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Walmart's fintech venture could be 'wakeup call' for banks

Walmart Inc.'s financial technology startup company could pose a threat to banks if the company uses the data at its disposal to pinpoint exactly what services its customers need.

On Jan. 11, Walmart announced that it is partnering with fintech-focused investment firm Ribbit Capital to launch a fintech company to offer financial services to employees and consumers. Few details are known about what products the retail giant will offer, but it has many advantages such as its size and customer base, observers said. Ultimately, Walmart's announcement is part of the larger battle between retailers moving into financial services and banks and who can use the data they possess to win customers, according to Sam Kilmer, a senior director at Cornerstone Advisors.

"They're both on the battlefield, and they both want to lead and influence the consumer. The big question is: who wins the battle? ... The key tool in the battle is data," Kilmer said in an interview. "If your bank or credit union is not very good at mining data ... and Walmart is big in your market, this may be a wakeup call for you."

Walmart can tailor the financial services it will eventually offer to its customers' needs by using the vast amount of data it has, one retail expert said. "[Walmart] can slice and dice their customer behaviors and statistics and figure out how they can pinpoint which financial services [to offer]," said Robert Amster, principal and co-founder of Retail Technology Group, a provider of consulting services to various retailers.

Direct access to that large customer base is another advantage for the retail giant. "It's not a cold start," Amster said. "They have a huge list of customers that they can start tapping immediately."

Walmart's venture could pose a specific threat to Woodforest Financial Group Inc., which operates more than 700 branches inside Walmart retail locations. In the 1990s, Kilmer worked for Union Federal Bank of Indianapolis, which operated branches inside Marsh Supermarkets.

"Your customer base of an in-store branch is almost entirely reflective of the store," Kilmer said. "If Walmart is going directly to those customers and directly competing with you, that's a threat."

Woodforest will welcome any competition Walmart's fintech company could bring, James Dreibelbis, chairman, president and CEO of Woodforest National Bank, wrote in an email. "The world of financial services is competitive, but like other industries, we see competition as an opportunity. Like restaurants congregating in one area, this is an opportunity for Woodforest to offer our services alongside Walmart and expand our presence inside their stores."

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How much of a threat Walmart will pose to banks and credit unions nationwide could come down to what services it plans to offer. The retailer has yet to provide many details about the startup. "The new company is being developed to create a suite of digitally enabled financial products that are tailored to our customers and associates' unique needs. The list of exact projects and timeline is still being developed," a Walmart spokesperson said in a statement.

The increased competition from Walmart's fintech startup might encourage banks to hone their skills and customer relationships, but breaking into financial services could prove to be a hard feat, Christopher Marinac, director of research at Janney Montgomery Scott LLC, said in an interview.

"These types of things help the banks sharpen their skills," Marinac said. "The easy reaction is 'oh, Walmart can knock out banks.' No, not necessarily ... It still remains to be seen how easy it's going to be for people to get into the banking business. I'm not convinced it's that easy."

Despite the advantages Walmart has, this pivot into financial services could be unsuccessful if it proves to be a distraction for the company, both Kilmer and Amster said.

Kilmer pointed to Walmart's attempt to move into the e-commerce space with acquisitions of Jet.com, Bonobos and ModCloth as an example. Growing a profitable e-commerce business through those acquisitions proved to be a challenge for the company. Walmart began slashing jobs as it struggled for profitability and announced that it was discontinuing Jet.com in May 2020, almost four years after announcing the acquisition.

This is also not Walmart's first attempt to break into financial services. In 2005, it applied for an industrial loan charter with the Federal Deposit Insurance Corp. The move prompted outcry from banks and banking industry groups, and the FDIC instituted a moratorium on ILC applications in 2006. Walmart withdrew its application in 2007 after the FDIC extended its moratorium.

"There's always been a little bit of a fear factor that every time Walmart gets near financial services everyone goes 'oh, how much of a threat are they going to be?' but it's turned out to be not that big of a deal," Kilmer said.

But Walmart's size and resources could allow it to experiment with different financial services and see if it can be a successful venture.

"Walmart has deep pockets so they can experiment with almost anything they want to experiment with," Amster said. "They can afford to test the waters for some limited period of time and then either pull the trigger on closing it, expanding it or selling it to somebody else."