Walmart provided another sneak peak of its future in banking and payments when they filed for a patent for their own digital currency which was announced last week.
I've read their patent application. Here's what you need to know:
Cash hides information. Digital currency creates information.
What does it cost Walmart to accept a $20 bill for payment? Think of it. They have to receive physical currency from a bank. They have to send currency back to the bank. They have to stock all of their cashier drawers with paper money and heavy coins. They have to spend more time per cash transaction. Etc.
That's not a problem in 1999. But for argument's sake let say it's 2019 and there is a competitor that also likes to sell a bunch of stuff. Only this competitor excels in allowing customers to buy this stuff on their phones from the comfort of their homes and delivers it to their doorsteps the same day ... for free. Not only that, this competitor will get to know their customers so well over time through all of their cumulative buying and browsing decisions they will be able to accurately predict what their customers are going to buy next and will suggest they buy it now ... instead of driving through traffic, filling up the car with gas, parking their car, walking through the aisles and waiting in line to buy the same goods from Walmart later.
Not only was that a long sentence, that's a problem for a retailer that accepts cash and loses out on the additional customer information. It could put lesser retailers out of business, couldn't it Sears?
Look. Walmart is smart. They know the opportunity cost of cash is expensive. That's why it's not surprising that they're rolling out their own digital currency whenever it may be. Walmart also understands that their digital currency will improve it's predictive forecasting models. Consumer demand doesn't need to be a guess. It can be predicted with the right data and digital currency can provide that data.
Cash is pawn. Digital currency is king.
With 5,362 locations in the United States, Walmart's customer base mirrors the population.
So what do we know about banking in the US ?
We know that 7% of our adult citizens are 'unbanked' and 20% are 'underbanked'. So if 27% of Walmart's customer base is basically using cash, Walmart is making its supply decisions with only 73% of the available customer-specific information while Amazon hovers near 100% with more accurate information.
The informational differences between cash and digital currency are sizable. A purchase with cash shows WHAT was purchased only. A purchase with digital currency shows WHAT was purchased, WHO purchased it, WHEN they purchased it, WHERE they purchased it, HOW MUCH they purchased, HOW OFTEN they purchased it and more.
That information is digital gold. That's why Walmart wants it. That's why Walmart needs it. It's not a luxury.
Walmart now has 11,368 locations globally
If you haven't been to a Walmart since 1962, you may notice that they've expanded. They're no longer exclusive to the metropolis of Rogers, Arkansas. They've added another 11,367 locations across 27 countries such as Argentina, Brazil, Canada, Chile, China, Costa Rica, El Salvador, Guatemala, Honduras, India, Japan, Mexico, Nicaragua, South Africa and the United Kingdom.
In fact, there are now more locations outside the US than inside the US. What does this mean for banking? Well, many of these countries have a higher unbanked population percentage than the US. This makes for even messier and more incomplete data for Walmart and creates a greater need for banking as a service for its customers.
275 million customers. Every. Darn. Week.
I'll save you a scroll to the calculator on your telephone. 275,000,000 is a big number and it's also the number of customers that shop at Walmart every week across the world.
So let's be conservative and stay with the figure that 27% of these customers will use cash. That means Walmart has no customer-specific data on 74 million of its weekly customers. This is a problem even for the best predictive analytics models. And it's problem that will never affect Amazon.
A Walmart coin as a service could also reduce their underbanked customers' reliance on short-term borrowing, eliminate the associated fees, provide interest and even provide small, short-term, interest-free loans itself.
Walmart isn't developing a digital currency because it's hip. They're doing it to compete in the next decade. They're doing it to create a customer-centric competitive advantage.
That sounds like a bank. In fact,
Walmart already is a bank ...
Walmart partners with:
PayPal - For a $3 fee Walmart customers can withdraw from or deposit to PayPal
American Express - Walmart customers can use or earn AmEx Rewards points.
American Express again - Bluebird2Walmart card can be used for direct deposits, to send money, to receive money and to cash checks.
MoneyGram - With Walmart2World customers can send money globally for a fee.
Walmart also has:
Financial Services areas within its stores
A mobile app that accepts payments
... but their bank is broken ...:
Walmart is also losing in banking:
Their mobile wallet partnership failed.
They've had contentious relationship with Visa.
Their customer-specific data goes to payments processors instead of Walmart.
Walmart already knows Apple Pay, Google Pay, Samsung Pay and Visa aren't allies. They're real and massive threats. These payments services use encryption and tokenization to protect data.
That's good for customers. Their personal information won't be stolen.
It's great for Apple, Google, Visa and Samsung. They get the precious customer-specific data. It's terrible for Walmart. Walmart is paying their partners to take their data away from them.
... and Walmart Coin fixes it:
A digital currency allows Walmart to consolidate and own their list of traditional banking services while eliminating their over-reliance on its payments partners. Adopting a digital coin would mean:
Good-bye, PayPal. Walmart customers could withdraw and deposit money without a fee via their Walmart digital currency.
So long, AmEx. Walmart would provide their own highly-targeted incentives that rewards customer behaviors that make the customer more predictable for Walmart.
See you, MoneyGram. Walmart customers could instantaneously transfer digital currency to friends and family for no fee.
Take care, Visa. Walmart no longer wants or needs to pay $8 billion annually to payments processors.
What are the other bank disruptive features in the Walmart patent application?:
A no fee, interest earning bank account: Walmart's stable digital currency (meaning the coin will likely mimic the value of the local national fiat currency) can provide a fee-free alternative store of value. According to the patent application, their coin could be spent at Walmart or participating retailers. It can be converted to cash. It might even earn interest.
Buy micro-futures: See a big sale on milk? Well how many gallons could you buy at once? Milk spoils. With a Walmart digital currency their patent explains that their customers can buy future goods, or in this example, gallons of milk at today's price and then just pick them up over the coming weeks or months at the pre-paid lower cost. The customer benefits from the lower prices on a good they know they're going to purchase every week. Walmart benefits from highly predictable demand, an additional source of revenue and greater volume.
Pay by thumb ... or face: Why pull out a Visa card, which now would be a competitor product, when you could just look at a screen or place your thumb on a reader at the self-service checkout lane. Their blockchain patent shows a digital and encrypted biometric identity platform allowing for frictionless payments without a wallet or phone.
Promote consistency. Reward loyalty:
Of all the potential benefits for creating its own currency ecosystem, it really comes down to better data. Walmart wants consistency, predictability and accuracy. Walmart has many competitive advantages such as scale and supply chain management. So why give away their valuable customer data to a partner or competitor firm when they can own it all for themselves, realize significant cost savings and improve accuracy while rewarding their customers with lower prices and a better shopping experience.
So what does this mean for banking?:
It's been a busy year for blockchain announcements that affect banking at Fortune 100 companies. JPMorgan rolled out Quorum. Facebook has introduced it's Libra group project. And now Walmart has applied for a patent on it's own digital currency.
This is not about Bitcoin and other lesser known cryptocurrencies. A few of them have value. Most do not. That's another article for another time. But it should be clear that these Fortune 100 projects are about payments. They're about data. They're about adapting to the realities of a new competitive landscape in banking and capitalizing on the benefits of blockchain technology.
This is only the beginning. Blockchain will disrupt banking. JPMorgan saw the threat to its cross-border payments business and adapted with Quorum. Facebook saw the massive new market in both digital identity and payments and is developing Libra with dozens of partners. Now Walmart, our largest US company, has announced they see an opportunity to further compete with Amazon on data and to disrupt banking with digital identity and payments too.
So Walmart's application is yet another immediate reminder for banking in 2019: Change is coming.
Disrupt or be disrupted.