The Writing on the Wal-Mart: To Bank or Not To Bank

By Mark Hoerrner

Wal-Mart’s move to create an Industrial Loan Company based in Salt Lake City, Utah, has many small community banks across the nation worried that though the retail behemoth claims to only be interested in cutting costs through internalizing certain banking operations, the company will eventually turn its sights on making banking services available to the consumer.

Utah is one of only seven states in which an industrial loan company may be set up. The company claims that the move is to lower internal costs on various banking procedures and to allow the company to sponsor debit cards, a new potential revenue stream from the company that does nearly $1 billion a day in sales and sees 138 million customers darken its doors each week.

But this is not a new move for Wal-Mart. It’s the fourth in a series of continued corporate moves to position the retailer in the financial services industry. Because of this aggressiveness, smaller banks have lobbied against Wal-Mart’s applications with the Federal Deposit Insurance Corp. that has the ultimate decision-making power to grant the company the ability to create banking operations. In fact the opposition to Wal-Mart has been so strong, the company issued public statements on the matter.

"Our application and our testimony made it clear that we will continue to support and expand upon the over 1150 independent bank branches already in our stores," said a spokesman for the retail chain. "and that our goal is to save money on transaction costs and then pass on those savings to working families who shop in our stores.

"After three hearings and dozens of witnesses, one thing is clear - regulators can choose between approving a routine application or yielding to unfounded speculation and heated rhetoric about issues unrelated to our application. We also made it clear that we will continue our strong and long-standing support of our communities, including our intention to be fully compliant with the Community Reinvestment Act."

Though other retailers, such at Target, have created similar ILCs to save money on transaction costs, the independent banking community see the move as the beginning of a descent down a particularly slippery slope.

"Once the camel's nose is underneath the tent, community banks are going to lose their battle," said Steve Andrews, president and CEO of Bank of Alameda in a recent interview with the East Bay Business Times. Andrews is the former chair of the California Independent Bankers Association.