Wal-Marts proposal to offer banking services to its customers has touched off another round of anti-Wal-Mart hysteria. At the urging of community banks and some members of Congress, the Federal Deposit Insurance Corporation (FDIC) is holding a series of public hearings on Wal-Marts application for an industrial bank charter (IBC). Never before in its seventy-three-year history has the FDIC held hearings on an IBC application, and they should not start now. Consumers would benefit from Wal-Marts expansion of financial services, although some banks afraid of competition are trying to block the bank charter.
Wal-Mart wants a bank charter to sponsor credit and debit cards, and process electronic check transactions. The cost savings would enable the company to earn higher profits and would benefit consumers by offering lower prices. According to Jane Thompson, the companys president of financial services, Wal-Mart is absolutely and unequivocally committed not to engage in branch banking. Despite these assurances and the fact that Wal-Mart has long-term leases allowing more than 1,150 community banks to operate in its stores, some bankers still oppose the application.
A particularly ill-informed charge came from Paul Blank of WakeUpWalMart.com. According to Blank, If the FDIC approves Wal-Marts banking application, it will create a new modern-day American monopoly with the economic power of Standard Oil. An unlikely scenario, given the more than 7,500 commercial banks, 1,300 savings and loans, and 8,500 credit unions operating in the U.S. today. Nationwide branch banking allows many of these financial institutions to potentially compete with Wal-Mart in any market.
Some have also complained that a Wal-Mart bank poses a risk to our financial system. Kenneth Redding, a spokesman for Americas Community Bankers, said, The sheer size of Wal-Marts business . . . raises serious questions of systemic risk in the payments system as well as for the deposit insurance fund more generally. An even more exaggerated claim came from Congresswoman Stephanie Tubbs (D.-Ohio), who claimed, Given Wal-Marts international dealings, a Wal-Mart bank could potentially create economic disruption around the world.
However, according to Robert McKew, Senior Vice-President at the American Financial Services Association, there is no evidence that banks owned by commercial companies are more likely to fail than banks owned by individuals or bank-holding companies. In fact, banks are allowed to affiliate with financial firms that deal in complex derivative securities, insurance firms that underwrite disaster insurance, and a host of other businesses. There is no reason to think that merging banking and retail, especially the worlds most successful retailer, would be any riskier.
Another unjustified worry is that Wal-Mart would use predatory pricing to drive competing banks out of business. Predatory pricing requires taking losses to drive a local bank out of the market. Therefore, Wal-Mart would need to be able to raise its banking prices after taking losses to recoup revenue and make a profit. With so many other banks in the U.S. that could potentially enter the market and compete with Wal-Mart banks, its unlikely Wal-Mart could ever be successful with such a strategy, so they are unlikely to even try it.
Nor is it likely that Wal-Mart banks would refuse to lend to other retail businesses because those businesses could always turn to other lenders. The American Association of Financial Services finds that while banks affiliate with brokerage, insurance, mutual fund, and finance companies there is no evidence that these industries have been hurt by favoritism resulting from affiliations with banks.
Ultimately the opposition to Wal-Marts application is the fear of competition. While offering a litany of objections against Wal-Marts application, Terry Jorde, chairman of the Independent Community Bankers of America (ICBA), said, to suggest that community bankers are afraid of competition is uniformed, unwarranted, and only diverts attention away from the real policy issues. Brad Williams, also of the ICBA, was more honest when he admitted that, My overriding concern about Wal-Marts pending application before you is that if approved, my bank and those other banks in Shannon County could go the way of many of our retail businesses and join the dinosaurs.
There is nothing novel about Wal-Marts application. Target, GM, and BMW have all had applications approved without any public hearings. Wal-Mart should be allowed to sponsor credit and debit cards and should be encouraged to enter the commercial branch banking business. Consumers would benefit from the increased low-cost competition that Wal-Mart could bring.
|Benjamin Powell is a Senior Fellow at the Independent Institute, Director of the Free Market Institute at Texas Tech University, and former President of the Association of Private Enterprise Education. Dr. Powell received his Ph.D. in economics from George Mason University. He has been Assistant Professor of Economics at San Jose State University, Associate Professor of Economics at Suffolk University, a Fellow with the Mercatus Center's Global Prosperity Initiative, and a Visiting Research Fellow with the American Institute for Economic Research. He is also the editor of the Independent Institute books, Housing America: Building out of Crisis and Making Poor Nations Rich.|
HOUSING AMERICA: Building Out of a Crisis
Could government's pervasive involvement in housing be related to the very real problems of affordability, availability, mortgage defaults and loans, and much more? If so, the appropriate policy response would be to significantly reduce, not increase, government involvement. In reassessing government housing measures, Housing America: Building Out of a Crisis is the authoritative and most comprehensive book available on resolving the housing crisis.