Should Wal-Mart Be Allowed To Own a Bank? (Gillespie on CNBC This Morning)

Nick Gillespie | April 10, 2006

Not a commercial bank, but an "industrial loan corporation," a sort of in-house bank that would cover 140 million credit card, debit card, and electronic check payments Wal-Mart makes each year. More here.

I'll be debating that question on CNBC's Morning Call at 11:10AM ET.

Bonus Too Much Information: I'll be wearing a pair of $7 jeans (Rustler Golds, a cheapo Wrangler brand, if such a thing can even exist, god help me) I bought several years ago at a Wal-Mart in Oxford, Ohio.

Comments

VM|4.10.06 @ 10:53AM|#

Why not?

|4.10.06 @ 11:02AM|#

Nick,

That all? No leather jacket? ;)

|4.10.06 @ 11:22AM|#

He had the leather jacket, Hell has not frozen over.

I think he acquitted himself well, better than the other guy, but the "debate" was too short to convince anyone either way. At least some viewers probably came away with the notion that there is another side besides being anti-walmart on this.

Timothy|4.10.06 @ 11:23AM|#

Ahhh, so it seems it is as my boss expected: they're doing this to reduce costs of their check-clearing and ACH. That would make sense for a company that size, really, as I'm sure between their client make-up (the sorts of people who're likely to write checks) and sheer volume, even being able to realize a 2 or 3 cent savings per item would be huge dollars.

I also think that a fear of expanse into banking is silly, borne of industry trying to protect itself from competition. In some cases, also a lack of knowledge about retail banking being worth very little money (except in the case of OD/NSF fees). The AFL-CIO angle is interesting, but that's their hatred of Wal-Mart more than anything else. Plus, there just aren't that many local banks left: Wells-Fargo, JPMorgan Chase, and Citigroup bought most anything that was worth owning. Wamu and US Bankcorps are working on being major regional players in the west, and the rest is either small community banks that anyone will ignore because their portfolio is risky and bad for the most part or mid-caps like my employer. There aren't too many of the latter left these days.

I'm guessing that if Wal-Mart ever went to a full-on bank owner their business model simply wouldn't be very good at it, at least if they ever decided to be a full-on commercial bank. Not just any idiot can evaluate credit, comply with the CRA, with the BSA, etc etc, and write a commercial loan memo. Let alone set up complicated legal agreements for Treasury Management services like lockbox, remote capture, or account analysis. Or properly secure control accounts (which are the property of the secure party rather than the depositor). Frankly, as far as this banker is concerned, they're welcome to try it.

|4.10.06 @ 11:37AM|#

Give 'em whatever the hell they want, and keep the low prices rolling!
Let 'em hire illegal aliens too.
(I'm serious.)

|4.10.06 @ 11:41AM|#

Another fine job by Nick. Let's advance the cause of a freer and better world. Contact CNBC and tell em that we wanna hear Nick's views on more topics.

[e-mail]

|4.10.06 @ 12:15PM|#

It may be a bit of paranoid loose association that I'm revealing here but - in a country where there dispoable income to consumer debt ratio is -10%, I really don't think a WalMart bank is a good idea.

Ruthless,

That giant sucking sound? That's coming off of you.

JMJ

|4.10.06 @ 12:34PM|#

It may be a bit of paranoid loose association that I'm revealing here...

No more than usual, I'd say.

|4.10.06 @ 12:37PM|#

I actually evaluated the issue of Wal-Mart getting an IB/ILC charter for some clients. Frankly, there is no reason whatsoever to believe that Wal-Mart has any plans other than those stated (i.e., payment processing) for getting into "banking". The target demographic of Wal-Mart doesn't map up with the typical demographics for successful banks, the in-store branching of other banks hasn't been all that successful (and Wal-Mart is likely locked into some very long-term deals with those banks), and the industrial bank charter doesn't allow for demand deposits, which would make it harder for Wal-Mart to compete vis-à-vis cost of funds.

