What happens when a drug & convenience store also starts offering banking services? The case of Walgreens

Banks have been luring the unbanked by offering prepaid debit cards for years. Last year people in the US used prepaid cards 1.6 Billion times and transactions worth $77 Billion were made, according to Consumer Reports. Cards have been the fastest growing segment in the payments industry according to Federal Reserve Bank of Boston.

In a move which could add more prepaid card based transactions in USA, Walgreens announced this month that it would soon launch a prepaid debit card. Walgreens plans to launch this service by the end of this year at over 8,000 Walgreens and Duane Reade drugstores. Walgreens claims that the service would not only act as an alternative to cash but also offer a range of financial services such as check cashing, online bill payments and direct deposit of paychecks.

For users interested in joining the program, there is a $2.95 activation fee, plus a $2.95 monthly fee. Users can get the monthly fee waived if $1000 is added onto the card during that month. In-store ATM withdrawals are free and withdrawals outside come at a charge of $2.95. Walgreens would also charge $2.95 as reload charges.

This is a move which could get the convenience stores across US, take notice of what Walgreens plans to do. Such models already exist in UK. For over a decade now, grocery chains such as Marks & Spencer and Sainsbury's have tie ups with financial institutions to offer financial services from insurance to mortgages. America had them too. But what is new is depositing and withdrawing money in any form. According to Bryan Roberts, insights director of Kantar Retial, one of the reasons why such model has been successful for the grocery chains is the high profit margin involved. Items sold such as soaps, toothpaste, etc., have an estimated profit margin of 5%. Whereas, financial services provide the grocery chains profit margins as high as 20 to 25%.

The upside of such model for retailers despite higher profit margins would be to integrate payments and loyalty programs. Wal-mart has rolled out such a service across USA called Bluebird card. One of the downsides for a user to use prepaid cards is its inability to track a user’s credit history which can be used to take a loan or buy a house.

LTP View: If Walgreens is successful with such an initiative, there might be a high likelihood that other major chains will adopt such model. Banks must be taking notice of this. The rift between TESCO and Royal Bank of Scotland is one of the examples where retailer went too far and decided to do banking services on its own.