NEWS
Wal-Mart banks on Mexico
- By Adriana Arai
- Bloomberg News
- April 1, 2007
“These projects will help us have a bigger, deeper banking system.
Mexican banking official Guillermo Zamarripa
Wal-Mart Stores Inc.’s banking ambitions, snarled in the U.S., are on a fast track in Mexico.
Mexico is eager to increase bank competition and has given the local unit of the world’s biggest retailer the go-ahead to provide consumer banking services. Wal-Mart de Mexico SAB plans to win customers at branches it will set up at its 576 stores starting in July.
Wal-Mart, Mexico’s largest retailer by sales, will compete against some of the biggest multinational banks, including Citigroup and HSBC Holdings Plc, which regulators say lend too little and charge too much in interest and fees. Mexican authorities, including central bank governor Guillermo Ortiz, say Wal-Mart and three smaller retailers that were granted bank charters can begin to change that.
“These projects will help us have a bigger, deeper banking system,” said Guillermo Zamarripa, who is responsible for issuing banking licenses at the Mexican Finance Ministry.
Foreign banks in Mexico typically charge interest of about 40 percent on credit cards, according to the consumer protection agency that specializes in financial services. Even in riskier developing nations, these rates are too high, Ortiz and other regulators said.
The banks borrow at about 7 percent, making the difference between the two rates several times more than in the U.S.
Adding fees, the cost of running credit card debt in Mexico can be as high as 89 percent annually, according to the consumer agency.
Wal-Mart hasn’t said what its rates and fees will be.
The charges enable banks in Mexico to reap bigger returns than those in the U.S. and Europe. For every 100 euros that Spain’s Banco Bilbao Vizcaya Argentaria SA invests in its Mexican affiliate, BBVA Bancomer, it makes 38.8 euros in profit, according to data compiled by Mexico’s Banking and Securities Commission. In Spain, the bank earns 25 euros. Citigroup’s return on equity in Mexico is 26 percent compared with 19 percent in the U.S., the commission says.
Mexican authorities say they hope Wal-Mart, in addition to bringing down borrowing costs, will also extend services to the nation’s so-called unbanked — the low-income individuals and small businesses that have been scorned by the banks since the government abandoned support for the peso in 1994. The subsequent plunge in the currency sent interest rates soaring, triggering defaults across the economy.
Just one-fifth of Mexico’s 25.8 million households use financial services, according to a 2004 survey by the government’s statistics agency.
Attempts by Wal-Mart Stores to get into banking in the U.S. have been much more difficult. The company last month announced it was dropping its bid to establish a bank here.
The company sparked protests from community lenders and lawmakers in the U.S. when it applied in 2005 to open an industrial bank in Utah. Small banks have argued that the move was a first step toward the retailer’s entry in consumer banking in a way that might drive local lenders out of business. The Bentonville, Ark.-based company said it wanted only to process its own credit- and debit-card transactions at the bank.
On Jan. 29, U.S. Reps. Barney Frank, a Massachusetts Democrat, and Paul Gillmor, an Ohio Republican, introduced legislation that would curb the ability of Wal-Mart and similar retailers to open banks. Two days later, the Federal Deposit Insurance Corp. said it would extend for one year a freeze on deposit insurance applications from commercial company-backed industrial banks, including Wal-Mart.
But U.S. regulators and lawmakers have no jurisdiction over Wal-Mart de Mexico, which is incorporated in Mexico and subject to Mexican laws.
So far, Wal-Mart has been tight-lipped about its Mexico bank plan. All the company has said is that the bank will initially offer savings accounts and “simple loans” at its Supercenters, Bodegas Aurrera and Sam’s Club outlets, and probably wouldn’t make a profit until the fourth year of operation. It made no mention of checking accounts.
Wal-Mart’s bank may net about $400 million in five years of operation, Merrill Lynch & Co. analyst Robert Ford said in a Jan. 5 report. Ford said there’s growth potential for Wal-Mart because so many Mexicans don’t have bank accounts.
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