There was another article in the Seattle Times today about retailers and their desire to move into banking. The article profiled Home Depot and its quest to enter the banking industry, while mentioning the backlash Wal-mart received when they initiated similar moves.
What is it that is so provocative about retailers entering the retail banking business? From a consumer perspective, some extra competition would be a good thing given ever increasing bank fees and core profitability. Bank executives want Wal-mart and other retailers to stay out of the banking the business and if they have to plant public relations stories to stir up a “The communists are coming” type furor, then they will.
Profits, pure and simple. The banks assume that if retailers get into the banking business that profits will shrink as a result of the competition, and they worry that because of the retailers more frequent relationships with the customer they will lose out. Is the frenzy that is being whipped up in opposition based on a valid concern?
No. In this country, retailers are already allowed to have some limited banking privileges for the purposes of offering store-brand credit cards to provide their customers with revolving lines of credit. To bring in true financing programs, like 0% credit for 36 months, the retailers usually have to bring a finance company into the picture. So in some sense, retailers are acting as pseudo retail banks already. Would giving retailers expanded bank capabilities cause a collapse in the banking industry?
No. If we look to the UK we will see an environment where retailers such as Tesco, Marks & Spencer, Sainsbury, and ASDA (owned by Wal-mart) offer everything from savings accounts to retirement plans to insurance. Have the banking or insurance industries collapsed in the UK? No, and here’s why: internal consumer concerns limit the numbers willing to give retailer’s banking and insurance offerings a try. So why can’t we let the consumer decide in the U.S.A.?
The problem is that banking executives feel that the retailers will put a squeeze on their profits and revenues, and as a result their bonuses. Scared to death that their bonus might shrink or that they might lose their jobs, they will fight to the death using whatever means to keep the retailers out of banking. But why do retailers actually want to go into banking?
The answer is margins. Banks make much higher margins than a discount retailer or grocery store, and banking offers retail executives the opportunity to improve overall revenues and profits and ultimately increase the size of their own bonuses. So on both sides we have a classical example of motivated self-interest. But do retailers really need to own a bank?
I would argue that retailers are wise to stay out of the banking business. Retailers are better served with allocating a portion of their square footage to a retail bank and charging them escalating rents based on how attractive that location seems to be for their bank tenant and playing one bank off of another to maximize the revenue per square foot of their “banking space.” Some grocery stores are already pursuing this strategy. This is what shopping mall landlords have been doing with McDonald’s and other food court tenants for years (and for all tenants for that matter). Shopping mall landlords don’t get directly into the hamburger business, they instead extract rents from the profitability of the hamburger business given the value of the location they provide.
Retailers do not need to own the bank, they just need to maximize their revenue opportunity in this complementary industry. In the same way that McDonald’s burgers are more attractive to people than Shopping Center’s burgers, Bank of America will always be more attractive to shoppers than Wal-mart Bank or Home Depot Bank. At the same time, any other financial services opportunity they might profit from should be done through revenue sharing. This is what Tesco does with things like Travel Insurance.
To close, retailers should focus on their classic charge, to maximize revenue per square foot. To me, extracting revenue from a bank makes more sense than becoming the bank. What do you think?