Costco Moves into Mortgage Loans
By Amanda Alix
There doesn't seem to be anything under the sun that Costco (COST) doesn't sell, including mortgage loans. The retailer's new online financial offering had been in testing mode for the past year, and it has worked so well that it has now been launched publicly.
The program has already made more than 10,000 mortgage loans, and in typical consumer-friendly Costco style. Unlike other online mortgage services, Costco's puts the member in the driver's seat: The identity of the member is not known to any mortgage provider until the consumer decides which one is his or her top choice.
Costco has been hustling to bring its members expanded financial services, in addition to the RV and boat loans and insurance products that it already offers. The retailer plans to offer student loans and automobile loans in the near future.
A Good Idea, But Not a New One
Retailers have been offering financial services for years, with perhaps the best-known example being Sears Holdings' (SHLD) involvement in the 1980s and early 1990s. Known then as Sears, Roebuck & Co., the retail chain had a full kaleidoscope of mortgage services, lumped together into the Sears Mortgage Banking Group. The retailer sold the subsidiary to PNC Bank in 1993.
More recently, Wal-Mart (WMT) , which gave up its plan to obtain a federal bank charter several years ago, has been edging onto the financial services scene. Its Money Card, a prepaid debit card, has been gaining in popularity, and its flat-fee check cashing service is gaining ground, as well. Recent estimates suggest that approximately $8 billion has been loaded onto Wal-Mart's Money Card product since its debut. Although the retailer has not again pursued a bank charter in the U.S., it has received one in Canada and in Mexico. In addition, Wal-Mart subsidiary Sam's Club has offered its members small-business loans of up to $25,000 since 2010.
Wait, There's More: Health Insurance
Costco has offered auto and home insurance in 44 states through its partner Ameriprise Financial (AMP) for the past nine years, so it's no big surprise that the company is now getting into the health insurance game. Health-care reform is requiring most Americans to purchase health insurance by 2014, and the push is on to make those policies available, despite the battle over the constitutionality of that provision. The partnership between Costco and Aetna (AET) will offer members discounted pricing on policies, as well as lower co-pays as long as they use the pharmacies at Costco.
I can certainly see this new mortgage product, from which Costco makes money through promotion fees, as being very lucrative for the retail giant as well as its 11 mortgage servicing partners. This program will also give banks some competition, especially in the customer relations portion of mortgage lending. Instead of being perceived as predatory or adversarial during the mortgage process -- as many banks are considered to be these days -- Costco is going out of its way to make the process customer-friendly. Indeed, one lender, New Jersey-based First Choice Bank, has been tasked with making sure the other servicers adhere to Costco's member-protection policies. Expect Wal-Mart to revisit the bank charter issue again, too, if it sees success in Costco's program.
The company's online insurance offering should also be a hit, particularly as it expands to more states, giving Aetna a much-needed boost. Costco will surely see its membership income rise via these programs, as more and more consumers realize that Costco really is the place for "one-stop shopping."
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