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.”
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The merchant processing world is tough to ignore if banks want to please their business customers. There’s also the potential for revenues: combined MasterCard and Visa annual transaction volume topped $1.5 trillion in 2004.
There are three types of merchant processors, according to the Office of the Comptroller of the Currency-acquiring banks, agent banks with and without liability, and third-party organizations.
A bank that contracts with merchants for settlement of credit card transactions is an acquiring bank, according to the OCC. Agent banks contract with merchants on behalf of an acquiring bank. Agent banks that only refer banks to participate in an acquiring bank’s program are known as referral banks, which typically do not assume liability for merchant losses.
Community banks usually function as agent banks that do not directly offer merchant processing services to their customers. Third-party organizations include any company the acquiring bank contracts with to provide merchant processing services, according to the OCC.
“Merchant processing activities involve gathering sales information from the merchant, obtaining authorization for the transaction, collecting funds from the card-issuing bank, and reimbursing the merchant,” said the OCC in its December 2001 Merchant Processing: Comptroller’s Handbook.
Some vendors do acquiring and processing, such as First Data Corp., while others, such as Certegy, only do processing.
The merchant acquiring business is concentrated: the top eight merchant acquirers hold 94 percent of the market share in terms of volume, according to The Nilson Report. First Data Corp., including alliances with Chase Merchant Services and Paymentech, controls 50 percent of all MasterCard and Visa transactions.
Other vendors include InfiCorp Holdings, Nova Information Systems, Global Payments. Elan Financial Sen-ices, and Vital Processing. These all offer merchant acquiring services for community banks. Core processors are teaming up with payment vendors to offer banks one-stop shopping. Fiserv Inc. is working with Primax Payment Systems, a credit and debit card transaction processor.
Banks can keep costs down by doing more of the work in-house, with a vendor handling only the processing. Yet, this entails assuming liability and hiring the talent to manage it. Here, the bank has the responsibility to sell services and set up its own pricing scale. The bank retains loss liability for the merchant.
Generally, community banks are better off paying a higher price and shifting liability to a provider, vendors advised. Banks should also make sure their brand is used front and center by the merchant processor.
“Make sure you can align with a partner that can put your name in front of your clients,” said Jan Estep, executive vice president of Elan Financial Services.
When evaluating a merchant acquiring vendor, banks must also make sure they’re working with a secure provider.
“Exposure of cardholder information is a risk area at a merchant processor,” Estep said. “Banks need to partner with a vendor that is totally tied up relative to risk management, regulations and cardholder compliance. All those are things that might put your financial institution at risk,” Estep said.
From a security standpoint, banks need to make sure the merchant processor is properly certified for the MasterCard or Visa network they will use to clear transactions, said Patricia Hewitt, vice president of business development for Fiserv Credit Processing Services. Be sure to ask for standard audits to ensure the processor is financially stable.