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Is It Wise To Bank At Big Box Retailers?

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MICHEL MARTIN, HOST:

And now to matters of personal finance. If you're one of the millions of people already on the prowl for that hot must-have gift this holiday season, you might have already noticed something new at your favorite big box store and we're not talking about stocking stuffers. More and more of the big box stores are also offering financial products, like home mortgages or small business loans, along with the flat-screen TVs, lumber and paper towels.

But, as with most things, people who've taken a hard look at some of these items say that customers should be careful because some of these products, while attractively priced, are not as closely regulated as those offered by banks.

Here to tell us more about this is Stephanie Clifford. She is a business reporter for the New York Times and she recently wrote about this.

Stephanie, welcome. Thanks for joining us.

STEPHANIE CLIFFORD: Thank you. Good to be here.

MARTIN: Now, you've reported that many of the stores most familiar to consumers, like Wal-Mart, Costco, Sam's Clubs, Home Depot, are also offering financial products - like Costco, for example, is now offering home insurance and health insurance. Wal-Mart debuted a prepaid debit card. They're selling life insurance in a few states and Home Depot is expanding its line of credits. How did this start?

CLIFFORD: It actually started ages ago. Sears tried this strategy in the 1980s when it acquired the Dean Witter brokerage and launched the Discover card and it had this idea of socks to stocks, which is - you know, you sell everything from basic products all the way up to the financial services that your customers will need.

It really faded from popularity. The Sears strategy did not work and they got out of it by the late '80s. But then Wal-Mart, which wants to be, as its executives say, a one-stop shop for all people, started to pursue a bank charter a few years ago. The banks ultimately stopped that. They said, this isn't fair. They can't also be a bank and so Wal-Mart started quietly building up banking services on the side or bank-like services on the side and then other retailers followed suit.

MARTIN: Well, you can see the logic for something like a debit card in that you figure people will spend more, at least, or they'll spend at Wal-Mart. I mean, I think a lot of people may remember that, for many people, Sears was their first credit card. But what about things like mortgages and, you know, small business loans and things of that sort?

CLIFFORD: Yeah. The idea there is, the more that the retailers can get customers into stores and into stores regularly, the more those customers will spend at the stores and, you know, the retailers will position it as - we don't make much money from this. It's really a service we want to offer our customers for loyalty. And it's not all altruistic. They want people getting into stores as frequently as possible.

MARTIN: Well, one of the other things you wrote about in your piece was the competition to bring in the so-called unbanked. That's a subject that we've talked about a lot on this program. It's estimated that 10 million households in the U.S. don't participate in traditional banking. Can you talk a little bit about who these consumers are and why is it that the retailers think that they can service this particular group of folks and the banks aren't?

CLIFFORD: Yeah. So this is a group of people that Wal-Mart especially is really focused on. As you said, it's the unbanked and Wal-Mart also adds into that, the underbanked, the people who have a bank account, but don't really use it, don't like the fees.

There are sort of two things going on here. One is people who have a bank account that are getting sick of banks, you know, after the financial crisis. Some just got fed up with banks altogether, so they're fed up.

On the other side, you have the unbanked. These are generally pretty new immigrants who may not trust the banking system, may not want to deal with a formal banking system, but still have sort of banking-like needs. They need to wire money home and they need to deposit checks and pay bills.

And so Wal-Mart has created, essentially, a shadow bank for them where you can go into any Wal-Mart, do a wire transfer, you know, withdraw cash, pay a bill and it says that this is sort of their core customer. They want these people coming into stores and there's a lot of competition around who gets to do the financial services for this pretty big and growing group.

MARTIN: If you just joined us, I'm Michel Martin and this is TELL ME MORE from NPR News. I'm speaking with Stephanie Clifford. She is a business reporter for the New York Times and we're talking about retailers, particularly the big box stores, names you know, like Wal-Mart and Costco and Sam's Club, now offering financial products along with their typical fare, the flat-screen TVs, the big flats of paper towels. We're talking about why they might do this, why they think this is a good opportunity for them.

So now we've talked about why the retailers think that this is a good opportunity for them. Is this a good opportunity for consumers? Are they competitively priced and are they better on fees for consumers?

CLIFFORD: On fees, they tend not to be better. There are a couple exceptions, but the interest rates tend to be a little bit higher. On the flipside, the retailers will offer these products to customers who can't get, you know, a loan or a credit card through a typical bank.

So Home Depot, for instance. They say that they extend this credit to people who may not be able to get credit from their banks. Likewise, with their credit card, they say they go down to a credit score of about 600, which is not a great credit score, where a regular credit card will only go to about 640 or 680.

MARTIN: Do you have to spend the credit line at the Home Depot?

CLIFFORD: There you do and it's actually a pretty clever setup because Home Depot saw sales growth slow down during the recession, as you can imagine, as people stopped building homes. And so they realized that their customers were having trouble getting cash and they thought, hey, why don't we start giving them, essentially, cash that they can spend here?

MARTIN: Well, as the country just continues to try to kind of crawl its way out of these difficult, you know, economic times that the country's been having, there's been a lot of discussion about whether the banks went too far in lending to people who really weren't credit-worthy. So the question now becomes, are these retailers going down a similar path?

CLIFFORD: Well, one difference is that these retailers - they're not highly regulated on these financial products, so they don't have government backing or FDIC backing, for instance, on deposits. So there's not sort of the same weight behind what the retailers are doing. They're savvy operators - the retailers - and, you know, while they're going down to a credit score of 600, they're not going to 400 or 200 and they say that the repayment rates are quite high. And they say that they're really pleased with the level of consumers they're getting so far.

MARTIN: The bottom line, Stephanie - I know I'm asking you to predict, which is really unfair, but do you see this trend as being limited to these really major retailers or is this something that you think is going to grow to other kinds of retailers offering this kind of thing? I mean, where do you see this trend going?

CLIFFORD: Yeah. On a formal level, I think big box retailers and big national retailers will be adding on products. They all say they're really happy with them so far and it makes, you know, this big box physical store into something relevant. It gives consumers a reason to come in and they're all trying to figure out what to do with all this physical space that they've bought and this is like a pretty smart answer to that.

On a less formal scale, you could see small businesses or smaller local retailers offering informal credit to customers, but I don't think it will be on the same scale.

MARTIN: Stephanie Clifford is a business reporter for the New York Times and she joined us from their studios in New York City.

Stephanie Clifford, thank you so much for joining us.

CLIFFORD: Thank you. It was fun. Transcript provided by NPR, Copyright NPR.

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