Retailers as Financial Services Providers: The Potential and Pitfalls of This Burgeoning Distribution Channel

Retailers are emerging as significant distribution channels for a broad range of financial services. Large retailers in particular are capable of reaching significant numbers of customers cost-effectively, providing a broad patchwork of financial access points for lower income, underbanked consumers and creating a platform for bundling full suites of targeted products and services.The implications are potentially revolutionary, as they call into question the definitions for terms like "branches" and "deposits." This distribution model for financial services could be very beneficial for firms that seek to acquire and serve a broad range of consumers. Retailers stand to gain access to increased foot traffic in their stores and fee revenue from a large customer base that is relatively untapped by mainstream financial institutions. In turn, financial institutions that partner with retailers gain access to potentially extensive distribution networks that reach consumers in their everyday lives.This report analyzes the promises and pitfalls of utilizing retail locations as distribution channels for financial services. It provides an overview of trends and innovations in retailer involvement in financial services, how these trends affect underbanked consumers and the policy implications. Key findings of the report include the following:

• While a subset of consumers have been accessing financial services in retail locations for decades, retailers are providing these services in more formal and significant ways. Advanced ATM, point of sale and kiosk technology has contributed to this change. The advent of reloadable stored value cards has had a major impact, and innovative partnerships among retailers, banks, and vendors have furthered this trend;
• In this new financial services environment, some retailers, particularly large firms such as 7-Eleven and Wal-Mart, are simultaneously partnering with banks and credit unions and competing with them. The legal and regulatory systems are struggling to keep pace with these developments. As retailers gain momentum in the financial services market, traditional definitions of banking are changing. In order to understand their roles and responsibilities, retailers and their partners must navigate a complex web of federal and state money service business (MSB) laws and regulations, in addition to the USA PATRIOT Act and the Bank Secrecy Act;
• The primary motivation for most retailers to provide financial services has been to enhance their core business. While many retail companies understand their customers' preferences surrounding the purchase of consumables, they have spent less time learning about their customers' financial services preferences. As the financial services landscape continues to evolve, retailers are beginning to provide financial services in increasingly sophisticated ways that have the potential to reach significant scale. For consumers that have been left out of the mainstream financial system, retailers could help to fill the financial services gap that leaves many families operating on a cash basis. But more work needs to be done to untangle retailers', banks' and third party providers' roles and responsibilities.