Wal-Mart?s Name Will Adorn Banks

Wal-Mart’s partnership with a Memphis bank is making some community bankers nervous.

In October, the Bentonville retailer and the National Commerce Financial Corp. of Memphis, a pioneer in supermarket banking, quietly launched a pilot program that calls for 16 of the bank’s branches in Wal-Mart stores to be renamed “Wal-Mart Money Centers.” The banks are operated and staffed by National Commerce employees.

The financial terms of the arrangements weren’t released.

The move has riled up community bankers who think it’s another attempt by Wal-Mart Stores Inc. to break into the banking industry, which they say would be disastrous.

Meanwhile, there are two bills in Congress that could open the door for Wal-Mart to obtain a bank. Three earlier attempts have been shot down.

While Wal-Mart has vowed it has no current plans to operate a bank, others don’t believe it. Banks operate branches in about 800 of Wal-Mart’s 2,900 stores nationwide, said a spokesman for the world’s largest company (by revenue).

“It’s not a question of if Wal-Mart is going to get banking power, it’s a question of when it’s going to happen,” said Tony Plath, associate professor of finance at the University of North Carolina at Charlotte.

Plath said Wal-Mart’s growth in retailing will eventually slow, so it is looking for another growth area.

“So financial services is natural,” he said. “It’s a relatively fragmented industry when you look at community banking. Cost structures tend to be high, and Wal-Mart tends to be able to develop relations well with the same kinds of customers that bank at community banks. And these people tend to be price sensitive.”

Financial services is an area that Wal-Mart wants to add, Wal-Mart CEO H. Lee Scott Jr. said in a November interview with the Los Angles Times.

“We’re already offering money orders,” Scott told the Times. “We’ve dramatically lowered the costs of wiring money. There’s probably a place for us in mortgages. I think the dot-com is going to be a very powerful tool.”

Wal-Mart does not generally make its executives available to speak with the local press.

The retailer views financial services as a way to serve its customers, attract people to its stores and generate revenue, said Bert Ely, president of Ely and Co. Inc. of Alexandria, Va., which has specialized in deposit insurance and banking structure issues.

While Plath thinks Wal-Mart’s entry into the banking industry would eventually wipe out half of the country’s community banks, others say it would be good for competition.

National Commerce Deal

In its third-quarter 2003 earnings report, released Oct. 16, National Commerce Financial mentioned that it was teaming up with Wal-Mart for a pilot program: The names of 16 existing National Bank of Commerce branches inside Wal-Mart stores in Georgia and Tennessee would be changed to Wal-Mart Money Centers.

“Because the program is pilot, we downplayed any publicity around it,” Eileen Sarro, a spokeswoman for National Commerce, said in an e-mail statement.

National Bank of Commerce will continue to run the banks, which will offer traditional banking and financial services. The banks also will handle all of the financial services that Wal-Mart does in its store, such as issuing money orders and cashing payroll and government checks.

Since June 2002, Wal-Mart has received regulatory approval to cash payroll and government checks in 20 states, and it is working on adding the other 30.

Sarro declined to disclose the financial terms of Wal-Mart’s arrangement with National Commerce.

“Any further expansion depends on many factors, including customer response and operational success,” she said.

Wal-Mart spokeswoman Melissa Berryhill said a goal of the program is to capture those customers who are unserved or under served by banks.

The alliance pairs the best retailer and in-store bankers in the country, said Kevin Reynolds, senior vice president for equity research for Morgan Keegan & Co. Reynolds said he doesn’t own stock in National Commerce, nor has Morgan Keegan received any investment banking fees from the company in the last 12 months.

“I think it’s potentially a very powerful combination,” Reynolds said. “It’s good for Wal-Mart because they got the leader of in-store banking coming in and running [the bank] for them.”

National Commerce has been so successful at in-store banking that it has a division that advises other banks outside its geographic region on how to do it, Reynolds said. That subsidiary is called National Commerce Bank Services Inc.

Reynolds said the amount of rent National Commerce pays will probably be tied to certain thresholds it crosses, such as profitability and traffic.

Plath, the UNC professor, said the relationship sounds a lot like one Wal-Mart pursued with Canada’s Toronto-Dominion Bank’s subsidiary TD Bank USA.

