Monday, March 26, 2007

The First (Inter)National Bank of...Wal-Mart?!

Hat tip to Michael McLarney and John Caulfield at HARDLINES, the Canadian trade newsletter for the lumber and building industry, for alerting me to this story.

According to the Atlanta Journal-Constitution and the Associated Press,
After years of facing resolute resistance, Wal-Mart Stores on Friday gave up on trying to open its own bank.

Community bankers and union activists cheered Wal-Mart's decision, and took credit for making the world's largest retailer withdraw its application to operate an industrial loan company, a type of bank that dozens of other commercial companies already own.

An industrial loan company (ILC) is a limited-service private bank run by a corporation, usually for the purpose of extending credit services and processing credit transactions for clients. Probably the earliest and most well-known (notorious) example of an ILC is GMAC, General Motors' financial services division, that provides financing and credit services to General Motors car-buyers. Other large companies that operate ILCs are General Electric, Target, American Express, and Harley-Davidson.

Partially in response to the actions of a broad coalition of grassroots activists, and partially in response to a very strongly-worded letter from Congresswoman Stephanie Tubbs-Jones (D-OH-11), Wal-Mart withdrew its application. (The recent Bush-appointee head of the FDIC, Sheila Bair, called the withdrawl a "wise choice.") Republican Representative Paul Gillmor (R-OH-5) released an e-mail in support of the bid to make Wal-Mart withdraw, saying that Wal-Mart evinced "a pattern of deception and dishonesty" in its business practices.

Wal-Mart was apparently looking to save money, by eliminating the fraction-of-a-cent transaction fees it pays to third-party financial services institutions for processing financial and credit transactions.

This raises the question of why exactly it would be bad for Wal-Mart to have its own ILC, even though many other large corporations (including corporate behemoths like GE and GM) operate them already. The answer may lie in why, on January 31, the FDIC extended its moratorium on granting ILC charters to nonfinancial institutions (such as giant retail companies), and why Representatives Barney Frank (D-MA-5) and Paul Gillmor have tabled a bill* to "[block] commercial acquisitions or formations of ILCs after June 1, 2006, [bar] new activities by commercially-owned ILCs chartered between October 2003 and June 2006, and [make] the FDIC the consolidated supervisor for all ILC holding companies."

According to Terry Jorde, spokesperson for the Independent Community Bankers of America (quoted in the Illinois Business Journal),
"Banks currently play a central role in the payment system," she said. "While companies other than banks may help stores and banks process check and card transactions, only banks can actually transfer funds from one party to another, which is known as settlement. Federal supervisors make sure that banks follow stringent policies and procedures to manage the risks involved in this process. The Wal-Mart Bank would process more than $170 billion per year, and this does not include the transfer of funds to Wal-Mart suppliers."

Jorde adds that Wal-Mart would have to balance its responsibilities as a federally insured bank with the liquidity and profit-motivated business demands of its owner.

"If the Wal-Mart Bank fails to timely settle payment transactions, it could harm thousands of other financial institutions and their customers," Jorde said. "Since the owners of industrial loan companies are exempt from Federal Reserve oversight, there is weakened regulatory protection to effectively guard against this abuse."

Wal-Mart, of course, says that it intends its ILC solely for processing credit/debit card and cheque transactions in its US stores...

...but that assumes that one can trust Wal-Mart, especially after its ruthless history as a vigourous practitioner of the strategy Microsoft calls "embrace and extend." I submit to you the following data point as evidence of an ulterior motive:

As reported in the super-conservative National Post:
Wal-Mart Canada Corp. is looking to expand into the financial services business, a potentially lucrative growth area ... The big-box giant recently hired Trudy Fahie as vice-president of financial services at Wal-Mart Canada, a role created for assessing the retailer's options in the sector. Ms. Fahie is the former vice-president of financial services for American Express Canada.

"We will be looking at a range of possible financial services to enhance our offering to our customers," Andrew Pelletier, a spokesman for Wal-Mart Canada, confirmed yesterday, calling the next six months to a year an "exploratory" period. "It's too early to speculate on what those services will be at this point."

