The retailers are mainstreaming a $320 billion industry of alternative financial services that has long operated in the shadow of the formal banking system and under the radar of federal regulators. The new Consumer Financial Protection Bureau was established in part to plug the gaps in oversight, but it remains unclear how much authority it will have over stores. One thing, however, does seem certain: Demand for alternative services is only expected to grow as strict new rules force banks to charge higher fees for checking accounts, placing them out of reach of many financially strapped households.
"We're in a place where large banks are becoming more conservative," said Kimberly Gartner, vice president of market services for the Center for Financial Services Innovation, a think tank. Meanwhile, "consumers are a little disgruntled with banks, so there's a real opportunity here to attract more customers."
According to a recent government survey, nearly 30 million households either do not have a bank account or use one sparingly. Nearly 70 percent of families considered "unbanked" earn less than $30,000 a year and many say they will never do business at a bank.
These households have traditionally relied on a patchwork of services to manage their money, and retailers have begun to realize that those same consumers are shopping in their stores. Wal-Mart, for example, has said that one in five of its customers does not have a checking account.
Many consumers think that they don't make enough money to warrant a bank account, the government survey found. But others simply don't trust banks or come from cash-based cultures. That is part of the impetus for the bill-payment service Best Buy launched last year in a handful of markets. The kiosks, operated by Tio Networks, cater to Hispanic shoppers who are often wary of banks. But many are willing to sign up for complicated cellphone plans at Best Buy, and executives say it was a short step to paying the bills in the store as well.
Kmart began wading into the market when it reintroduced layaway in its stores at the start of the recession. Many shoppers had lost their jobs and were wary of building up credit card debt, making layaway an attractive alternative.
The program was so successful that Kmart began offering it year-round. And Susan Ehrlich, president of financial services for Kmart and parent company Sears, said executives learned another important lesson: Shoppers turned to the store to help them manage their money.
"That sort of drew us up the value chain," Ehrlich said.
Customers were reliant on cash, so check cashing was the next logical extension. That cash could then be loaded on to a prepaid card, used to pay bills or send money to family in another country. The combination of services closely matches those provided by a checking account - without the hassle of going through a bank.
But consumer groups have criticized the services traditionally available to the unbanked as being riddled with high fees and for not offering clear disclosures. The average fee for cashing a check ranges from 2 to 4 percent of the value, according to consumer groups.
Yet as larger companies enter the field, they are bringing economies of scale to a market that has been dominated by mom-and-pop players. Wal-Mart, for example, lowered its fee to cash a check to $3, and slashed the cost of its prepaid card from nearly $9 to $3.
"Wal-Mart is certainly the -pound gorilla in any market that they choose to serve," said Jamie Fulmer, vice president of public affairs for Advance America, one of the few publicly held companies that offers payday loans and check cashing. "I don't think we'll ever be a competitor to Wal-Mart in terms of sheer volume, [but] we believe there's a big enough market that we can have some share."
Wal-Mart, however, is doing more than just selling to customers. Not only does it account for 64 percent of business for its prepaid-card issuer, Green Dot, it acquired a stake in the company last summer. The blurring of the line between banks and companies that just act like banks has been a challenge for federal regulators.
Under the new consumer protection bureau, financial products and services offered by retailers will have to meet the agency's rules. But the question remains whether it will have the authority to examine the companies' books and business practices, according to consumer groups. The law that established the agency exempts retailers from such oversight, unless they are large players in the market - a phrase that has yet to be clearly defined.
Meanwhile, retailers are getting a seat at the table: Kmart's Ehrlich was named to the Federal Reserve's Consumer Advisory Council, the precursor to the new agency.
"My belief and expectation is that retail is going to continue to play an increasing and evolving role in the provision of financial services, particularly in underserved communities," she said. "Our having a voice in making sure that there is an awareness of that, and that we set the regulatory framework to accommodate that, is going to be important."