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Sam's Bank

posted by Ronald Mann

As I come to the end of Pietra Rivoli's engaging book on the Travels of a T-Shirt in the Global Economy, I learn that the principal reason that clothing imports into this country have been restricted so successfully is that apparel manufacturers, concentrated in specific congressional districts, have much more influence over Congress than Wal-Mart.  So, on the seemingly unrelated question whether Sam Walton's children can acquire a bank, I guess it should be no surprise that the protests of the independent community bankers, the regulated constituency of federal banking regulators, can derail Wal-Mart's application.

But this is a more interesting story than it first appears.  For one thing, there is a substantial "level playing field" argument that supports the regulators' position.  If Wal-Mart can ask pointedly "Why should Target get a bank if we can't have one," CitiGroup can just as well ask why Wal-Mart should be able to own banks with no regulatory supervision while CitiGroup must endure the red tape of supervision by the Fed.  There also is a considerable public-choice narrative.  If the exception for ILCs that would permit Wal-Mart to buy a bank without federal supervision rests only on the power of Utah legislators in Washington, then who needs it?

The intriguing side of the problem, however, relates (of course) to payment systems.  {You might wonder what this has to do with consumer credit, but they shouldn't have asked me to guest blog if they didn't want me to write about payment systems.}  The market for consumer payment systems in our country is dominated by a pair of national networks, whose market shares have grown rapidly over the past 30 years.  During those thirty years, the price of the product -- which is at its core a sophisticated information processing service -- has remained stable even as Moore's Law has halved the cost of information processing time after time after time after time.

For obvious reasons, it is enormously difficult to challenge Visa and MasterCard.  We might better ask (as I do in Charging Ahead) how Visa and MasterCard ever succeeded in establishing their networks in the first instance!  If we were to look for a challenger, and if we look past the possibilities of Google and PayPal (who essentially piggyback on Visa/MC), Wal-Mart certainly would be the most formidable competitor.  Wal-Mart has a network of almost 4000 locations in the United States, with tens of millions of devoted customers.  Wal-Mart is highly skilled at designing products to meet the desires of mainstream American consumers.  A payment system designed by Wal-Mart, accepted at all of its stores, could penetrate the consumer consciousness more effectively than any product since the credit card.

And if the purpose of Sam-Pay was to lower the costs of payments -- cost-cutting being Wal-Mart's core competency -- then it presumably would shift spending from credit cards, which would slow the financial distress associated with credit card use.  To be sure, there is always the possibility that Wal-Mart could follow the lead of Target and transform itself into a consumer-credit operation with an in-house retailing arm.  Wal-Mart's efforts to open full-service banks in Mexico show that this is at least a possibility.  But, my prediction is that Wal-Mart will focus on cost, as it has with the check-cashing services and money orders that are offered in its stores in most states.

In the end, I think we can rely on the lobbying power of the independent bankers to keep Wal-Mart out of the consumer credit business.  So putting the question squarely -- should we craft a regulatory exception for banks specializing in consumer payments? -- count me in!


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I agree with Professor Mann's view that consumers would probably benefit from another strong competitor to MC/Visa. My question is: Why can't Wal-Mart build a presence in the payments system by acquiring a special-purpose credit card bank, which (like an ILC) is exempt from the Fed's holding company regulations under 12 U.S.C. 1841(c)(2)(F)? If a credit card bank would give Wal-Mart everything it needs to offer payments services, why is it seeking to acquire an ILC, which would potentially have full deposit-taking powers (except for demand deposits) and full lending powers? W-M's application for an ILC causes me to think that W-M really wants a full-service bank, and I agree with Professor Mann that W-M should not be allowed to operate a full-service bank without Fed oversight.

I agree with Mr. Wilmarth. Wall-Mart, like so many big retail players (Tesco and Virgin, for example, in the UK), soon or later, want to have a full-licence Bank. Like Banks (for example BBVA, in Spain) want to be consulting and adviser firms.

In my opinion, they should be specialized in what they know to do, and leaving costly adventures out of their vision.

Salvador Trinxet Llorca
CEO Banco Internacional de Investimentos (International Investment Bank)
IESE, Professor of International Taxation

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