Wal-Mart Would Be Welcome Entrant to U.S. Banking

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by: Rolfe Winkler, CFA

By Rolfe Winkler and Rob Cox

Who’s afraid of Wal-Mart? No doubt many people — but American bankers seem to have a particularly irrational fear of the retail behemoth.

Three years ago, fierce opposition to Wal-Mart’s (NYSE:WMT) application for a banking license persuaded the company to retreat. Now lawmakers are poised to use financial reform to keep it even further at bay.

That would be a mistake. Extra competition, particularly in the concentrated U.S. credit card market and high fee retail banking sector, should be encouraged. Wal-Mart has the market power, loyal customer base and financial wherewithal to make that happen.

Indeed, the Arkansas-based juggernaut is forging ahead with plans to crack the financial services business in Canada and Mexico. Banco Walmart plans to open over 160 branches this year, nearly doubling its Mexican footprint. Walmart Canada Bank opened its doors this month, is offering a credit card and may make loans, including mortgages.

As it has done with retail in the United States, a Wal-Mart Bank could be a disciplining force in keeping costs for customers down. It could also act as an engine of credit creation for a significantly under-banked subset of the American populace.

The Federal Deposit Insurance Corp estimates 60 million Americans, most of them low-income, are being underserved by local community banks and wind up using usurious check-cashers, payday lenders and pawnbrokers for financial services.

Meantime, mergers of big banks, many blessed by regulators concerned with the safety of the financial system — like Wells Fargo’s (NYSE:WFC) purchase of Wachovia and JPMorgan’s (NYSE:JPM) takeover of Washington Mutual — have concentrated the industry further.

This consolidation has coincided with a 10 percent annual increase since 2000 in overdraft and other fees, according to the Government Accountability Office. Meantime, nearly two-thirds of the domestic credit card business is controlled by three banks.

So it’s no wonder the banking industry — in particular the community bank lobby — is so opposed to letting Wal-Mart onto its turf. As part of the financial reform bill being written in Congress, bankers have supported a three-year freeze on new applications for industrial loan corporations, the charter Wal-Mart would need.

That runs contrary to the supposed spirit of reform that seeks to empower and protect consumers of financial services. Greater competition, coupled with sounder regulatory supervision, would help accomplish that. And Wal-Mart could be its catalyst.