Depositing Wal-Mart

From IBD:
Posted 4/11/2006

Regulation: Gales of creative destruction in the financial services industry have bankers asking Washington to help them hold onto their hats.

The industry, however, should not be immune to what economist Joseph Schumpeter saw as a strength of capitalism: that economic progress results when entrepreneurs and innovators are allowed to destroy the old ways of doing business.

But in a hearing room in Arlington, Va., on Monday, the American Bankers Association, the Independent Community Bankers of America and consumer groups all moaned about Wal-Mart's effort to get into the banking business.

It was the first time in U.S. history that the Federal Deposit Insurance Corp. held hearings on an application. That such an unprecedented event was reserved for Wal-Mart, the world's largest retailer, is fitting. Other than perhaps drug manufacturers and oil producers, it is the most demonized company on the planet.

Though Wal-Mart has the potential to make a significant, and likely useful, impact on the industry, its banking ambitions appear to be modest. It wants to open its own bank mainly to process credit cards, debit cards and other electronic transactions to cut its costs on the fees it pays to third-party processors. No branches. No loans.

Yet the industry fears the Arkansas-based company will open branches and compete with banks at the local level. And Wal-Mart being Wal-Mart — profitable and consumer-friendly — its banking foes fear the competition. So they dredge up the same muck — like charges of low pay and poor health-care benefits — that unions have long used in their ongoing campaign to poison the public's perception of the company.

The relative merits and shortcomings of Wal-Mart's pay and benefits may be arguable. But there's no denying the company is able to keep its prices low in large part because it closely watches payroll and health-care costs.

As for the consumer groups that oppose Wal-Mart's entry into banking, they should be defending the company — if, that is, they're really looking out for the welfare of consumers (especially lower-income consumers) and don't have some other agenda.

That said, Wal-Mart's payroll and health-care benefits have nothing to do with its ability — and right — to run either an industrial bank, as proposed, or a full-service commercial bank in every city in the U.S.

Nor should the issuance of a charter rest on the retailer's unpopularity with special-interest groups or would-be competitors. In this case, however, we fear that might be the case.

A bigger fear is that such rejection of a charter would not be met with the outrage it deserves.