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Wal-Mart: banking battle looms

12th April 2006
By BBR Staff Writer

Wal-Mart has told US banking regulators it has no plans to open any bank branches. The retail titan is seeking to set up limited banking operations to generate payment transaction savings, but the plans have the US banking industry worried that this is the start of a Wal-Mart entry into consumer finance.

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Under US banking regulations, the ability of a commercial entity to enter the banking arena is highly restricted. In 1998 Wal-Mart attempted to integrate Oklahoma's State Bank and Trust Company to its business, but the move was promptly terminated by newly enacted federal legislation. Three years later it attempted to establish a banking partnership with Toronto-Dominion Bank, but its plans were rebuffed by regulatory authorities, as they were again in 2002 when the company launched a takeover of California's Franklin Bank.

Despite these setbacks, Wal-Mart is not a company that gives up easily. Last year it lodged an application to operate an Industrial Loan Company (ILC), which falls outside of the laws which prevent businesses from operating in both general commercial and financial spheres. The incorporation of an ILC requires approval from both state and federal authorities: the FDIC is currently holding a hearing on Wal-Mart's application.

So why, despite all the setbacks and difficulties, is Wal-Mart so insistent on getting into the banking arena? Their application to the FDIC is clear on this point: they want to be able to process the financial transactions made in their stores rather than relying on a third party to do this for them. The transactional cost savings this would bring would be fractional; but multiplied by the millions of transactions made at Wal-Mart each year it runs into tens of millions of dollars, even after the costs of the banking operation are accounted for.

While such back-office financial processing is seemingly benign, Wal-Mart's plans have many in the banking industry worried that eventually Wal-Mart will want to branch out into providing consumer financial services. In its application to the FDIC, Wal-Mart makes it clear that it has no intention of expanding into banking services outside of transactional processing for 3 to 5 years. Whether this is truly enforceable and what Wal-Mart will do after this period of time are both open questions and sources of concern for many in the industry.

Commercially, entering the world of consumer banking would be a shrewd move for Wal-Mart to make. Many of its customers in the lower income segments have basic banking requirements easily provided for by a non-specialist financial institution; a large number are actually excluded from mainstream banking and do not have bank accounts. Aside from the fact that by providing financial services, Wal-Mart could make money out of these segments, having an integrated full line bank in store would help to drive footfall and thus sales.

Competitively, Wal-Mart could do very well in banking by applying its large scale, low price model to an industry which exhibits neither of these traits and is probably long overdue for a shake-up. There are a number of hurdles to jump over before any of this happens. But despite intense protestations from a number of quarters, Wal-Mart's expansion into the financial arena is increasingly a matter of when, not if.

Source: Verdict Research
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