Bank on Wal-Mart and Home Depot
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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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.
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.
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.
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.