Quick Thoughts – WMT Continues to Undercut Banks using Distribution Advantage and Durbin Arbitrage

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SEE LAST PAGE OF THIS REPORT Howard Mason

FOR IMPORTANT DISCLOSURES 203.901.1635

hmason@ssrllc.com

September 25, 2014

Quick Thoughts – WMT Continues to Undercut Banks using Distribution Advantage and Durbin Arbitrage

Yesterday, WMT announced it will distribute GoBank, a mobile-only checking account offered by GDOT, which is exempt from the Durbin cap on debit interchange because of its size; with assets of less than $1bn, GDOT’s bank subsidiary, Bonneville Bank (a single-branch Utah-based bank GDOT purchased in December 2011) falls well under the $10bn asset-threshold for Durbin exemption. As a result, as in the case of AXP which is WMT’s partner on the Bluebird prepaid product, GDOT can charge pre-Durbin interchange on debit of ~50 cents/transaction versus regulated interchange of ~25 cents, and use the difference to subsidize consumer fees.

This subsidy is an important, but not the entire, reason WMT/GDOT can undercut traditional bank products. Specifically: (i) WMT/GDOT does not charge overdraft fees which generate an average of
$200-300
in annual revenue for traditional bank checking accounts with low-balance customers; and (ii) offers more attractive base pricing with a monthly fee of $8.95 (versus $12 at, say, BAC) which is waived in any month with qualifying deposits of more than $500 (whereas the BAC fee is waived with a qualifying deposit of more than $250 or an average daily balance of more than $1,500). GoBank has the usual checking-account access features including ATMs, P2P via email or text, a MasterCard debit card, and check-writing (albeit digital, not paper, since GoBank is a mobile-only product).

The other reason WMT/GDOT can undercut traditional bank products is that there is no dedicated branch network; rather, customers use WMT stores which, with a count of 4,300, make the firm the fourth largest distributor of checking accounts in the US after WFC, JPM, and BAC (see chart below). Physical infrastructure is particularly important for low-balance customers because, more than their high-balance counterparts, they make cash deposits; and banks cannot support this physical infrastructure for low-balance customers without overdraft fees which, as the
Pew
Charitable Trust comments, tend to “push consumers out of the banking system”. The low marginal cost to WMT of providing the physical infrastructure, particularly when coupled with Durbin exemption, therefore makes WMT an advantaged provider of retail bank product to these low-balance customers.

Of course, WMT customers who sign up for the GoBank account are natural candidates for the CurrentC app from MCX when it rolls out in 2015.

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