Banking: why be when you can team?
Half a year ago, in By any other name? (Part 1 and Part 2), I posted about Wal-Mart’s application to form a bank, observing that in practical terms, Wal-Mart (like any other major credit provider, such as GECC or GMAC) is in fact acting very bank-like already:
What defines a bank? Is it a vast physical structure, with imposing granite Greek columns?
Egbert Souse, accent grave over the E
Is it then simply a receptacle to take deposits of cash and turn then into information? (For in its purest essence, money is simply information acknowledged by all as being true.)
Yet if a bank limited itself to the deposit-taking function, it would be as a one-legged Tarzan: banks must put capital to work, by making loans or investments.
In other words, a bank is a continuing marketplace, where money providers (capital sources, including depositors) meet money consumers (borrowers). These fundamentals are captured in everyone’s childhood conception of the bank: the Savings and Loan Institution (note the ‘and’).
Now, as reported in the New York Times, in the face of furious resistance by a segment of the public, Wal-Mart has backed down —
We just changed our minds
Few efforts illustrate the breadth of Wal-Mart’s ambitions — and the fears that they at times generate — as much as a nearly decade-long drive to establish its own bank.
Not putting a Wal-Mart here
Yesterday [March 16, 2007 — Ed.], Wal-Mart Stores abruptly abandoned those plans for its own bank, withdrawing its application to obtain a special banking charter after a firestorm of criticism from lawmakers, banking industry officials and watchdog groups.
“We don’t plan to do this again,” said Jane Thompson, Wal-Mart’s president for financial services.
— or is it?
You’re planning to do what?
Yet the company, the world’s largest retailer, also said that it was not pulling back from plans to roll out a stream of new financial products, which could include mortgages and other types of consumer loans.
Is one a store if one sells products by pushcart?
“The bank is behind us, [said Ms. Thompson]. “We will use our partners to roll out new products.”
Why found one’s own bank when it is just as effective financially, and far less controversial, to partner symbiotically with an entity that already has a charter?
Wal-Mart’s latest banking bid, made in July 2005, had been stalled after the Federal Deposit Insurance Corporation announced in late January that it would delay reviewing applications for so-called industrial loan corporations. And a move in Congress to bar non-financial companies like retailers from owning banks has been gathering steam.
It takes the battleship of government a long time to build up steam
Anti-business populism always plays well with a large portion of the voting base, and here Wal-Mart was never able to create a constituency that clamored for the Wal-Mart bank:
Representative Barney Frank, Democrat of Massachusetts and a co-sponsor of a bill that would prevent Wal-Mart from operating an industrial bank, said that Wal-Mart’s withdrawal “doesn’t remove the need for a bill,” but he conceded that it might “dial down the temperature” for passage in the Senate.
Ease off, Senator
More than likely, Wal-Mart realized that from its perspective, Wal-Mart did not need to own the bank, just partner exclusively with a large bank, and let the bank infiltrate.
The opposition to Wal-Mart’s application had initially come from bankers, who had feared that Wal-Mart would eventually open traditional consumer banks that accept deposits and dispense loans. Such a move, they argued, could wipe out small community banks and hurt profits at bigger ones, given Wal-Mart’s huge economic might and record of vanquishing rival retailers.
Hmm, do you think the bankers were worried about wiping out their smaller competitors, or their own profits? As I wrote last summer:
Of course it would [lead to more Wal-Mart banking], given the slightest crack in the fortress.
Nothing to worry about here
Already, the retailer cashes cheques, sends money orders and so forth, often much more cheaply than competitors do.
“Now you’ve done it! Doing things more cheaply that we do!”
Here we uncover the banks’ real fear: if you boil away all the brick structures, and the need for massive safes, a bank is an interface between a retail customer and a financial network. Co-locating that inside a major retail outlet is logical, and efficient — not just for the provider, who adds another ’share of wallet’ capturing opportunity, but also for the customer, who’s there in the store anyway.
Retailers as banks are so logical that if enacted, they would be formidable competition through the dastardly, under-handed, nefarious strategy of charging less.
“Charging less” is also equivalent to “lowering costs”:
Wal-Mart insisted that it was not interested in running a retail bank, but saw obtaining a banking charter as a way to save money by internally processing credit and debit card transactions. Other non-financial companies — including Target and General Motors — had already received approval to operate industrial banks.
