The nation’s largest seller of everything from groceries to toys wants to go into banking. Wal-Mart has applied to open a bank in Utah. State regulators say it will take about four months for them to review the application.
The move is opposed by a wide range of business, labor, and banking groups, including the Independent Community Bankers of America, which argues that mixing retail and banking “would produce an excessive concentration of economic power” and “jeopardize the impartial allocation of credit.”
Under a 1999 federal banking law, non-financial companies are prohibited from owning banks that are regulated by the Federal Reserve. The only banks not regulated by the Federal Reserve are those with industrial charters, a small and controversial corner of the banking industry. Utah is one of only a handful of states that charter industrial banks, which were first established in the 19th century to provide loans to blue-collar workers, but are more commonly created today to handle very specific services, such as financing auto loans or processing credit card transactions.
Wal-Mart says that it does not intend to go into consumer banking or to open bank branches across the country. The company says its only purpose in owning a bank is to process the 140 million debit and credit card transactions that are made at its stores each month. Not having to contract out for these services could save the retailer as much as $650 million a year, according to Electronic Payments Week.
But independent bankers contend this is the camel’s nose in the tent. Over the last few years, Wal-Mart has been offering a growing number of financial services at its stores and sees banking as a major opportunity for growth. In 2002, the company began providing wire transfers, money orders, and check cashing services. Earlier this year it unveiled its own credit card, in partnership with Discover.
It has also partnered with banks to set up branches in about 1,000 of its U.S. stores. In some cases these are co-branded: SunTrust bank operates branches in several dozen superstores that are called “Wal-Mart Money Center by SunTrust.” This helps the company build an association in people’s minds between Wal-Mart and banking.
Wal-Mart’s long established pattern when entering a new field has been to initially partner with another company, but ultimately to take over the business itself. Wal-Mart, for example, partnered with Murphy Oil to operate gas stations at 800 of its stores, but this year the retailer began establishing its own stations.
Independent banks fear Wal-Mart could drive them out of business, leaving consumers with fewer choices and small businesses dependent on their biggest competitor for loans.
This is Wal-Mart’s fourth attempt at getting into banking. In 1999, it tried to buy a bank in Oklahoma, but was blocked after independent bankers successfully lobbied Congress to include a provision in banking legislation that barred non-financial companies from operating banks (except for state-chartered industrial banks).
In 2001, Wal-Mart attempted to enter banking through a partnership with a Toronto bank, but federal regulators blocked the deal, concluding that it effectively amounted to the sort of marriage between a non-financial company and a bank that Congress intended to prevent. In 2002, Wal-Mart tried to buy an industrial bank in California, but at the 11th hour independent bankers persuaded the legislature to prohibit non-financial companies from acquiring state-chartered industrial banks.
Establishing an industrial bank in Utah is one of the few avenues into banking still open to retailers. Last year, Target launched a Utah-based bank, which issues Target credit cards. In addition to services like processing card transactions, Utah law allows industrial banks to take deposits, make loans, and issue credit cards.
Once established as a Utah bank, Wal-Mart would be able to freely branch into more than 20 other states under an multi-state agreement that Utah is party to.
But in order to branch into any of the remaining states, Wal-Mart would have to buy an existing bank in that state. That’s potentially an insurmountable hurdle for the company, as most states do not charter industrial banks and/or do not allow non-financial companies to buy banks.
Wal-Mart, however, has been quietly lobbying Congress to enact legislation that would preempt state laws and allow industrial banks unlimited nationwide expansion.
But the Sound Banking Coalition — a broad alliance that includes the Independent Community Bankers of America, the National Grocers Association, and the United Food and Commercial Workers union — have countered, first with a measure that would preserve state authority to limit bank branching within their borders, and second with a push to close the loophole that allows non-financial companies to operate industrial banks.