In the proposed arrangement, which was unveiled in 2001, the bank would have offered an array of services including checking and savings accounts and certificates of deposits through in-store financial centers at Wal-Marts. But the plan fell apart when it couldn’t get regulatory approval.

Learning the Ropes

Still, Plath thinks Wal-Mart is making the move with National Commerce in order to learn the banking business in preparation for another attempt to break into the banking industry.

Currently, banking regulations prohibit a retailer from owning a bank.

“Wal-Mart didn’t create a financial services division so they can put ATMs in their stores,” Plath said.

Berryhill, the Wal-Mart spokeswoman, said Wal-Mart financial services started in August 2000 with the goal of “providing value, access and education to under served and overcharged customers, helping them live better lives. Our primary target is the unbanked customer.”

Plath said he believes Wal-Mart is combing over the federal legislation looking for a loophole to gain entry into the banking business.

“They can’t do it with a bank charter,” he said. “They can’t do it with a thrift charter. So they are going to have to do it with a limited-purpose charter, or they are going to have to do it with a separate corporation and combine these entities at the holding company level.”

If Wal-Mart owned a bank, it would be a positive step for the industry and consumers, said Peter Wallison, a resident fellow at the American Enterprise Institute for Public Policy Research in Washington, D.C.

But it’s not going to be easy.

“The banking industry and many unenlightened people in Congress continue to believe that there is some reason why banks … cannot be affiliated with companies like Wal-Mart,” Wallison said. “They have all kinds of screwy ideas about why Wal-Mart should not be in the banking business, but none of it makes any sense at all.”

One of the fears is that Wal-Mart or any other retailer that operated a commercial bank could deny business loans to competitors, said Ron Ence, legislative director of Independent Community Bankers of America. And even if Wal-Mart made such loans, the terms might not be fair, he said.

ICBA is opposed to Wal-Mart getting into the banking business.

Another potential problem: The bank’s resources might be used to bail out the commercial side of the business if it hit the skids, Ence said.

Wallison said such concerns are perpetuated by bankers who are afraid of competition.

“There isn’t any good reason, policy or finance or anything else, that should be used to prevent Wal-Mart from offering these banking services to its customers,” Wallison said.

Legislation

Currently in Congress, there are two pieces of legislation that would allow Wal-Mart to get into banking and open up branches across the country.

The first is the Financial Services Regulatory Relief Act in the House of Representatives. The bill would allow banks, including industrial loan companies, to open branches in any state without getting the prior approval from the state where they would like to open a branch.

Industrial loan companies’ deposits are insured by the FDIC, but they aren’t regulated by the Federal Reserve, which means a retailer could own one.

“If Wal-Mart were to acquire an ILC, this would give them the opportunity to open a branch of Wal-Mart Banks in every one of their retail locations,” Ence said.

The other bill, the Business Checking Freedom Act, has already passed the House and is in the Senate. The bill would allow banks and ILCs to pay interest on business checking accounts, which they are currently prohibited from doing.

If ILCs are allowed to pay interest on business checking accounts, they would function like a commercial bank, Ence said. But they wouldn’t be subjected to the Bank Holding Company Act, so their parent company wouldn’t be supervised by the Federal Reserve.

“We are working with Congress to try to block these two things,” Ence said.

Ely, the banking specialist from Virginia, said both bills are hung up in Congress and he doesn’t think any action will be taken on the bills any time soon.

Failed Attempts

In 1999, Congress passed the Gramm-Leach-Bliley Act, which excluded Wal-Mart from acquiring a bank charter or a federal savings bank charter — language added to the legislation at the 11th hour because the retailer had announced it was acquiring a federal thrift, Plath said.

After that defeat, Wal-Mart was then stopped again by regulators when it wanted to partner with TD Bank.

In 2002, Wal-Mart tried to buy an industrial loan company in California and was blocked by that state’s Legislature.

Berryhill said Wal-Mart tried to obtain the bank to reduce its expenses.

By owning a bank, Wal-Mart could obtain a debit card system, and that could save about a penny on every debit card transaction at Wal-Mart stores nationwide.

“Any savings we would see there could be passed on to our customers in lower costs,” Berryhill said.

Click here to find out who is National Commerce.