A Virtual Problem for Banks
Ron Galloway
Author, producer and public speaker
As if banks didn’t have enough worries with rising foreclosures and the head of the Fed asking banks to restructure loans, new players are eyeing financial services, banking in particular, as a means to leverage their existing capital investments in technology and distribution (physical or virtual) into new businesses.
Perhaps the most notable new competitive threat comes from retailing leviathan Wal-Mart. Wal-Mart had originally intended to have their own ILC, only to pull their FDIC application last April after much protest from traditional banks. Six weeks later, the company introduced and began heavily promoting the Wal-Mart Money Card, a stored value VISA card with a $3,000 limit that is a deposit account in all but name. Wal-Mart estimates 25 percent of its 130 million weekly customers are unbanked. Now these and other customers can present their paycheck at a Wal-Mart, and have the amount transferred instantly onto the card.
If 25 percent of the people who walked into Wal-Mart in one week had $3,000 on the Money Card, that would total $98 billion in stored value, existing in a Wal-Mart financial ecosystem outside the traditional banking system. Wal-Mart got its bank.
Another entrant into this arena is Paypal. There are 155 million Paypal accounts, with people initially using them to buy and sell on eBay (who now owns Paypal), but then using them to pay bills for services or simply to transfer money from one to another. All outside the traditional banking system. A friend of mine who has a Christmas store accepts web payments through Paypal and has $40,000 sitting in her Paypal account. Earning interest. To access this money she has a Paypal Mastercard debit card. She has no intention of depositing this money in a bank. Why would she? She’s earning interest and can access it whenever she wants.
And then there’s Facebook, the social networking phenomenon. Facebook, the heir apparent to MySpace, has 60 million members and is growing at a rate of 15 percent per month. What does this have to do with banking? Well, some enterprising fellows have developed a concept called Acebucks, which is a virtual currency that operates a bit like Paypal, but exists completely within Facebook and can be used to buy physical and virtual goods from other members. It sounds like science fiction, but with the viral social nature of Facebook, it could grow very big, very fast.
Facebook also has its own social lending service, whereby a member can apply for a loan, let’s say $15,000, and other Facebook members will band together in a peer-to-peer like manner to provide that loan. The rates charged are dependent on the credit score of the applicant, and by pooling risk, let’s say amongst 100 members, no lending member is risking more than $150. The average rate earned currently on these microloans is 12 percent. Bear in mind this is happening within a business growing 15 percent per month.
The common thread amongst these new threats to banking is the leveraging of technology and distribution. Wal-Mart has physical distribution (4,000 stores); the others have Web distribution. All are leaders in their field in technology. All have decided to deploy existing technology and distribution to build a financial services business that will lure deposits and economic activity away from the traditional banking system. Their final advantage over banks? All are unregulated.
Ron Galloway directed the noted documentary film “Why Wal-Mart Works & Why That Makes Some People Crazy” and is the author of “Wal-O-Nomics.” He is a frequent public speaker whose presentations include a variety of business and technical topics, notably regarding Wal-Mart and business technology. On Feb. 2, Galloway presented at the 2008 IBA Management Conference in Des Moines. He will be a featured speaker during the 2008 IBA Ag Conference March 16-18 in Ames.
Ron Galloway directed the noted documentary film “Why Wal-Mart Works & Why That Makes Some People Crazy” and is the author of “Wal-O-Nomics.” He is a frequent public speaker whose presentations include a variety of business and technical topics, notably regarding Wal-Mart and business technology. On Feb. 2, Galloway presented at the 2008 IBA Management Conference in Des Moines. He will be a featured speaker during the 2008 IBA Ag Conference March 16-18 in Ames.
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