- The Washington Times - Sunday, April 9, 2006

BENTONVILLE, Ark. (AP) — Wal-Mart Stores Inc., always looking for ways to expand its empire, is asking the government for permission to move into an entirely different industry: running its own in-house bank.

The world’s largest retailer will ask the Federal Deposit Insurance Corp. (FDIC) today for permission to open a bank that can process millions of checks and credit-card payments each month. The company says it is not interested in running a consumer bank as well, but some of its opponents still fear that such a step could hurt local banks much like the mom and pop stores were hurt during Wal-Mart’s rapid expansion.

This is Wal-Mart’s fourth bid at running a bank, and its request unleashed an unprecedented flood of comments to the FDIC. In response, the FDIC scheduled its first public hearings ever on a bank application.

“It’s a landmark battle in both U.S. business and financial-services history,” said Jerry Comizio, a financial-services lawyer for Thacher Proffitt & Wood LLP in Washington, a former attorney with the Securities and Exchange Commission and deputy general counsel of the Treasury Department’s Office of Thrift Supervision.

Wal-Mart says consumers and retail banks have nothing to fear. It pledges to stay out of branch banking and says it will not provide consumer lending. About 300 institutions operate branches in 1,150 Wal-Mart stores, and the company says it does not want to compete with them.

For opponents, those assurances ring hollow.

“There is reason to believe that these [Wal-Mart] plans could be expansive. Wal-Mart has attempted on several occasions to enter the full-service banking business,” Art Johnson, head of government relations for the American Bankers Association, said in testimony prepared for today’s hearing. “The ABA believes that banking is too important to the nation to try such a risky experiment.”

Wal-Mart says it can save money if allowed to operate an in-house bank to handle the 140 million credit-card, debit-card and electronic check payments that it handles each year. It now pays outside companies to handle those transactions.

In the past five years, Wal-Mart has tried, without success, to buy financial institutions in California and Oklahoma and partner with a bank in Canada. The California Legislature, Congress and regulators blocked those deals over worries about big retailers getting into banking without full bank supervision.

This time, Wal-Mart is applying for a state charter to open a special type of bank called an industrial loan corporation (ILC) in Utah, where other companies, including rival Target Corp., already have one. Target uses its Utah industrial bank to issue credit cards for corporate customers and says it has no plans to expand that business.

The charter needs approval from the FDIC, which would supervise and insure its deposits. ILCs are not regulated by the Federal Reserve, which has oversight over traditional banks.

Although the Federal Reserve supervises the entire range of a bank’s business, including its holding company, state and federal oversight of ILCs does not extend to the commercial companies that run them. Opponents say this means that an ILC’s owner can take more business risks than a regular bank and potentially endanger deposits insured by the FDIC.

The first FDIC hearing will be held today and tomorrow in Arlington, Va., and a second one will be held April 25 in Overland Park, Kan.

Wal-Mart’s supporters in the hearings include the American Financial Services Association, which groups credit-card issuers, mortgage and car loan providers and other consumer lenders, and the Salvation Army, which says it will be a “character witness” to talk about Wal-Mart’s support for charities and disaster relief.

Concerns are twofold. One is the mixing of banking and commerce — parts of the economy that traditionally have been separate. The other is that a Wal-Mart bank could swallow local banks with its national presence and deep pockets, outcompeting even large institutions such as Bank of America and Chase and Wachovia banks that also have grown at the expense of local ownership.

Community bankers from across the country plan to tell the FDIC that they fear an ILC charter would open the door for Wal-Mart to expand into retail banking and drive them out of town.

“My sense is, whatever happens, there’s going to be a court challenge,” said Bert Ely, a banking consultant in Alexandria, Va., and longtime FDIC observer. If the FDIC rejects the application, Wal-Mart likely would sue, and if it approves it, the bankers could sue, Mr. Ely said.

“There are lots of people itching to have a fight with Wal-Mart. They’re a real lightning rod now,” Mr. Ely said.

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