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3,500 percent from $3.8 billion to more than $140 billion. In 1999, Congress overlooked the ILC loophole when it passed laws
to deregulate financial services by allowing bankers, securities brokers and insurers to enter one another's businesses.
This is Wal-Mart's fifth attempt to enter that loophole and get into banking. The retailer made application for its latest
ILC in Utah but needs ultimate approval from the FDIC.
Bank lobbyists say not enough attention has been focused on a part of Wal-Mart's latest application that could wreak havoc
with the secure transfer of hundreds of billions of dollars annually. It's the part in which Wal-Mart requests to process its
own debit card, credit card and check payments. Lobbyists such as David Manning, senior vice president of the Community
Bankers Association of Illinois, say allowing Wal-Mart to do this would eliminate FDIC oversight and safeguards that have
always been inherent in bank-to-bank transfers of funds - and for good reason.
"Although Wal-Mart purports to use this bank charter specifically for credit card back room processing," said Manning, "its
stated attempt is suspect. It's amazing how the assets of ILCs have grown exponentially over the past several years. The
industrial loan company loophole has been exploited for some time. It has already been jeopardized. But you take the biggest
retail company in the world and let it into banking, and there's no going back."
FDIC spokesman David Barr said several members of Congress requested the FDIC hearings, of which there have been two this
year devoted specifically to discuss Wal-Mart's application. Barr said these were the first such FDIC hearings in 20 years.
Terry Jorde, who testified in an FDIC hearing on this matter on behalf of the Independent Community Bankers of America,
says allowing a non-FDIC-regulated player into the mix is courting fraud and even the potential insolvency of those who are
making and accepting payments - as well as those who are clearing and settling them.
"Banks currently play a central role in the payment system," she said. "While companies other than banks may help stores and
banks process check and card transactions, only banks can actually transfer funds from one party to another, which is known as
settlement. Federal supervisors make sure that banks follow stringent policies and procedures to manage the risks involved in
this process. The Wal-Mart Bank would process more than $170 billion per year, and this does not include the transfer of funds
to Wal-Mart suppliers."
Jorde adds that Wal-Mart would have to balance its responsibilities as a federally insured bank with the liquidity and
profit-motivated business demands of its owner.
"If the Wal-Mart Bank fails to timely settle payment transactions, it could harm thousands of other financial institutions
and their customers," Jorde said. "Since the owners of industrial loan companies are exempt from Federal Reserve oversight,
there is weakened regulatory protection to effectively guard against this abuse."
In her testimony before the FDIC, Jane Thompson, president of Wal-Mart's financial services division, said the retailer
wants an in-house bank solely to process millions of credit card, debit card and electronic check payments in its nearly 4,000
U.S. stores.
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Thompson and other Wal-Mart officials say they aren't putting a dollar amount to the expected savings, but that by handling
its own payment processing, the company would save the fraction of a penny per transaction it currently pays two large banks
for the service, adding up to millions of dollars a year.
According to Jorde, Wal-Mart's unofficial entrance into the banking industry began more than three years ago when the
retailer began offering money orders. It has since rolled out payroll check-cashing and money-transfer services. Each of these
services, says Jorde, are being offered by Wal-Mart for noticeably less than traditional competitors' fees.
"If Wal-Mart were to offer certificates of deposit and pay significantly higher rates in order to attract deposits, my
personal suspicion is that the retailer would use it to ship the dollars to their home office, essentially drying up the
liquidity of smaller community banks. It's hard to imagine Wal-Mart making loans to small businesses that are competitors of
theirs, such as the local hardware store," Manning said.
In a recent statement posted to the company's Web site, Wal-Mart Corporate Affairs Director Marty Heires said the retailer
"pledges to stay out of branch banking." But Arthur Johnson, head of government relations for the American Bankers
Association, says granting this charter would be a misguided vote of trust in America's retail giant.
"There is reason to believe that Wal-Mart's plans could be expansive," Johnson said. "Wal-Mart has attempted on several
occasions to enter the full-service banking business. The American Bankers Association believes that banking is too important
to the nation to try such a risky experiment."
According to Johnson, Wal-Mart's intensions are broader than what retailers such as Target and recently Home Depot do with
regard to bank-related functions. Both Target and Home Depot use their industrial bank charters to issue credit cards for
corporate customers; spokespersons for both of these retailers say they have no plans to become players in the overall payment
processing system as Wal-Mart is seeking to do. On May 9, Home Depot Inc. acquired home improvement loan provider EnerBank USA
from CMS Energy Corp., a Michigan-based energy holding company. Home Depot officials say the retailer's plans are to use its
new powers only to originate home improvement loans for its customers in its role as a contractor.
Historically, FDIC rejections of banking charters are rare. Analysts say that since Home Depot's ILC deal was approved just
recently, it may make it more difficult for the FDIC to turn down Wal-Mart's application.
FDIC spokesman David Barr declined to comment in detail on the Wal-Mart charter application because it is pending. He said
although the FDIC's Acting Chairman Martin Gruenberg expects the board to have a permanent chairman in place before taking
action on the application, the board has the power to approve or deny the application at any time.
President George W. Bush has nominated Sheila Bair to take the post as head of the FDIC, but her nomination has yet to be
confirmed by the U.S. Senate.
Kathleen Day, a Washington Post staff writer, questions whether Wal-Mart should be allowed to enter the banking world and
negatively affect smaller community banks as it has already affected hometown grocery stores, toy stores and other types of
competition it has trumped.
"The critics I've spoken with fear that a Wal-Mart move into banking would dominate the industry," said Day. "They're
already calling the retailer a 'piggy banker.'"
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