The NewStandard ceased publishing on April 27, 2007.

Wal-Martâ€TMs Foray into Banking Meets Resistance

by Michelle Chen

When Wal-Mart made public its plans to venture into the finance industry last summer, critics came out of the woodwork and a diverse resistance movement formed – and for reasons we may have only begun to comprehend.

Mar. 27, 2006 – With thousands of superstores dotting the country, Wal-Mart has become the dominant name in American consumerism. Now, the retail giant is working to pump up its unrivaled commercial fortitude by setting up shop on the flipside of consumption: the banking sector.

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But the plans have run up against outcry from consumer advocates, community banking institutions and other groups that have long railed against the company’s business practices. They worry that Wal-Mart’s proposed banking venture will go the way of its retail regime: wiping out the competition with the same relentlessness that fuels its credo of "low prices."

Wal-Mart has proposed to establish a type of bank known as an industrial loan corporation (ILC) in Salt Lake City, Utah. Conceived around the turn of the last century to enable companies to help consumers finance purchases, ILC’s are free of many regulations binding conventional banks.

Though bank-charter applications seldom generate much political noise, Wal-Mart’s proposal has drawn a groundswell of criticism from an array of constituencies. In the public comment process that the Federal Deposit Insurance Corporation (FDIC) has convened, public interest groups, unions, legislators and managers of small banks have aligned in opposition. They argue that if the FDIC approves Wal-Mart’s proposal, there will be little stopping the retail giant from establishing the banking equivalent of a "big-box" superstore throughout American communities.

Last week, Wal-Mart announced one small forfeiture amid the fiercely negative public reaction.

"The nightmare scenario here is that Wal-Mart controls every aspect of a community’s economic life, both in the retail sector and the banking sector," said Chris Kofinis, spokesperson for the union-led campaign Wake-up Wal-Mart.

Last week, Wal-Mart announced one small forfeiture amid the fiercely negative public reaction. On Thursday, as community groups rallied in Washington, DC to protest the corporation’s plans, Wal-Mart revealed that it was dropping its request for an exemption from regulations that would restrict its ability to manipulate community financial resources for corporate gain.

Under the federal Community Reinvestment Act of 1977, banks must target some services to facilitate low-income people’s access to credit and to help meet local investment needs, rather than trying to maximize profits by limiting credit access and focusing on more profitable areas.

Wal-Mart’s announcement that it would comply with the Act followed a slew of recent public statements from lawmakers warning of potentially drastic economic consequences if Wal-Mart’s proposal is approved.

Wal-Mart had argued that while it would strive to serve local needs, the Act’s oversight and reporting obligations would pose an unnecessary burden. But Marty Heiers, a spokesperson for the company, told The NewStandard that the company quietly dropped the request earlier this month. "We want to demonstrate to everyone that we’re going to support the community," he said.

Opponents fear Wal-Mart’s “narrow” operation would have wide-ranging impacts on community financial health.

The concession on the Community Reinvestment Act, however, has so far done little to persuade critics that Wal-Mart has their best interests at heart. Dozens of organizations are planning to testify at upcoming FDIC hearings in April. The opposition ranges from grassroots labor groups like Jobs with Justice, which view Wal-Mart as an aggressively exploitative employer, to groups like the Minnesota Bankers Association, which fear that a Wal-Mart bank would have free reign to squelch their businesses and undermine the integrity of community financial systems.

Wal-Mart’s effort to break into banking – the latest of several attempts since the 1990s – may also face a congressional hurdle: House Banking Committee Chairman James Leach (R-Iowa) has proposed legislation that would effectively bar corporations like Wal-Mart from obtaining ILC charters.

Nonetheless, Wal-Mart insists in its three-year business plan submitted to the FDIC last year, that the bank’s main purpose will be to help the company process shoppers’ payments by electronic check, debit or credit cards. At present, Wal-Mart says its plans do not include lending services or competition with local banks. According to the company, Wal-Mart processes over 140 million credit, debit and checking transactions per month, and handling these in-house would cut costs and help customers save at the register.

Heiers said that the company’s main strategy in the financial sector is to partner with outside firms. In more than 1,100 of its retail locations, Wal-Mart offers in-store financial services through third-party outlets such as bank branches and money-wiring services – often underpricing similar "money center" operations in surrounding communities. "For the very narrow purpose of this bank," he said, "we feel that there is really no risk to anyone."

