The new shopping list: milk, bread, eggs and a mortgage

New York TimesNovember 17, 2012 

On a recent shopping trip to Costco, Lilly Neubauer picked up paper towels, lentils, carrots – and a home mortgage.

While Neubauer, 27, said she was surprised to find the warehouse club selling financial products, she and her husband saved about $200 a month by refinancing there this year. She also bought home insurance from Costco, she said, again because it was cheaper there.

“It opened us up to the fact that Costco is more than toilet paper,” said Neubauer, who lives in Dallas.

As the nation’s largest banks stay stingy with credit and a growing portion of the population has no bank at all, major retailers are stepping into the void. Customers can withdraw cash at an ATM with a prepaid card from Wal-Mart, take out a loan at The Home Depot for a kitchen renovation or kick-start a new venture with a small-business loan from Sam’s Club. This year, Wal-Mart even started to test selling life insurance.

Consumer advocates are torn about the growth of this shadow banking industry. Financial products are making it into the hands of people who otherwise might not qualify for them, but these products are not always subject to the same regulations as bank products are. And to turn a profit, retailers generally have to charge more to people with poor credit or none at all.

“These products can come with high fees and few real protections,” said Norma Garcia, a senior lawyer with Consumers Union.

For the retailers, banking products are not huge profit centers but a business strategy, meant to put money into customers’ hands and so to get them buying more.

“You’ve got to remember, Wal-Mart is intended to be a one-stop shop,” said Charles Holley Jr., the company’s chief financial officer.

A new market

Part of the lure is the so-called underbanked population – people who use few, if any, bank services. The Federal Deposit Insurance Corp. estimates that roughly 10 million households in the United States do not use a bank, up from 9 million three years ago. And the agency says 24 million more households have a bank account but still use nonbank financial services, like prepaid cards.

Holley said 20 to 25 percent of Wal-Mart customers were unbanked.

“The more kinds of services we can offer our core customer like that, the better for them,” he said.

Last month, Wal-Mart unveiled a prepaid card with American Express. The card operates much like a debit card except that it is not attached to a bank account. It comes with free customer-service telephone support, and fees are relatively low, but the account is not backed by the FDIC.

Hidden fees

Frustrated with the fees charged by her bank, Nancy Fry, a real estate broker in Logan, Utah, bought a prepaid card from Wal-Mart this year. But this was even worse, she said – she was charged $3 every time she loaded money onto the card.

“I really don’t have very much money and can’t afford these fees,” she said.

Consumer advocates complain that prepaid cards are loosely regulated and can cannibalize the money put on them. Consumer lawyers have pushed for greater disclosure of fees and more stringent regulation of the card providers. The government is expected to issue new rules this year.

The Home Depot, whose customers are mainly homeowners, is trying to increase sales by extending credit to people who would otherwise have trouble getting it. Last year, the company began offering loans of up to $40,000, and this year it extended its no-interest credit card payment terms.

“We have the ability to get credit to consumers in this tight credit market, and we wanted people to take advantage of that in a market where people don’t have access to home-equity lines of credit like they used to,” said Dwaine Kimmet, The Home Depot’s treasurer and vice president for financial services.

Store loans

Kimmet said the loans were especially useful for people who needed emergency items, like a water heater, although shoppers use them for home decor projects as well.

They are also helpful for The Home Depot, whose sales growth has been squeezed by the housing crisis.

Kimmet said the store loans, unlike home-equity lines of credit, did not require collateral, meaning The Home Depot could not seize someone’s house for a failure to pay.

The interest rate on The Home Depot’s credit card is higher than that on a typical credit card – 18 to 27 percent, depending on credit score, compared with an average of 14.59 percent, according to Bankrate. But Kimmet said the retailer offered cards to people with credit scores as low as 600, below what many lenders accept.

Other retailers are also trying to make it easier for people to qualify for financial products. Office Depot and Sam’s Club offer loans backed by the government’s Small Business Administration, and both involve quick, one-page initial applications. More than 1,000 Sam’s Club members have used the program since its introduction two years ago, the company said.

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