Wal-Mart Sets Another Record

By George Anderson


Wal-Mart has set another in a long line of records.


According to the Federal Deposit Insurance Corp., it has received more comments than ever before from Wal-Mart’s application to open a bank in Utah.


In a letter to the House of Representatives’ Committee on Financial Services, the Chairman of the FDIC, Donald Powell, said the agency was looking into whether it should hold
public hearings on the retailer’s application.


Mr. Powell said the retailer would not receive treatment any different than any other applicant in determining whether its application should be approved or rejected.


“I am aware that there is a great deal of public interest in the Wal-Mart Bank application; however, I believe it is important that the application be processed in a manner that
is consistent with current law,” he wrote.


Rep. Paul Gillmor (R-Ohio), a member of the financial services committee, has come 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.”


Last month, Rep Gillmor’s colleague in the House, Rep. Jim Leach (R-Iowa) introduced legislation to block Wal-Mart and other commercial companies from controlling industrial
banks. Under the bill, reports Reuters, any company controlling an industrial bank would have to become a financial holding company subject to regulations under the Bank
Holding Company Act.


Moderator’s Comment: What affect would approval of Wal-Mart’s application to open an industrial bank have on the company’s retail business? What would
it mean for competitors, customers and suppliers to the retailer?

George Anderson – Moderator

BrainTrust

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David Livingston
David Livingston
18 years ago

It would be nice to see Wal-Mart put a bank branch in every unit and added interest rates to their list of “will not be beat” items. A former Roundy’s retailer here in Milwaukee was also the major shareholder in a local bank. He made the bank quite successful, putting in bank branches in all of his stores. Wal-Mart could really pull off something big. Target put E-Trade ATMs in their stores but who the heck banks at E-Trade? Wal-Mart, being just about everywhere, could build a huge consumer banking empire. I don’t see them getting into mortgages and car loans, but rather checking, savings, money market accounts, check cashing, money orders, and wiring money to Mexico and such. They could drain a lot of money away from traditional banks.

Ed Dennis
Ed Dennis
18 years ago

How could anything ever be closer than “banking” and retail? For years, almost every retailer acted as a bank by allowing credit to their customers. Down South, it was common for retailers to “carry” customers until the cotton crop or tobacco crop came in. Our representative from Ohio is just grandstanding and generally is the kind of politician who gives all politicians a bad name. He postures and pontificates, bellows and brags but contributes absolutely nothing to the public good. There is no law prohibiting Wal-Mart or any other retailer from offering credit to their customers. For gosh sakes, Sears founded the entire credit card industry by formalizing their customer credit services. If Wal-Mart wants to become a banker, then they must meet the requirements that anyone else would be required to meet – not one requirement less or one requirement more. After all, what’s the worse that could happen? I don’t think they can lend Chinese money in the good old USA!

Warren Thayer
Warren Thayer
18 years ago

You could make the argument that Schweggman’s, down in New Orleans, had a bank and grocery stores at the same time, but it was clearly a different case and a different era. I don’t reject the idea out of hand, but I do support looking at it closely. Sure, it would give Wal-Mart strong new advantages. I think any rational person would have to worry about the long-term effects on the market. This comes, as you know, from a real Wal-Mart fan.

Mark Lilien
Mark Lilien
18 years ago

Sears owned a “bank” for many years and still does. In fact, almost all the profits in the past few years came from the “bank,” not the merchandising. The “bank” at Sears borrows money at single digit rates and lends it out at double-digit rates. Right now, 5% of all credit card debt is in default. Here’s the math: borrow money at 8%, lose 3% to overhead and 5% to defaults, and lend it out at 18%. The profit is 2% before taxes. If you can borrow the money at 6% you double the profit. If you can lend it at 20%, you double the profit. Do both and your profit is 6%. How many retailers would like to make an extra 6% on their sales? Or would they prefer giving their credit card processor 1% to 3%? To ignore this opportunity, Wal-Mart management would have to be totally irresponsible to their shareholders! The neat thing is this: it’s VERY easy for any reasonably-sized retailer to do this themselves or by joining with other retailers. You can buy an existing small bank for less than $10 million, or start one for even less.

Camille P. Schuster, Ph.D.
Camille P. Schuster, Ph.D.
18 years ago

In Japan, the banking industry has been closely involved with business resulting in lower standards for loans, difficult payback situations, and difficulty in getting the banks back to a strong position. Transparency becomes difficult to assess with close ties between banks and companies. We have had a great deal of problems over the past 5 years with “cozy” relationships between auditors and top management. Banking and business have been separate entities so that banks can make independent judgments when approving applications from companies. Changing the playing field will have major long term consequences.

James Tenser
James Tenser
18 years ago

If I understand correctly, Wal-Mart is not at this time proposing to enter retail banking (which Ukrop’s has done in Virginia). But a Wal-Mart commercial bank could recapture the processing fees associated with credit card transactions and thereby improve profits. I would compare this step to others the Great Wal has made – taking its electric power brokering in-house, for example, or establishing its private satellite communications network two decades ago.

Yes, it would be irresponsible to shareholders for Wal-Mart to ignore this option. Lawmakers must decide whether this kind of business extension is in conformance with banking and antitrust law and in the interest of the citizenry. I hope they look very critically before rendering a decision.

Jason Brasher
Jason Brasher
18 years ago

I agree with Camille’s comments about allowing business to be tied closer to the banking industry. At a time when we have several high profile criminal cases with corporate fraud, do we really want to create an environment where companies can play shell games and three card monty with our banking industry?

Len Lewis
Len Lewis
18 years ago

The independent bankers association hates it because it further commoditizes the banking business. It would also significantly alter the structure of the banking business in the U.S. This may or may not be a bad thing. Bankers don’t like competition any more than retailers.

But the real problem is that if you pass legislation allowing Wal-Mart to do it, you open the flood gates for other, less solvent companies, to get into banking. There’s also another scenario. As unlikely as it may be, some are concerned that Wal-Mart might move capital from banking operations to shore up the retailing side if that business starts to tank. I told you it was unlikely, but something to think about.

Jeff Schaengold
Jeff Schaengold
18 years ago

When Wal-Mart announced its intention to charter a bank, it appears that once again they touched an open business sore in the retail and banking industry.

Once again, Wal-Mart is simply recycling an old business concept, but because it’s Wal-Mart the initiative is perceived as an unfriendly act.

We should all remember that Sears was the first national retail chain to issue not only a credit card, but charter a bank to support the credit card operation, and there was no voice of concern.

In 1990, Circuit City Stores chartered a bank in Georgia, and issued its own credit card and provided limited banking services. As with Sears, for a few years the Circuit City banking arm fueled its sales at Circuit City and was the foundation for launching CarMax.

UPS is a Bank. They make asset loans, commercial loans, real estate loans…

I have a suggestion for Wal-Mart Bank and Trust… take the average of fees and penalties charged by B of A, Wells Fargo, Wachovia, Chase and CitiGroup and cut the fees in half.

The national banks make all their money on fees. If we can use Wal-Mart to cut fees in half, all consumers will benefit.

Sounds just like the Wal-Mart retail business model, yes?