The new Walgreens in Washington D.C.'s glitzy Gallery Place neighborhood, as has been amply documented, is a wonderland. It's got frozen yogurt, a juice bar, a manicure station, a decent selection of craft beers, a health-care clinic, a "yoga needs" aisle, refrigerated displays full of fresh prepared food, plus everything else you'd expect from a regular corner drugstore. Like other convenience chains, it's becoming a general store for a world in which it's all too easy to buy routine items with a click of a mouse, providing as many amenities as possible -- including groceries! -- to keep you walking through the doors.
Soon, it'll also be a bank. Wait, what?
Last week, Walgreens announced that it was rolling out a prepaid debit card at all of its 8,541 locations, including Duane Reades, by the end of the year. And not just your run-of-the-mill rechargable piece of plastic: This one will be able to do online bill payments, check cashing, and direct deposit of paychecks. It's only $2.95 to join, and ATM withdrawals will be free at machines inside the stores, with a $2.95 fee for those outside of it. For people without a bank account -- and there are 10 million of them, as of 2011 -- dropping into a Walgreens could become the easiest way to manage their finances.
That lends a whole new meaning to the term "convenience store." It could also shift the ways in which people on the economic margins plan for the future.
Banks themselves have been offering prepaid debit cards for years now as a way to get at the unbanked. According to the Federal Reserve Bank of Boston, they're the fastest growing segment of the payment industry; about a third of American households used some sort of prepaid card in 2009, and in 2012 they transacted $77 billion. (The growth is also fueled by a rule that kicked in earlier this year requiring recipients of some federal benefits to accept them in electronic form). It's easy to understand the appeal: They function in most ways like a regular debit card, except you don't have to go through the hassle of opening a regular bank account, and won't be burned by overdraft fees.
For a retailer, the upside is even greater. If you can provide a form of payment that has built-in rewards for shopping in your stores, you've created customers with a strong loyalty bias toward your products. Wal-Mart recognized this a while ago and introduced its Bluebird card, which Consumers Union gave top marks in a review of the industry this summer.
There's just one problem. Like all debit cards, prepaid ones don't help you build a credit history. So if you're satisfied using one indefinitely -- and some of them have enough features that you might be -- you may not be able to make some of the larger investments that can lead to advancement and financial stability, like taking out a business loan or buying a house.
Now, banks make it relatively easy to use their prepaid products as an onboarding mechanism for a more robust suite of financial services, which turns marginal customers into more valuable clients. A retail institution, however, might not: Making loans and taking deposits amounts to nothing less than entering an entirely different, highly regulated industry (and unlike some more high-margin businesses, convenience stores don't tend to have billions of dollars in liquidity sitting around to play with). Even if a Wal-Mart or a Walgreens allows the unbanked to elevate themselves from an all-cash existence, it might also create a permanently underbanked middle tier that can't make the jump to traditional credit products.
It is, however, possible that retailers could become full-fledged banks. After all, it's already happened in Britain, after years of conservative government and financial deregulation: Big grocery chains like Sainsbury's and Marks & Spencer have partnered with consumer financial institutions for over a decade now, offering everything from mortgages to insurance. It's been a lucrative transition: According to Kantar Retail insights director Bryan Roberts, they realize 20 to 25 percent profit margins on their financial products, compared to 5 percent for things like cheese and toothpaste.
"I think a lot of retailers in the U.S. will be looking enviously at what the British supermarkets have achieved," Roberts says. "It's a cradle-to-grave strategy of trying to provide everything that you possibly can." (The health-care sector isn't as fertile for British retailers as it is in the United States, though, since most Brits get their needs taken care of at nationalized free clinics).
Banks themselves are probably getting nervous. One supermarket, Tesco, recently took full control of its financial services from the Royal Bank of Scotland, proving that a grocery store can do banking on its own. "I think the opportunity for Tesco is that the banks have such a dismal reputation following the financial crisis, their brand equity is at an all-time low," says Roberts. "So the British public's much more open to alternatives to banks."
There's one more question that might trouble people who get nervous about corporations controlling large swaths of the consumer experience. Even if retailers do succeed in becoming full-fledged banks, is it really a good idea to entrust your financial life to as monopolistic an institution as Wal-Mart, which can now make it even less of a good deal to shop anywhere else, and oh by the way has access to all your purchase data as well?
For consumer advocates, it's still better than the alternative. Adam Rust, director of research for the North Carolina-based nonprofit Reinvestment Partners, has been tracking the prepaid debit card industry for a few years now and thinks the retailer-based products are doing a better job serving the unbanked than most large financial institutions -- not to mention risky emergency services like payday lenders.
"I like that it's Wal-Mart or Walgreens, CVS, more than a payday lender or a check cashing store," he says. And besides, there's no better route to ubiquity for financial services than your local convenience store. "In my neighborhood, a full service bank branch costs about a million dollars to set up. They still have Walgreens and CVSes in most neighborhoods."