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Wal-Mart woos Congress as bankers cry foul
By KERRY L. SMITH

   A growing, bipartisan group of U.S. House of Representatives members continue asking the Federal Deposit Insurance Corp. to hold public hearings on Wal-Mart's latest effort to branch into the banking industry.

   Rep. Paul Gillmor, a Republican from Ohio, and Rep. Barney Frank, a Democrat from Massachusetts, are asking for a public hearing process specific to Wal-Mart's recent application for deposit insurance to gain an industrial bank charter in the state of Utah.

   Wal-Mart has tried to enter the banking realm three times over the past several years, only to be blocked by Congress each time.

   Utah is one of seven U.S. states - joined by Colorado, Nevada, Minnesota, Hawaii, Califronia and Indiana - that allow local versions of industrial banks, banks backed by commercial entities. The California Legislature blocked the retailer's attempt to charter a bank there nearly three years ago.

   Marty Heires, senior communications manager for Wal-Mart, says the retailer's bank plans to engage only in back-office operations. Gillmor said he has his doubts.

   "Once an ILC (industrial loan corporation) has opened its doors and received FDIC insurance, it is only restricted to the original business model for the first three years of the bank's existence," said Gillmor. "After the first three years, the ILC can engage in all activities allowed by law, including de novo branching in 21 states and the District of Columbia."

   "De novo" branching, he explained, means that once the FDIC initially approves bank deposit insurance for Wal-Mart for one bank - in this current case, in Utah - Wal-Mart wouldn't need further FDIC approval to continue opening branches in other states, and it wouldn't need FDIC approval to acquire other banks.

   Camden Fine, president and chief executive officer of the Independent Community Bankers of America, said although Wal-Mart's current FDIC application states it is not planning on offering front-line banking services, the retailer has specified such in prior applications. "It's important to see Wal-Mart's detailed business plans, plans that are now only included in the secret part of its FDIC application," he said.

   Heires said Wal-Mart's plans, if approved by the FDIC, are merely to open the bank as an internal processing center in Salt Lake City.

   "We've filed this application so that Wal-Mart can capture the costs currently paid to third-party financial institutions for the processing of debit, credit and electronic check transactions," said Heires.

   Alan Whitchurch, a long-time Utah banker, will head the bank. "The bank will accept limited deposits from nonprofit and charitable organizations, but we have no plans to operate branch banks under this charter," he said at press time. "We will not engage in lending of any type."

   What Wal-Mart's arrival in cities and towns has meant to small, homegrown retailers could well be what it could mean to independently owned community banks, said Fine - being undercut and forced out of business.

   "Wal-Mart has a long history of destabilizing communities by undercutting prices of local merchants and driving them out of business," he said. "That is not a theory; it is a fact."

   When Wal-Mart entered Iowa, he said, 50 percent of the state's clothing stores, 30 percent of hardware stores, 42 percent of variety stores, 26 percent of department stores and 25 percent of building materials stores went out of business.

   "The largest company in the world could do the same thing to community banks," said Fine. "The FDIC would be ill-advised to set this nation on a course that could result in the demise of the community banking industry as we know it today."

   Mixing banking and commerce would create serious conflicts of interest and would also distort credit decisions, he added.

   Gillmor said Wal-Mart has sought an exemption from the Community Reinvestment Act for Wal-Mart Bank; there is stiff Congressional opposition to this exemption as well. "The bank would attract deposits from financial institutions that are subject to CRA, thereby reducing the resources available to those financial institutions to meet their CRA obligations."

   Charlotte Birch, spokeswoman for the American Bankers Association, said the U.S. House's Financial Services Subcommittee is garnering support for additional language to a bill known as the Financial Services Regulatory Relief Act of 2005, House Resolution 3505. This regulatory relief bill, she said, includes a provision that distinguishes between industrial loan corporations owned by financial companies and those owned by commercial companies.

   "We have long advocated the separation of banking and commerce," Birch said. "The ABA's concerns are multi-faceted. First, there is the issue of regulatory oversight. The Federal Reserve has oversight on banks, financial service companies, holding companies and the like. But there is no such Federal Reserve oversight over Wal-Mart or any commercial parent of an ILC."

   Birch says the American Bankers Association echoes the ICBA's worries over the credit decisions conflict of interest.

   "And another huge concern we have is the raw, competitive challenge of competing with a bank that's backed by an institution the magnitude of Wal-Mart," she said. "There is a conversation happening right now in Congress about what to do in general about the ILC charter. It's not over yet. It's only just begun."

   Back in July 2004, Moline-based John Deere & Co., Target and Toyota were among a number of non-financial companies that lobbied the U.S. House to allow them to offer lending services nationwide. They did not succeed.