Outside the Box

Opinion: Walmart, Amazon and Apple are becoming a threat to bank-stock investors

Retail giants want to be big in banking without becoming banks, selling financial services in addition to consumer goods

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If you follow financial services, you’re likely aware of Walmart’s longstanding ambition to become a bank. The retail giant applied for a license almost two decades ago — only to pull it after the banking industry objected loudly, saying Walmart would have an unfair advantage because of its massive customer base.

We’re now seeing that Walmart WMT, +0.47% has been working on something bigger — and they’re not alone. This time, the company is building its financial services presence alongside Amazon.com AMZN, +3.09% and Apple AAPL, +1.35%, both engaged in similar work to leverage their massive consumer networks.

Walmart’s latest financial services foray came into clearer focus when the company announced this spring that it would sever its credit card business with Capital One Financial COF, +0.73%.  Walmart cited disappointments with Capital One’s customer service, but that’s unlikely the real reason. Implicitly, Walmart signaled that it’s now in a position to connect its vast consumer businesses to financial services without requiring the help of a large established financial institution.

And why not? During the pandemic, Walmart, like other retailers, learned valuable lessons on how digital commerce was evolving. The company took a step into the future by forming a venture with a mobile financial tech company. Then it hired top executives from Goldman Sachs’ online bank Marcus. That was the launchpad. 

With the financial infrastructure in place, why not pluck the low-hanging fruit and try to acquire those Capital One credit-card accounts? It’s a logical next step. From my experience, it’s almost a certainty that current card holders won’t flee. After all, most people would be hard-pressed to name the issuers — the banks — behind their credit cards.

Walmart’s tactic with Capital One might be viewed as predatory: Cut out an ally and take over the business. But is that really such a new concept? Amazon and Apple have also been relying less on other companies — taking a DIY approach to logistics and payments, or placing themselves at the center of an ecosystem of small, agile partners. (Interestingly, Apple recently hit some not insignificant bumps in its savings account partnership with Marcus, when customers experienced fund-transfer delays.)  

Drive revenue without being beholden to a middleman.

All three companies have won praise for doing the same in almost all aspects of their businesses, except perhaps banking.  

In the case of this particular customer-facing initiative, Walmart executives likely asked themselves: Who knows Walmart’s shoppers better than Walmart? Apple and Amazon surely have done the same with respect to their vast networks.

With total control, these companies can fully shape the customer experience and use their knowledge of consumers’ behavior to drive revenue without being beholden to a middleman taking a cut. With an array of sophisticated fintech tools embedded in the economy, traditional financial partners increasingly end up getting in the way.

Presuming it moves forward, a big benefit to Walmart will be that it will be able to avoid paying much in customer-acquisition costs. Capital One had been incurring most of that expense; with Walmart saying it will offer a new option, it’s a good bet current card holders will sign up. 

Because Walmart’s customers are typically in the low- to middle-income segment, and many are underserved in banking, they’d likely welcome continuing a relationship with a company they view as benefiting them.

An advantage for companies that bolt-on financial services is improved customer lifetime value, a metric that shows how companies maximize the value of customer relationships. Walmart will be able to use its expertise in sales to design reward and discount programs, creating loyalty as it cross-sells financial services in addition to consumer goods.

In this way, Walmart is closing the loop in its ecosystem, following in the path of tech giants including Apple that create lucrative incentives and make switching services burdensome. As a bonus, fees from cards and other financial services help defray the costs of those programs, creating a flywheel effect — a holy grail in business. With that in mind, it’s hard to see any downside in Walmart ditching Capital One.

Walmart pushing deeper into financial services is sure to rattle bank investors.

What’s certain is that Walmart pushing deeper into financial services is sure to rattle bank investors. Card issuers — the big banks, essentially — know companies besides Walmart will favor fintech upstarts. That means risk for bigger players, already held back by legacy computer systems, a culture of conservatism and stricter banking regulations.

Around the same time as Walmart’s announcement, Apple made its own financial push, launching a high-yield savings account with help from Goldman Sachs. That surely will enable Apple to siphon deposits in a year when there’s been a mini-crisis about bank runs. Like Walmart, Apple has an enormous customer base from which it can wring out additional profits. Its new product, branded as Savings, builds on Apple Pay, Card and Wallet, and is part of an effort to keep users loyal to the iPhone.

Walmart, unlike its chief rival Amazon.com, will soon have a constellation of financial services. Its new fintech unit is bound to extend offerings of savings accounts, debit cards and money management products across the country. Amazon, which originally disrupted Walmart, is now in the position of playing catch up. 

I suspect Amazon, Target and other large retailers will at least need to be at parity with Walmart. If asked to predict the retail winner in the long run, I’d say it doesn’t really matter. More important is that the banking industry is being recast.

Yuval Brisker is CEO and co-founder of Alviere, an embedded finance company. Prior to Alviere, he co-founded TOA Technologies, a SaaS solutions firm that was acquired by Oracle in 2014.

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