Wal-Mart: Stay Out of Banking, Period

The retailer’s recent offering of financial services—including a prepaid Visa card, international money transfers, and check-cashing—to customers via its Wal-Mart MoneyCenters is bad for banking and consumers. Pro or con?

Pro: Not in the Best Interest

The Independent Community Bankers of America (ICBA), representing 5,000 small financial institutions nationwide, strongly opposes the entry of commercial enterprises such as Wal-Mart (WMT) into retail banking. ICBA has nothing against Wal-Mart stores, just Wal-Mart banks.

Federal and state lawmakers traditionally have limited banks’ rights to conduct commercial activities and prohibited commercial firms from owning banks. The reason: to prevent a dangerous concentration of economic and financial power or a threat to the safety and soundness of our financial system and the federal deposit insurance fund.

Mixing banking and commerce would create conflicts of interest, with banks pressured to make credit decisions based on competitive position rather than the creditworthiness of the borrower. The rationale for maintaining the separation of commerce and banking is as strong today as ever. Imagine if Enron or WorldCom had owned a bank. Before banking regulators could get a handle on the situation, their problems could have spilled over to their banks and beyond, draining the FDIC’s resources and wreaking further havoc on our financial system.

Some say ICBA’s position derives from fear of competition. In reality, community bankers compete with thousands of regulated and unregulated firms, including some—like credit unions—that don’t pay taxes, giving them a tremendous competitive advantage. Like any good business operator, community bankers welcome and thrive on competition. It stimulates new products and services and creates real value for customers.

A Wal-Mart bank, however, would not increase competition; it would reduce it, and it would reduce consumer choice. Wal-Mart has a history of engaging in predatory pricing until it drives the competition out of the market—meaning consumers would have to pay whatever the Wal-Mart bank charged, and small businesses that compete with Wal-Mart would find far fewer sources of credit.

Through firsthand knowledge of their locality, community banks bring value well beyond their assets. Deposits placed in a community bank stay in the community and become loans that generate new businesses and new jobs. They do not end up in Bentonville, Ark. Community banks stay with the community in good times and in bad, fostering healthy, fair competition that helps consumers.

Congress has before it a strong legislative proposal that will effectively preserve the separation of commerce and banking by closing a loophole that commercial concerns such as Wal-Mart want to use to own FDIC-insured banks. ICBA urges our representatives in Washington to take prompt and positive action.

Con: Simply Filling a Need

The hue and cry over Wal-Mart’s attempts to expand its financial-services business is largely motivated by a single fact: The company will offer these services at a lower cost to the consumer, taking revenue away from competitors that happen to include banks. So what else is new?

Wal-Mart’s low-price business model has resulted in consolidations, displacement of inefficient operators, and reduced prices in many areas including discount stores, grocery stores, and consumer electronics. Has this been all bad for consumers? By their continued patronage, 150 million Wal-Mart customers are saying no. Incidentally, 20% of these customers do not have checking accounts and depend heavily on check-cashing and money-order services.

The financial-services industry is ripe for competition from a low-cost operator offering the consumer a fair deal. The country has experienced a record 23 months of negative savings and high levels of consumer debt compounded by a national debt that has exploded beyond any prior experience. Banks and other financial-service companies have risen to this challenge by offering a huge array of mortgages, credit cards, and other financial instruments, all designed primarily to generate more debt.

Variable and teaser interest rates have served to offer the initial hope of affordability while turning up the heat on the consumer as time passes and interest rates rise. Financial-services companies impose a staggering assortment of charges and fees for all sorts of activities with names such as application, initiation, transaction, ATM, transfer, foreign conversion, penalty. Revised disclosure agreements are sent to the customer on a regular basis with most of the changes in favor of the institution. All of this is not well understood by the average person and disproportionately affects the lower-income segment of our society, that is, the mainstream Wal-Mart customer.

Competition in the marketplace benefits the consumer and is a cornerstone of our free-enterprise system. The issues of deposits, insurance of deposits, regulatory oversight, and so on, are not deal breakers, but rather problems to be solved. Perhaps Wal-Mart’s latest approach, co-branded in-store MoneyCenters with Sun Bank, will prove a satisfactory solution for now (see BusinessWeek.com, 6/20/07, “Why Wal-Mart Will Help Finance Customers”). It is clear to me, however, that the growth of a more competitive environment with lower costs for the consumer is inevitable. It is not a question of if it will happen, just when.

