Is a WalMart Bank in Your Future?
By Walter C. Ayers
Editor’s note: As this edition of Connecticut Banking went into production, the FDIC informed several members of Congress that they would now conduct public hearings regarding Wal-Mart Bank’s (in organization) federal deposit insurance application. They further stated that, to date, the application has generated more than 1,500 comments from the public and more than 90 requests for hearings.
Could a banking facility owned by Wal-Mart one day become your bank’s most aggressive competitor? Might Wal-Mart, as it has with its store-pricing strategies, position its bank to be the lowest-cost provider in the marketplace? Would some of your customers perceive a Wal-Mart-owned banking facility in its stores as an attractive option to your bank? As has occurred on the retail-store side, might company-owned banking facilities in local Wal-Mart stores cause banks near those stores to close offices? If Wal-Mart is allowed to own a banking facility, will not other commercial firms of similar ilk follow? Inasmuch as banks are prohibited from owning commercial firms, would it be fair for a commercial firm like Wal-Mart to own a bank?
If you have not pondered these questions, it would be wise for you to do so. Wal-Mart has already made at least three unsuccessful attempts to crack the barrier separating banking and commerce, a barrier that was reaffirmed with the passage of the Gramm-Leach-Bliley Act (GLBA). Its objective is to own a bank, not rent space in its stores to other banks. It has unsuccessfully sought authorization to acquire an Oklahoma thrift, to create a partnership with a Canadian bank and to acquire an industrial bank in California. Even though rejected on all three fronts, as is typical of Wal-Mart, it has not given up. It is now seeking an industrial bank charter in Utah, a state which provides for such charters. At the same time, it is seeking to exploit a loophole that GLBA failed to close, under which the FDIC could approve a Wal-Mart charter application that is pending with the agency. The important thing to note is that an industrial bank, more typically referred to as an industrial loan company (ILC), possesses most of the same powers as a bank, including the ability to accept FDIC-insured deposits and to make loans. Indeed, the Wal-Mart application refers to the entity for which it seeks a charter as being Wal-Mart Bank.
Wal-Mart is not waiting for a final ruling by the FDIC. It is lobbying Congress for full interstate branching authority for ILCs. Stated simply, if the FDIC approves the application for the Wal-Mart Bank, and if Congress provides for interstate branching of ILCs, Wal-Mart will have won its case. It will have found a way around GLBA. Even though Wal-Mart indicates in its application that it is only seeking the ability to process internal transactions, its previous efforts to get into banking, and its lobbying for interstate branching, leave little doubt what Wal-Mart’s ultimate objective is for its new bank. That is, to put full-service banking offices in their stores. Meanwhile, as is so typically the case, banks will remain barred from entering commercial enterprises by GLBA.
Facts for Consideration
In deciding whether you are concerned about this potential development, and whether you should be talking to your member of Congress, consider a few facts.
First of all, we are not talking about the addition of some small local new bank competitor, or the addition of some large bank competitor for that matter. We are talking about the largest commercial company in the United States. We are talking about an international economic behemoth that already straddles the retail store market like a colossus. Consider, if you will, that, according to published reports, if Wal-Mart were an individual economy, it would be China’s eighth-largest trading partner. Might Wal-Mart use its overpowering economic clout, gained on the commercial side, to lowball or loss-leader banking services, at least until such time as they gain the banking market share they want?
A study conducted by Iowa State University found that, following Wal-Mart’s expansion into the state, 555 grocery stores, 298 hardware stores, 293 building suppliers, 161 variety shops, 158 women’s apparel stores and 116 pharmacies CLOSED. Retail Forward, a market research firm, indicates that for every one Wal-Mart SuperCenter opened, two local grocery stores close. Would the same trend occur for banking offices if Wal-Mart is authorized to directly offer banking services?
If Wal-Mart prevails, how far behind will other national/international commercial enterprises be? Does anyone think that competitors of Wal-Mart will stand idly by while Wal-Mart aggressively moves into the banking business? Is it not logical to assume that, if Wal-Mart succeeds in blowing open the banking door, others will follow? Is it not logical to also assume that it would not be limited to Wal-Mart-type operations, but might also include manufacturers (automobile, for example) that have channels that reach through to the individual consumer level? And what happens to banks that are barred from combining banking and commerce the same way as Wal-Mart and others that follow their lead?
Again, there are a lot of questions bankers should be pondering. But if all we do is ponder, Wal-Mart will get its banking authorization, coupled with full interstate branching rights. If your pondering leads you to conclude that this door should be slammed shut before Wal-Mart walks through the crack, you had best be talking to your member of Congress NOW.
Walter C. Ayers retired as president and CEO of the Virginia Bankers Association in December 2005.