Retailers as Bankers

While the activity of retailers may, at first glance, appear of secondary importance to the world of payments, in today’s changing economic landscape it could have big implications, particularly when retailers of the scale of Walmart are involved and with card and payment fees rising.

Just as Walmart has announced that it is linking up with Ribbit Capital to enable it to offer financial services, another retailer, the UK’s Marks and Spencer (M&S), has announce that it will close its three million current accounts and its 29 in-shop branches. M&S Bank was a JV with HSBC.

M&S isn’t the only UK retailer that has had a go at banking, there is also Tesco Bank, Sainsbury Bank, Orange Bank and more, always in combination with an existing bank. Tesco and Sainsbury have behaved as traditional banks rather than as ‘challenger’ banks.

Walmart has hired Omer Ismail from Goldman Sachs, where he was head of their consumer bank, Marcus, and his lieutenant David Stark. Walmart intends to combine its retail knowledge and scale with Ribbit’s fintech expertise. Ribbit is described as ‘a venture firm that has funded Robinhood, Affirm, and Credit Karma’.

The Financial Times’ view of Walmart’s decision is that it is wants to offer a straightforward deposit and credit service to its vast customer base, most of whom are on modest incomes. Many of them fall into the unbanked or underbanked group of people. It appears Walmart will reach its customers through its web app.

Regulators appear not to like powerful retailers becoming banks, hence tech giants Amazon, Google and Facebooks not becoming banks. China allowed the development of AliPay and WeChat Pay, which combine social, commercial and financial services, but it appears the China Banking and Insurance Regulatory Commission (CBIRC) has now changed its mind and moved against Ant Group.

In 2016, Walmart bought a company called Jet for $3.3 billion. The company was only 15 months old. It was acquired to get the skills needed to do online shopping, similar to Amazon. Just as Walmart has hired Ismail from Goldman Sachs, the CEO of Jet had come from Amazon. Today, Walmart is the second largest US online shopping site, after Amazon, having doubled its share of online sales since buying Jet. It will be interesting to see if it can repeat this success with its new financial services venture.

What is happening to China’s Ant Group?

Nikkei Asia recently published an article explaining the new regulations introduced by the CBIRC and their implications for the Ant Group and its micro lending model.

Banks can no longer outsource the management of risks. Until now Ant has received loan applications from amongst its billion customers and forwarded them, with a credit assessment, to partner banks. This is no longer allowed. Fees are paid to Ant for this information, and these are said to be 15-30% of the bank’s interest income, representing 40% of Ant’s operating revenue. If Ant can’t provide the credit assessment, those fees will fall.

The new regulations are intended to strengthen the banks’ risk management. The CBIRC has also required online microlenders to provide at least 30% of the funding of the loans from its own funds. Until now Ant has either relied on the banks doing this or securitised its own loans so that they are not on its balance sheet. It is estimated that Ant will need to find about $90 billion to meet this new requirement.

Two further new regulations worth mentioning are that co-lending platforms should not exceed 25% of a bank’s core Tier-1 capital, and regional banks are banned from online lending outside of the region where they are registered. Both of these will have an impact on Ant’s business model.

In principle the transition to compliance with the new regulations is due to be completed in 2022. Ant has, therefore, a relatively short period of time in which to re-organise and, if it still wants to seek an initial public offering, to demonstrate that it has an attractive growth business model. Ant Group’s CEO, Simon Hu, resigned mid-March for ‘personal reasons’.

Ant is the largest holder of consumer data in China, according to the Financial Times (FT), but does not currently share much of that data with the central bank. Perhaps ironically, the People’s Bank of China wants access to it to help state owned banks assess credit worthiness.

Ant claims that privacy laws require user consent to pass data to third parties, but has agreed to share some information for those to whom it has made loans. The FT reports that it has not yet agreed to make it a condition of use for its customers to share data.

Tesco Bank invests in its ATMs

Tesco Bank runs the UK’s third largest ATM network, with 3,100 free to use ATMs. They are located at its retail outlets and account for 15% of the UK’s cash withdrawals.

It has announced that it is starting a three year programme to replace over 2,000 ATMs with newer models. Tesco will, where planning rules allow, install ATMs at all new shops as part of its commitment to protect free access to cash.