Opinions and conclusions expressed in the BusinessWeek Debate Room do not necessarily reflect the views of BusinessWeek, BusinessWeek.com, or The McGraw-Hill Companies.

Reader Comments

james

Be careful about Wal-Mart. At the beginning, it might offer lower prices. At the end, it will charge you whatever it wants. Recently, Wal-Mart opened a Wal-Mart superstore in my neighborhood, and the prices for many, many items are higher than those at other stores in the neighborhood like Kmart, Aldi, Meijer, or Kroger. So when you shop in a Wal-Mart, open your eyes.

Rich

I absolutely think Wal-Mart should get into banking. Wal-Mart should also get into retail gas, electricity, medical care, and any other business that hasn't been devastated by Wal-Mart. We were told that big government was bad. I guess big business is good. Wal-Mart's banking system will be located in Peking, because 80% of its merchandise comes from that country. I always wanted to be part of the United States of China. Wake up, America.

random

The con argument is very much incorrect in saying that banks have responded to 23 quarters of negative savings with products aimed to generate more debt. Banks have responded with more ways to spend one's money, true. However, banks also have more savings and investment options then ever. Americans are simply choosing not to use them.

As for the idea that mortgages and loans simply increase debt, how would the average person pay for a house and start building equity and ownership in real estate if not for mortgages and loans? Get anywhere from $100,000 to $750,000 in cash and hand it over in suitcases at the closing?

Another oversight of the con argument is the idea that banks are fleecing consumers by sending them constantly revised disclosure agreements that favor the institution and implying that Wal-Mart would rectify that. How is this assertion being made? How does Mr. Davidowitz know that Wal-Mart's banking arm wouldn't do the same?

I understand that there is a word limit on these articles, but that's no excuse for red herrings.

US of Wal-Mart

I find it amusing that the con arguments were provided by a retail consultant who happens to reside in Manhattan (not that there's anything wrong with that).

Ironically, Wal-Mart has not been able to get a foothold in the five New York City boroughs. Perhaps most New Yorkers know exactly what can happen when Wal-Mart comes to town. It's an implosion of small to medium-sized business, as a result of predatory pricing. Thus almost all the small to medium-sized towns in this country have lost their true community character to Wal-Mart.

The three Waltons' (or their estates') combined number of shares is 23,180,451, according to Yahoo Finance. When is enough really enough wealth? Keep this behemoth out of banking.

Mark-Anthony

I keep hearing about the big Wal-Mart fear--that they are going to raise prices the minute they complete their master plan. I have yet to hear one instance of that. Why? Because that would be their undoing. The minute they raise prices, competitors would come to the marketplace. Capitalism 101.

I live in the swamp aka Gainesville, Fla. Trust me--with no super Wal-Mart here, Publix is raping me on price, vs. Orlando, where they have to compete. I want these check-cashing places and banks to feel the heat.

Robert

Mark Anthony, you just contradicted yourself completely by first stating Wal-Mart would unwind if they charged whatever they wanted in the face of no competition, and then you state that the Publix (in this state of non-competition) is raping your wallet.

Once a competitor enters the marketplace, you can only imagine Wal-Mart would subsidize the affected store and basically give its stuff away until the little guy starves and wastes away. You should have taken Logical Commenting 101.

As for Wal-Mart's big-business (greed) model, don't all the poor people realize that they are poor because people like the owners of Wal-Mart make them shop at their store, instead of at the local place down the street? They draw money out of every town they go to and offer people McJobs as compensation. McDonald's is starting to look like less of a PR nightmare every time Wal-Mart splashes the front page.

Jim

For those of you interested in the topic of whether or not Wal-Mart is evil, read the blog on this Web site:

http://www.businessweek.com/mediacenter/podcasts/welchway/welchway_05_07_07.htm

It's the one at the very bottom.

Srini Iyer

Customers should by their patronage decide whether they want Wal-Mart bank or not, not the bureaucrats or leftist goons.

End of discussion.

Taylor O.

It is (or at least should be) up to Wal-Mart. Our opinions are merely that and nothing more. Let the individuals who run the business make decisions according to their best judgment. Anything less is fascist anathema to all consumers and business.

