Bank on Wal-Mart and Home Depot

Discussion
Jan 09, 2007

By George Anderson

With the Federal Deposit and Insurance Corporation (FDIC) moratorium on deposit insurance applications about at an end, a decision may finally be made on Wal-Mart, Home Depot and applications made by others to operate industrial banks.

The FDIC declared the moratorium last July as it was considering Wal-Mart’s application to buy an industrial bank in Utah. At the time, the FDIC had reported receiving more comments than ever before in reaction to Wal-Mart’s application.

Last summer, a coalition of groups, including those from the banking industry, labor unions and others in retailing, lobbied Congress to block Wal-Mart’s application before the FDIC approved it. Among the positions taken by those opposed to Wal-Mart’s bid was that the retailer would put community-owned banks out of business as it did mom and pop retailers.

Back in 2005, Rep. Paul Gillmor (R-Ohio), a member of the financial services committee, came out against Wal-Mart’s application. “The basic principle is not to mix commerce and banking,” he said. “To control a financial institution, you need to be at least 85 percent financial and Wal-Mart clearly is not that. Wal-Mart should not be permitted to play by different rules from financial institutions.”

Opposition to Wal-Mart remains strong. Last month, Rep. Gillmor and Massachusetts Democrat Barney Frank wrote to the FDIC asking it to extend the moratorium. The agency has indicated that it is looking to move forward as enough time is passed and those that have submitted applications deserve a ruling.

If Wal-Mart’s application were to be approved, it would be able to process its own electronic transactions (checks, credit and debit cards) and, in the process, reduce its costs. The retailer would also be able to offer consumers loans and federally insured accounts of deposit.

While not receiving the same level of publicity as Wal-Mart, Home Depot has also run into strong opposition in its bid to acquire EnerBank USA, an industrial bank catering to construction contractors that is also headquartered in Utah.

At the time the deal in principle was announced, Frank Blake, the recently name CEO of Home Depot, said, “This acquisition is another part of our strategy to expand our business and relationships with professional customers. EnerBank has a unique way of helping home improvement contractors grow their business, especially the smaller contractors who frequent our retail stores. Enerbank’s focus on offering loans via contractor referrals complements our existing credit offerings and partnerships.”

Discussion Questions: What will granting the applications of Wal-Mart and Home Depot to operate industrial banks mean for the sectors of retailing in which they currently operate? How will it affect the broad retailing business in years to come?

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6 Comments on "Bank on Wal-Mart and Home Depot"


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Ed Dennis
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Ed Dennis
15 years 4 months ago

The only possible result is that Wal-Mart will become even more profitable. While Home Depot will earn money via banking activities, I don’t know if this extra income will overcome an impending slide in sales. The entities that might suffer will probably be the large credit carriers like MasterCard and Visa. I would assume that Wal-Mart will provide incentive to use their credit. On second thought, the consumer will probably be the biggest loser in this situation as Joe Sixpack will be encouraged to borrow even more.

Kai Clarke
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15 years 4 months ago

This is a bad decision. Letting retailers manage banks has been a poor decision. This places a conflict of interest in the consumer arena, where one should not exist. The reason this hasn’t occurred is because of this conflict (where the lender and the seller are the same). We need to continue to define these institutions as separate entities to keep the potential of abuse away from the consumer. Our current fiscal protections are designed to protect the consumer only if we don’t have lenders who are also sellers. Retailers should not be bankers and vice-versa.

Bill Bishop
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Bill Bishop
15 years 4 months ago

If these applications are approved, it will have a huge effect on the retailing business because it represents a significant “break” in the banking businesses’ efforts to control the U.S. payment systems. Lower credit and transaction fees may be one of the immediate benefits, but there will be a lot more positive changes to follow once the banks’ vice grip on payment systems is released.

Bill Bittner
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Bill Bittner
15 years 4 months ago
There is no doubt that the current costs associated with credit card use are ridiculous and border on, or are in fact, usurious. Three major laws passed by our “house of representatives” have made the credit card industry a license to steal from the users. The universal application of state credit laws based on the operating area of the company, the removal of limits on fees, and the revision of personal bankruptcy laws have all worked to make credit card operations a license to print money. I enjoy discussion topics that force me to do some research. I did not remember the differences between an “industrial bank” and a “commercial bank.” Apparently the only significant difference is that the industrial bank does not offer checking (demand) accounts. They can offer loans, savings accounts, and credit cards. We have heard all the terrible discussions of personal bankruptcies and consumers living beyond their means. No one who watches television or reads a newspaper is immune to all the advertising credit card companies spend to encourage people to… Read more »
Mark Lilien
Guest
15 years 4 months ago

Target makes several hundred million dollars a year (before interest and taxes) on its credit cards. For decades, Sears made huge profits on its credit cards, often earning more than it did on the merchandise. When a retailer borrows money at 8% and lends it at 24%, there’s plenty left over for profit, after the overhead and write-offs. General Motors, through GMAC, doesn’t just make auto loans. It’s one of the largest mortgage lenders, too. Although the small community banks fear Wal-Mart and Home Depot, they’ve been competing successfully against huge national lenders for generations.

Bill Robinson
Guest
Bill Robinson
15 years 4 months ago
No wonder the banking industry doesn’t want Wal-Mart, Home Depot and other retail giants to hang out their banking shingle. Every day these behemoths handle billions in cash, checks, credit and debit transactions. By keeping retailers out of banking, existing law really protects the banking industry allowing to build up highly profitable businesses on the backs of retailers and consumers. What benefits would accrue to retailers if they went into banking? Apart from eliminating the fees banks charge for these services, consider the float. If it had the full use of its cash from the consumer transaction to the time its suppliers deposited their Wal-Mart checks, Wal-Mart would gain hundreds of millions in profits just on the extended use of the money. Likely, these dollars would increase dramatically from revenues other consumer facing banking services and, perhaps, other services to retailers. Would this give Wal-Mart and Home Depot a competitive advantage over other retailers that don’t run banks? Of course. Unless law makers can figure a way to level the playing field to benefit all… Read more »
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