I also doubt that Wal-Mart would be able to do much in commercial lending, and it would have serious trouble acquiring and maintaining the kind of executive help they'd need. It would make a whole lot more sense for Wal-Mart to partner with a national bank or thrift and reap the benefits while avoiding the hassle of dealing with banking and bank regulations. Furthermore, where it makes sense for Wal-Mart to get into financial services--money services and, perhaps, consumer lending--it doesn't need to be a bank. Wal-Mart could get state licenses to start a consumer finance or mortgage company. The former maps up well with its demographic (reputedly the lower 40% of income) and would allow Wal-Mart to originate unsecured personal loans, credit sales, and mortgages (particularly seconds and HELOCs). Of course, if Wal-Mart engaged in subprime lending, I'm sure there'd be screaming about that, too.

Evil Target has held a Utah IB charter for some time now. What? No outcry? This really is much ado about nothing. As far as bankers are concerned, most know better. You know who their real enemy is? Credit unions--splitters! (They don't like credit unions because of the tax exemption CUs get while increasingly offering services that make it harder and harder to distinguish them from banks.)

|4.10.06 @ 12:41PM|#

So far, PL, I too have not heard of the WalMart plan involving commercial or subprime lending. But, if that's where this is heading, best to cut it off at the pass, no?

JMJ

|4.10.06 @ 12:42PM|#

Incidentally, the reason I think some banks are making noise about this is to get regulations passed to deal with other competitors, not the hypothetical Wal-Mart Bank. Wal-Mart is certainly no more "fearsome" than Citigroup or Chase. While I was with Citigroup, I recall reading a "joke" by one of the executives about acquiring Canada. I don't think it was a joke, though :)

I think the Walton family owns a bank already (probably a state-chartered institution of some sort), if that means anything.

|4.10.06 @ 12:48PM|#

Well, JMJ, the stated plan has nothing to do with banking--just payment processing. Let's say banking really isn't in the strategy, but subprime lending is. If so, they not only don't need a bank charter, they probably don't want one. A bank can only hold a limited percentage of subprime assets for safety and soundness purposes. Obviously, a finance company doesn't have the same type of limitations. Nor does it operate under very heavy scrutiny in most states. The trick with finance companies, however, is that "Walton Finance" would have to be licensed in every state it wanted to operate in. Not that difficult to do, but it is a hurdle.

Oh, one more thing. The reciprocity/parity "agreement" for starting de novo bank branches under a Utah charter in other states is limited to something like 20 states. Yet another limitation.

Timothy|4.10.06 @ 1:01PM|#

Pro Libertate: That was about my take. Like I said, if they can trim their payment processing costs down even a cent an item, that's probably significant dollars.

|4.10.06 @ 1:04PM|#

Hey, Nick--

Are you a Miami Grad?

|4.10.06 @ 1:12PM|#

Let's see, Walmart banking would provide:

lower fees for ATMs, checking, and especially money orders (they're like the biggest provider of money orders worldwide, according to some stats I'm pulling out of my ass).
higher interest rates on deposits.
possibly better deals on loans, particularly used car loans.

So, essentially, an easily accesible location providing credit-union-like services in a bid to frustrate the competition (and, yeah, agree, save a penny or two on debit/credit transactions, plus payroll mebbe.)

Run for your lives!

|4.10.06 @ 1:18PM|#

Timothy, I read something--a comment from a Wal-Mart executive, I think--that said that they could save $650 million a year in handling their own payment processing. Which makes sense given their pretty strenuous legal fight against Visa and Mastercard (which Wal-Mart and other retailers won, if I recall correctly).

|4.10.06 @ 1:40PM|#

Ruthless: Let them hire illegals? Is this a call involving the reformation of the immigration process or a call for free competition between illegals and citizens?

|4.10.06 @ 4:42PM|#

76,
The immigration process will be reformed when peace is declared on all drugs, so interpret my comment accordingly.

|4.10.06 @ 5:21PM|#

Please tell me Nick that you were just stopping at the home of little miami on your way to Yellow Springs...

|4.10.06 @ 9:56PM|#

Sounds fine to me, I'm all for more competition and more heat on banks to lower fees.

|4.10.06 @ 10:33PM|#

Yeah, because going to Antioch is way, way better than going to Miami!

Nick Gillespie|4.10.06 @ 10:44PM|#

At the request of a couple of readers, let me clarify that I'm not a Miami University of Ohio grad, though I did live in Oxford from 1998 to 2004.