House To Walmart: No Banks For You

The House is poised to pass a bill that will keep Walmart, and all who seek to follow them, from ever having a bank to call their own. The measure, H.R. 698, prevents industrial loan companies (ILCs) from being owned or chartered by any institution that doesn’t derive at least 85% of their revenue from financial activity.

ILCs are state-chartered banks that can issue credit cards, offer loans, and occasionally accept deposits. After Walmart, Home Depot, and DaimlerChrysler all filed applications for ILCs earlier this year, the FDIC issued a moratorium on new charters and asked Congress for some hot legislative action.

Only seven states charter ILCs, but most have limited or banned applications from commercial firms. Only Utah still encourages the practice, and their 32 ILCs hold over $186 billion in assets.

The measure will be considered tonight on the suspension calendar, which allows for 40 minutes of debate. No amendments are allowed and a two-thirds vote is required for passage. The measure is expected to pass easily, after which it will move onto the Senate where it will run smack into Senator Robert Bennett (R-UT,) who served the people of his state by killing a similar measure in the 109th Congress. — CAREY GREENBERG-BERGER

Update: The House passed H.R. 698, 371-16, with the entire Utah delegation voting nay.

Retail Bank Branches [AP]
H.R. 698 [THOMAS]
H. Report 110-55 [Committee on Financial Services]
(Photo: babasteve)

Comments

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  1. Lewis says:

    I assume existing entities would be grandfathered under this legislation? E.g. Department Stores National Bank (Macys), Target National Bank, GMAC?

    Or are these separate legal entities which would therefore be exempt from the proposed legislation? How is what WalMart proposed different from what the above companies do, in that case?

  2. @LewisNYC: Yes, there are two grandfather provisions. From the House Report:

    The first grandfather provision in paragraph (3) applies to any industrial bank that became an insured depository institution or had its application for deposit insurance approved before October 1, 2003. Such an industrial bank is exempt from the prohibition on commercial ownership of industrial banks set forth in paragraph (1) as long as it does not undergo a change in control that requires certain enumerated regulatory filings. An internal corporate reorganization does not result in a loss of the grandfather status.

    The second grandfather provision in paragraph (4) applies to any commercial firm that became a holding company of an industrial bank on or after October 1, 2003 and before January 29, 2007. Such a commercial firm is exempt from the prohibition on commercial ownership of industrial banks set forth in paragraph (1) as long as it does not acquire control of another insured depository institution after January 28, 2007, does not undergo a change in control that requires certain enumerated regulatory filings, and does not violate the activity and branching limitations set forth in subparagraph (4)(B). An internal corporate reorganization does not result in a loss of the grandfather status.

  3. Lewis says:

    Thank you for the clarification.

    This legislation, then, is a potential boon to the traditional banks which already service many retail accounts – most notably Citi, BofA (nee MBNA), Chase (nee BankOne) and Barclays (nee Juniper).

  4. basherbot4000 says:

    Well thank god that Bank of America won’t be in danger of real competition. Thank you House of Representatives!

  5. Squeezer99 says:

    all that law is doing is hurting capitalism. i’d use a walmart CC if it offered better rewards then the ones I use now.

  6. mac-phisto says:

    one needs to understand why ILCs are a bad idea before just claiming that disallowing it is bad for capitalism or competition.

    first, a question arises whether an ILC can fulfill its requirement as a fiduciary as a conflict of duty can arise (ie -> target bank & their heavy approval of subprime paper to increase sales at target. the bank may ignore its duty to provide investors with a positive ROI in order to provide its parent higher sales).

    second, banks benefit from a form of government subsidization in the form of the FDIC & the “too big to fail doctrine” legislated in the FDIC improvement act. to grossly simplify, what it means is that an ILC could be prevented from going under with government monies.

    that said, essentially a company can create a federally subsidized shell that it can use to boost business until it fails, at which point the gov’t steps in & rectifies either through liquidation, sale, or assistance.

    there’s other reasons why an ILC isn’t a good idea, but i think that’s a pretty good summary of why you shouldn’t be for one.

    unless, of course, you would like the government to bailout wal-mart once the masses start defaulting on their credit lines.

  7. matdevdug says:

    I couldn’t agree more. There is nothing worse than this idea right now, as the recent problems with high-risk lenders going bankrupt and appealing for government aid shows us. Wal-Mart and others are looking for a way of targeting more people using predatory lending tactics and for a nation in debt this is the last thing we need right now.

  8. foghat81 says:

    @mac-phisto: thanks for the clarification. I hadn’t really researched either side yet. You took care of the bulk of my work with just a few paragraphs. thanks :)

  9. r81984 says:

    This is not fair. Walmart getting into the banking industry is a good idea. They are great at cutting costs and providing good service.

    The rich politicians in our government are just protecting their investments.

    Just think about the good competition and cost cutting walmart will do to the banking industry.

    ATM fees could drop from $3 to nothing and interests rates could increase from .00001% to 3% for a savings account.

    Why doesn’t walmart just incorporate their banking in another country and just have the offices in the US???

  10. catnapped says:

    @r81984: So in other words, they’re going to get into business just to benefit the customer? Keep dreaming!

  11. dazzla says:

    @r81984: If you shop around you can get that and better already. e.g. An ING Direct Electric Orange checking account gives you 4%+ and uses a network of 32,000 free ATM’s.

  12. Anonymous says:

    @r81984: what other country? China?

  13. Sonnymooks says:

    You know things are strange today, when people are cheering for legislation that protects Big Banking from competition, simply because they are opposed to wal-mart, which ironically would probably benefit consumers……it would definatly end the disgusting and vulgar practise of red lining.

