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.
But while bankers are concerned about being undercut by a Wal-Mart bank, other major corporations have already scooped up charters for so-called industrial loan company banks, or ILCs. They include Volkswagen, Pitney Bowes, General Motors, General Electric, BMW–and even retailer Target Corp.
Warnings of commercial companies using such banks to breach the country’s banking system–and slipping past federal regulators’ abilities to adequately regulate them–cropped up as new Federal Reserve Chairman Ben Bernanke testified last week before the U.S. Senate banking committee.
“I don’t think Target ought to have a bank,” said Sen. Paul Sarbanes (D-Md.).
But Utah Sen. Robert Bennett, a Republican, said what’s good for Target should be good for Wal-Mart.
“No one wanted to prevent Target from getting an ILC charter, and I have a hard time understanding why it’s OK for one large retailer to have such a charter and not for its competitor to have such a charter,” Bennett said.
Bernanke said the FDIC expects to hold hearings on Wal-Mart’s application. While an industrial loan company’s deposits are insured by the FDIC, a special exemption allows such banks to be owned by non-financial institutions.
“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.”
The industrial company banks used to be mostly local institutions that had only limited deposit-taking and lending powers. In 1987 the largest had assets of less than $400 million, according to Greenspan. Now, the Merrill Lynch Bank of Utah has about $60 billion in assets.
Total assets of all ILCs have grown by more than 3,500 percent between 1987 and 2004, to $140 billion from $3.8 billion, Greenspan said.
Through industrial loan companies, commercial firms gain control of FDIC-insured banks engaged in broad lending and deposit-taking activities and thereby breach the general separation of banking and commerce, Greenspan said.
So far, Target’s bank is small. It started its Utah bank in September 2004 and its assets grew from $10 million on Dec. 31, 2004, to $16.6 million as of June 30, 2005.
It was solely set up to offer a business credit card to customers who own small businesses or who are part of nonprofits or government agencies who want access to a business or commercial credit card, said a spokeswoman for Minneapolis-based Target.
“That’s the only purpose for which we’re using the ILC,” she said.
Through Salt Lake City-based BMW Bank of North America Inc., consumers can apply for credit cards or sign up for checking or savings accounts, BMW spokeswoman Martha McKinley said.
Carmaker BMW generally doesn’t advertise its bank, started in 1999 and with $1.45 billion in assets, outside of BMW’s usual marketing to customers. BMW’s interest in offering checking and savings accounts has waned, McKinley said, because of the costs to administer the program.
General Motors started its GMAC Automotive Bank in 2004 and GMAC Commercial Mortgage Bank in 2003. One buys sales contracts and leases from GM dealerships. “It’s a pretty limited business, I’d say,” spokeswoman Joanne Krell said.
The other provides mortgage loans for multifamily and commercial properties. Combined, the two banks have assets of $5.42 billion.
For Bentonville, Ark.-based Wal-Mart, its own Utah bank would save it about $30 million a year, according to Sen. Bennett. Wal-Mart has said only it would save “millions” annually by processing in-house some 140 million debit, credit and electronic transactions from its stores each month.
“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.”
Wal-Mart’s ILC, however, would offer certificates of deposit to non-profits, its FDIC filing shows.
Lisa Schiltz, who teaches banking law at the University of St. Thomas in Minnesota, said even if Wal-Mart wanted to move beyond such basic services to start a full-service bank, regulators have the power to slap strict limits on its charter.
“You’ve got to feel sorry for Wal-Mart. I know that’s not PC,” Schiltz said. “But there are all these other people who have used the loopholes. No one ever thinks that Wal-Mart isn’t taking over the world.”
That is certainly the way some banks have reacted to Wal-Mart’s efforts in Utah.
TCF Financial Corp., the Minnesota-based bank with $12.7 billion in assets, called the ILC exemption an “unfortunate loophole.”
Federal law “bars retailers from owning banks, and banks from owning retailers,” TCF Vice Chairman Gregory Pulles said in a statement Feb. 10. “There are good reasons for the wall between banking and commerce.”
The Illinois Bankers Association also complained to the FDIC: “Wal-Mart’s past aggressive moves into almost all retail lines, such as pharmacy, gas and groceries, should leave little doubt that once it gets its foot in the door, it will seek to provide banking services in as many of its stores as possible,” said the group, one of about 20 banking associations to sign the letter.
Another banker complains that Wal-Mart already has too much economic clout, controlling about 8 percent of retail sales excluding restaurants and vehicle sales. “Power tends to corrupt; absolute power corrupts absolutely,” Community Bank Wheaton/Glen Ellyn CEO Donald Fischer wrote to the FDIC, dusting off the chestnut from British historian Lord Acton.
Larry Maschhoff, president of Normal-based Bank of Illinois, asked in a letter to the FDIC, “If Wal-Mart would get into financial trouble, the government and the FDIC would have to bail them out. What if Enron owned a bank?”
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.”
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`Banking’ services, fees
Wal-Mart, which wants to open a limited-purpose bank in Utah, is already making a push to offer everyday low prices on check cashing, money orders and wire transfers.
Here’s how Wal-Mart’s fees stack up against most other services providers:
Payroll check cashing–Wal-Mart charges $3 for up to $1,000; many rival services charge from $6 to $15.
Money orders–Wal-Mart money orders cost 46 cents, compared with 75 cents to $1.25 at most other providers.
Wire transfers–Will set Wal-Mart shoppers back $9.46 or $11.46, depending on the destination. Most other places charge at least $15. In December, Wal-Mart bought ads in media outlets in the Chicago market to tout its wire transfer rates to consumers, particularly those sending money to Ghana, Liberia and Kenya.
Source: Wal-Mart
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Wal-Mart’s bank relationships
Wal-Mart currently leases space to more than 1,150 bank branches in its 1,980 U.S. Supercenters, with commitments for another 250 branches and with leases running as long as 2024.
“We have a team that spends all of its time recruiting banks,” Wal-Mart Financial Services President Jane Thompson said in an interview last week.
“We even just put an ad in American Banker saying, `Please come to our stores. We’re looking for banks.'”
While many banks have lodged complaints about Wal-Mart’s efforts to obtain an industrial loan company bank in Utah, independent bankers have missed chances to partner with the retailer, Thompson said.
“In Virginia, we had 15 leased spaces we wanted branches in, and a Texas bank took them,” she said. “We’re happy to have that Texas bank, but we would have preferred to have independent banks of Virginia. They’re all chasing in the wrong direction.”
— Becky Yerak
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byerak@tribune.com