(Note to Canadians: Now's the time to petition *sigh* the Harper government for something like the Gillmor-Frank bill.)

Reading these articles, it becomes clear that Wal-Mart is far, far from being the only offender in this area. Nonetheless, they have more clout than most of the rest of their cohort combined (GE and GM are exceptions). Giant corporations not only want you to spend your money with them, they're also looking for an 'in' to manage your money for you. Much as I distrust the motivations of banks in general, I must admit they have a point: Too much centralisation in the hands of any industry, especially the financial industry, is bad. It represents a complete horizontal and vertical integration of the corporation with its suppliers and its consumers. And that is anticompetitive and downright anticapitalist.


* I am given to understand that Americans use "table" in the bill sense slightly differently from Canadians; in this sense, I mean submit it for discussion and consideration.


Blogger Dr. Know said...

Good presentation!
I used to shop at Wal-Mart, when they were small, had no "SuperStores" and promoted American made goods. As they grew, things changed - they began pressuring vendors, forcing many to move offshore to meet a price point and remain profitable. They began running child labor sweat shops to manufacture their signature clothing lines. In short, they became global predators.
Haven't been in one in years - I have simply stopped shopping since the goods offered are no longer produced on an equitable playing field and represent no bargain long term, regardless of price. You should see the condition of my tube-socks. ;-)

12:39 AM  
Blogger Interrobang said...

Afterthought: I used to work for a tiny subcontractor to a really, really big corporation, one of the ones usually referred to by a two-letter initialism that starts with "G." On rereading that passage by Jorde again, I notice that she's concerned about whether a corporation like Wal-Mart will pay its bills on time. The particular big company whose name starts with "G" that I have experience with was notorious for bankrupting its small suppliers by racking up enormous accounts receivables with them; basically they wanted work done on credit, and then wouldn't pay the invoices when they were anything like due, or past due, or anything. It's really, really hard for a tiny supplier to threaten a company like that with a collections action, as well, simply because of the power imbalance and the inertia of giant corporations. This particular company, which also has its own ILC, called somethingorother "Finance," uses a central payment system, and it can take them weeks just to cut an authorised cheque.

How much do you want to bet that G-for-Giant corporation isn't the only giant corporate offender in that department?

5:16 PM  
Blogger Dr. Know said...

It's not only G*, to hear the local print shops and such talk about it, but is a widespread problem throughout most vendor/service industries. The Big Guys, such as Coca-Cola locally, know they represent large volumes, that you need the money, and that they'll go somewhere else if you complain too much about the overdue recievables they have racked up.

But gosh-darn if you miss one of the payments to G* Finance, while their shoddy product sits in a shop awaiting $3200 in repairs.

4:05 AM  
Blogger Interrobang said...

I'm not sure I can think of anything that the G* I'm talking about makes for the consumer market that would sit in the shop waiting for $3200 in repairs. That should tell you more specifically which one I'm talking about, I think. (They make a lot of stuff, but transportation-related things for the consumer market are not among them.)

I'll agree it's certainly a problem amongst the big players. The other big corporation-tiny supplier problem is that they're more likely to pay an outstanding invoice for $500 000 than they are to pay one for $5000, because that's change they found in the couch to them. All the more reason not to let them run their own banks, methinks.

Apropos of nothing, I have this crazy theory, backed up with a certain amount of evidence, that any company whose name starts with "General" is probably unethical and sleazy from the ground up...

12:42 PM  
Blogger Dr. Know said...

OK - that clears it up. When it's all said and done, I wouldn't think there is much difference between the E or M versions of the monolithic corporate monster. They swap CEOs around like bad coins, and all seem to graduate from the same Harvard MBA thinktanks.

2:58 PM  
Blogger Deacon Barry said...

What would have been the chances that they would have expected their employees to have had an account with their bank so that they could transfer wages without charge, like these guys?

11:13 AM  
Blogger Interrobang said...

Two comments deleted on the grounds that they were comment spam.

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12:37 AM  
Blogger shannon said...

i actually used to have a wal-mart credit card (its so convenient when they accept credit cards, and even more convenient that they have THEIR OWN card program.

10:13 PM  
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