might be – you may not be able to make some of the larger investments that can lead to advancement and financial stability, such as taking out a business loan or buying a house.

Banks make it relatively easy to use their prepaid products as a mechanism to sign up for a more robust suite of financial services, which turns marginal customers into more valuable clients.

A retail institution, however, might not be set up for that. Making loans and taking deposits amounts to nothing less than entering an entirely different, highly regulated industry. And unlike more high-margin businesses, convenience stores don’t tend to have billions of dollars in liquidity.

Even if a Wal-Mart or a Walgreens allows the unbanked to elevate themselves from an all-cash existence, the trend might also create a permanently underbanked middle tier that can’t make the jump to traditional credit products.

Lucrative margins

It is possible, however, that retailers could become full-fledged banks.

It has already happened in Britain, after years of conservative government and financial deregulation.

Big grocery chains such as Sainsbury’s and Marks & Spencer have partnered with consumer financial institutions for more than a decade, offering things from mortgages to insurance.

It has been lucrative. The chains realize 20 percent to 25 percent profit margins on their financial products, compared with 5 percent for things such as cheese and toothpaste, according to Bryan Roberts, insights director of Kantar Retail.

“I think a lot of retailers in the U.S. will be looking enviously at what the British supermarkets have achieved,” Roberts said.

“It’s a cradle-to-grave strategy of trying to provide everything that you possibly can.”

Banks might be getting nervous. One supermarket, Tesco, recently took full control of its financial services from the Royal Bank of Scotland, proving that a grocery store can do banking on its own.

Pros and cons

There’s one more question that might be troubling people about corporations controlling large swaths of the consumer experience:

If retailers do succeed in becoming full-fledged banks, is it really a good idea to entrust your financial life to as monopolistic an institution as Wal-Mart, which can make it even less of a good deal to shop anywhere else – and has access to all your purchase data as well?

For consumer advocates, though, it’s still better than the alternative.

Adam Rust, director of research for the North Carolina-based nonprofit group Reinvestment Partners, has been tracking the prepaid debit card industry for a few years and said the retailer-based products are doing a better job serving the unbanked than most large financial institutions – not to mention risky emergency services such as payday lenders.

“I like that it’s Wal-Mart or Walgreens, CVS, more than a payday lender or a check-cashing store,” Rust said.

Besides, he said, there’s no better route to ubiquity for financial services than the local convenience store.