By Maria Bruno-Britz

Just when you thought it was safe to be a bank, here comes Wal-Mart yet again.

After its failed effort to obtain an industrial loan corporation license, the retail giant, showing its usual tenacity, seems to have taken a different tactic in the financial services space—going after the underbanked and unbanked with a prepaid card. These are people with little, if any, relationship with a financial institution. There are millions of these people in this country (the estimates vary according to who you ask). Due to their sheer numbers, banks realize the enormous market potential of this untapped segment of the population. However, penetrating the psyche of this market is easier said than done, and banks are also realizing this fact.

People refuse to deal with a bank for a variety of reasons. This market consists of many Americans, not just recent or undocumented immigrants. To them, a bank is to be approached with caution. Instead, the underbanked usually gravitate toward retailers with trusted brands, like Wal-Mart. Perhaps they better understand what a merchant does and feel they know them better because they may shop there frequently. Wal-Mart knows this and is smart to capitalize on it with its announced prepaid card. This is a virtual captive audience for Wal-Mart. The company figures if it can’t get into banking by traditional means, why not take a more circuitous route—and perhaps throw a monkey wrench into any plans by financial institutions to expand their reach in the underserved community.

Prepaid cards are growing in popularity, according to experts. These are also the perfect payments instrument by which a financial services provider (regardless of the fact that it is a bank) can offer services to the underbanked. These are virtual accounts, sometimes with the logo of a major credit card network behind them, that give the underbanked a sense of empowerment and financial independence in many cases that they previously lacked by visiting the local check cashing outlet.

Contending with the Western Unions of the world is tough enough for banks that wish to capture a share of the global remittance market. Now they have to deal with Wal-Mart on the prepaid card side of things. Banks will need to become even more creative in their approach to the underbanked market going forward. It’s not a segment that every bank can handle, of course, given the risk involved and the marketing effort they must expend to get the attention of this population. Many financial institutions actually do have successful programs with this market segment. However, there are millions of these untapped customers out there and now they might become even more entrenched with the Wal-Mart brand.

Wal-Mart’s efforts in this space should be watched closely. It probably comes as no surprise to the industry that the retailer is expanding its financial services offerings to a prepaid card. It was only a matter of time.

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