You are here

The Spectre of Wal-Mart Haunts the Small Town Bank

Adam Rust's picture

Posted June 14, 2010

There is a spectre haunting your local community bank - the Spectre of Wal-Mart.

Imagine there is a Wal-Mart Bank. Can you see the little man dropping prices on those overdrafts? Would you still be paying $2.50 for the ability to use an ATM, or $14 to get your checks printed?

Yes, you would see those prices dropping. No, you would not pay so much for an overdraft. Non-interest income, rather than constituting 30 to 50 percent of gross income, would dwindle. The drop would the most precipitous at small banks, where there is less likely to be much income from either investment banking or trust management. There's also the issue of competition. Plenty of small banks only have one or two national chains to worry about in their home town. If the Wal-Mart out on the bypass had a bank, though, it might be different.

Wal-Mart has tried to get a bank charter in the past, but it has not worked. They've applied for industrial loan charters, to no avail. This is a special purpose bank. This charter can be used as a means of in-house financing. Plenty of retailers have utilized the capacity of the ILC.  Target, for instance, has an ILC. Ditto for Home Depot.

The Independent Community Bankers Association does not like the ILC. It is only a coincidence, but here is how Terry Jorde, CEO of CountryBank (Cando, North Dakota)  put it in testimony before the House Subcommittee on Financial Institutions and Consumer Credit in 2006.

The ILC specter looms over the nation’s financial system. The flood of new applications for ILC charters threatens to eliminate the historic separation of banking and commerce and undermine the system of holding company supervision, harming consumers and threatening financial stability.

The ICBA is pretty clear.

That is why I am surprised that they did not notice when Green Dot applied to purchase Bonneville Bank in Utah earlier this spring.Bonneville Bank is very small. It has one branch. Yet, it does have a charter, and one in a state with a very bank-friendly regulatory environment.

Green Dot makes debit cards. Those cards include reloadable cards. Currently, Green Dot partners with Columbus Bank & Trust. CB&T holds the deposits and provides its charter. Buying Bonneville Bank changes all of that.  Green Dot's acquisition poses the possibility that those cards will be one step closer to the new

retail banking standard for the 40 million unbanked and underbanked Americans.

Why does that matter? Because, right now, Green Dot is essentially a store brand of Wal-Mart. Green Dot cards are sold in lots of places, but 64 percent of their revenue stems from this one retail relationship.

Wal-Mart has a way of setting the terms of its relationships. Wal-Mart has an aggressive system of accounting. In many instances, items on their shelves remain on the books of their suppliers up until the moment when they are scanned by the check out clerk. In that moment, the item moves to Wal-Mart's accounts payable. Seconds later, it moves to accounts receivable. That is very favorable for Wal-Mart. Not so much for the supplier.

It would seem possible, then, that if a supplier of a bank charter came to work with Wal-Mart, that their relationship might also be very one-sided.

Has Wal-Mart found a way to get around public opposition to their acquisition of a bank charter? Wait and see. I'm not sure if the ICBA has even noticed. The Federal Reserve has closed the comment period on the acquisition, but they are still thinking about their response.