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Wal-Mart wants a bank

Wal-Mart entered the grocery business in 1988 to compete with established names such as Kroger, Safeway and Albertsons, which had dominated food retailing for decades.

Today Wal-Mart is America's biggest grocer, with 16 percent of the U.S. retail food market, and its sales continue to climb, even as dozens of grocery chains struggle.

Wal-Mart Stores Inc.'s decision to jump full-force into toys about 15 years ago has had similar results. Its sales overtook leader Toys "R" Us Inc., the inventor of selling toys in big-box discount stores, in 1998. Wal-Mart has 28 percent of that market.

Congressional lawmakers and federal regulators face a tough question: Should they permit Wal-Mart to use a legal loophole to enter banking and potentially do in that arena what it has done to nearly every other consumer product and service it has touched?

The question rattles bankers from Maine to California, even though the retailer no longer wants a full-service bank, only a limited-purpose one. It has whipped up longtime Wal-Mart critics, including labor unions, consumer groups and some congressmen on both sides of the aisle, who say the company is too big, with too much power over the American economy, sometimes to the detriment of workers' pay and domestic jobs.

Charles Fishman, author of a new book, The Wal-Mart Effect, chronicling how the company's growth and low-price philosophy influences the U.S. economy, is undecided: "I don't know if Wal-Mart would be good or bad for banking in the long run. But I'll bet ATM fees would come down pretty quick."

At issue is the possibility that Wal-Mart and a dozen other nonfinancial firms would be allowed to erode and possibly jettison a ban that's been in place for most of America's 230-year history barring commercial firms from owning full-service retail banks, and vice versa. Supporters of the ban say letting commerce and banking mix would foster unfair concentrations of power, create conflicts of interest in how credit is granted and perhaps one day burden taxpayers should the failure of a bank and its affiliate put at risk the Federal Deposit Insurance Corp., the federal fund that insures consumers' bank deposits.

"What's really at issue is the nature of the American economy," says Rep. Jim Leach, R-Iowa, who for two decades has fought efforts by industry to lift the ban. "If such concentrations are allowed, you could have our largest banks combined with our largest retail companies and high-tech companies and create questions about how credit is allocated. It has enormous consequences for competition, and I think America would become less competitive in the world."

But others say low pricing is king.

"Wal-Mart sees banking as an opportunity to give the customer a better deal," says Howard Davidowitz, founder and chairman of Davidowitz & Associates Inc., a New York retail consulting and investment banking firm. "That's what Wal-Mart's about. That's why they have demolished the food and toy industries. If it's better for the customers, then that's the way it ought to be."

Sparking the uproar is Wal-Mart's application to get federal deposit insurance, which is required before it can open a state-chartered bank in Utah known as an industrial loan corporation, or ILC.

Congress overlooked the ILC loophole in 1999 when it passed laws to deregulate financial services by allowing bankers, securities brokers and insurers to enter one another's businesses and sell such products under one roof. But despite overlooking ILCs, Congress specifically addressed the issue of commerce and banking: It voted to maintain the ban on mixing the two by closing a loophole that allowed nonfinancial firms such as Wal-Mart to own a savings and loan, a specialty bank.

A handful of states, including California and Nevada but most of all Utah, grant charters for ILCs. Sixty-one ILCs have been granted since 1984, nearly half of them after the 1999 financial deregulation bill passed, and six applications, including Wal-Mart's, are pending. The advantage of an ILC - aside from the fact that commercial firms are banned from owning a traditional bank - is that it allows its owner to bypass regulation by this country's main bank regulator, the Federal Reserve Board.

Instead, ILCs are supervised by their state regulator and, at the federal level, the FDIC, which in addition to insuring all banks has for decades regulated some state banks. The FDIC has said it has the capability to provide sufficient federal oversight of these state banks. Leach and others disagree, as did the Government Accountability Office, the research arm of Congress, in a report last fall.

Most ILCs are owned by financial companies such as securities firms Merrill Lynch & Co. and Goldman Sachs Group Inc. that under deregulation could own a traditional bank but don't want to because that would require they be regulated by the Fed as bank holding companies. The Fed requires holding companies to maintain certain amounts of cash against potential losses, and that's an expense these firms want to avoid. The dozen or so nonfinancial companies that own ILCs - BMW of North America LLC, Volvo and the like - do so to finance purchases of their cars and motorcycles.

The FDIC, with little fanfare and no headlines, granted retail discounter Target Corp.'s application for insurance for a Utah-chartered ILC 18 months ago. Target is using it to offer a credit card to its small-business customers. Wal-Mart uses Target to press its case in its lobbying of Congress, saying it's unfair to let its rival own a bank when it doesn't.

Wal-Mart officials say it too would use the Utah bank for limited purposes, namely to accept large deposits brokered through third parties and, by removing the middleman, to lower costs of back-room operations by tens of millions of dollars a year in the processing of 2.5-billion credit and debit-card transactions.

That's a change in plans from a few years ago, when the company said it wanted to enter full-service retail banking because that's what its customers want.

Since then, Wal-Mart has changed its approach, said Jane Thompson, president of Wal-Mart Financial Services. The company has "read the tea leaves," she said. The in-store banks will now be outside partners.


Sixty-one charters for industrial loan corporations, or ILCs, have been granted since 1984. A good number of the charters have gone to financial services firms, which use the corporations to engage in some banking activities without maintaining the level of cash reserves the Federal Reserve demands of banks. These ILCs include:

- American Express Centurion Bank

- Goldman Sachs Bank USA

- Lehman Brothers Commercial Bank

- Merrill Lynch Bank

- Morgan Stanley Bank

- UBS Bank USA

Some nonfinancial firms own ILCs as well, in part to offer financing to their customers. Some of these are:

- BMW of North America LLC

- Harley-Davidson Inc.

- Fry's Electronics Inc.

- Toyota Motor Corp.

- Volkswagen AG

- AB Volvo