Retailer uses backdoor to beat credit processing fees

Since Wal-Mart – one of the nation’s largest commercial powers applied for a banking charter, a brouhaha has been brewing over the implications of such an act.

Applying in Utah, which is just one of the five states that issues industrial banking charters, Wal-Mart aims to establish a bank to avoid fees associated with the processing of credit, debit and electronic checks transactions.
A Wal-Mart spokesperson to CNN/Money that a banking charter could ultimately save the company millions of dollars. Passing the savings onto customers through lower prices, Wal-Mart claims that it will operate a “back door” banking operation.

Although it plans a low-key approach to its financial endeavors, many fear that future intentions will change and Wal-Mart will become a physical, consumeroriented banking empire that could offer services in 20 states.

Charlotte Birch, spokesperson for the American Bankers Association, the largest banking trade association in the country that represents community, regional and money center banks, holding companies, savings associations, trust companies and savings banks, said the issue raises a number of concerns, but broadly speaking, many bankers fear that economic power will be concentrated by large companies.

“Commercial companies should not be allowed to own a bank. The law that currently separates bank and commerce should be maintained.”

Although the law currently separates bank and commerce, it has a back door. Commercial companies can receive an industrial loan charter ultimately allowing them to enter the banking industry.

Birch said there might be issues with commercial banks’ regulatory oversight and their ability to make biased or preferential credit decisions. She is advocating that legislators close the door.

“It is true. The current law allows this, so technically as it stands, there is no legal reason why the Wal-Mart application would not be approved; however, bankers have been concerned for a long time about banks that enter the banking world this way. The issue that needs to be addressed in the current law – not Wal-Mart’s application.”

In the past, other commercial entitles such as Target, have used the back door to gain access to the world of banking. Those who support Wal-Mart’s application say denying the application would be discrimination – especially since other commercial entities have been granted such opportunities.

Still, many oppose the Wal-Mart’s application. In a public statement, the Independent Community Bankers of America said that a WalMart Bank would -pose a serious threat to drive community banks out of business, Like they have done to local grocery stores, drug stores and hardware stores.

Although some community bankers may agree, Fred Hickman, president and CEO of North Penn Bank, Scranton, said that he is not that concerned about the possibility of Wal-Mart banking.

“There are so many different corporations that have their own bank now. What is the difference with Wal-Mart? We are competing against different financial entities – State Farm, Merrill Linch, credit unions. I don’t think it is going to directly affect us.”

His rationale surrounds the unique customer service that the bank offers. As a $100 million financial institution, North Penn Bank thrives on developing local relationships, and making financial decisions in a timely matter. Hickman feels that the Scranton bank is appealing for those customers who “are looking for a personal touch,” customers that may not be attracted by a Wal-Mart bank.

According to Hickman, what may be a larger concern for community banks is the competition with credit unionsespecially since credit unions are not subjected to federal income taxes like other lending institutions. In addition, credit unions have developed increasingly lax standards of who can utilize their institutions-broadening the clientele they can serve.

“It is difficult to compete,” stated Hickman. “I am not to worried about Wal-Mart, but there is not a level playing field when you took at credit unions.”

Although he doesn’t see Wal-Mart’s application as a threat, he does label it unfair, since Wal-Mart requested to be exempt from the Community Reinvestment Act.

“I don’t think they should be exempt. That is a pretty onerous compliance issue for banks, and it takes a lot of effort to make sure we service the credit needs of all of the community. I don’t understand why Wal-Mart would want to do this-especially since it has a reputation of coming into an area and undercutting the prices on the locals.”

In the past, Wal-Mart has made an attempt to obtain a charter, but was shot down. The newest application requires the approval of the FDIC and Utah state regulators. The ruling is expected early this year, but until then, the debate will continue.

“It still unclear of the fate of this effort,” stated Birch. “But it is definitely gaining a lot of attention and criticism.”