If it’s okay for Target, why not Wal-Mart? If bad for Wal-Mart, why allow General Motors a bank?
One of these three is not like the others
But its opponents said that Wal-Mart could not be trusted.
Trust me just this once
As opposed to the other companies? Non sequitur.
In an interview yesterday, Ms. Thompson said that Wal-Mart made the decision to withdraw the bank application late last week after seeking approval from H. Lee Scott, the company’s chairman and chief executive. Wal-Mart determined that it could pursue other ways to achieve cost-savings and offer its customers more financial products without the glare of the national spotlight.
Once upon a time in the primordial ooze, there was the protoplasmic unicellular blob, and then one day, it engulfed the mitochondria, a separate organism that could thrive only in an anaerobic environment, whereupon the two became symbiotic: mitochondria supplying energy to the protoplasm, the latter offering protection to the mitochondria. The result (serial endosymbiosis) was the eukaryotic one-celled creature.
Mitochondria like capsules inside the spaceship cell
In precisely the same way, from Wal-Mart’s perspective, a bank inside a Wal-Mart is financial mitochondria: an ATM that exchanges energy (money) with customers, the better for both to sell them Wal-Mart products and to capture their banking business.
It currently offers check cashing, a branded credit card and a limited number of other financial services.
For most people, a bank is a place to get a checking account, maintain a credit card, and manage funds. Wal-Mart is already something of a Money Store, therefore halfway to being a bank already. What difference does it make, to Wal-Mart or to its customers, if the entity at the other and of the ATM broadband is owned by Wal-Mart or independent?
Wal-Mart’s announcement came as a surprise to many on Capitol Hill. Next week, the House Committee on Financial Services is scheduled to hold hearings on a proposed bill that would close the remaining loopholes that allow non-financial institutions to operate an industrial bank and prevent existing ones from expanding. It is sponsored by Mr. Frank, the committee’s chairman, and Representative Paul E. Gillmor, an Ohio Republican.
“Wal-Mart is the proverbial red blanket in front of the bull,” said Bert Ely, a banking consultant. “The blanket has now been pulled away, and I am not sure how much force there is to get this through Congress.”
Nothing left to legislate
Wal-Mart’s move may thus be a clever means of pre-emptive defense. Given that it was unlikely to achieve permission to found a bank, and knowing that current law allows Wal-Mart both to roll out financial products and to partner readily with an existing bank, Wal-Mart probably determined it could get virtually everything it wanted indirectly. Why, therefore, run the risk of having current authority curtailed — particularly since, as I pointed out six months ago, a non-bank has some compensating advantages over an actual bank?
Pursuit of CRA investment test credit is a principal driver in LIHTC equity investment, leading to very high prices and resulting in highly efficient use of government tax expenditures. And however much banks may tout their CRA performance, there’s no question it’s a burden to them, so if banks are competing against non-banks without a CRA obligation, they will be at a competitive disadvantage.
Consider then an entity that:
· Has an enormous market capitalization.
· Is active from coast-to-coast.
· Takes deposits.
· Makes loans and provides financial services to its depositors.
Is that a bank by any other name?
Meanwhile, the wind has gone from Congress’ sails:
Congress, my move steals your wind
While there still appears to be strong support in the House, its chances for Senate approval are less clear. Senator Christopher J. Dodd, the Connecticut Democrat who is chairman of the Senate Banking Committee, said in a statement yesterday that he intended to continue examining the issue.
These are examinations Congress seldom takes.
Ms. Thompson, the Wal-Mart executive, called it a “manufactured controversy” and said that the company’s decision to withdraw its application yesterday was “just a coincidence.”
Just a coincidence we’re withdrawing now
Ms. Thompson played down the effect that the withdrawal of the banking application would have on Wal-Mart’s business, suggesting that it had captured a substantial part of the cost-savings they had hoped for as credit and debit card processing fees have declined over time.
Instead, Wal-Mart will revert to its planned symbiosis:
And she vowed that the retailer would expand its financial offerings in the first half of this year.
Expanding financial offerings = taking more steps toward being a bank.
She declined to elaborate on what products Wal-Mart would offer through third-party partnerships, but also did not rule out making loans.
“As far as lending per se,” she said, “all I can say is that we are looking for all the needs of our customers.”
After all, if you’re already providing credit cards, which are among the most expensive forms of short-term lending, how will your customers be hurt if you offer cheaper financing over longer terms?
Do no financial harm to your customers