Iggy D

Mr. Ence, please give an example of Wal-Mart's predatory pricing.

Yengu

Do not hate Wal-Mart. Everyone should be given a chance to go into banking. Wal-Mart is no less a corporate citizen than any other corporate citizen. Wal-Mart will bankrupt other banking institutions, and then China will buy Wal-Mart, since they already are best friends. Than alas, we can buy cheaper noodles in the U.S. I want to start a chain of noodle shops, and I think Wal-Mart is heading in a good direction. China will be the superpower, so I am pro the Wal-Mart move.

Susan

It's one thing to buy a cheap shirt at Wal-Mart and another thing to get your mortgage there. If local banks can't compete, rates will eventually go up. We need more competition in banking rather than less, and the consolidation of power in one large institution seems problematic in the long run.

studentstocks

Wal-Mart has decreased the cost of living in the United States. At a time when predatory lending has taken advantage of the American consumer, what harm would a low-cost banking solution create?

Jack

Sam Walton's original business model innovation was to buy in volume and pass the savings on to the consumer. Millions still vote on the value of this business model every day by shopping there.

The true perpetrators of predatory pricing are the check-cashing franchises that routinely charge interest rates in excess of 100% to 200% to those least able to afford them. A Wal-Mart alternative to disrupt this marketplace should be welcomed by everyone--since our lawmakers seem unwilling to curb the usurious interest rates being charged in this market.

Lucio

Let Wal-Mart get into banking--it's either a free market or it isn't. Regulate as needed, when needed, but don't stop it because it could turn into something ugly. If it looks that way, we can deal with it then.

Tish

I do not like Wal-Mart anymore. My husband, retired, says their vegetables and fruits go bad quickly. He now buys meats, when we buy them, from the local university. Ross, Target, Belk's (at sale time) beat their clothes prices hands down. Hobby Lobby beats other stuff. Now they do not even have lay-away for families who have to live on a budget. That is pathetic that young parents cannot pick out toys to put back before Christmas. That's okay though. I have a few put back in boxes and trunks for my granddaughter. I don't want her eating lead.

What we have got, it seems, is a country with no borders, and debt bankers got bailed out. They even get the write-offs for business losses; they probably set up debt collection businesses, etc. We have a $10 trillion deficit. If Keynesian economics are correct, we better pay this off in the next three years; however, why should anyone who is not wealthy want that? For years, money has been spent to accumulate an almost Hitlerian debt, and now you want those who have least and work most for lower wages or salaries to pay back what has been stolen as if it is okay because it is business. No, I don't think individuals will buy what you are selling. They may go along with you, but then there will not be a country like I knew growing up in Virginia or my cousins knew growing up in Pennsylvania and Michigan. I read somewhere on a Christian women's devotional Web site that she did not advocate for a Robin Hood mentality. I wonder why. I think money is fine, but I don't like finance and economists talking about putting strict standards on lending practices. Why didn't they do that before? They hedged all their bets and knew exactly what they were doing. The only people who will not benefit from these strict standards are the ones who never benefited from the loans. Lucio, I am sorry, my friend, it is not a free market. You can talk that trash till the cows come home. Nobody believes it except for the folks who want to sell you a pig in a poke. It needs to be regulated for individuals. They need a little charity and forgiveness. These leaders who can't run anything well are really dangerous.

mike

Sigh, another anti-Wal-Mart rant, except this time it's from the banking industry. All the arguments against Wal-Mart lending fall apart pretty quickly.

1) That they offer credit based on the free market, not on credit-worthiness. And just what do you suppose credit-worthiness is? It's an estimation of how much people would lend you and at what rate. Credit rates are the result of the free market.

2) Predatory practices. This is a bit of a myth actually. Predatory practices don't even work that well. Supposedly you can lower prices to eliminate competition and then raise them again. Um, wouldn't other businesses just come back and sell their products at their original rates? The only thing that makes predatory pricing work is the overhead in opening and closing businesses. But unlike with physical goods, that won't work with capital.

3) Oh wait, there are no more arguments against Wal-Mart entering the lending and banking industry. It's just the last two, unless someone can come up with one.

I mean, as long as they follow all the government regulations (i.e., have enough cash in reserves to money people put in, etc.). I fail to see what the problem is.

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