Wal-Mart Is Looking For The Back Door Into The Banking Business

Wal-Mart is trying mightily to find a way to get into the banking business, attempting to ignore the legal and historical separation between the retail business and the banking business.

From the Chicago Tribune:

 Last July, when Wal-Mart Stores Inc. announced plans to open an industrial bank in Utah, one might have thought the retail giant had just acquired the combination to the banking industry's safe.

So up in arms is the banking industry that Wal-Mart Bank, as the proposed entity is dubbed, inspired more than 1,500 letters to the Federal Deposit Insurance Corp.

"Typically, we receive one or two letters on a new bank, and many times we receive none," an FDIC spokesman said.

 Wal-Mart tries to make their effort sound innocuous:

"It's about debit, credit and check processing only," said Wal-Mart Financial Services President Jane Thompson. "It's not a bank any consumer will see. It would be in an upstairs office in Utah and the money we save is money we'll use to lower prices."

But folks like the Fed and Alan Greenspan warn against permitting Wal-Mart to proceed with their plans:

"We've been concerned about the ownership of ILCs by non-financial institutions and whether or not that poses risk to the safety net or creates an un-level playing field with other kinds of financial institutions," Bernanke said. If they are to be the "functional equivalent" of banks, then they should face the same kind of supervision as banks, he said.

Alan Greenspan, Bernanke's predecessor, also warned in a letter less than a month ago that industrial loan company banks pose a potential threat because "their corporate owners are not subject to supervisory requirements and activity restrictions that Congress has established to govern the banking system."

Greenspan added, "certain legislative proposals pending in Congress also would enhance the significance of the ILC exemption by giving ILCs the ability to open de novo branches across the nation and offer interest-bearing checking accounts to business customers."

And Wal-Mart's previous efforts show their real intention:

Wal-Mart's application for the Utah charter is the retailer's fourth effort to get into the banking business.

In 1999 Wal-Mart applied for a charter for a full-service federal savings bank, but Congress clamped down on non-financial companies hoping to own one.

"That shut Wal-Mart out of the banking business," said Jerry Comizio, financial-services lawyer for Thacher Proffitt & Wood LLP in Washington.

In 2001, Wal-Mart tried to partner with Toronto-Dominion Bank, but that proposal also ran into trouble.

Comizio calls the ILC charter, available in only a few states, the "last remaining loophole" for non-financial companies to enter banking.

Wal-Mart in 2002 had sought an ILC in California but that state then passed a law preventing non-financial businesses from owning ILCs.

Despite Wal-Mart's assurances, bankers aren't being paranoid, Comizio said. "Once you have a banking charter, you are in the club, and it won't be much of a problem for them, under current law, to expand their activities if they wanted to," he said. "As the toy and grocery industries have learned, once Wal-Mart enters an industry it can be an extremely formidable competitor."

This is definitely something to keep an eye on.