It appears that Wal-Mart Stores, Inc. (NYSE: WMT) has dropped its planned foray into the banking business as of late last Friday. The world's largest retailer has abandoned its bid to establish a banking business after quite a firestorm of controversy over that move.Some groups and individuals lashed out at Wal-Mart for trying to enter the banking business (and establishing a power beachhead in that area), although Wal-Mart's application to the FDIC was to use banking operations internal to the company, not external to the customer. Wal-Mart wanted to process all those electronic transactions itself instead of outsourcing it, which would have saved the company hundreds of millions based on the volume of transactions it handles.
But Wal-Mart withdrew its application for a bank charter from the FDIC (Federal Deposit Insurance Corporation) on Friday. Instead, Wal-Mart has apparently signed leases with banks that operate branches in hundreds of its stores that will reserve Wal-Mart's right to offer an array of future financial services in its stores. According to the lease terms, Wal-Mart can offer future services including mortgages, consumer loans, home equity loans, investment and insurance products and any other type of service or product that the company might develop.
So when it came down to it, the possible "cover" of using an internal banking institution to process transactions may indeed have been just an entry point to start offering banking services to customers, since that is what Wal-Mart is doing with its banking lease partners as far as the information I've seen so far. Was Wal-Mart's "internal banking plan" just a smokescreen from the start? Your call.
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Reader Comments (Page 1 of 1)
3-19-2007 @ 3:51PM
Mike said...
Let’s get down to basics. Making loans, including mortgage loans, is not banking. Anyone can make loans, and in general no government license or approval is required to do so. The largest mortgage lender in the United States, Countrywide Financial Corporation, is not a bank, and there are literally thousands of nonbank mortgage lenders and finance companies that make loans of all kinds to homebuyers and consumers at every income level. Banking is distinguished from other financial activities by the fact that banks take deposits, most of which are withdrawable on demand or through the use of instruments of transfer such as checks.
Wal-Mart had NEVER applied for the authority to take deposits—it left that out of its application to reduce controversy. It wanted an ILC because these institutions, like ordinary banks, have access to the U.S. payment system. This system—operated by the Federal Reserve—is the means through which funds are transferred from buyers to sellers, and access to it would have given Wal-Mart an opportunity to reduce costs for paying its suppliers and collecting the credit card charges of its customers.
So Wal-Mart’s ILC application was never intended as a banking or deposit-taking enterprise, but only another way that the company could cut its costs. If it could have gained access to the payment system it would not have had to pay one or more banks for funds transfer services, and as with all of Wal-Mart’s cost-saving efforts these benefits would eventually have been passed on to its customers.
Whoops...