Wal-Mart's Bank Shot

By Jyoti Thottam

The First National Bank of Hope, Kans., a town where the noon whistle blows daily for its 400 residents, has survived all kinds of competition. The rural bank has remained independently owned for its entire 83 years, even through the Great Depression, says Dan Coup, its president and CEO. But Coup is worried that his bank may not survive what he sees on the horizon: Wal-Mart. "They could run us out of business in a heartbeat."

Coup is one of the community bankers who have turned a routine regulatory application into a referendum on the world's biggest retailer. Wal-Mart submitted a filing last July asking the Federal Deposit Insurance Corporation (FDIC), the agency that guarantees bank deposits, to create a new entity called Wal-Mart Bank. It won't be a regular bank at all; the company says it will do nothing but process credit- and debit-card payments internally. But the application generated so many comment letters--3,600 and counting--that for the first time in its history, the FDIC decided to hold public hearings on a deposit application.

The session last week near Washington attracted a parade of Wal-Mart's regular adversaries--unions, corporate activists, small-business owners--along with bankers, individuals and experts on both sides. But most comments came from rural America, so the agency will hold another session next week in Overland Park, Kans. Coup will testify there, along with other bankers who believe that their businesses will soon be the next to feel the weight of Wal-Mart.

Don't think about a Wal-Mart Bank with ATMs, branches and tellers. Jane Thompson, who would be chairman of Wal-Mart Bank, says the new bank would have a "very narrow role." Currently, every time a customer swipes a credit or debit card, Wal-Mart pays a fee to a bank for watching over the money for those few seconds as it moves between the customer's account and Wal-Mart's. By using its own bank, the company will save fractions of a penny on each transaction, yielding $5 million to $10 million a year, which it says can go toward lower prices.

Critics don't buy it and see the credit- debit function as the thin edge of the banking wedge. "I cannot believe they are doing all of this to save $5 million a year," the equivalent of about nine minutes of sales, says Terry Jorde, president and CEO of Country Bank USA in Cando, N.D. The fear, says Lawrence White, a professor of economics at New York University, is that the company will do to retail banking what it has done in apparel and groceries. Indeed, the application Wal-Mart filed would allow it to request a changed business plan through the FDIC without necessarily going through the entire process again.

The real threat to banks, say Wal-Mart supporters, is that the company might someday attack the financial industry's juicy fee structure. Even a critic like Jorde concedes that if Wal-Mart were to offer savings accounts and consumer loans at its usual rock-bottom prices, "the cost of banking services would decline, and consumers would say, 'This is great.'" Wal-Mart would also be in a good position to reach the 10 million households in the U.S. that don't use a bank account, says John Caskey, a professor of economics at Swarthmore and expert on the "unbanked." The company has already punctured the high cost of check cashing, which hits the unbanked hardest, by offering the service in its stores. Caskey says that with the right mix of low-cost services--bill payment, money orders, check cashing and basic savings accounts--Wal-Mart could serve an overlooked, overcharged population already in its stores.

The one thing a Wal-Mart Bank could probably never replace is the role of the small-town banker. With 8,000 charters, community banks have strong competition, and their deposits finance small businesses and home mortgages. Local bankers made a similar fuss, White says, when regulators allowed regional banks to expand, but most of the local banks found new ways to compete. Local bankers know better than most what happens to those who don't adapt to change. The closest Wal-Mart is 35 miles away, Coup says, but "I've seen the effects that it has on our local grocery store. It's now for sale."