  14. matt1978 says:

    @dazzla: Like ING Checking has it all together anyways. Just refer to their tale of misworded letters on this. And all those atms? They’re great, if you don’t mind gas stations, gentlemen’s clubs, and casinos as about the only places you can get your money.

  15. AcidReign says:

    …..The Walmart near me already has a bank-like “Walmart Money” kiosk up front, that has longer lines than at the cash registers. They might be grandfathered in, too. I’m not sure what this new operation does, although I’d guess check-cashing and predatory loans. Nothing like a payday loan to buy your groceries with…

  16. Allowing these companies to enter the banking industry would be a conflict of interest (no pun intended). What would stop home depot from approving a high risk loan to a consumer just to make that extra buck? Once they are a bank wouldnt they have the resources to get paid back from their insurance or just own that person for the rest of their lives?

    Allowing box retailers to bank is a VERY BAD IDEA.

  17. shadygrove says:

    I believe many of you are missing the point. Walmart has no interest in consumer banking (i.e. checking accounts, consumer credit cards, etc.). Walmart wants to be a Visa and MasterCard acquiring institution.

    There are generally 3 parties involved in the merchant side of a credit card transaction. These parties include the processor, the bank (aka acquiring institution) and the merchant. Processors are large networks such as Total Systems Solutions (TSYS) or FirstData. Walmart can save a tremendous amount of money by cutting the bank out of the process and going directly to TSYS or FirstData.

    This is a compelling enough reason to charter a bank. Ask any business owner how they feel about credit card processing fees and you will find out how much Walmart has to gain by chartering a bank.

    Walmart already has long term leases with many banks to provide branch services in its stores. In Western Washington State we see Anchor Bank in many Walmarts. They would not be able to compete effectively in branch banking for several decades.

    I can’t believe I just defended Walmart! What the hell is wrong with me?!?

  18. rbcat says:

    @Holden Caulfield: What stops BofA, Juniper, Capital One, HSBC or any other entity from approving high-risk loans just to make a buck? Target National Bank (formerly Retailers National) has done a fantastic job of remaining wildly profitable, even while expanding into the sub-prime market.

    Most credit card-issuing banks are chartered specifically as credit card banks, meaning they take on no deposits from individuals, and only issue debt balanced against warehouse lines of credit or from specific purpose investments by their holding companies. (That’s why Citi-branded cards are issued by Citibank (South Dakota), N.A. and not Citibank, N.A.) If one of these banks craters, they take only those who have invested money with them. If you owe one of these banks money, they have the exact same leverage that GE Money Bank (current issuers of a wide range of store cards) has, which is not a lot in the unsecured arena.

    Frankly, I’d rather have dedicated credit card banks set up, since they can fail and only take their investors with them, as opposed to general-purpose banks issuing these mass-appeal cards and quite possibly wiping out individual bank accounts when the drain plug is pulled.

  19. hop says:

    the scumbag politos really act quick to protect the big fund contributors….they should start acting this quick on the illegal issues……
    and i don’t care one way or the other if wall mart get to be in the banking business…

  20. @r81984: “Why doesn’t walmart just incorporate their banking in another country and just have the offices in the US???”

    Because they’d still require regulatory approval to operate banks in the U.S.

    And personally, I’m for a return to more stringent “branch” laws (which were still in existence in Illinois when I was growing up), because we had a helluva lot more competition and MUCH better rates when the number of branches a bank could operate were restricted. Many more small, local players, and much more competition for our business. In this case, free competition has squashed consumer choice and has resulted in a handful of major national providers who do NOT use any “economies of scale” to better serve customers — we just pay higher fees and get lower rates. I’m guessing any “economies of scale” savings go directly to CEO salaries.

  21. mac-phisto says:

    @shadygrove: that’s not entirely accurate. it’s true that their application to the fdic was strictly for backend operations, but as any banker will tell you, banks change charters like people change underwear. the hardest part is getting your foot in the door.

    a number of steps by wal-mart previous to the withdrawal of its application lead many experts both in & outside the banking industry to believe that wal-mart had not fully disclosed its intentions to the regulatory board.

    first, wal-mart began accepting applications for new executive positions in consumer lending – specifically with experience in home-based lending. they shrugged this off by claiming that they were planning on providing counseling for employees looking to purchase a home.

    second, wal-mart began renegotiating their lease terms with bank/credit union branches in the weeks previous to their application being withdrawn. the new leases gave them (wal-mart) exclusive rights to offer mortgages, home equities & consumer loans to customers, as well as investment & insurance products – even debit cards!

    at this point it is merely speculation as to what wal-mart was really planning, but if that doesn’t sound like commercial banking to you, i don’t know what does.

    again, moot point (b/c even if this resolution doesn’t pass, the fdic has placed a 1-yr moratorium on ilc charters & could extend that indefinitely) but the fdic was not happy about allowing the largest retailer in the united states to even operate an interchange. questions as to whether the retailer could use their ownership of a payment processing system to quash competitors & effectively run a racketeering operation could not be satisfactorily answered.

    let it be said that wal-mart has already affected the market considerably by changing the customer’s option of “credit or debit” to the merchant’s choice (debit costs them MUCH less) a couple years back. & that – to me – is the very definition of wal-mart: limiting customer choices since 1969.

  22. Trackback says:

    What’s been written about Wal-Mart on various blogs this week? A bill that says “no” to big-box banks passed in the House, and the company’s statements regarding the high deductibles on their heath care benefits made the rounds.