BENTONVILLE, Ark. — What's next for Wal-Mart's banking efforts?
Facing an avalanche of criticism and governmental resistance, Wal-Mart Stores here this month withdrew its application for an industrial loan company charter, which would have allowed it to operate a banking entity.
However, the apparent defeat could mark an expansion of the retailer's banking-related products in partnership with other financial companies.
“Our strategy is to develop more financial services products to complement what we're already offering, such as check cashing, money transfers, bill payment and product care plans,” Wal-Mart spokesman Kevin Gardner told SN.
As to what's next for debit and credit card interchange fees, the company's stated reason for pursuing an ILC charter, Gardner said, “when we have news to announce, we'll do just that.”
Wal-Mart had first applied for the ILC in July 2005, but had been put off by the Federal Deposit Insurance Corp., which decided in January to defer reviewing such applications for a year, allowing time for legislators to debate the merits of ILCs, particularly those owned by retailers. Last month, Ben Bernanke, chairman of the Federal Reserve Board, said he agreed that retail firms should not become banks.
While Wal-Mart said it wanted the charter to process card fees, critics worry worried that the company had designs on becoming a major player in the banking business, putting pressure on smaller banks. Recent reports that the retailer had revised lease agreements with tenant banks so it could offer banking products itself fueled the controversy and apparently led to the withdrawal.
A spokeswoman for the retailer described the opposition to its latest attempt to get into banking as “a manufactured controversy.” Jane Thompson, president of Wal-Mart Financial Services, said in a statement, “At no stage did we intend to use the ILC to establish branch banking operations as critics have suggested — we simply sought to reduce credit and debit card transaction costs. We fully intend to introduce new products and services that champion those who deserve convenient, lower-priced financial services.”
Sheila Bair, chairman of the FDIC, said in a statement, “Wal-Mart made a wise choice. This decision will remove the controversy surrounding their intentions.”
“I think it is a shame,” said Lawrence White, economics professor, Stern School of Business, New York University, New York. White said he has no relationship to Wal-Mart and testified before the FDIC and the House Financial Services Committee advocating a “relatively open” ILC process.
If adequate protections are in place for banks owned by commercial firms, “it would be a good thing to have a Wal-Mart in the banking business, not a bad thing, because they will provide more competition,” White said.
“The stories that the community bankers put out that Wal-Mart was somehow going to sweep the landscape clean of all community bankers is hogwash,” he said. The less efficient banks might fall by the wayside, but others would figure out how to keep their customers. “It's all about competition, and basically these guys didn't want competition.”
However, White also questioned Wal-Mart's contention that it wanted to use the ILC to process interchange fees. Those fees are set by the issuing bank, and the only fees Wal-Mart would have been able to control would have been those for cards it issued, he said.
Looking ahead, White sees legislators continuing to press for more regulation on ILCs, and for Wal-Mart to move forward with banking products using financial partners. “I think Wal-Mart is going to be re-examining its contracts and its relationships with banks, and I think they are going to try to cut better deals in the future.”
“We welcome their withdrawal of the ILC application,” said Tom Wenning, senior vice president and general counsel, National Grocers Association, Arlington, Va. “We opposed it in our testimony before the FDIC.”
Wenning said NGA agrees with former Federal Reserve Chairman Alan Greenspan and current Chairman Bernanke that banking and commerce should remain separate, while supporting the efforts of Rep. Barney Frank, D-Mass., to legislate this “because we think it is in the best interest of the country.”