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.
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.
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