A coalition of consumer groups, unions, independent banks, credit unions, and realtors managed a legislative feat in California last month when they pushed through an 11th hour bill to block Wal-Mart’s attempt to acquire a small bank.
Wal-Mart filed an application with state regulators in April to buy Franklin Bank of California, an industrial bank with $2.5 million in assets and three employees in Orange County. The new law prohibits non-financial firms from buying state-chartered banks.
Opponents of the move argued that it could lead to dangerous conflicts of interest. Not only might Wal-Mart use its size and power to muscle out smaller banks and credit unions, it could also deny loans to retail competitors and their suppliers. Such distortions would undermine the soundness of the banking sector and lead to a dangerous aggregation of economic power."
Wal-Mart says it is being unfairly targeted because of its size. The company insists it has no interest in offering consumer banking services. Owning a bank would allow Wal-Mart to process its own debit card transactions, bypassing Visa and MasterCard and saving about a penny per transaction. Wal-Mart stores handle about 35 million debit card purchases per month.
But Craig Hudson, director of the California Independent Bankers Association, which led the legislative effort, suspects Wal-Mart has bigger long-term plans to enter banking. "This is the camel’s nose under the tent," he said.
Wal-Mart has tried to acquire banks before. In 1999, the company tried to buy a small Oklahoma thrift, saying at the time that it wanted to offer savings and checking accounts to customers nationwide. But a major overhaul to federal banking law that year barred non-financial companies from owning banks that are regulated by the Federal Reserve.
The only banks not regulated by the Federal Reserve are those with industrial charters. Only a handful of states allow industrial banks, which were founded in the early 19th century to provide loans to blue-collar workers. Now that California has closed the loophole allowing non-financial companies to buy these banks, Wal-Mart will likely look for an industrial bank in another state.
Meanwhile, the company plans to resubmit an application to federal regulators to allow Toronto Dominion, a Canadian bank, to offer consumer banking services in partnership with Wal-Mart through branch offices in its stores. An earlier application was denied by regulators, because Wal-Mart employees were to staff the in-store branches.