By Martin H. Bosworth

April 10, 2006
The world's biggest retailer is telling the government that its bid for a charter bank is not designed to compete with community banks.

The Federal Deposit Insurance Corporation (FDIC) is holding final hearings to determine whether or not Wal-Mart can use an industrial loan company, chartered in Utah, to found its own bank.

The retail behemoth has claimed it would not use the financial franchise to undermine local bank chains, but everyone from consumer advocates such as Ed Mierzwinski to new Federal Reserve chair Ben Bernanke has expressed concern about the move.

Mierzwinski, chairman of the U.S. Public Interest Research Group (PIRG), has called Wal-Mart's move "a truly bad idea that has harsh risks for the economy."

He said that using an industrial bank as its foundation would enable Wal-Mart to offer loans and other products at prices that undercut local competition, and without the same regulatory scrutiny that's applied to commercial banks.

In prepared testimony before the FDIC, Wal-Mart spokesperson Jane Thompson said the company "has no plan to open bank branches."

Thompson points to the many lease agreements Wal-Mart has already made with community banks to open branches inside Wal-Mart superstores. The industrial bank would only be used to process "low-risk" transactions from current Wal-Mart customers, she said.

But an alliance of consumer groups, banking advocates, and Congressional representatives have been gathering forces to oppose Wal-Mart's plan, expressing concern that the company is using loopholes in banking law to open banks in any state the Utah bank is chartered with.

The FDIC has received nearly 2,000 letters on the issue, most of it opposed to Wal-Mart's plans.

Industrial Strength

The key to Wal-Mart's banking ambitions lies in the differences between a commercial bank and an industrial bank.

Industrial banks, or Industrial Loan Centers (ILCs), operate under an exemption from federal regulations that govern oversight of banks insured by the Federal Reserve.

The exemption has allowed big corporations ranging from Harley-Davidson to General Electric to own ILCs, leading to phenomenal growth in their assets and financial clout since the exemption was instituted in 1987.

Utah alone hosts several ILCs, including those controlled by Merrill Lynch, the Volvo Corporation, and Pitney Bowes, with hundreds of millions of dollars in assets.

ILCs are used by these companies to handle payment processing, such as debit and credit card transactions.

The lack of financial scrutiny over ILCs led both former Fed chair Alan Greenspan and current chair Bernanke to advocate closing the loophole and putting ILCs under the government's thumb.

Utah has an agreement with 20 states that enables its ILCs to do business with them. To expand into the remaining 30 states, Wal-Mart would have to buy out an existing bank.

According to The New Rules Project, a local business advocacy group, Wal-Mart has been stealthily lobbying Congress to preempt state laws and allow industrial banks to expand nationwide.

Wal-Mart has tried on several prior occasions to partner up with community banks in order to gain a charter, but was rejected. As part of its current bank bid, the company agreed to drop its proposed exemption from the Community Reinvestment Act (CRA), designed to encourage banks' investment in low- and moderate-income neighborhoods.

Even with that olive branch, community bankers and consumer advocates are still skeptical of the retailers' claims. Andrew Grossman, executive director of the Wal-Mart Watch organization, said "stability is the bedrock of the American financial system, but the Bank of Wal-Mart would threaten that with a dangerous concentration of commercial and financial power."

"When the enormous bank comes to town, it will threaten the local alternatives, just like super centers have undermined so many other local stores," Grossman said. "Then, with these critical centers of capital gone, local businesses that compete with Wal-Mart may be forced to rely on the retail giant's bank for loans."