Wal-Mart Abandons Bank Plans (NYTimes, 3/17/07)

March 17, 2007
Wal-Mart Abandons Bank Plans
By ERIC DASH
Few efforts illustrate the breadth of Wal-Mart’s ambitions — and the fears that they at times generate — as much as a nearly decade-long drive to establish its own bank.
Yesterday, Wal-Mart Stores abruptly abandoned those plans for its own bank, withdrawing its application to obtain a special banking charter after a firestorm of criticism from lawmakers, banking industry officials and watchdog groups.
Yet the company, the world’s largest retailer, also said that it was not pulling back from plans to roll out a stream of new financial products, which could include mortgages and other types of consumer loans.
“We don’t plan to do this again,” said Jane Thompson, Wal-Mart’s president for financial services. “The bank is behind us. We will use our partners to roll out new products.”
Wal-Mart’s latest banking bid, made in July 2005, had been stalled after the Federal Deposit Insurance Corporation announced in late January that it would delay reviewing applications for so-called industrial loan corporations. And a move in Congress to bar nonfinancial companies like retailers from owning banks has been gathering steam.
Representative Barney Frank, Democrat of Massachusetts and a co-sponsor of a bill that would prevent Wal-Mart from operating an industrial bank, said that Wal-Mart’s withdrawal “doesn’t remove the need for a bill,” but he conceded that it might “dial down the temperature” for passage in the Senate.
The opposition to Wal-Mart’s application had initially come from bankers, who had feared that Wal-Mart would eventually open traditional consumer banks that accept deposits and dispense loans. Such a move, they argued, could wipe out small community banks and hurt profits at bigger ones, given Wal-Mart’s huge economic might and record of vanquishing rival retailers.
Wal-Mart insisted that it was not interested in running a retail bank, but saw obtaining a banking charter as a way to save money by internally processing credit and debit card transactions. Other nonfinancial companies — including Target and General Motors — had already received approval to operate industrial banks.
But its opponents said that Wal-Mart could not be trusted. The banking application soon escalated into an issue well beyond financial circles, becoming a political flashpoint among longstanding critics and a referendum on the company itself.
In an interview yesterday, Ms. Thompson said that Wal-Mart made the decision to withdraw the bank application late last week after seeking approval from H. Lee Scott, the company’s chairman and chief executive. Wal-Mart determined that it could pursue other ways to achieve cost-savings and offer its customers more financial products without the glare of the national spotlight. The uncertainty surrounding the F.D.I.C.’s moratorium, which meant that the application could not be approved until next January, also contributed to the decision.
Wal-Mart’s announcement came as a surprise to many on Capitol Hill. Next week, the House Committee on Financial Services is scheduled to hold hearings on a proposed bill that would close the remaining loopholes that allow nonfinancial institutions to operate an industrial bank and prevent existing ones from expanding. It is sponsored by Mr. Frank, the committee’s chairman, and Representative Paul E. Gillmor, an Ohio Republican.
“Wal-Mart is the proverbial red blanket in front of the bull,” said Bert Ely, a banking consultant. “The blanket has now been pulled away, and I am not sure how much force there is to get this through Congress.”
While there still appears to be strong support in the House, its chances for Senate approval are less clear. Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, said in a statement yesterday that he intended to continue examining the issue.
But Senator Robert F. Bennett, an influential Republican committee member from Utah, where many industrial banks are based, said in a statement that he would continue his effort to preserve the granting of industrial bank charters.
The F.D.I.C., said Sheila C. Bair, its chairwoman, would wait for Congress to weigh in on whether commercial entities should own industrial banks.
While the fate of any new laws is being closely watched throughout the banking industry, its most immediate effect could be on Home Depot and eight other commercial entities that have industrial bank charters pending regulatory approval.
For Wal-Mart, the company’s decision to withdraw its application is the strongest evidence to date that the retailer’s public relation’s troubles are restricting its ability to grow, something that company executives are reluctant to acknowledge.
“This is the fourth time they have struck out since 1998 in trying to get into the deposit-taking business,” Mr. Ely said. “They clearly could have played the game better.”
Earlier this week, Wal-Mart’s credibility was again questioned. On Thursday, Mr. Gillmor, the Ohio representative, released a leaked e-mail document that he said was evidence that the retailer’s motives extended far deeper into banking than it previously disclosed.
Ms. Thompson, the Wal-Mart executive, called it a “manufactured controversy” and said that the company’s decision to withdraw its application yesterday was “just a coincidence.” Ms. Thompson played down the effect that the withdrawal of the banking application would have on Wal-Mart’s business, suggesting that it had captured a substantial part of the cost-savings they had hoped for as credit and debit card processing fees have declined over time.
And she vowed that the retailer would expand its financial offerings in the first half of this year. It currently offers check cashing, a branded credit card and a limited number of other financial services. She declined to elaborate on what products Wal-Mart would offer through third-party partnerships, but also did not rule out making loans.
“As far as lending per se,” she said, “all I can say is that we are looking for all the needs of our customers.”