Walmart Entering Banking World

Summary

• Walmart is moving again to enter into the banking world forming, with Ribbit Capital, a new operation aimed at creating a digital platform that will achieve major scale.
• The pandemic has had a major effect on banking as more people move to digital tools and this is changing the landscape, something that Walmart doesn't want to miss.
• Investors are going to have to deal with these changes coming to the banking industry as many "major" players become FinTech competitors along with the many mergers/acquisitions taking place.

The biggest threat to the banking industry - tech and fintech is."

This comes from Robert Armstrong in the Financial Times.

This is the world of today, and, even more, the world of tomorrow.

Laura Noonan and Robert Armstrong also write in another Financial Times article that in regards to banking:

It's all about scale."

The digital world is all about building platforms and networks and, since, these vehicles are based primarily upon intellectual capital, they can scale up at zero- or near-zero marginal cost.

And, the result is massive changes underway in the banking world.

This movement is taking place within the U.S. banking system, but pressure to change is also coming from the rest-of-the-world, especially from China.

These developments are putting pressure on investors because they contribute to the "radical uncertainty" that exists in today's world. Investors in financial institutions must keep their eyes on how these changes are impacting the organizations they are interested in.

Strict value investing is taking a back seat in such a world because investors don't know what the world of banking and finance are going to look like in five years.

Walmart Is Entering The Fray

Walmart, Inc. (WMT) attempted to start a bank in the early 2000's but withdrew its application for a U.S. bank charter in 2007.

Now, it is rushing in and betting that the world has adjusted to the FinTech movement and to the digital world.

Walmart is associated with Ribbit Capital in this effort. Ribbit is headed up by a serial venture capitalists and is aiming to "deliver tech-driven financial experiences tailored to Walmart's customers and associates. Walmart is the major owner and is very willing to grow the new "through partnerships and acquisitions."

In other words, Walmart has some very big plans.

Another indication that this is the case is the two top people hired to run the organization, both from Goldman Sachs Group Inc. (GS).

The first is Omer Ismail who was the head of the consumer finance division at Goldman Sachs. Mr. Ismail headed up the digital effort called Marcus. This is a major thrust into the digital financial world and you can read more about it in one of my recent posts for Seeking Alpha.

The other hire is David Stark, a Goldman partner who has been at Marcus since it was founded in 20016.

Goldman Sachs has bet a lot on Marcus and it seems to be starting to payoff. The movement of these two top leaders to the Walmart/Ribbit Capital effort indicates how committed Walmart must be to move in this direction.

The competition in the banking area is heating up. Walmart joins other major institutions getting into the financial world along with Apple and Apple Pay (note that Apple is connected with Goldman Sachs on the Marcus effort) and Amazon and Amazon Pay. Then, of course, there is PayPal.

Pandemic Also Hitting Banking And Size of Banks

In the article cited above authored by Noonan and Armstrong, we find that:

the pandemic has highlighted the advantages of size in banking. With branches closed or customers wary of visiting them, digital banking has become more important putting pressure on banks to invest."

The authors suggest that:

Likely buyers include such U.S. regional lenders as US Bank and Citizens Financial, as well as Canada's TD Bank and Bank of Montreal."

The targets are:

Smaller U.S. banks and foreign lenders with weak returns and less reason to remain in the U.S."

Spain's Santander appears to be a bank likely to sell. HSBC also seems to be exploring selling off it 150-branch U.S. retail bank.

An example of the acquisition of "smaller banks" is the recent M&T Bancorp (MTB) agreement with People's United Financial Inc. (PBCT).

Ms. Noonan and Mr. Armstrong add:

Everybody wants to do a deal."

In other words, the money is out there and the climate is right. Almost everyone realizes that banking is changing and the change is going to accelerate as some of the global competition spills over into the American marketplace.

Nothing New

The truth is that this trend is not new. The shrinkage in the number of commercial banks in existence has been massive. A banking system that used to boast that it included over 14,000 banks, now is down to less than 5,000. And, the pace, I believe, is not going to slow down.

If anything it is going to speed up. JPMorgan Chase & Co. (JPM) has just put a "new" consumer bank into the United Kingdom. This bank is digital and "the new model will not come from 'legacy' banking, but from the Googles and Apples of the world.

The drive is to achieve scale and dominance.

Walmart senses this and is willing to make major effort to be a part of this world. I believe that with the talent Walmart has hired, Walmart will, one day, be a recognized presence in the world of digital finance.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.