While Wal-Mart pushes its application through the federal review process on the promise that its proposed bank will benefit consumers, opponents say that whether it is processing checks or selling groceries, Wal-Mart’s economic expansion has had deep social costs.

But opponents fear Wal-Mart’s "narrow" operation would have wide-ranging impacts on community financial health.

The Independent Community Bankers of America (ICBA), which represents small-scale financial institutions, argues that after the initial three-year plan runs its course, Wal-Mart could easily expand its banking operations beyond electronic transactions. Under statutes governing bank branching, a Utah-chartered Wal-Mart ILC would be able to extend to over twenty states. With minimal regulatory oversight, say critics, a Wal-Mart bank could broaden its service array to compete with and ultimately displace small-scale local banking and credit institutions across the country.

"With all of their outlets and locations, they could overwhelm [competitors] and control all of the money," said Dan Ford, president of Pine River Valley Bank, which runs on a staff of about 30 people in Bayfield, Colorado.

Advocates for community banks predict that the sheer volume of Wal-Mart’s electronic financial transactions would give it overpowering influence in the flow of money through the nation’s banking system.

"Wal-Mart wants to cut out the banks and become the middle man, so that they profit from the cash that flows in and out of Wal-Mart... and then go build more Wal-Marts," said John Taylor, president of the National Community Reinvestment Coalition, which advocates for fair banking in low-income communities.

Tom Wilbur, founder and chairman of Bank VI, which serves two small towns in Kansas with a staff of 18, argued that a lender run by a big-box retailer could mushroom into a channel for promoting consumption, and thus be much less likely than a community-based, independent bank to focus on clients’ long-term financial goals and interests.

"At the end of the day," he said, "I think the ultimate driver for an organization like Wal-Mart is going to be to sell them something first, and then figure out a way to get it financed, whether [or not] it makes the right sense for the customer."

Warning of potential conflicts of interest that regulators have historically sought to prevent, Ron Ence, ICBA’s vice president of congressional relations, told TNS, "If you allow banking and commerce to be mixed... you would have a tremendous concentration of economic power that would pose a systemic risk to our entire economy."

Under current law, ILCs are controlled by their parent companies, not government-certified bank-holding companies. As such, they are shielded from major regulatory controls levied by the Federal Reserve, such as capital requirements to ensure financial stability and penalties for unsound business practices.

ILC’s, which have been set up by numerous companies like General Electric and General Motors, have come under scrutiny from Congress following a GAO report released last September showing their extraordinary profits. Between 1987 and 2004, the assets of industrial loan corporations ballooned by about 3,500 percent, from $3.8 billion to over $140 billion, with a handful of massive corporations soaking up most of the wealth.

Ence predicted that if permitted to enter the financial sector, Wal-Mart’s banking arm could easily grow into the world’s largest financial institution, "and this could pose catastrophic implications for the economy if Wal-Mart ever really got into trouble."

Opponents fear that the company’s extensive international-trade networks would leave its bank vulnerable to fluctuations in the global economy, and a sudden downturn could endanger the federal banking-insurance fund, which backs up commercial banks against financial crises.

While Wal-Mart pushes its application through the federal review process on the promise that its proposed bank will benefit consumers, opponents say that whether it is processing checks or selling groceries, Wal-Mart’s economic expansion has had deep social costs.

A University of California–Berkeley study released last October showed that Wal-Mart’s presence in an area tends to displace local businesses, while driving down wages and promoting jobs with substandard benefits. Since the 1990s, Wal-Mart has faced government citations and legal battles over numerous labor-law violations involving child and undocumented immigrant workers.

"If you look at Wal-Mart’s general business strategy," Kofinis of Wakeup Wal-Mart said, "they enter a market, they decimate the competition because they’re able to gain an advantage through exploiting their workers and the taxpayer, and then the American people end up paying the price for it. No one should be foolish enough to think it would be any different if it enters into banking."

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The NewStandard ceased publishing on April 27, 2007.

This News Article originally appeared in the March 27, 2006 edition of The NewStandard.
Michelle Chen is a staff journalist.

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